begin quote from:
Rob
Austin and his wife, Natalia, have a 10-month-old son, healthy incomes
and plenty of cash in the bank for a down payment on a house. But they
are happily renting a townhouse in …
Your Money
To Buy or Rent a Home? Weighing Which Is Better
Rob
Austin and his wife, Natalia, have a 10-month-old son, healthy incomes
and plenty of cash in the bank for a down payment on a house. But they
are happily renting a townhouse in Pasadena, Calif., with no plans to
buy for now, given the frothy prices in their area.
“As
long as there is such a disconnect, where a couple like my wife and me
have to put down a gargantuan down payment and still have a large
monthly payment to get into a decent, and not necessarily nice, house,
that is a game we don’t wish to play,” said Mr. Austin, a 39-year-old
business manager at a biotechnology company. “When home price-to-income
levels come back to a more normal level, when that happens, then we will
be the first to jump in. If that never happens, that is O.K.”
More
American households are renting, across all income levels and
generations, for different reasons. But when homeownership is the
centerpiece of the American dream, most of us have internalized certain
ideals: Buying a home builds equity, putting you on the fast track to
building wealth. Renting, by contrast, is essentially throwing money to
the wind.
But with renters now accounting for 37 percent of all households, the highest level
since the mid-1960s, according to the Joint Center for Housing Studies
of Harvard University, more people may be renting for longer. Does that
mean people who rent for extended periods, perhaps decades — even a
lifetime — are forever at a disadvantage?
“Arguing
about whether rent versus buy is a better financial decision is like
debating active versus passive investment strategies, hedge funds versus
mutual funds, Apple versus Google,” said Milo M. Benningfield, a financial planner
in San Francisco. “Somebody’s going to be right in terms of higher
returns in the future, but we can’t know in advance who that will be —
and it will be tough to quantify how much risk was taken along the way.”
The
arguments in favor of ownership are persuasive, particularly for people
who expect to stay in place for at least five to seven years but
probably more. A mortgage
acts like a forced savings plan, even if you’re paying the bank
hundreds of thousands of dollars in interest for the privilege of
building equity. Call it the cost of enforcing a positive behavior.
Buying
also generally protects consumers from rising rents, while traditional
mortgage payments remain constant. Then, there is the fact that buyers
are using borrowed money to purchase an asset that is likely to
appreciate over a long period, though that can backfire as well (see
housing market plunge, millions of underwater borrowers, circa 2008).
Being able to call a place your own has a real, albeit intangible, value
too.
Continue reading the main story
How
well any household will fare financially by buying or renting really
depends on factors no one can predict. Other studies have found that
renters who invest their down payment and any savings from renting as
opposed to owning often come out ahead.
Either
way, most financial professionals would caution against viewing a home
purchase as an investment, particularly after factoring in the cost of
maintenance, taxes, insurance and the high costs of buying and selling, though it’s difficult not to.
It
may be hard for people living in bubbly markets to believe, but, over
all, home prices in the United States have risen just 0.37 percent
annualized, after inflation, for the last 126 years, according to calculations
by Robert J. Shiller, an economist who received the Nobel in economic
science in 2013 and wrote the book on speculative bubbles, “Irrational
Exuberance.”
“Disregarding
the special amenities that many people value in homeownership,”
Professor Shiller said, “it would be hugely better invested in the stock
market.”
And many people do accumulate substantial equity in their homes, which often becomes a cushy safety net in retirement. A study
by the Harvard Joint Center found that, even after the housing crash,
the median household who bought a home after 1999 still accrued
significant amounts of wealth through 2013 (though whites gained more
than African-Americans and Hispanics).
Is It Better to Rent or Buy?
The choice between buying a home and renting one is
among the biggest financial decisions that many adults make.
Christopher E. Herbert,
managing director of Harvard’s Joint Center, said he believed the
results could be tied, in large part, to behavioral incentives. “The
motivated savings up front and the forced savings over time,” he said of
accumulating a down payment and making mortgage payments.
There
may also be something about many people who buy. As Mr. Benningfield
pointed out, they may have other attributes that may contribute to their
economic success.
Renting can still be financially advantageous under certain circumstances. Consider the work in 2012 by the academics Eli Beracha of Florida International University and Ken Johnson of Florida Atlantic University. They simulated
a horse race between buyers and renters, and concluded that in many
cases, renters came out ahead, at least during the eight-year stretches
they studied.
Theoretical
renters put their down payment in a portfolio that often consisted of
more than 50 percent stocks (the professors created a portfolio that
approximated the risk of owning a home), and continued to invest any
savings from renting. But this assumes that there are savings from renting, which is not always the case, and that the renter is disciplined enough to actually set the money aside.
The
authors’ point, however, is that people often blindly believe that
buying is usually the smarter option. “Most of the public drive to buy
is without looking under the hood,” Professor Johnson said.
Another study,
from HelloWallet, a unit of Morningstar, came to similar conclusions in
2014 when comparing a hypothetical, moderate-income family that bought,
with one that rented, in 20 major cities across the country. The study
projects that median-income families, or those who earn about $50,000,
will often end up with more net wealth if they rent versus own over the
10 years from 2013 to 2022.
But
any number of variables can quickly shift that calculus, including the
price of the home relative to the rent, whether the family is affluent
enough to benefit from tax savings, and the time spent in the home.
“The
longer you stay, the stronger the argument is for buying, all else
equal,” said Aron Szapiro, who conducted the analysis. But he also
contends that the tax advantages of homeownership are often oversold,
particularly to moderate-income households.
If
you’re trying to determine the right option, some guideposts may help.
Mr. Szapiro, for example, found that in households with about $100,000
in earnings, net wealth typically rose more 10 years after buying a home
than if they had rented — but only if the annual rent was 6 percent or
more of the purchase price. So it would pay to buy a $600,000 home when
rent in the area was about $3,000 a month or more. (In a couple of
places, including New York and Washington, he found that it made sense
to buy when the cost of renting was a bit lower relative to home
prices.)
William Bernstein, an investment adviser
who has written several books for do-it-yourself investors, offered
another rule of thumb: Never pay more than 15 years’ fair rental value
for any home, or 180 months of rent.
Why
15 years? By his calculations, someone paying more than 180 months of
rent might potentially do better by investing in the market, after
considering the costs of owning.
So
if an apartment would rent for $4,000 a month, that means you shouldn’t
pay more than $720,000 ($4,000 x 180) for an equivalent property.
Perhaps easier to digest, Zillow
advocates looking at how long it would take for buyers to break even,
when compared with renters who invested their down payment of 20 percent
and any savings in the stock market. Not surprisingly, buyers in places
like Brooklyn, Washington and Los Angeles had to wait longer, at least
four years.
Then
there’s what you feel in the pit of your stomach. To Mr. Austin, house
prices in the enclave where he lives in Los Angeles feel as if they are
in a bubble, the housing downturn a faded memory. “Many people we know,”
he added, “are tripping over themselves to buy right now.”
Correction: April 1, 2016 An earlier version of this article misstated, in one instance, the surname of a financial planner in San Francisco. He is Milo M. B
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