Should I Buy or Rent?
According to FAU, “The U.S. housing market has remained surprisingly resilient during the coronavirus crisis. Home prices pushed even higher and made renting the more attractive option in many markets across the country. What a conundrum trying to decide should I buy or rent the place I call home and the place where I lay my head?
Should I Buy or Rent?
The latest Beracha, Hardin & Johnson Buy vs. Rent Index determines whether consumers will create greater wealth by buying a home and building equity or renting the same property and reinvesting the money they would have spent on ownership, such as taxes, insurance, and maintenanceThe quarterly figures show that home prices are above their long-term average in 13 markets – Atlanta, Dallas, Denver, Houston, Kansas City, Los Angeles, Miami, Philadelphia, Pittsburgh, San Diego, San Francisco, Seattle, and Portland, Oregon. That means consumers should rent and reinvest rather than buy and build equity
In particular, buying in Dallas, Denver, Houston, and Kansas City carries significant risk due to soaring home prices and the potential for declines off the peak, Johnson noted.
But Johnson, Beracha, and William Hardin, Ph.D. all agree that renters who don’t plan to reinvest the money they would otherwise be spending on ownership are better off buying a home over the long term because homeownership serves as a forced savings plan.
Should I Buy or Rent?
A Renter has:
- Flexibility – if you don’t know how long you will stay in a particular area, rent instead of buy works well
- Career stability – many young people, seem to change jobs frequently; renting works well
- Credit – is either lacking or not well established. The good news here for renters is that on-time rental payments can establish credit.
- Income instability – It is hard to make a long-term commitment to a house when you have worries about a stable income
- No maintenance expenses – when something breaks, you just call the landlord. Maintenance can add significantly to the cost of homeownership.
- No down payment – sure you may have first and last month’s rent due when you move in plus a security deposit. However, it’s nothing compared to the 3% to 20% down payment required when you buy a house.
- You may be closer to work in an apartment than with a house you can afford.
- Amenities – many apartment complexes offer a pool, gym, meeting, and rec rooms. Like college dorms for adults and you are surrounded by a circle of friends your age.
- Fear – they are afraid of another housing collapse that could send them down the river financially.
Should I buy or rent?
- The biggest reason to buy is equity build. Mortgage payments go to the bank, as you gradually pay down the mortgage.
- Landlords generally raise rents, especially if the market for rentals is tight as it is now. With a 15 or 30-year mortgage, your payment is always the same.
- A symptom of inflation is housing going up in price over time. Many cities, before the recent housing downturn, experienced 7% increases each year, which doubles the house price in 10 years and increases your equity.
- Should you buy or rent? Rental payments are not tax-deductible. The interest paid on a mortgage is deductible on your tax return, as are property taxes. You can look at it as Uncle Sam helping you buy your house.
- Creative control – you want to paint a wall purple, tear out a wall, hang every picture you have, no problem. You don’t have to get permission. You also don’t hear foot traffic from a tenant up above you or a stereo blasting.
- A house is your castle, your rock. You could write a poem about ownership. A house is private property, and for the most part, we still protect private property rights.
- The government is working hard to make homeownership affordable. The rates on mortgage insurance are at record lows, and banks are encouraged to make mortgage loans.
Compound interest – one way to get rich in real estate
Suppose you buy a house for $300,000 and put down $30,000. At 7% appreciation per year, for example, the house doubles to $600,000. Assuming you didn’t take out a bunch of home equity loans to buy toys, your equity in your home would be $330,000, an eleven-fold increase, not counting any reduction in your mortgage.
The buy instead of rent argument has good reasons on both sides. As you age and have families, your needs change, and some points become more or less important.
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