5 Reasons You May Be Better Off Renting Than Owning A Home

by Kevin M on July 9, 2012

in Housing

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.

Renting vs Owning

Consider the following:

  1. Mortgage rates are at historic lows, house prices are lower than they have been in years, and yet prices show few signs of recovery
  2. The 76 million-strong Baby Boom generation have entered the retirement years—a typical time of trading down or selling off housing completely
  3. Generation Y is showing nothing like the fever to own a home that previous generations did
  4. Millions of households have been impaired by the financial meltdown, effectively removing them from the housing market for a very long time
  5. 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?

Probably not.

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.

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{ 9 comments… read them below or add one }

1 Julie @ Freedom 48

Great points! In Canada, the government has also placed great restrictions on mortgages… making it more difficult for people to qualify. So, with less folks qualifying… there’ll be less buyers out there… and house prices will surely fall.

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2 Kevin M

Hi Julie–Same is true in the US. A few years ago about all you needed to get a mortgage was a pulse, now you need a stable work history, good or better credit and assets (no more 100% financing). That’s pushed a lot of people out of the market.

Long term I think that’s good, but it will also mean years of the market adjusting to a smaller buying pool, and that will keep downward pressure on house prices.

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3 JP @ My Family Finance

Well argued Kevin. I’d also add that people tend to overvalue equity. Your house may be worth x dollars, but you have to sell it and pay commissions to get it or take out a loan for interest or pay capital gains taxes if the return is high enough.

However, the main benefit for a house is so big, that it really is a good choice for most people. Homeowners avoid rent inflation, while at the same time, they bank home price inflation. Housing is just about the only cost in your life that you’ll be able to fix, at least a large portion of. The only circumstance where this is a bad idea, for someone who can reasonably afford a mortgage, is when housing prices are so high compared to renting, that the price outweighs these benefits.

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4 Kevin M

Hi Lance–That’s true, especially if you’re in an area with high rents, though that usually means equally high house prices too. I think the most important thing is to be thinking less about conventional wisdom, ie, everyone should own a house, and more about personal circumstances. For example, if you’re young and/or single, do you really need to own a house? If you’re career is unstable, would you be better off renting? If all of your money will be tied up in the house, would you be better off renting and keeping your cash in the bank? Or paying off debt? The days of “one size fits all” are over.

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5 Lance @ Money Life and More

Those are definitely some great arguments against buying a house but there are also arguments for it too. I think in a lot of cases you can buy for less than you can rent for if you’re smart about it. It just depends on where you live.

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6 Kevin M

Hi Josh, that maybe be true (a wise decision for most people) but I think the decision to buy has to be weighed much more carefully then in the recent past. For one thing, it’s not nearly as easy to get out of a house as is used to be. For another, no one knows where their employment will take them. As far as renting it out if you have to leave, not everyone is qualified to be a landlord, nor is that what most people anticipate when buying. Renting is a more viable option then ever before, and it may be the right choice for a lot of people.

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7 Josh @ Live Well Simply

All very good reasons to rent. In the long term, however, I think purchasing a home is a wise decision for most people. And when better to buy than now while mortgage rates are at rock bottom and home values are low and stagnant? Just don’t ever sell. If you have to leave, rent it out.

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8 Kevin M

Thanks Roger!

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9 Roger @ The Chicago Financial Planner

Excellent post, well-written, you highlight several solid points.

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