Abberly Crest Blog

Although there are many reasons why people can tell you to buy a home, the decision to buy or rent a home depends on your personal situation; who you are, where you are, your career, your financial goals and how you want to spend your time. There is a prevailing thought that everybody should buy their own home. But research shows there are times and circumstances when renting might be a better idea.

Do you have the time?

There is no such thing as a sure thing in any investment. Usually what makes real estate a better risk than some investments is time. The longer you commit to a property, the better your chances of seeing its value appreciate.

If it is likely in any way that you will move, change jobs or stay in the house for a short period of time, less than 10 years, buying may not be a good idea. Letting go of a property before it has appreciated enough to cover the costs and commissions is not fun and if you bought with less than a 10% down payment, it could be costly. Fees and closing costs can wipe out appreciation gains, if there were any. If the purchase was made with an even smaller down payment, chances are you'll come out at a substantial loss.

Will you like the neighborhood?

If you are new to Lexington Park or Southern Maryland, take ample time to get to know the area before investing money in a house and its neighborhood. If you are relocating to a place you hardly know, spend a year in an apartment in Lexington Park until you're certain where and how you want to live and that you are going to stay at your job.

Will you be happy giving up the freedom?

Initially renting is less financial pressure than buying. Paying a first and last deposit doesn't compare to the big chunk of change required for a down payment on a house. If you do have enough savings for the down payment, you could invest it elsewhere and hope for significant capital gains. Imagine if you'd invested a typical down payment amount in the stock market ten years ago.

Renting gives you the freedom of time as well, with no yard or home maintenance projects. Natural and other disasters make renting a home a lower risk.

Even though rents tend to increase by 3% per year, unexpected maintenance costs or sudden property tax hikes will not affect you as a renter.

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When deciding whether to rent or buy, you are making the choice to rent an apartment home or renting the capital needed to buy a home. Most Americans don't consider that they are renting equity (from the bank) to buy a home. As you are aware, very little equity is built in the first few years of paying a mortgage. Many people are surprisingly still very unaware of this fact.

This following article explains how renting is financially better than buying in about 75% of cases!

For the Past 30 Years, Renting Was Generally Better Than Buying

If homeownership is the American dream, then the nation had better wake up. That's the message from a new research paper that examines whether buying or renting a home was a better financial decision over the past 30 years. Most would find the result surprising: over the period Americans were better off renting between 65% and 75% of the time, depending on the investment alternative.

The article essentially looks at eight-year periods and assumes that a person invests the money he or she saves by renting. Since buying is generally more expensive than renting, renters have extra money to invest. It also makes a number of assumptions favorable to homeownership, including gains from the mortgage interest tax deduction, the option to refinance, and the ability to walk away -- loss-free -- from an underwater mortgage. Still, renting wins approximately three-quarters of the time.

The staff at economic research organization e21 explains why this result actually shouldn't be so shocking:

Counter-intuitive as the finding may be to some, it is actually quite logical. Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property. The amount of capital to be rented is a function of house prices, while the bulk of a mortgage payment is interest, which is the rental payment on this capital. After 2 years, the typical 30-year amortizing mortgage balance has been reduced by less than 3%. This means that a household that took out a $300,000 mortgage with a 5% interest rate to buy a home has only reduced its mortgage balance by $8,600 after two years despite spending nearly $39,000 in total over this period.

Housing advocates may respond by pointing out that at least the $8,600 in this scenario went towards home equity rather than simply being squandered on rent. But, as demonstrated in the Real Estate Economics article, the principal component of each mortgage payment - i.e. the portion of the mortgage payment that goes towards reducing the principal mortgage balance instead of interest - is an added expense renters don't have.

This turns the real estate industry's biggest talking point on its head: you aren't throwing rent into the wind each month, you're casting away equity.

Of course, that equity also provides a potential benefit. The analysis's eight-year rolling methodology appears to miss the biggest reward of owning a home: living rent-free once the home is paid off. After that 30-years is up, the longer a family remains in that home rent-free, the more buying pays off. Taking this into account would almost certainly change the result in some, if not all situations. Renting may be a better option initially, but there's no eventual reward.

An important point still needs to be made here: buying a home that you don't plan to live in for an extended period of time probably isn't a great idea. The rent you pay in the form of interest on a 30-year loan for five or even 10 years won't be any better than if you had just rented outright. But if you're planning on living in a home for 30-plus years, then you could potentially get some benefit from buying rather than renting.

Original article by By Daniel Indiviglio, The Atlantic

National house prices have dipped in 19 of the 20 largest metro regions, and declines in house prices are expected to continue given the 1.9 million in backlogged foreclosures. As the American economy shifts from buying to renting, with the number of renting households rising by 700,000 annually -- according to a USA Today analysis of Census data -- the number of homeowners fell by nearly 200,000 per year. Unemployment rates remain high and wages are down, which makes it more difficult for people to buy a house and prompts them to rent.

A number of studies continue to show that renting is better than owning for many Americans, with a house being a poor investment compared to renting and investing in inflation-adjusted Treasury bonds. In the paper "American Dream or American Obsession?," Wenli Li and Fang Yang from the Philadelphia Federal Reserve Bank concluded that the "adjusted real rate of return on housing actually falls below zero," and the national rate of return for home ownership between 1975 and 2009 was 1.3 percent, below the 3.375 percent return for stocks.

Home ownership translates into less money available for investment and owning a house limits mobility should a new job opportunity arise elsewhere. Some economists have even suggested that high home ownership rates correlate to high unemployment rates. Declines in house prices could make it difficult to sell if the house is worth less than its mortgage. Not everyone should own a house, and the recession has helped eliminate some of the stigma once associated with renting, now that 70 percent of Americans now agree that renting has its advantages over owning.

Article from National Multi Housing recent release