December 17th, 2016 9:59 AM by Jackie A. Graves, President
To buy or not to buy? That is the question
— or it should be if you in the market for a new home.
the conventional wisdom that buying a home is a surefire investment that every
sentient being should pursue. The Great Recession was a harsh reminder that the
housing market can decline, even plummet.
too, is the notion that paying rent is just throwing away money. Americans
move, get married and divorced and change jobs at an unprecedented rate — which
means that there are times when buying a home may not make any sense at all,
even for people with ample means, and even when the market is strong.
to rent or buy is a decision that requires some serious consideration. It
depends on several factors, including the market, your age, income and
have devised tools to help home-seekers solve that complicated equation. Most
begin with an attempt to compare monthly rents with mortgage
costs for similar units or homes.
This calculator provided by the New York Times allows you
to get a reasonably good idea of what makes sense for you by allowing you to
input a number of factors, including:
Mortgage interest rate and mortgage duration, amount of down payment,
inflation rate, property tax rates, maintenance and renovation costs, fees and
dues for homeowners association and so on.
Renters monthly payments, including utilities and renters
like this one are helpful as a way of seeing how the different variables work.
But many calculators also leave it up to you to guess where the real
estate market is going, and most of us are not really qualified to make
So, in a
different approach to the problem, three Florida scholars developed something
called the Buy vs. Rent Index. Professors Ken Johnson of Florida Atlantic
University and Eli Beracha and William Hardin at Florida
International University created a mathematical model that analyzes 23
major metro areas in the United States to determine whether market conditions
favor renting or owning as a means of generating wealth over time. It
considers many factors, according to a website introducing the project:
but not limited to, rent-to-price ratio, mortgage rates, expected rate of
inflation, real past stock market long term returns, long term rent growth and
housing price appreciation, costs associated with maintenance and property
taxes, homeownership tax benefits, transaction costs and average homeowners’
duration between relocations.
words, it looks at the costs associated with renting versus buying, and
the likely return on investing in a home versus the likely return of putting
that money in stocks and bonds. According to the website:
to arrive at the index value for each location and each point in time, the
index conducts a “horse race” comparison between an individual that is buying a
home and an individual that rents a similar quality home and reinvests all
monies otherwise invested in homeownership.
area — Seattle — their index shows that buying was
still, on average, the better financial choice until the end of 2015. But the
advantage of buying over renting diminished almost to zero as we entered
back, our purchase of a house here in 1997 came at a time when the numbers
favored buying over renting. After that — as when we decided to purchase a
different home in 2008 — umm, not so much. (We ended up selling that one, and
moving back to the first, but that is a longer story.)
Beracha, Hardin and Johnson “Rent vs. Buy Index” for
In Houston, renting has been the better choice since about 2004.
In Dallas, renting has made more sense since 2014, according to the index.
Meanwhile, the index shows that it still makes more financial sense —
again, on average — to buy in Detroit, Boston, and Philadelphia. (You can see graphs for all 23 metro areas here.)
good idea to go through the numbers in a nonemotional way, and these tools are
a great way to do so. But eventually, everyone on a quest for a new home has to
answer questions about their personality and priorities.
with, where are you in life?
want to remain highly mobile, or are pretty sure you will need to move to
further your career, the creators of the index suggest it may not be a
good time to buy.
of selling is so high it hurts your accumulation of wealth,” says one of the
index creators, Ken Johnson. “Then renting on average is a better way to go.”
you need to be honest with yourself about your spending habits. If you choose
to rent, the way to accumulate wealth is to invest money that you would
otherwise have spent on a down payment, interest payments, house maintenance
and other homebuyers’ costs.
number one thing you have to ask yourself is, ‘Am I a strong saver?'” says
Johnson, in a video introduction to the index. “Because the model we built all
this on assumes that you will take all that money and reinvest it —
monastically — into the stock market or into the bond market. … If the answer
is no, you need on average to lean a little more towards ownership … because
homeownership, at its heart, is a forced savings plan.”
Family: If you live near your family, you may get the
grandparents’ love and support for your kids, and be able to help them out when
they need it. It’s hard to put a price on that support and contact. Where
your relatives live, how old they are and the importance of being close by
may affect your decision about where to live, and whether to rent or buy.
Lifestyle: Maybe being
able to walk or bike to work, restaurants and stores is top priority for you,
yet you can only afford to buy in the suburbs. In that case, you may
decide to chuck the financial case for buying in order to live the life that
fits your personality.
you have children, the quality of schools may be a big determining factor about
where you are willing to live. Maybe you can afford to rent in the right
neighborhood for those schools, but not buy.
important is it for you to put your personality into your home? I love
to take on home remodel projects and transform spaces. That’s generally
not an option when you are renting. But if you don’t like spending
your time on upkeep and remodeling, steering clear of homeownership — the
world’s biggest DIY project — is probably a good idea.
are constantly changing. If you’re young and want to be mobile, you might want
to stick with renting. If you’re settling down with a family or are highly
committed to a certain community, it might make sense to buy. And when you
retire, it might be appealing to rent again — as many boomers are deciding in recent years.
no one-size-fits-all way to make this major life decision. Think through the
numbers and be honest with yourself about your priorities, and you can reach an
answer that makes sense for your finances and your lifestyle.
BY Kari Huus
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