Home Ownership – Buy or Rent Your Residence?

One of the biggest financial decisions people make is whether to buy or rent their place of residence. It was generally accepted that buying was the wealth-maximizing strategy prior to the housing bust of 2006-2011. Now, many people are not as enamored with the idea of home ownership as they once were.

Home ownership has sunk to an 19-year low (64% of all households). The number was as high as 69.4% of households as recently as 2004. There are a variety of reasons for this change, and it is not necessarily a bad thing. After all, not everyone is qualified, ready, or in the right place in his or her life/career to own a home.

Changing attitudes toward home ownership:

However, what I find concerning is the attitudes toward home ownership. We see this in articles like: “For more people, the American Dream doesn’t include a home of their own,” from the Washington Post. That article cited a poll that showed that in the past three decades, the number of people saying owning a home is “very much” how they define the American Dream has fallen to 61%, down from 78% in 1986.

Real estate website Trulia.com has done the math to demonstrate the financial benefits of home ownership. Specifically, its 2014 buy vs. rent report showed that nationally it is 38% cheaper to buy a home than it is to rent it.

Location and how long you will live there should drive your decision:

Naturally, all real estate is local, so this varies from city to city. Detroit represented one of the relatively cheaper places to buy (66% less expensive to buy vs. rent). Honolulu (and most beach areas) was at the other end of the spectrum (only 5% cheaper). The Trulia report assumes that you buy with 20% down, stay in the home seven years, finance with fixed rate debt at 4.5%, you are in the 25% tax bracket and itemize your deductions, experience a 2.2% increase in annual home prices and rents, spend 1% of the home’s value on maintenance each year, and have 4% closing costs to buy and 8% closing costs to sell (including commissions).

I dug into their methodology, which looked legit. If you want to play around, check out Trulia’s very cool buy vs. rent calculator.

So is it better to buy than rent? Everyone does not agree that buying is a no-brainer, especially in high-demand areas where prices have skyrocketed lately. The longer you stay in the home, the more it makes sense to buy. This is because more of your mortgage payments are going toward principal, your mortgage expense does not increase annually like rents, and the transaction costs to buy become less significant when amortized over a longer period of time.

The New York Times also developed a rent vs. buy calculator and used an example that explained it could be a better decision to rent a $500,000 home instead of buying it, if you could rent it for $1,956 a month or less. The problem is that a $500,000 home would normally rent for closer to $3,000.