For many, many years the renting-vs.-owning question was a done deal when it came to housing. Everyone who could own a home did, and everyone who couldn’t aspired to do so as soon as possible. Is that still true today? Is renting a better option? And if so, what changes have caused it?
Renting Vs. Owning: 5 Reasons You May Be Better Off Renting
House Prices Aren’t Rising Any More
When house prices were rising steadily owning made far more sense than renting. You were building wealth in the form of increasing home equity while you were living in the property. But that dynamic has been missing for the past five years and even if it does return, it’s unlikely that it will be anything like the price increases we’ve seen in the past.
Consider the following:
- Mortgage rates are at historic lows, house prices are lower than they have been in years, and yet prices show few signs of recovery
- The 76 million-strong Baby Boom generation have entered the retirement years—a typical time of trading down or selling off housing completely
- Generation Y is showing nothing like the fever to own a home that previous generations did
- Millions of households have been impaired by the financial meltdown, effectively removing them from the housing market for a very long time
- Though employment has been improving, jobs security is conspicuously absent
It seems that the combination of these factors are putting a lid on house prices and probably will for the foreseeable future. And if prices aren’t rising, there’s no imperative to own right now. Better to rent and see how it all plays out.
Freedom To Follow The Jobs
Let’s spend a little more time on item #5 from above. When you buy a home you’re usually signing a mortgage note that will bind you to the house for something like 30 years. Can you conceive of a job that you’ll have for 30 years?
Jobs and even careers are becoming notoriously unstable for reasons that appear to be beyond the financial meltdown. A 30 year mortgage requires some level of income stability for the term of the loan, and that may require not just changing jobs, but also uprooting to follow them to distant places.
If you have to make a geographic move to find work in your field, owning a home will complicate matters. You’ll have to sell or rent out your home in order to make the move. And if you can’t do either, you may have to pass up the job opportunity.
When you rent, it’s far easier to pick up and follow a job.
A House Is A Capital Trap
It’s not just a mortgage you have to contend with when you buy a home; you also have a down payment tied up in it. That wasn’t much of a problem when you could easily sell a home after just a few years—for more money than what you paid for it—or borrow out the equity any time you wanted. Today, your down payment is likely to be tied up for many years.
In addition, when you own a home you have to put money into repair and maintenance, adding thousands of dollars to the money you already have tied up in the house.
At a time when so many people are dealing with job and career issues, as well as debt problems, can you afford to tie up thousands of dollars in equity in a house? When you rent, all of your money can be held in liquid accounts ready for your use.
Maximum Financial Flexibility
Here’s something we don’t like to think about too much…if you were to experience a permanent income reduction, what would you do to lower your house payment to adjust to the smaller paycheck?
If you rent, you can move to a lower priced home or apartment, or even move in with family. If you own, you first have to sell your house. In today’s market, selling a house can take months or even a year or more. Worse, if you’re in a negative equity position, you may not be able to sell at all.
Renting provides the financial flexibility that’s more consistent with today’s economic and employment circumstances. Owning, because it’s long term in nature, is rigid and locks you into a lifestyle you may not be able to sustain—or get out of.
Some people may consider such thinking to be negative; I consider it being prepared.
The Mortgage Interest Income Tax Deduction Isn’t What It Used To Be
Real estate agents often hype the mortgage interest and real estate tax deductions as a compelling reason to own a home rather than to rent. Renting, after all, offers no income tax deduction. Two factors are now weighing against that assumption though.
First, interest rates are at very low levels—a 4% interest rate on a $150,000 mortgage, will produce only a $6,000 mortgage interest deduction. Second, the standard deduction is $11,900 for a married couple filing jointly in 2012; it’s possible that even owing a house will not get you any more than $11,900 in deductions. At best, you may only get additional deductions on part of your housing costs, but nothing like the 20%, 30%, or 40% deduction agents are quick to point out.
The mortgage interest and real estate tax deductions continue to be a real factor for higher income households buying higher priced homes. But for many middle class households, and most lower income ones, the deduction will make only a minor improvement in your cash flow.
Am I saying you shouldn’t buy a house? In many cases, yes, that’s what I’m saying. It’s not as “right” as it was a few years ago, not for a lot of people. Consider the value of owning against the possibility that the home could drop in value—would you buy knowing that might happen? Do you feel your job/career is stable enough that you’ll be able to make the payments and not need to move to another city for the foreseeable future? Is your financial situation strong enough that you could weather a prolonged period of unemployment and still keep up the house payments?
These questions were always a part of the homeownership equation—they’re just more relevant now than ever.
What do you think about owning versus renting today? Do you think the pendulum has swung in favor of renting?
photo credit: FreeDigitalPhotos.net
© 2012, KNS Financial, LLC. All rights reserved.