The Rent Or Buy Dilemma
May 29th, 2007Most people decide to buy a home for very emotional reasons. Their home-owning friends are constantly talking about fix-up projects and gardening chores. Family members keep asking when the apartment dweller will be hosting a holiday dinner. Children want bedrooms of their own and a backyard for playtime. And so it goes.
Despite these emotional tugs, buying a home isn’t always a wise financial decision. Such individual criteria as income, credit history, savings and lifestyle preferences determine whether a person will want to buy a home and, if so, whether he or she can qualify for mortgage financing. But the broader economic outlook for interest rates, other investments and the local real estate market should be factors in the decision as well.
Interest rates obviously have a big impact on the affordability of ownership housing. Low rates such as today’s make mortgage financing costs dramatically less burdensome for homeowners and make ownership an attractive proposition in many cases.
But low rates might mean the home will be less likely to appreciate in value. What caused interest rates to go down? If it is an inflation expectation, you shouldn’t be looking for as much appreciation as you might have when interest rates were higher.
If it is because the economy is soft, maybe you should be thinking about whether your employment is at risk. It’s not so much that there is a right or wrong answer. It is just that there is a list of considerations.
Another item on the list of considerations is the stock market or, more broadly, other investment opportunities. Although a house should be a home, it’s also a financial investment that ties up capital. No one can out-guess the stock and real estate market over a long term, so you want to be diversified.
Too many people put all their eggs into the home ownership basket, whereas they shouldn’t count on house price appreciation as being a source of increased wealth for them over time. In some years, house prices do better. Lately, the stock market has had a good run. The moral is that your investments should be diversified.
Mortgage financing increases both the risk and the possible return on buying a home. It is exactly like buying equities on margin. Using borrowed money in any investment increases the volatility.
Finally, is the absolute cost of ownership housing an important economic factor in the rent or buy decision? While high housing costs are a barrier to ownership for some people, the price of homes may be less of a factor than the relative costs of owning or renting comparable housing in an area.
The comparison between the costs of renting and the costs of owning must be made in each market area as another component of the rent or buy decision.
———————————————————————————
