Rent or Buy Your Home?

Submitted by Larry Frank Sr. on Thursday, May 31, 2012 - 3:00pm
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If the housing market has at last bottomed out, is now a good time to buy? Or does renting make more sense? Regardless of the macro picture, your answer to the rent versus buy question depends on your resources and your needs. For instance, if you plan to stay in the new home for five years or more, then maybe buying is the best move.
There are reports that home sales are picking up. The National Association of Realtors says existing-home sales were 10% higher in April than the year before. House prices may have stopped falling. They were flat in this year’s first quarter, according to the Standard & Poor’s/Case-Shiller index of 20 metro areas.
Most of the sales, however, are fueled by investors. This means that homeownership really isn’t changing since purchasers are not buying the property as a home, but as an investment.
This may mean a couple of things: 1) People are choosing renting over buying a home. Who goes into those houses owned by investors? Renters do. 2) Time will only tell if demographics and the economy turn where renters turn into homebuyers.
The rental market is robust and will be for some time. The demographic reality is that fewer people need to own houses. Most houses in the past were built in the suburbs because that’s where the land was. It is not a given that the young prefer living in a house in the suburbs versus an apartment closer to where their job or recreational activities are.
Odds are those investors will be renting out their houses for a long time. Who are the investors going to sell to later? You see, investing requires two things: the purchase, and the sale. Most people do the first based on illusions of the second. But the housing market shows no signs of a strong recovery.
Renting has advantages. Renters have the flexibility to move when their job requires it. Homeowners don’t. This may be a factor in the increase in rentals. The national vacancy rate for rental housing dropped 0.8 percentage points to 8.8% in the first quarter, according to the U.S. Census Bureau.
A home is first and foremost shelter. Renters recognize this. A home is an asset, but as recent experience shows, prices don’t always go up. There are additional costs to ownership that renters don’t bear. The owner pays taxes and upkeep, for instance. These costs reduce returns.
How can you tell whether buying or renting is right for you? I suggest using three calculators in tandem:
The New York Times has a rent versus buy calculator. In most cases, it takes a lot of years of ownership for ownership to work. This calculator focuses on yearly outlays like the mortgage payment, utilities and insurance. It also includes purchasing and selling costs. In general, the Times site says, you need to stay in a home for a minimum of five years for ownership to be worthwhile. lists many factors to help you decide as part of their calculator. For instance, it asks whether the home prices in your area are going up or down, and if you are willing to put in extra effort to maintain the place.
Home maintenance also needs to fit into your budget. Do you have extra money (cash flow) in your budget to support unplanned ownership expenses? My website’s calculator lets you plug in your spending and income so you can figure out what is affordable.
Larry R Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning.

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