Renting or Buying a Home? – that is a Question!
Every year around this time, a lot of my Clients look on the year behind and take time to reflect and plan for next year. Some, who rent, call me and we go for a coffee or meet at my office and brainstorm the best possible scenario to become a homeowner by buying a home in the coming year. For some homeownership is just a dream, for others it is a destination. Are you one of the dreamers or doers?
From experience the choice between renting or buying a home has been a tough decision especially for the younger generation.
ADVANTAGES OF RENTING
When I ask my Clients who rent, why they liked renting and vice versa, most love flexibility of renting a home:
- Some choose to rent a home because it is more convenient for their lifestyle. Those, whose job requires frequent travels around the country need the flexibility that a 6-12 month lease agreement gives them so they can move to their next project!
- Many renters believe that renting is cheaper because they do not have to pay for maintenance and repairs.
- Renting to buying a home also allows to test-drive different neighbourhoods.
Interestingly a nationwide survey of about 1,166 renters found that 34% said they rent because they cannot afford to buy, 29% said they cannot afford to buy where they live, and nearly a quarter (24%) were saving to buy.
And it is true, in today’s market many rent, because, they feel like they cannot afford the down payment and closing costs required for buying a home. This is due to their inability to save much after paying their monthly rent and monthly expenses. Buying a home costs money, a lot of money.
..and so does renting! There is a rule that a household should not spend more than 28% of its income on housing expenses. With nearly half of renters surveyed, already spending more than that, and with their rents likely to rise again… so why are they still renting?
“Currently, nearly half (47 percent) of renter households are cost burdened (i.e., paying more than 30 percent of income for housing), while 25 percent (totaling 11 million households) are severely cost burdened, paying over 50 percent of their total household income for rent.” – American Mortgage Corporation
DISADVANTAGES OF RENTING
So why some disliked renting? 52% of the renters said rising rental costs were their top reason. Many are convinced that that their rent will continue going up.
Other disadvantages are:
- Landlord might sell the property or decide to stop renting
- Limited sense of stability/permanence
- By renting tenants do not build any equity
There are some people who haven’t purchased homes because they are uncomfortable taking on the obligation of a mortgage. However, everyone should realize that unless you are living with your parents rent-free, you are paying a mortgage – either yours or your landlord’s. So it truly is your choice whose mortgage do You choose to pay?
As Entrepreneur Magazine, a premier source for small business explained in their article, “12 Practical Steps to Getting Rich”:
“While renting on a temporary basis isn’t terrible, you should most certainly own the roof over your head if you’re serious about your finances. It won’t make you rich overnight, but by renting, you’re paying someone else’s mortgage. In effect, you’re making someone else rich.”
DISADVANTAGES OF BUYING A HOME
Now let’s talk about some disadvantages of buying a home:
- You will be responsible for maintenance and taking care of the home. This may range anywhere from regular landscaping to major repairs.
- It is a long-term financial commitment!It is not easy to pack quickly and move. You will need time and good planning to do it in a short amount of time.
- You need to be very disciplined in saving your money. Our generation is all about instant gratification, instant reward. Getting a mortgage requires planning, commitment to long term saving for a down payment, closing costs, and moving expenses. Again, that will require time patience and a lot of planning!
- Some argue that renting eliminates the cost of property taxes and home repairs. But you must realize that all the expenses the landlord incurs (property taxes, repairs, insurance, etc.) are built into your rent payment already. In addition to profit margin…”
ADVANTAGES OF BUYING A HOME
- As a home owner, your mortgage payment is a form of ‘forced savings,’ which allows you to build equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person building that equity. Owning is usually a form of “forced savings”
- Among other benefits to homeownership, one of them top ones is a protection against rising rents. By locking in your housing cost for the life of your mortgage by buying a home. So while the rents are going up – your mortgage payment is locked for the rest of your life. Assuming you will have a fixed-rate mortgage, your costs are predictable! You will know exactly what your mortgage payment will be for the next 15-30 years.
- When you rent, you are paying your landlord’s mortgage. So they are the beneficiaries of the equity gained from paying that mortgage and not you.
- House values and rents tend to go up at or higher than the rate of inflation. When you own, your home’s value will protect you from that inflation. So in a way buying a home and consequently Owning a home is a hedge against inflation.
- Homeowners can take advantage of tax deductions that let them claim their property taxes and mortgage interest.
Interestingly, every year, the New York Federal Reserve publishes the results of their Survey of Consumer Expectations (SCE). One of the many questions asked in the housing section of the survey was: Assuming you had the financial resurces to do so, would you like to OWN instead of RENT your primary residence? The report states:
“Attitudes toward housing as a financial investment remained strongly positive: 65% of all respondents think that buying property in their zip code is a “very good” or “somewhat good” investment, the same level as in 2018. Only 9.0% think housing is a “bad” investment, down from 10.6% a year ago.”
So yes, many if they had a choice you would probably choose buying a home, instead of renting.LOOKING BACK
Not too long ago, multiple headlines said that homeownership is less affordable today than at any other time in the last decade. Though the headlines are accurate, they lack context. They also lead too many Americans to believe that they can’t partake in a major part of the American Dream – owning a home.
In 2008, the housing market crashed and home values fell by as much as 60% in certain markets. This was the major trigger to the Great Recession we experienced from 2008 to 2010. To come back from that recession, mortgage interest rates were pushed down to levels that were never seen before.
For the last ten years, you could purchase a home at a dramatically discounted price and attain a mortgage at a historically low mortgage rate.
Now that home values have returned to where they should be, and mortgage rates are beginning to increase, it is less affordable to own a home than it was over the last ten years.
However, what is not being reported is that it is MORE AFFORDABLE to own a home today than at any other time since 1985:
As an example, the latest edition of Freddie Mac’s Research: Profile of Today’s Renter reveals that 75% of renters now believe it is more affordable to rent than to own their own homes. This is the highest ever recorded percentage. The challenge is that this belief is incorrect. Study after study has proven that in today’s market, it is less expensive to own a home than it is to rent a home in the United States.
Thankfully, some are starting to see this situation and accurately report on it. The National Association of Realtors, in their 2019 Housing Forecast, mentions this concern:
“The U.S. is experiencing historically normal levels of affordability. Nevertheless potential buyers may be staying out of the market because of perceived problems with affordability.”
Buying a Home Is Now 26.3% Cheaper Than Renting in the US
The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting, with a traditional 30-year fixed rate mortgage, in 98 of the 100 largest metro areas in the United States.
Trulia has conducted this study six years in a row. This is the first time that it was cheaper to rent than buy in any of the metropolitan areas. The two metros are San Jose and San Francisco, CA. Here median home prices have jumped to over $1 million dollars this year. Home values in San Jose have risen 29% in the last year, while rents have remained relatively unchanged.
Below is a map of the 100 metros that were studied. The darker the blue dot on the metro, the cheaper it is to buy there.
To calculate the true cost of renting vs. buying, Trulia includes all assumed renting costs. Such as: one-time costs (like security deposits). Trulia then compares these costs to the monthly costs of owning a home (insurance, mortgage payments, taxes, and maintenance) including one-time costs (down payments, closing costs, sale proceeds). They also assume that households stay in their home for seven years, putting down a 20% down payment, and taking out a 30-year fixed rate mortgage.
SO WHAT ARE YOUR OPTIONS?
The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage in the 100 largest metro areas in the United States.
The updated numbers show that it is on average of 2% less expensive to buy in Honolulu (HI). And all the way up to 48.9% less expensive in Detroit (MI), and 26.3% nationwide!
One of the biggest misconceptions of homeownership is the need to produce a 20% down payment especially for first-time buyers. That means a large number of renters may be able to buy now, and they don’t even know it.
Perhaps you don’t realise but you might have already saved enough to buy your first home. Many first-time homebuyers who believe that they need a large down payment are holding themselves back from their dream homes.
If possible at all, try to save for a 3% down payment. I was working with a Buyer several months ago, who was renting a nice condo in Miami. Her lease was coming to an end. To move to a new condo, she would have to put down first last and security deposit total of $12000. She, instead, used these funds to purchase her first home. Today her home on average $50,000 and her mortgage payment stayed the same. If she rented, her rent would have probably gone up. She might even have had to move, coming out of pocket and incurring moving costs every time.
To summarise, there are many financial benefits to homeownership, but probably none more important than its ability to create family wealth.
The National Association of Realtors’ (NAR) Economists’ Outlook Blog revealed in one of the recent posts:
“Housing wealth contributes positively to the homeowner’s and children’s economic condition. Home equity can be tapped for different expenditures. Some are: investing in another property (to generate rental income), home renovation (to further increase the home value), a child’s college education, emergency or major life events, or expenses in retirement…
Housing wealth is built up over time. Mainly due to home price appreciation and the principal payments that the homeowner makes on the loan.”
“…the mortgage interest deduction is not the main source of these gains. Even if it were removed, homeowners would continue to benefit from tax breaks and capital gains.”
One study found, if you wait just one year to buy a home, you throw nearly $19,000 in savings down the drain. Postpone for another year, and you’re losing out on additional estimated $18,672 in savings. Delay for three years, and that figure jumps to $54,879.
THE TRUE COST OF NOT BUYING A HOME
Owning a home has great financial benefits, yet many continue to rent!
Every three years, the Federal Reserve conducts their Survey of Consumer Finances.
The study revealed that the median net worth of a homeowner is $231,400 – a 15% increase since 2013. At the same time, the median net worth of renters decreased by 5% ($5,200 today compared to $5,500 in 2013).
These numbers reveal that the net worth of a homeowner is over 44 times greater than that of a renter.
Be careful not to get caught in the trap that so many chose to live in. Homeownership provides many benefits beyond the financial ones. Housing is typically the one leveraged investment available. If you are one of the many renters who is tiered up with rising rents and may be uncertain of what is required in today’s market in buying a home, let’s get together to help you on your path to buying a home. Of course, every market is different, but before you renew your lease again, find out if you can put your housing costs to work by buying a home this year!
I always tell my clients, the price of your home is the deposit you put down and closing costs. The rest would still be your rental payment. Just remember: You’re always paying for housing, whether you own or rent. So why no own?