To Buy or Rent? How to Find the Answer to That Million-Dollar Question

Some number-crunching scholars have developed an index to help you find the best financial choice in 23 different U.S. cities. Use this tool, calculators … and some soul-searching as you make the decision.

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To buy or not to buy? That is the question — or it should be if you in the market for a new home.

Gone is the conventional wisdom that buying a home is a surefire investment that every sentient being should pursue. The Great Recession was a harsh reminder that the housing market can decline, even plummet.

Gone, too, is the notion that paying rent is just throwing away money. Americans move, get married and divorced and change jobs at an unprecedented rate — which means that there are times when buying a home may not make any sense at all, even for people with ample means, and even when the market is strong.

Whether to rent or buy is a decision that requires some serious consideration. It depends on several factors, including the market, your age, income and expectations.

Here’s a way to start

Many people have devised tools to help home-seekers solve that complicated equation. Most begin with an attempt to compare monthly rents with mortgage costs for similar units or homes.

This calculator provided by the New York Times allows you to get a reasonably good idea of what makes sense for you by allowing you to input a number of factors, including:

  • Mortgage interest rate and mortgage duration, amount of down payment, inflation rate, property tax rates, maintenance and renovation costs, fees and dues for homeowners association and so on.
  • Renters monthly payments, including utilities and renters insurance.

Calculators like this one are helpful as a way of seeing how the different variables work. But many calculators also leave it up to you to guess where the real estate market is going, and most of us are not really qualified to make those predictions.

Another helpful angle

So, in a different approach to the problem, three Florida scholars developed something called the Buy vs. Rent Index. Professors Ken Johnson of Florida Atlantic University and Eli Beracha and William Hardin at Florida International University created a mathematical model that analyzes 23 major metro areas in the United States to determine whether market conditions favor renting or owning as a means of generating wealth over time. It considers many factors, according to a website introducing the project:

…including, but not limited to, rent-to-price ratio, mortgage rates, expected rate of inflation, real past stock market long term returns, long term rent growth and housing price appreciation, costs associated with maintenance and property taxes, homeownership tax benefits, transaction costs and average homeowners’ duration between relocations.

In other words, it looks at the costs associated with renting versus buying, and the likely return on investing in a home versus the likely return of putting that money in stocks and bonds. According to the website:

In order to arrive at the index value for each location and each point in time, the index conducts a “horse race” comparison between an individual that is buying a home and an individual that rents a similar quality home and reinvests all monies otherwise invested in homeownership.

For my area — Seattle — their index shows that buying was still, on average, the better financial choice until the end of 2015. But the advantage of buying over renting diminished almost to zero as we entered 2016.

Looking back, our purchase of a house here in 1997 came at a time when the numbers favored buying over renting. After that — as when we decided to purchase a different home in 2008 — umm, not so much. (We ended up selling that one, and moving back to the first, but that is a longer story.)

Beracha, Hardin and Johnson "Rent or Buy Index" Beracha, Hardin and Johnson “Rent vs. Buy Index” for Seattle, Washington.

In Houston, renting has been the better choice since about 2004. In Dallas, renting has made more sense since 2014, according to the index. Meanwhile, the index shows that it still makes more financial sense — again, on average — to buy in Detroit, Boston, and Philadelphia. (You can see graphs for all 23 metro areas here.)

The personality factor …

It’s a good idea to go through the numbers in a nonemotional way, and these tools are a great way to do so. But eventually, everyone on a quest for a new home has to answer questions about their personality and priorities.

To start with, where are you in life?

If you want to remain highly mobile, or are pretty sure you will need to move to further your career, the creators of the index suggest it may not be a good time to buy.

“The cost of selling is so high it hurts your accumulation of wealth,” says one of the index creators, Ken Johnson. “Then renting on average is a better way to go.”

Further, you need to be honest with yourself about your spending habits. If you choose to rent, the way to accumulate wealth is to invest money that you would otherwise have spent on a down payment, interest payments, house maintenance and other homebuyers’ costs.

“The number one thing you have to ask yourself is, ‘Am I a strong saver?'” says Johnson, in a video introduction to the index. “Because the model we built all this on assumes that you will take all that money and reinvest it — monastically — into the stock market or into the bond market. … If the answer is no, you need on average to lean a little more towards ownership … because homeownership, at its heart, is a forced savings plan.”

Other nonfinancial factors

Family: If you live near your family, you may get the grandparents’ love and support for your kids, and be able to help them out when they need it. It’s hard to put a price on that support and contact. Where your relatives live, how old they are and the importance of being close by may affect your decision about where to live, and whether to rent or buy.

Lifestyle: Maybe being able to walk or bike to work, restaurants and stores is top priority for you, yet you can only afford to buy in the suburbs. In that case, you may decide to chuck the financial case for buying in order to live the life that fits your personality.

Schools: If you have children, the quality of schools may be a big determining factor about where you are willing to live. Maybe you can afford to rent in the right neighborhood for those schools, but not buy.

Handiness: How important is it for you to put your personality into your home? I love to take on home remodel projects and transform spaces. That’s generally not an option when you are renting. But if you don’t like spending your time on upkeep and remodeling, steering clear of homeownership — the world’s biggest DIY project — is probably a good idea.

Age: Circumstances are constantly changing. If you’re young and want to be mobile, you might want to stick with renting. If you’re settling down with a family or are highly committed to a certain community, it might make sense to buy. And when you retire, it might be appealing to rent again — as many boomers are deciding in recent years.

There is no one-size-fits-all way to make this major life decision. Think through the numbers and be honest with yourself about your priorities, and you can reach an answer that makes sense for your finances and your lifestyle.

What’s your experience with renting or buying homes? Share your stories in comments below or on our Facebook page.

Stacy Johnson

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