Home ownership has always been a cornerstone of the “American Dream.” While it is certainly an accomplishment worth striving to achieve, it may not always be the best or most appropriate financial choice to make in every circumstance.
In fact, purchasing a home at the wrong time or in the wrong market can lead to serious financial strains including investment losses, foreclosure or even bankruptcy.
As a result, home ownership has been steadily declining in the U.S. In fact, according to recent Census Bureau numbers, the percentage of Americans who own a home is down to 64.8 percent.
Additionally, home ownership for Americans 35 and younger is down to 36.2 percent — the lowest on record. From individual financial circumstances to rents, property values and interest rates, there are many factors to consider before making what is likely the most significant financial commitment in your life.
Examine your financial position
The first thing to do when trying to decide between renting and buying is to take a close look at your current financial position. Consider taking the time to thoroughly examine your finances including credit reports, cash reserves, cash flow and long-term financial goals.
How will purchasing a home affect your ability to save for other goals such as retirement or education funding for children? How long do you plan to stay in the home you are considering purchasing? Do you expect to be relocated for work or do you anticipate outgrowing your home due to a growing family?
Generally, the longer you plan on staying in one place the better home ownership may begin to look when compared to renting. A longer holding period also gives you time to recoup fluctuations or volatility in the value of real estate.
Real estate prices do decline. For instance, many homebuyers who purchased near the peak of the market are now upside down (owe more on their mortgage than their home is worth).
They are forced to either wait-out the real estate market to recoup their losses, sell their home, or consider a short sale, which can be seriously detrimental to their credit. Like many things in life, timing is everything.
Crunching the numbers
After examining your personal finances and long-term plans, the next variables to review involve the property itself.
What are your total costs of ownership when compared to renting? Consider reviewing rental prices in the area, rental insurance premiums and annual rental increases as compared to the purchase price, interest rates, closing costs, potential real estate appreciate rates, real estate taxes, association fees and insurance costs. While there is a lot to consider, online calculators can help. Consider visiting www.bankrate.com for a handy calculator.
It also is extremely helpful to be able to compare renting versus buying based upon geographic region. While this has been quite difficult to do in the past, new tools have made this easier.
Consider using RealtyTrac’s rent or buy interactive tool to help determine whether you should purchase or rent. According to Daren Blomquist, vice president at RealtyTrac, “This data can help identify markets where someone might be renting, but should consider purchasing a home because the cost of a mortgage is less.”
For example, according to RealtyTrac data, Ocean County is one of the better areas in New Jersey to purchase rather than rent.
This is because the average rent is estimated to be $1,865 as compared to the median mortgage payment to purchase a home in the county of $1,095 — a $770 difference.
In contrast, with an average rent of $1,632 and a median mortgage payment of $1,839, it is more affordable to rent rather than buy in Morris County. From a national perspective, New York City was more attractive for renters while Baltimore was friendlier for buyers.
The rent versus buy decision also is critical for investors as they attempt to identify markets where the ratios look most promising. In addition to cash flow, it also is important to consider future appreciation.
But be careful. It can be difficult to predict how much real estate may appreciate, so be conservative with any growth assumptions. Remember, the numbers should work without relying on significant increases in the value of real estate.
The rent versus buy decision can be quite complex for many savers. There is no question that under the right circumstances, home ownership can be significantly more advantageous than renting. However, personal circumstances and the relationship between home values/rents should be considered before jumping in and automatically assuming that buying is way to go.
Since everyone’s situation is unique, consider speaking to your financial, tax and legal advisers to determine the best approach for you.
Kurt J. Rossi, MBA is a certified financial planner practitioner & wealth adviser.
He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or
www.Independentwm.com. LPL Financial Member FINRA/SIPC