Three years into the national housing recovery, activity and price increases are moderating. While the unusually severe weather across the country has contributed to the recent weakness, the effects of last year’s rise in mortgage rates and the incremental increase in inventory have slowed things down. As a result, it is a perfect time to consider one of the age old questions that plagues would-be homeowners and equity rich near-retirees: Should I buy or rent?
Let’s start with some post-housing crash statistics. According to the Census Bureau, homeownership peaked in 2004 at 69.2. Since then, the US homeownership rate has fallen for nine consecutive years, down to 65.2 at the end of last year. Obviously the housing boom and bust and subsequent recession reversed the trend. But something else happened over the past ten years: the “dream” of homeownership was called into question by every age group.
The under 35 set watched with dismay as their parents were crushed by the housing crisis. As a result, they are spooked by homeownership, with just 36.8 percent taking the plunge. Some of them have been forced to live with their parents longer rather than forming their own households, while others are content to live the carefree life of a renter.
Meanwhile, their parents, aged 55 to 64 saw their share of household ownership at its lowest point since recordkeeping began in 1976. Where did they go? Also to the rental market, according to Harvard University’s Joint Center for Housing Studies. The number of renter households aged 55-64 grew by 80 percent between 2002 and 2012, compared to 50 percent growth among all households. As the housing recovery continues, the ranks of pre-retiree and retiree renters may continue grow, because many will seek to finally recoup home equity that could be vital during their retirement years.
The calculation of renting versus owning, like most financial decisions, is an intensely personal one. The best lesson of the past ten years is that each potential homeowner must be financially prepared. I recommend putting down at least 20 percent and having an ample emergency reserve fund to pay for the routine maintenance a home requires.
If you have squirreled away the necessary funds, the next question is whether it is better for YOU to rent or buy. On a national level, monthly mortgage payments dipped below rent payments in mid-2008 after the housing meltdown, making owning cheaper than renting. But every market is different, which is why you need to run the numbers. You can use this NYT calculator, which requires you to do some market research in order to compare the cost of renting and owning in your area.
All of these calculations have a caveat: Even if it makes financial sense for you to rent today in certain locations, if inflation picks up in the future (which it probably will), so too will your rent. That may make the rent versus buy calculation tip in the other direction over time. On the other hand, the benefit of not being tied to a house can mean the ability to grab a better job in a different city. And maybe renting in retirement can free up much-needed liquidity, which may be more valuable to you than keeping the family home.
And then there is the emotional equation. There is a blissful peace of mind that renters have, because they never worry about the boiler imploding, the roof leaking or an appliance that stops working. All of those problems are easily solved with a quick call to a landlord, who has to deal with the hassle of repairs.
While renting can instill a sense of freedom, many homeowners will tell you about the great psychic benefits of owning their own homes, of nesting and creating a "home" rather than simply a place to hang your hat for a while. All of these factors are important variables in your decision to buy versus to rent.
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