Decisions, Decisions, Shall I Buy or Rent?

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The decision to buy a home is often more emotional than intellectual. The urge to buy is triggered by an unpleasant neighbor, an unresponsive landlord, found money for a downpayment or a friend raving about the joys of having a garage, a vegetable garden, or whatever. Apartment dwellers who feel the tug of homeownership start wondering whether they too can afford to buy. However, being able to buy doesn't necessarily mean buying is a wise financial choice. If you're thinking about becoming a homeowner, it's well worth taking a step back from the emotional pull of this life-altering decision and calmly comparing the costs of ownership with the costs of renting in your own personal situation.

One of the most important factors in the rent/buy decision is the length of time you plan to live in your next home. If you expect to move in just a few years, buying a home could be a financial mistake, according to research by the National Multi Housing Council (NMHC), an apartment industry organization in Washington, D.C. That's because many first-time buyers underestimate or fail to consider the total cost of homeownership. In addition to monthly mortgage payments, homeowners must be able to pay property taxes, higher utility bills and home maintenance and repair costs. Homeowners also face transaction (buying and selling) costs, including the real estate broker's commission, escrow fees, title insurance, transfer taxes and loan origination charges (e.g., prepaid interest, points and appraisal fees).

The one-time costs of buying and selling should be amortized across the time span of owning the home. Generally, annualized transaction costs are moderate for someone who plans to live in a home for 20 years; however, spread over five or fewer years, these amount are substantial and could be a significant factor in the buy or rent decision. Annualized calculations also should account for the mortgage interest tax deduction, which is a lucrative perk of homeownership, especially if you live in an area with high housing costs.

Homeowners also are subject to "opportunity costs," a term coined by economists to describe the potential gain that could have been realized if money were used in another way. In term of homeownership, the money in question is the downpayment that becomes the equity in your home. If the home appreciates in value, your downpayment investment can net an attractive return. But if your home declines in value, the downpayment might have earned more in a better-performing investment. Over a long period of time, homes tend to increase overall in value. However, home prices certainly can decline, and the shorter the ownership period, the greater the risk of being forced to sell in a less-than-ideal market and losing money on your investment.

The NMHC researchers concluded that a majority of families and individuals who bought homes in the mid-1980s would have saved money by renting comparable housing. The costs of ownership were particularly high for short-term owners, mainly because of the unfavorable amortization of transaction costs.

Promoting the advantages of rental housing is an important facet of the NMHC agenda, yet the arguments and considerations brought forth by the organization are of value to people weighing the financial costs and risks of homeownership.

Written by Marcie Geffner

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