Should You Buy or Rent?

Is Owning a Home Still the American Dream?

A friend of mine recently called asking me whether it makes more sense to rent. He had been considering purchasing a home in the mid-West and was beginning to rethink the decision.

With lower home prices, high affordability and low interest rates, you might think its a no-brainer. But it isn't. Sure, you have to live somewhere, but if you're thinking of a home as an investment, what other investment would you consider if you thought it may be worth less a year from now?

Speaking at the National Multi Housing Council Mid-Year Apartment Strategies Finance Conference and Board of Directors meeting held recemtly in Palm Beach, FL, industry experts examined how apartments will change based on the preferences of today’s renters.

Observers and insiders say today’s renters want urban locations within walking distance of entertainment and employment.  They are willing to accept smaller apartments to lower their rent in these more expensive downtown neighborhoods, but they expect developers to incorporate more usability into a smaller footprint.  They are also very social and want places around the property to congregate.

Renting, it seems, is becoming a new normal.

A recent article in the Dallas Morning News supports this notion. In the June 2, 2011 article, Shontina Kuykendoll tells the reporter she's renting in part because she fell in love with a downtown neighborhood. The article also points out that more than 50 percent of residents in Dallas- a relatively affordable market, rent. Moreover, the U.S. homeownership rate is at the lowest level in more than two decades and still falling. Some 3 million have been converted to renters since the crash began around 2008.

So does it make some sense to rent? The calculators I tried with my friend suggested it does. After five years and spending just $125,000 on a home vs. $700 in rent, these programs suggest he'd actually be $7,000 or more ahead by renting than buying. We had to adjust the home price down to the high $70K's to tilt the scales towards buying.

That's not always the case. I tried it on the home I live using my purchase price and the current rental rate suggested by Zillow.com. It says I would save almost $20K by buying. Buying is better than renting, however only after four years. Recently relocating to DFW and then deciding to move again after only 1.5 years means taking a considerable hit. In the home I am planning to move to, this calculator says buying is better than renting only after seven years! My parents home in a small town in Pennsylvania came up with buying beating renting after only two years, however.

Today some people are choosing to rent because it is their preference. In many cases you can live in a more walkable area with amenities built for pedestrians if you choose to rent instead of buy. Other people are renting because they own a home somewhere else which they haven't been able to sell. In the process they may be sold on the conveniences of renting.

Should you rent or buy? These questions are not always easy to answer. The longer you plan to stay in a home, the more likely buying is the answer. The more frequently you move and the less time you spend at home, may tilt the scales towards renting.

The scales now may over-all tilt towards renting, and this is due to more than just problems in the housing market. It has to do with demographics, fuel prices and a simple change in preferences. Walkable urban life is in vogue, and in many cases there's a lot more availability and affordability in those areas with rental units.

As for my friend, I suspect he wants to own whether or not it makes perfect financial sense. There's also a case to be made for spending your money on something you desire.