Housing: Is It Better to Rent or Buy?
With Spring and Summer often being the hottest seasons for buying a home, many people across the U.S. are currently pondering that classic question: is it better to rent or buy a house? It’s a difficult question to answer because the answer needs to be both very personal and at the same time very impersonal.
For example, if national and local housing market trends are not favorable to buying a house, you might decide not to buy even though your personal circumstances make it very appealing. Or conversely, if the national/local trends make it a good time to buy a house, you might choose not to because you don’t feel ready on a personal level (due to finances, career stability, etc.).
Below, we’ll take a closer look at how to sort through these factors and determine whether buying or renting is right for you – right now.
Housing Market Timing: When It’s Good to Buy vs. Rent
One of the things anyone should do before buying a home is of course to look at the housing market – both nationally and in their local area. Over the last ten years, we’ve seen both the benefits that can come from buying at the right time and the hardships that can come from buying at the wrong time.
Imagine you were preparing to buy a house in Pheonix, AZ, in 2005, you could have looked at the local market trends and seen a graph that looked like this:
Phoenix, AZ, home prices 2000-2005
You might have thought it was a great time to buy since the prices seemed to be going up and up and up. Or perhaps you would have suspected that prices were becoming too high and that there might be a crash coming in the near future. If you had the latter view, you would have been correct, since this is what the graph looked like six years later:
Phoenix, AZ, home prices 2000-2011
None of this means you can perfectly time your house purchase. But it does mean you should do some research and make an effort to avoid buying a house if there are signs of a bubble. One indication of a bubble might be if the Case-Shiller Index is way above its historical average. If it is, then you know it’s time to proceed with caution.
Another indication of home prices that are too high is the ratio of home prices to rental rates for a given city or town. If you can rent a home for much cheaper than you can buy, it may not make much sense to buy. And vice versa.
Ultimately, you will want to check all of these factors – national trends, local trends, etc. – before making your decision. However, that’s not the whole picture, because you also need to examine your own personal factors.
Your Personal Timing: When It’s Good to Buy vs. Rent
If we ignore all the factors above for a moment, there are a few leftover considerations that are very important. These relate to your personal life.
First, you’ll want to think about your career and your plans for the future. How long do you plan to live in your current city or town? If you plan to move somewhere else – either for work or for other reasons – in the next five years, then you would probably be better off waiting to buy a house. The reason is there are a lot of upfront costs to buying a home: hiring a real estate agent, hiring a property assessor, finding contractors to examine the house and perhaps even make necessary repairs. Not to mention the interest costs that you’ll pay at the beginning of your home loan. If you stay in the same house for many years – or rent it out – then these costs are not a problem. But if you need to sell the house within five years, the costs likely won’t be worth it.
Second, your financial situation is something that directly affects your readiness to buy a home. In most cases, you’re better off having a sizeable down payment – of at least 5% and perhaps even 20% or more – to reduce the amount of the mortgage you’ll need. It takes awhile to save up such a down payment, and if you don’t have one yet, you may not feel ready to buy a home, regardless of the market trends. Not only that, but if your income is in jeopardy for any reason, such as a potential pay cut or upcoming round of layoffs at your company, that is a very good reason to avoid purchasing a home. You want to be pretty certain about your ability to make that monthly mortgage payment before you sign on the dotted line.
Finally, before you decide to buy a home you should know that you’re ready to deal with all the logistical challenges that can arise when you’re responsible for maintaining a piece of property. If the pipes break on a Tuesday morning, will you be comfortable finding a plumber and arranging for them to come fix the problem? There are many such problems that can come up when owning a home, and the solution is not as simple as when you’re a renter and you can simply call up your landlord. It’s important to be prepared for these things before buying a house.
Ultimately, the decision to buy or rent will be up to you. But one tool that might help you make sense of all these competing factors is this online calculator created by the New York Times. The Times recently launched this calculator in order to help prospective homebuyers look at their situation from all angles and make the right decision for them. You can use the tool and the points mentioned above to weigh your own questions while deciding whether to buy a home. As long as you think through your decision carefully, the odds are pretty good that you’ll make the right choice.
Have you had experience buying a home? Or are you renting? Let us know how you made your decision in the comments below.
By: Ben