Real Estate

To Rent or Buy: A Housing Question with No Right Answer

It wasn’t too long ago that paying rent to a landlord was considered anathema. Home ownership was the pinnacle of the American dream. Things have changed. Not only is our culture more accepting of lifelong renting but renting also makes more economic sense in some areas.

That sound you just heard was the collective gasp of older homeowners who simply cannot believe that renting is a good idea. Yet the numbers do not lie. When you look at it purely from a dollars and cents perspective, there are some places in this country in which it is prohibitively expensive to buy. The other side of that coin are those areas in which renting is quite expensive.

Prices Are the X Factor

The thing about renting versus buying is that it is a question with no right answer. From a purely economic standpoint, housing prices are the X factor. This can be easily seen just by looking at prices around the country. That’s just what CNBC did in a report filed on February 7, 2020.

CNBC relied on research data from CJ Patrick Co. and First American Data Tree to compile the report. Their research revealed that in 50 metropolitan areas surveyed, 24 markets proved more affordable for buyers while the other 26 were better for renters. Are you surprised to know that it is split down the middle?

The research in question accounted for median rental and purchase prices along with taxes and insurance. Researchers also assumed home prices in the lowest 25 percentile along with a 5% down payment and a fixed rate 5% mortgage for buyers.

They discovered that in regions where purchase prices were excessively high, renting was cheaper. In those areas where home prices are fairly low, renting is more expensive. This inverse relationship makes good sense when you stop and think about it.

The Total Cost of Ownership

We often speak of renting in terms of putting money into housing but having nothing to show for it. But such thinking is a matter of perspective. What many people do not take into account is the total cost of ownership over a person’s lifetime.

City Home Collective, a Salt Lake City real estate and design firm, explains that the total cost of ownership includes sale price, interest payments, other mortgage costs, taxes, repair, and upkeep. For purposes of illustration,let us just look at cumulative mortgage payments.

More Than Sale Price

Imagine buying a $300,000 home with 20% down. You would be mortgaging $240,000. Assume an interest rate of 3.8% at 30 years with a PMI of 0.5%, property taxes at $200 per month, and homeowner’s insurance at $83 per month. After 30 years of paying your mortgage, you will have paid a total of $504,587.

The total cost of ownership over those 30 years is two-thirds higher than the actual price of the home. That does not even consider money you would have put in your home to repair the furnace, replace the roof, etc. Could you sell the home for a high enough price to recover every penny you put into it? If not, are you still better off after 30 years than someone who has rented?

Buying is absolutely the best choice for some people. But renting is the best choice for others. Whether a family decides to rent or buy really depends on what they want to accomplish. One thing we know for sure is that it is cheaper to rent in some areas and vice versa. That is just the reality of the era in which we live.

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