I have been asked to appear on a popular Kansas City Mortgage and Lending radio show this weekend; my task is to explain why even in this market you should still rent a home instead of buying one. I'll be up against advocates of buying homes who make their living lending money and selling real estate.
The producers of the show have asked me to create a Top Five Reasons you should rent instead of buy. As a real estate broker I'm supposed to try and convince people that buying a home is still a great Investment, but as a property manager I still manage hundreds of rental properties for many owners and I have to keep them rented.
The rental market is doing exceptionally well, with the crash of the housing market caused by sub-prime lending, stated income mortgages and no money down lending practices there are millions of Americans who have no choice but to rent for the foreseeable future. The millions of Americans who have been through foreclosure, bankruptcy, short sale or deed in lieu are not able to borrow and many have no desire to buy again.
A new study from Eli Beracha of East Carolina University and Ken H. Johnson of Florida International University looks at the last thirty years of home ownership vs renting your home and have come up with some fascinating numbers and facts.
Reported on by the Atlantic, the headline read: "For the Past 30 Years, Renting Was Generally Better Than Buying." Because most home-owners stay in their homes for less than eight years by the time the data was in about 75% would have actually benefited by renting.
The obvious exceptions to the rule are those who are capable of purchasing a home with cash or those who purchased a home they stayed in for a very long time and paid it off. The cost of renting money (mortgage) coupled with the cost of maintenance and repair often outweigh the benefits of short-term home ownership. Both The Atlantic and Reuters quote the folks at e21 (Economic Policies for the 21st Century) who further explain and break down the information.
Why you should rent instead of buying even in a down market:
- Market Instability: The real estate market began heading down several years ago, despite rosy economic forecasts from NAR and others who have a big stake in this game, the numbers have continued to decline.
- Shadow Inventory: While there are millions of foreclosed homes on the market, there are yet perhaps millions more that are somewhere in the foreclosure process that haven't hit the market yet. The lenders and others with much to lose from declining housing prices are simply not putting them on the market because greater supply will only serve to further reduce the value.
- You're Stuck: So you found the home of your dreams, you buy it with a 15 or 30 year note planning that you and the whole fam damily will stay there until you retire. But the job moves you to the West Coast, you lose your job, you get divorced, you get married, you have kids and outgrow the house or something else pops up! .... Now what? Thirty percent of the homes in the neighborhood are also on the market and with declining values you can't sell it so now you become part of the foreclosure mess.
- Freedom: You wanted to go fishing, but the basement flooded, you planned a vacation but the roof started leaking, you were offered a better job but it was 200 miles away! You are tied to that home with little hope of selling it in a timely manner and you are responsible for the repairs. If you were renting, you could have just called the landlord and gotten the stuff fixed while you went fishing or taken that higher paying job and worked out a deal to end your lease!
- Debt: While it used to be a sign of stability to show a mortgage on your credit rating, things have changed. Lenders and the big three credit reporting agencies are now looking harder at income to debt ratios and are less likely to give you favorable interest rates if your numbers don't line up. So that boat you could have been fishing out of if you weren't pulling soaking wet carpet out of the basement or that truck you wanted to haul the shingles home in for your new roof might not be attainable as a result of your mortgage debt.
So whether you are renting the money from a lender to live in a home or paying rent to the landlord the reality is you would likely have come out ahead by renting. With the current administration considering abolishing the mortgage interest tax deduction you may really want to reconsider that home purchase as your hopes for gaining any equity are being dashed by a ship-wrecked economy.
In most cases it is actually cheaper in the long-run to rent, because the cost of borrowing money, taxation and home maintenance eat up any real hopes for equity. If a renter would put that savings into other investments the statistics actually show a significant increase in the value of renting, as explained in the links to this article.
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