real estate

Rent or buy? Answer is not a no-brainer

Steve McLindenQuestionDear Real Estate Adviser,
I cringe when I turn on the news and hear people choosing renting over buying a home. I tell my children they should own a home, not rent, and pay that home off as soon as possible. Wouldn't buying a home at today's suppressed values be far cheaper than the rents of the present and future?
-- Philip

AnswerDear Philip,
Yes, that would seem to be a no-brainer, particularly with housing about 30 percent cheaper than it was four or five years ago. Problems in the housing and job markets led to that value loss. Those problems remain, tipping the balance for renting for many economy-wary folks. After all, so many of today's renters were yesterday's homeowners.

With all things being equal, though, homeownership at today's prices is a bargain for people who are prepared for its realities. Unlike renters, homeowners build equity and are more apt to enjoy a sense of stability and community. They aren't dependent on landlords to maintain property and have the freedom to change landscaping, decor and even dimensions. They can own pets. The biggest potential negative in buying right now is reduced mobility, particularly after a job layoff or transfer. Homeowners must endure more ancillary expenses such as closing costs, maintenance, property taxes, mortgage interest (though it's usually deductible) and possibly homeowners association dues.

One big intangible is that a home has traditionally been looked upon as a great long-term investment, though the steep value declines over the past four years have dampened that notion.

The metrics of the buy-versus-rent equation vary greatly among markets and price brackets. Some mature, highly desirable cities such as New York, Los Angeles and San Francisco typically skew toward renters. There are numerous rent-or-buy calculators out there to help would-be buyers with the decision, including Bankrate.com's own.

Generally, if you have access to substantial savings or a lump sum of money for a healthy down payment and know you will stay put for more than five or six years, most of the rent-versus-buy calculators point to buying. If you plan to live there for less time than that, it makes less financial sense to buy because of the payments and transaction fees.

Here are a few questions to ask when buying a home. Do I have an exit strategy if the worst happens? Can I buy without cutting myself too thin in the personal-savings department? Will the extra costs put me over the budgetary tipping point? What about quality-of-life issues? Even if the price seems right, is the neighborhood conducive to my personality, profile and demographic group? Is a longer commute worth it (more stress, vehicle maintenance and other transportation costs)?

As for paying off a mortgage as soon as possible, that's certainly a comforting feeling for most people with that objective and usually good business. But an early mortgage payoff might not be the best way to go for those who want to pay off high credit card debt, those who haven't fully financed their 401(k)s or are ongoing investors in profitable ventures or their own business, or those who are skittish about future steep value drops that might negate the thousands of dollars of savings they'd gain from paying off early.

All in all, though, you are offering your kids pretty solid advice. I wish your family good luck.

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