Rent or Buy?

Buying is not Always Best

Homeownership has long been a strong component of the American dream, but over the past decade or so, homeownership rates have been declining for a variety of reasons. Many people lost their homes during the recession and others are too mobile to go through the hassle of buying a home in a single location. As Americans, we have the idea that owning a home is one of the key markers for success and that we will be better off if we choose to buy a home. This is not always the case. I will go into a discussion further, but if you don't believe me, check out this calculator by the New York Times.

There are a variety of reasons that you could be better off renting a home than buying. As you might see from this map, the decision is not always clear cut in favor of buying. Let's discuss some key factors.

Rent vs Buy Map

1. Location

In some locations in the country, you could pay more to rent a home than to buy the same home. There are a variety of market conditions that may influence this. In a situation like this, it is important to be aware that your budget, even if unchanged, will buy different things in the rental vs. owner markets. This is not a be all end all factor for everyone, but it is important to be aware of. 

2. Mobility

How long are you going to stay in one place? In general, the longer that you stay in one home the more financially attractive it becomes to buy. This is because when you are paying off a 30 year mortgage, you pay mostly interest in the beginning; equity does not begin to accumulate quickly until after year 10. That means that if you sell before 10 years, you will have accumulated little equity and the transaction costs of selling and buying may outweigh these equity gains. 

3. Lost Opportunity Costs

This one may be the most subtle but most important. When saving for a home, we usually try and accumulate a down payment as fast as possible by stashing cash in the bank. Once we buy the house, we tend to feel that we are "paying ourselves" and that gives us less of an incentive to save. In general, it is cheaper to rent than to buy. Imagine that you have the choice to buy a house for $1200 per month or rent for $1000 per month. If you rent, you can invest that extra $200 per month, which will likely appreciate faster than the value of the home. If you are consistent, you can make a lot of money this way over time. This idea however gets flipped in markets where it is cheaper to buy than rent!

Despite our apprehensions about renting, there are certainly times that it works out to be a better option than homeownership. Americans should stop putting themselves into mental boxes because when you think narrowly, you can avoid making the best decisions.