When to Make the Switch From Rent to Buy
Many Americans are now delaying their life's biggest purchase until much later, or forgoing it completely.
If you've been paying attention to the real estate headlines at all lately, or if you're in the market to buy or sell a home, chances are you've noticed prices are going up - way up. According to a recent report from the Federal Housing Finance Agency, home prices around the U.S. as of the first quarter of 2016 are up 5.7 percent over this time last year. That makes the first quarter of 2016 the 19th straight quarter of home price increases.
"Home prices are trending up across the U.S."
This environment could make rookie homebuyers more than a little anxious. On one hand, it seems like it's always been common knowledge that buying a house is a better investment than renting. On the other hand, this real estate rite of passage is becoming more and more expensive. Although having a mortgage has historically been a stepping stone coming soon after college graduation, many Americans are now delaying their life's biggest purchase until much later, or forgoing it completely.
A recent story in The New York Times cited a report from the Joint Center for Housing Studies at Harvard University, which found that renters now make up 37 percent of all households in the U.S. That's the highest the figure has been since the 1960s. Some say this stems from a new suspicion of homeownership following the housing market crisis of 2008. As the Times reported, many question the long-term viability of a home purchase, even if the short-term expenses are manageable.
Calculating your advantage
As financial planner Milo M. Benningfield told the Times, the rent vs. buy argument never has a clear-cut answer.
"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," Benningfield said, according to the Times. "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."
While it may be impossible to know for sure, there are some reliable ways to at least scope out the situation. Many real estate websites now offer a rent vs. buy calculator that can help. Of course, these shouldn't be used as a green light to run out and get a mortgage, but can be helpful for potential owners who want to assess their situation. The Times built a very comprehensive calculator that allows users to input just about every variable at play, from home price to down payment and closing costs.
Deciding whether to keep renting or to start looking for houses might involve more than just calculations. Owning a home is only financially advantageous for those in the right position. As Realtor.com noted in a guide to renting or buying , timing has a lot to do with the decision. For one, a buyer needs to be in a financially stable position for the foreseeable future - at least seven years, but ideally much longer. That means people who have just switched careers or have been employed only sporadically over the last few years should probably keep on renting.
Liquid savings need to be high as well before pulling the trigger on a mortgage. The down payment on a home can be as high as 20 percent of the list price, a significant hurdle even for the most dedicated savers. In addition, lenders will take credit score and debt-to-income ratio into account when considering an application. If you're having trouble making ends meet with regular bill payments, chances are a mortgage won't do many favors.
With these issues sorted out, however, buying becomes a much easier choice. With home prices on their way up, buying in now will allow for a good chance at a decent return several years down the road, or at least breaking even on the investment. Mortgage rates also remain low, which has further enticed millions of people to buy in the last few years.
In the end, the choice of rent vs. own rests with you. Doing your homework now and making an informed decision will save you years of headaches down the road.