Is it time to rent or buy?

 

Just a couple of years ago, economic advice was easy.  Everyone, from your accountant to your parents, said the same three words, "Buy your home!"  With falling real estate prices and an unstable economy, the answer is no longer so clear cut.

 

If you already own and you are making your payments without too much of a struggle, by all means, stay. If you don’t already own, you might be surprised to find that continuing to rent might save you money in the long run.

 

For decades, the prevailing wisdom has been that home ownership is a person’s most stable investment. In fact, a home is the ultimate symbol of stability. A family’s home holds its memories, its personality and its security, but the security is often more symbolic than economic. The fact is that throughout the last century, returns from stocks have far exceeded returns from home ownership. According to Jack Hough for Smartmoney.com, returns on stocks historically and almost consistently average an annual return of almost 7% (adjusted for inflation), while home returns average just 2% a year. The reason for that, he speculates, is that businesses adjust their business models to increase profitability, while homes rise and fall with the market. A homeowner can do very little to control their home’s value.

 

In a study by the Center for Economic and Policy Research, Denver was listed as one of the 37 cities where it’s better to rent than to own. As a general rule of thumb, a home should cost about 15 times its annual market rent. For example, a home that rents for $1,000 a month or $12,000 per year should cost no more than $180,000. Anyone who has ever priced real estate in Denver knows that formula is far from reality.

 

In much of American society, home ownership has come to be a rite of adulthood. Most renters, especially those over 30, have experienced the look of distain that goes with the question, “You rent?” In fact, homeownership has become more of a societal expectation than marrying and having children. Things are changing, however. Earlier this year, the New York Times reported that 10% of homeowners were upside down in their mortgages. They owed more than their homes were worth. Home values are expected to drop even further. Renters are suddenly in a position of looking like trend setters.

 

Renters are in a much better position to negotiate when their rent starts to exceed market values. They might have to wait it out till the end of their lease, but smart landlords will know when the rent on their property is out of line. They will have two choices, either lower the rent or leave the property empty. Banks, on the other hand, can be negotiated with, but it’s usually more difficult. There is far less incentive for the bank to lower a homeowner’s mortgage than there is for a landlord to lower rent.

 

Beyond the obvious costs of mortgage, taxes and insurance, homeownership is expensive. Homeowners are responsible for all maintenance and upkeep on a home, while renters simply pick up the phone when the furnace breaks and a good landlord will take care of it.

 

Some homeowners do get tax breaks, but according to Hough, most incomes are too low to take advantage of them. Most benefit simply by taking the standard deduction.

 

Even if you do have equity, unless you are downsizing, you will most likely not be able to capitalize on it. If you sell your house, you will still need to move and most people move into larger, more expensive homes, often spending any equity they had.

 

Renting isn’t for everyone. For a family with a stable income source and a decent down payment, ownership might be very desirable, especially if you plan on staying in the home for a long period of time. According to the Harvard University Joint Center for Housing Studies, homeownership might have benefits that reach far beyond the financial. It can give people a greater sense of self-worth and community involvement. Homeowners feel a greater sense of control. They can decorate and modify as they see fit. They control who enters their home.

 

Renters, on the other hand, are at the mercy of their landlord. There are predatory landlords who prey on renters who have poor credit or low incomes, those that have few choices. Some landlords are simply neglectful. Tenants do have laws protecting them, but the court system can be slow and intimidating for many renters.

 

If you’re still unsure whether to rent or buy, there are several available calculators, like this one. Plug in the numbers. Ask yourself if you plan on staying in the home long enough to build real equity. Weigh the long term costs versus benefits, both financial and psychological.