John F. Wasik

It really isn’t heresy - in some situations renting beats buying a house

By John F. Wasik
Bloomberg News / October 15, 2009

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Unless you want to stay in a neighborhood for life, renting may make more sense than buying.

The housing market may not stabilize for years. And it’s no longer a given that you will build home equity. The housing debacle may have depressed housing prices for a generation in most areas.

Am I spouting heresy? After all, can’t you still build wealth by buying a home and holding it? And with 30-year, fixed-rate mortgages below 5 percent, isn’t your buy signal flashing “go’’?

A rent-versus-buy decision is complicated. You will need to do some in-depth homework.

If you are fairly certain you are going to be in a neighborhood for an extended period, check the “buy’’ category and calculate costs. Those facing relocation, looking to downsize, or retiring should strongly consider renting.

It’s difficult to recoup your closing costs and down payment quickly. This is the easy part to understand. Then comes some gnarly cash-flow analysis for those leaning toward buying.

Let’s say you were considering a $300,000 home, put down 20 percent, and obtained a 5 percent, 30-year fixed-rate mortgage. You are in the 33 percent federal tax bracket and will pay $7,000 annually in property taxes and about $1,000 for insurance and maintenance. Total monthly payments are $1,945.

Comparing that to a $2,000-a-month rental, you come out ahead buying and holding for 30 years. While your actual cash outlay is much less for renting - $583,267 versus $751,236 for buying - with tax benefits over three decades you are better off buying.

Appreciation, leverage, and tax breaks make buying the winner over 30 years. This example will show a net asset value of $526,770 for buyers. This, of course, assumes a positive annual gain in your home’s price, a 1 percent annual return rate, stable property taxes, and federal write-offs. Yet it’s unlikely you will have the same mortgage, expenses, and write-offs for three decades. Real estate taxes are wild cards few brokers discuss.

The most dangerous assumption: Property taxes will remain static. Ask your broker for past bills. Another flawed assumption is guaranteed appreciation. You can still lose home equity.

A few states were relatively untouched by the recent bubble, such as Texas and North Carolina. Home-value declines were the worst in Nevada, California, Florida, and Arizona.

Still want to buy? Then dig even deeper in your targeted areas.

How many foreclosures? Any vacant homes? What has been the mortgage default trend? Is there a glut of unsold housing, or a shortage?

An unstable neighborhood usually translates into a home-equity loss. There’s no shame in not buying. Money you would have spent on repairs, taxes, and insurance can pay bills or be invested.

John F. Wasik is a Bloomberg News columnist.