Better to Rent than Buy a Home

At the end of 2008, 57.5% of all homes were owned, 27.5% were rented, and 15% were vacant.

The difficulty in analyzing home ownership versus renting is that you are comparing apples to oranges. The median rental unit is different than the median house. The square footage per person and occupancy count is similar – but in the rentals there are a higher percentage of multi-family structures. Rental homes are skewed towards zero maintenance types with less land.

But in the years where enough data was available to ensure a relatively exact correlation – it did not appear to distort the median rental rate by more than 5% up or down. The data used in this analysis is from U.S. Census / HUD – and not from the National Association of Realtors (NAR).

Another issue in analyzing this subject is regional differences. There are areas in America relatively unaffected by the housing crisis. And in other areas, the prices have fallen by half. Even within states, there are significant differentials of data. Also, there are areas which have shortages or surpluses of rental properties which would diminish the applicability of this analysis. So in analyzing “median” data, it may not match any area in America exactly.

Simply put, the price of home ownership has been going up faster than the cost of renting a house. Just comparing the cost of a mortgage to the cost of a rental home shows a significant differential.

Looking at these graphs, there does not seem to be any financial reason to own a home – except for appreciation. This is why we buy a home. We purchase it and hold it for a period of time – then we sell it. We psychologically believe we have made a lot of money, but the reality is that the majority just buy another house – so there has been no realized gain.

The graph below shows the appreciation of home values on a monthly basis between 1973 and 2008. Home owners in the past have made significant gains to their net worth.

The problem is that since 2006, there is no longer appreciation.

The graph below integrates the owning versus renting cost penalty with the gain of appreciation:

But the above graph is a hypothetical situation as it is unlikely someone would hold a house for only one year. The graph below shows the real gain if you bought a home, held it for five years versus renting a home. You will notice that beginning in 2004, it would have been better to rent. This chart assumes another 15% home price decline over the next two years, and a 10% further decline in home monthly rental prices.

Once home prices stabilize, it will be $220 cheaper per month to rent a house over the mortgage costs. Additionally, there is a rule of thumb that says the monthly total cost of home ownership including insurances, taxes, maintenance, and utilities is 40% higher than a monthly 80% down fixed mortgage payment. For the median home today, this rule of thumb equals $500 per month.

The penalty for buying a home over the next few years versus renting is over $700 per month – and you have to risk losses due to deflation on your home. The median rental today correlates to a home purchase price of $157,000. With the median house currently worth $230,000, this is a significant difference.

If 4% home loans are offered to home buyers, house prices would have to fall another 15% to 20% to be at the buy vs rent home break even point.

Many will talk about the affordability index of home ownership. This simply ignores that financially there may be better uses for your money.

Proposed solutions for the housing crisis also ignore that home ownership is in a value competition with rental homes. Clearly it is cheaper to rent, and renting provides more value in your monthly budget.

If you are buying a home, keep in mind its rental potential – and make your offer accordingly.

With all the economic uncertainty – you should carefully analyze the benefits of buying a home in 2009.

Disclosure: None.

Comments

[User 9759:]

15% vacancy rate is wrong and we would have riots...the correct # is a weighted average of owned plus rental....10.1% of rentals and 2.9% of owned. i dont have the current # handy but i think it hovers about 4%

Feb 05 05:48 PM

[P. Kalven:]

A significant consideration in the current market of 7% to 8% unemployment; a renter who loses their job is in a better position from liquidity position to relocate in short order for a new job, and very well served if they have saved the money as suggested here.


On Feb 05 02:42 PM John Lounsbury wrote:

> xmplary - - -
>
> You raise the savings issue as an advantage of owning. It is a forced
> savings plan for many who would not otherwise save. Of course, it
> is a savings plan with a negative return for those who bought in
> the last 5-6 years. But many who have owned their home for 10-20
> years have a good return on their down payment at current prices,
> even taking carrying costs (insurance, maintenance, property taxes
> and mortgage interest) into account.
>
> A hypothetical sample: House purchased in 1990 for $100,000 with
> $20,000 down and worth $200,000 today. Assume property taxes at 1%
> of market value, homeowners insurance and maintenance costs of 1%
> of purchase price, and accumulated total mortage interest of $50,000.
> The property taxes and mortgage interest are assumed to included
> savings from itemized income tax deductions. Also assume equivalent
> rent over this period averaged $500 per month.
>
> The 18 year totals: $27,000 property taxes, $18,000 HO and maintenance,
> and mortgage interest $50,000 are expenses. This totals $95,000.
>
>
> The savings in rent over 18 years is $108,000. Thus we have spent
> $95,000 and saved $108,000, or a net plus of $7,000.
>
> Let's assume the buyer took out a 30 year mortgage and has not tapped
> home equity. The current principal due is around $40,000. Thus the
> current equity position is $7,000 plus $160,000. Therefore, the original
> $20,000 could be considered to have a value of $167,000. This is
> an internal rate of return (annual average) of 12.5%. If home values
> drop another 20%, the average internal rate of return drops to 10.8%
> per year. These rates of return are essentially free of income tax.
>
>
> Now let's look at how the renter could get to the same net equity
> position ($167,000). For calculation simplicity, let's assume that
> the $95,000 spent on the trappings of home ownership was saved in
> equal installments for the 18 years, or approximately $5,280 per
> year. We start with an investment of $20,000 and add $5,280 per year.
> We will have $167,000 after 18 years if the after-tax internal rate
> of return is approximately 4% a year. If the after-tax return averages
> 5% a year, the renter has approximately $200,000. This is close to
> the average annual rate of return for the S5P 500 (including dividends)
> for all but the top tax brackets.
>
> So the renter has a slight advanyage over the home owner if the money
> saved by renting is invested.
>
> As I pointed out in a preceding comment, most do not save available
> cash, but spend it. You said: "With a house of your own, you are
> forced to save, and that is a good thing." For many people, I agree.
>
>
> But don't forget timing. The savings vs. renting calculations for
> people who bought 2004-2007 will not favor the buyers in any way
> for many, many years.

Feb 05 06:43 PM

[Steven Hansen:]

Thank you for commenting.

User 9759, the 15% vacancy rate is valid. go to the top of page 3 of the document referenced. This rate is also confirmed in two other non-referenced documents and rose approximately 1% during the 2008 calendar year.

I think the commentary points out that everyone has different needs - and that is usually the determining factor between buying and renting. I have been a homeowner, renter and landlord (all at the same time) most of my life. there are downsides to all.

i will tell you that as a landlord, i do not want to lose a good tenant. this is a very costly experience. i only remember one time increasing the rents, and that was after a discussion. However, it is also true that if the landlord needs to sell the property - the tenant usually ends up having to move so in that regard the occupancy is more tentative than ownership.

John Lounsbury, the reason I wrote this at this time was that everyone needs to understand that this housing crisis has made significant changes to the home ownership equation. Renting always provided a better cash flow, but was a poor investment decision. Today, renting still provides better cash flow but now is the better investment decision - whether you invest the savings or not. But like you said, everyone spends all of their money - so you cannot look at investable money as an investment. forced savings (such as home ownership) is better for most.

However, until the market bottoms and regardless of the incentives offered - 2009 is not the time to buy a home unless you get a good deal. i created the last decision matrix chart for my use in making offers for houses. this is the type of offers you should be making in this environment. incidentally, it is also the type of offers i am getting.

Feb 05 06:58 PM

[User 9759:]

Regarding vacancy,
thanks for the additional info as well as well researched article...not to beat vacancy but i think there is confusion on it and now you have me more curious...the following is consistent (unfortunately i think) with both of our positions and maybe i missed your source

www.cnbc.com/id/289956...

Feb 05 08:31 PM

[Altos777:]

THE HAND - Would you share the "last decision matrix" mentioned in your comment?
**********************...
However, until the market bottoms and regardless of the incentives offered - 2009 is not the time to buy a home unless you get a good deal. i created the last decision matrix chart for my use in making offers for houses. this is the type of offers you should be making in this environment. incidentally, it is also the type of offers i am getting.

Feb 06 04:47 AM

[buckborden:]

From where I sit, hell yes, it is much better to rent. I used to "own" a condo in San Jose, CA and have rented since 2003 with zero regrets. Homeownership is vastly overrated. So what if I saved a few thousand on taxes? The constant, non tax-deductible HOA dues (at $220 a month for zero amenities when I sold, up from $80 in 1993) ate it up year after year, including the $4,200 new-window assessment THREE DAYS before I signed off on the sale! I sold the crap shack in 2003 for nearly THREE TIMES what I paid for it, and the sucker who bought it is now clearly behind in the game, way, way behind. I'm still living high off that free lunch. Even if I wanted to re-enter the market (and I most certainly do not, especially here in Silicon Valley, where prices are still six to eight times the median income), I earn much less than I did then, so it doesn't matter whether interest rates go to zero; I cannot possibly buy again, and I don't care. You can argue all you want about rent vs. buy, but some of us just are not interested in playing the debt game, not today, not tomorrow, not ever again. It is a sucker's bet.

Feb 06 04:53 AM

[User 352086:]

Rent vs Buy arguments often confuse utility versus investment. Rent is focused on utility while ownership has both utility and investment elements. Both have risks. Renters can be asked to leave even if they have dutifully paid rent for years. Owners have the burden of suprise repairs during their period of ownership. The fact is most people do not stay in a home for 30 years. People move. So you cannot make a blanket statement about which is better either way. This is a situational calculation and to advise someone to buy because you think it is "always" better to own is foolish. Conversely, there is a point where renting is not the right strategy.

One has to make the best decision based on their situation.

Feb 06 05:34 AM

[Bodz:]

There was a story recently about a California family that bought a modest house for $450,000 at the top of the market. Their monthly mortgage payment is almost $5,000 a month. They said that for this money they could be renting a house in beverly Hills. Meanwhile, even with a fixed rate mortgage, they are basically renting their house because in the first few years of their mortgage almost all of their mortgage payment is going towards the interest. To all the homeowners out there: Even with stable house prices, check out how much equity you will have build on a 30 year mortgage after 5 or 10 years and you will be shocked. You are renting but don't know it.

Feb 06 07:45 AM

[neocon4jesus:]

It's a no brainer. No need to argue. Simply do the math. Find out what the cost of a house in your area would cost you total monthly, mortage AND insurance, maint, utils, etc, then compare that to what your monthly rent would be. If you want to add in a few % points for extra space and no neighbors fine. Then compare costs and the lower cost wins. What's the big deal.


On Feb 04 12:42 PM sr9web wrote:

> All these chart and experts who say "rent, don't own" are talking
> out their butts.
>
> Why do I say that?
>
> Because it's NOT an "apples to apples" comparision.
>
> When you own your home, you control the environment and the premises.

>
>
> - You say who comes and goes
> - You keep the hours that you please
> - You can change your transmission in the driveway if you want

>
> - You can BBQ on the back deck in you want
>
> Etc., Etc., Etc....
>
> It's only in theory that the rights on tenancy which are supposed
> to vest to a renter are actually fully realizible.
>
> In actuality, renters get sh*t on all the time by *sshole neighbors,
> idiot landlords, cops, lunatics, etc, etc.
>
> And at the very least, when doing a risk comparision, you need to
> factor in the risk of RENT INCREASE and the risk of LOSS OF UNIT.

>
>
> Simply put, when you rent, your control over your residence is very
> tentative.
>
> It's MUCH MUCH better to own.
>
> I own a 5 bedroom 3.5 bath split level in the suburbs West of Boston
> and my FIXED mortgage is less than $1,500 a month.
>
> I have a full-size family living comfortably, with plenty of elbow
> room and storage space.
>
> This deal can not be duplicated - not even close by renting!

Feb 06 12:16 PM

[Geldpress:]

Take a look at this home in Redmond Washington, (home of Microsoft, and supposedly "immune" from decline). Prices are off over 18% in just 1 year.

www.geldpress.com/2009.../

Feb 06 02:28 PM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and the troops.

Feb 06 02:59 PM

[TaxRECapGai...:]

I agree with most of your pts, but the idea that renters are screwed by ***hole neighbors and owners are not is way off.

The renter can give notice and get out of Dodge. The owner has to call up a friendly realtor and donate 6% of the home's worth to move. Big diff.

That said, happy renting y'all.


On Feb 04 12:42 PM sr9web wrote:

> All these chart and experts who say "rent, don't own" are talking
> out their butts.
>
> Why do I say that?
>
> Because it's NOT an "apples to apples" comparision.
>
> When you own your home, you control the environment and the premises.

>
>
> - You say who comes and goes
> - You keep the hours that you please
> - You can change your transmission in the driveway if you want

>
> - You can BBQ on the back deck in you want
>
> Etc., Etc., Etc....
>
> It's only in theory that the rights on tenancy which are supposed
> to vest to a renter are actually fully realizible.
>
> In actuality, renters get sh*t on all the time by *sshole neighbors,
> idiot landlords, cops, lunatics, etc, etc.
>
> And at the very least, when doing a risk comparision, you need to
> factor in the risk of RENT INCREASE and the risk of LOSS OF UNIT.

>
>
> Simply put, when you rent, your control over your residence is very
> tentative.
>
> It's MUCH MUCH better to own.
>
> I own a 5 bedroom 3.5 bath split level in the suburbs West of Boston
> and my FIXED mortgage is less than $1,500 a month.
>
> I have a full-size family living comfortably, with plenty of elbow
> room and storage space.
>
> This deal can not be duplicated - not even close by renting!

Feb 06 04:21 PM

[Spokaneman:]

I've lived in the same house for 21 years, a nice three bedroom 3 bath in a nice stable neighborhood. I bought it at the right time, at the end of a previous mini-bubble, and the house could be sold now for about 2 1/2 times what I paid for it. I have attempted to run an cash on cash analysis comparing what I would have spent to rent something similar vs. what I have spent to retire the mortgate, pay the taxes and perform "required maintenance" ($20,000 to landscape the back yard is more an entertainment cost than a cost of ownership), and I figure that it is likely just about a push between renting and owning. From a financial standpoint, I now have an asset worth a quarter-mil, or alternately the access to very cheap rent for the rest of my life, depending on how you view it.

One also has to consider that for many (perhaps the majortiy ) of us there is a huge intangable value in the satisfaction of achieving the ownership of our shelter. For many of us our homes are not only our shelter, but are, to a large extent, our hobby. This can be true of a McMansion, or a more modest home such as mine.

I think we will return to the concept of responsible home ownership, where homes are purchased by those who can reasonably afford to buy, have a reasonable expectation of owning the home long enough to gain real net equity (through debt retirement) after making a significant downpayment and are willing to make the financial and lifestyle sacrifices required to actually own the property, particularly in the early years of ownership.

Feb 06 05:04 PM

[440rt:]

I love how the article "assumes that housing prices will continue to decrease, and that rents will continue to decrease". I don't know about the rest of the country, but our rents are increasing as property values decline because more and more people are losing their homes and being forced to rent. Our vacancy rate is down to 1% and people trying to rent sometimes have to settle for a less then ideal place for a high price.

This guy doesn't take into consideration any of the positive's of owning a home...such as the superior quality of life. Rent is great when you're an unemployed college student. Now that I have a decent job there's no way I would go back to renting.

Just try to rent a home with granite slab counters, custom cabinets, and travertine bathrooms.

Enjoy the 10 year old vinyl flooring, shag carpeting and crappy formica counters!

Feb 06 07:57 PM

[Red Esprit:]

In today's economic environment, you simply cannot put a high enough value on flexibility. I have only owned real estate twice in my life (while I was married) because it gave my spouse (the nest builder) what she wanted. As a single man, I always rent a nice condo to live in. Currently over 2,000 sq. ft for $1,000. Homes are investments. Investing in depreciating, illiquid assets that won't cash flow in an emergency simply makes no sense. Prices need to come down another 30% or more (and they will) before thye buy vs. rent equation is in balance.

Feb 07 08:47 AM

[Latesummer2009:]

It does seem like a better option to rent vs buy in the current real estate environment. Unfortunately that is only a snapshot of today. With the coming wave of ALT-A, Option ARMs and Prime defaults, that changes the equation drastically to the downside. The velocity of defaults and foreclosures is a telltale sign of what's ahead. Trends are more important now as we accellerate to the downside.

Way to much downside risk to put 20% down on a home....

Especially, in any affluent area that has yet to really correct .

Feb 07 12:30 PM

[pjmsurf:]

On Feb 04 12:42 PM sr9web wrote:

> All these chart and experts who say "rent, don't own" are talking
> out their butts.
>
> Why do I say that?
>
> Because it's NOT an "apples to apples" comparision.

I too live in the boston area. I can tell you a fews years
ago it wasn't a direct comparsion. BUT it is now. In fact, I
can rent some very expensive places cheaply. Also far as the
"environment" goes, I can do all the things you mentioned.
I have granite countertops, hardwood, more room than
I can possibly use, etc. and I live on the seacoast now
which was impossible just a few years ago. Comments
like yours ignore the current rental market - landlords
are desperate for good tenants. I pay 1600 and that
includes water/sewer.

Yes, I run the risk of the market turning up(good luck in
the near future on that), but I have flexibility to move
when I want and I don't incur maintanence or taxes. I
noticed you didn't mention those costs. Your 1500
gets you ~280000 at current rates with excellent
credit. You must live pretty far out in the burbs or
must have bought back before the runup to these
ridiculous prices(good for you if that is the case,
its not for the rest of us).

Feb 07 03:50 PM

[Harry T:]

I agree with you that renting has its downsides, the worst of which is getting the big boot from the place you call home because some landlord has some other motives or fell back on their mortgage payment.

But being a homeowner has its own downsides as well. It is a simple matter of how much risk you're willing to take.

If as a renter you can't repair your own brakes in front of the drive way, you can find a friend's house to do it, same as if you were a homeowner. I have seen some homeowners who were so shady because of their own ownership halo that they won't do or scratch a mark onto their home without freaking out. This same psychology is seen when someone purchases a brand new car, they bought a new $40,000 vehicle but won't put miles on them, and ask the used car owner to front for the car pool. Their reasoning? Because your car is older it already has a lot of miles on it, but theirs isn't so let's keep adding miles on the used car and let me drive my nice new car on the weekends to show off to everyone.

But one big risk for home ownership, imagine furnishing your home with all the living necessities such as a new metal fridge, washer, dryer. Than being foreclosed on than you will have to liquidate all your furniture at a heavy discount.


On Feb 04 12:42 PM sr9web wrote:

> All these chart and experts who say "rent, don't own" are talking
> out their butts.
>
> Why do I say that?
>
> Because it's NOT an "apples to apples" comparision.
>
> When you own your home, you control the environment and the premises.

>
>
> - You say who comes and goes
> - You keep the hours that you please
> - You can change your transmission in the driveway if you want

>
> - You can BBQ on the back deck in you want
>
> Etc., Etc., Etc....
>
> It's only in theory that the rights on tenancy which are supposed
> to vest to a renter are actually fully realizible.
>
> In actuality, renters get sh*t on all the time by *sshole neighbors,
> idiot landlords, cops, lunatics, etc, etc.
>
> And at the very least, when doing a risk comparision, you need to
> factor in the risk of RENT INCREASE and the risk of LOSS OF UNIT.

>
>
> Simply put, when you rent, your control over your residence is very
> tentative.
>
> It's MUCH MUCH better to own.
>
> I own a 5 bedroom 3.5 bath split level in the suburbs West of Boston
> and my FIXED mortgage is less than $1,500 a month.
>
> I have a full-size family living comfortably, with plenty of elbow
> room and storage space.
>
> This deal can not be duplicated - not even close by renting!

Feb 08 02:45 PM

[Jan Baker:]

My son is a thirty six year old bachelor/bartender. He owns a condo in a good location in Chicago. We are waiting to see if he will refinance his ARM, and waiting for the bad or good news about how much the value has fallen since he bought it. He benefits in all the ways mentioned by posters here--barbeques on the roof, leaves trash in the front when he feels like it, and smokes what he likes. But in the end, given how close to the edge of the pit the unskilled always live next to, regardless of location, the 700 cash per month he could be putting at least in cd's might make the difference between surviving, and not. That's what these numbers mean. Those who cite their circumstances as a reason to ignore what cash can do for a family when they have none--I pray every day they (and my son) never find out what it means. We can hope it never comes to that. But this time, it might. Because this time is different from all the other times. This time we have no next generation to come along and reignite consumption through the combination of their productivity and their needs to consume. We have killed them or contracepted them. That is the silent capital that was always present in other recoveries. Watch. It is not a moral issue. Not only.

Feb 11 08:26 AM

[Care Free R...:]

err it is just me or is there something missing from the rosy scenario of home ownership espoused by many of our mortgage holding friends on this comment board i.e. Inflation ?

Even when your home is appreciating at say 5% nominally per year, once you factor in principal, interest, maintenance, property taxes and utilities and add in annual inflation at on average 3%, you'll barely be breaking even - let alone if house prices are falling at 10-15% per year which they seems likely to do for at least the next 3-5 years

Then the fortunate people who have paid off their mortgage still have the pleasure of paying their property tax - ask seniors in affluent areas if that is an easy thing to do on a fixed income. Renters property tax bill is always zero.

Feb 12 08:26 AM