Smart SpendingSmart Spending

Which is better: Renting or buying a home?

Plenty of calculators around the Web are supposed to help you decide whether to rent or buy. There's only one problem: They probably won't help much.

By Stacy Johnson Jan 20, 2011 6:12PM

Before our nation's housing crisis began in 2007, the rent vs. buy question wasn't really a question at all. Because the answer was: If you can afford it and you're going to stay put long enough to recoup the transaction costs, you buy. Simple.

That's because for the generations leading up to the Great Recession, buying was always superior to renting for two reasons -- one societal and one financial.

 

As a society, the belief was virtually universal that owning a home was simply what normal, stable adults did. Homeownership has traditionally been known as the "American dream," and anyone not in pursuit of it was assumed to be either transient or not able to measure up financially.

 

Owning a home was also the right idea financially, because there had never been a time in modern memory when home values, at least nationally, didn't increase over time. In addition, Uncle Sam was contributing to the gains by subsidizing mortgage interest via tax deductions.

 

What a difference one recession/housing crisis can make.

 

Watch the following video addressing some of today's issues regarding homeownership and we'll continue the conversation on the other side.

As you saw in the video, whether to rent or own your home has once again become a question.

 

Are calculators worth using?

There are plenty of online calculators you can use to try to determine whether you should rent or own. For example, here's one from mortgage guarantor Ginnie Mae. And here's a really souped-up version from The New York Times.

 

But I wouldn't waste too much time on these types of calculators. Why? Because the answer you get will totally depend on the information you provide -- information you can't possibly know. For example, among other variables, most calculators will ask you how much the house you're buying will appreciate annually, as well as how much equivalent rent will increase over time.

 

If you know the answers to these questions, you don't need a calculator; you need to get a job on CNBC.

 

How should you decide?

The rent vs. own question only became popular again for one reason: Many people were wiped out financially by the housing crash of the last few years. If housing was still appreciating, it wouldn't be much of a question at all.

 

But the falling prices of the last few years shouldn't be that big of a determinant. After all, if not buying a house for fear of falling prices makes sense, then it also makes sense never to buy stocks, since they too can decline. But that's not good logic for either stocks or houses. What falling prices of any kind teach us isn't that it's dumb to buy -- it's that it's dumb to speculate. Over-leveraging by gambling on short-term price swings or otherwise biting off more than you can chew has always been a bad idea, whatever the asset.

 

I've been buying both houses and stocks for more than 30 years. Here's my advice: When it comes to houses, use the same rules that have always applied:

  • Buy only if you're confident you'll be staying put for at least four years. That's because buying a house has very high transaction costs, and also because the longer you own it, the lower the risk you'll lose.
  • Hope for appreciation, but don't count on it. You'll gain equity in your house by paying off the mortgage. If past is prologue -- and that's usually a good bet -- you'll also gain equity via appreciation over time. But the beauty of a house is more than financial, because it's an asset you live in. Making a home into something that reflects your personal needs isn't something you can take to the bank, but it is rewarding.
  • Don't get in over your head. The average house in 1950 was less than 1,000 square feet. Today it's more than twice that. Remember that whatever you buy, you're going to have to furnish, heat, cool and maintain it. As I said in the video above, owning a house can cost 35% more than renting one, and owning takes more of your free time. Plan accordingly.
  • Wait until you're ready. If you have bad credit and, as a result, are forced to take on a high-interest mortgage, it will likely cost you tens of thousands of dollars over the life of your loan. Likewise, the more money you put down, the less you borrow and the less risk you take. Don't just be ready emotionally, be ready financially. Build your credit and your savings before you build your house.
  • Buy in an area with rising employment. When the demand for housing (or anything else) outstrips the supply, prices rise. The single biggest factor influencing demand for homes? Jobs. If the community you're living in has both expanding employment opportunity and population -- easy factors to determine -- prices are likely to rise over time. If you live in an area that's shrinking, you're probably better off renting.

Bottom line? Forget the calculators and consider the factors above. If this is the right time and you're in the right place, go for it.

I live in one of the biggest former bubble markets -- South Florida. When many of my friends were flipping houses five years ago, I was sitting on my hands. Now that prices are down 40%, they're wiped out and I'm looking to move up.

 

More from Money Talks News and MSN Money:

1Comment
avatar
Why rent if you can buy. This would be a no brainer if the housing market were free. Freedom leads to prosperity. The cancer of exclusionary zoning should be ended so that each of us will have the freedom to live where we want in a home of our own choosing. We all have a constitutional right to life and liberty. In order to have life we all need the necessities of life such as food, shelter and clothing. That shelter should be one of your own choosing and not somebody else's choosing. In a free society no one should be free to take away someone else's freedom. No one should tell you how wide your home should be, how many square feet your home should have, what size lot your home should be on or that your home needs to conform to existing housing. America will only be strengthened by people having more financial security and self determination about their housing choices. Please sign my petition to end exclusionary zoning at "wh.gov/gvP". You'll have to put http:// in front of what is in quotes. Thanks.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More