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December 19, 2014

Should you rent or buy? What to consider in housing decisions

December 19, 2014

rentingvbuying

One by-product of the housing boom and bust has been a re-examination by many of the real costs and benefits of the American dream of homeownership. And while some have looked to condense the complicated decision into a simple rule, every family must make a careful decision that takes many factors into account. That’s why it was a relief to hear a more robust and reasoned discussion of this issue recently on the Diane Rehm show.

Rethinking the benefits of homeownership

The December 15 Diane Rehm show, “Rethinking the Benefits of Homeownership,” featured Adam Szapiro, author of a study on the topic from HelloWallet; Julia Gordon, director of housing finance and policy for the Center for American Progress; and syndicated columnist Michelle Singletary. The show was sparked by the HelloWallet study, which suggested that homeownership might be a “House of Cards” and that renting and investing is a better asset-building strategy.  But rather than an argument about “is buying or renting better in general”, the conversation was about carefully weighing the benefits and burdens of homeownership, waiting until you’re ready, getting good advice and “running the numbers.”

All three panelists acknowledged the stability and asset-building benefits of homeownership compared with the constant threat of rent increases and “landlords who change their minds” that renters face.  They also acknowledged the pitfalls, including unexpected maintenance expenses, reduced mobility and related high transaction costs, and the risk of a house price decline coinciding with a loss of income or forced move.

Five suggestions for making the best “rent or own” decision

What do you need to do to do in this critically important life decision?  The panelists had five suggestions:

  1. Get advice from a HUD-approved counselor—“not a bank or your parents,” Singletary said. Gordon added that counseling was critically important to “understand the full cost” of owning a home.
  2. Understand what kind of mortgage you’re getting. Gordon cited the benefits of a long-term fixed-rate mortgage to stabilize housing costs.
  3. Ensure you can pay for both expected and unexpected expenses. Singletary urged potential buyers to have a cushion of 3 to 6 months of expenses plus a “life happens” fund, in addition to money for a down payment. The Housing Finance Policy Center’s recent review of the performance of loans guaranteed by the Federal Housing Administration and the Veterans Administration (VA) suggested the VA’s consideration of income to live on after paying housing expenses is a major reason its loans perform better.
  4. Don’t be fooled by online calculators. Szapiro cautioned against reliance on the “biased” own/rent calculators on the internet, whose assumptions are biased against renting.
  5. Don’t overestimate tax benefits. A recent report  from the Tax Policy Center confirms that the mortgage interest deduction primarily benefits higher-income homeowners. Calculate the actual benefit you’ll receive come at tax time—taking into account the standard deduction that you get regardless of whether you buy or rent. You may well find the additional benefit you get from homeownership is small or non-existent.

Photo by Zach McDade, Urban Institute.

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Comments

In my own personal experience, the "forced savings" aspect of owning a home has been a very powerful tool. The appreciation and tax benefits are nice, too.

In California, the additional benefits of Prop 13 provide what is effectively "rent stabilization" to owners as their rate of property tax increases are capped.