Rent, Don't Buy, Your Home

Saturday, June 28, 2008
Justin Ewers
UsNews.Net

Real-estate agents have been pushing the virtues of homeownership since
homes were invented. Or since real-estate agents were invented, anyway.
Paying a mortgage, they insist, is a can't-miss investment (the tax
breaks, the appreciation, the thrill of fixing your own roof!). Renting
is for simpletons who don't like keeping their own money.

But does owning a home really trump renting? With the economy
stumbling, house prices falling, and credit tightening, many housing
experts are questioning the conventional wisdom. "Over the last decade,
it may have been true," says W. Van Harlow, an economist at the
Fidelity Research Institute. "Clearly, there are periods where [the
housing market] will dominate. But give this market correction another
18 months, and it may not be true anymore."

Not so hot. The
housing boom produced endless stories of homeowners getting twice what
they paid for their homes. But "prices don't always go up," says Jay
Butler, director of realty studies at Arizona State University. Even a boomtown like Phoenix
has seen median rates of appreciation climb only 4.6 percent a year
since 1981. According to a Fidelity study published this year, the
return on a dollar invested in real estate in 1963 barely beat that of
a low-risk treasury bill.

When the housing market slumps—as it
has every 10 or 15 years for the past several decades—homeownership
becomes little more than renting, from a bank. Without appreciation,
buying a $400,000 house—instead of renting the same property for, say,
$2,000 a month—can turn into an expensive, potentially money-losing
proposition. Assuming home prices come out of their death spiral
(prices fell 4.5 percent in the third quarter compared with last year),
they would still have to appreciate at 4 percent every year for a
decade—even if rents climbed well above the rate of inflation—before a
family would save more owning than renting. An $80,000 down payment
could be invested instead in a mutual fund earning 8 percent, and
housing comes with myriad other expenses, from maintenance to insurance
to taxes, none of which build equity. Tax breaks do ease the pain. But
with the average family staying in a house only six years,
homeownership during a slump (especially in foreclosure pits like Las Vegas and Tampa, where prices have dropped more than 9 percent since last year) can look less and less like the American dream.

Renting,
meanwhile, has its virtues. It's cheaper in the short term, it offers
maximum flexibility, and it pushes the headaches of maintenance and
taxes onto landlords. It can also be a sound long-term investment.
According to Fidelity, if renters save even $300 a month—the
difference, say, between their rent and a monthly mortgage payment—that
money, invested in stocks growing at only 4 percent, could add up to
$114,000 in 20 years. (And that's on top of earnings on a down payment
that never had to be made.) "Over long horizons, if you reinvest the
savings," Harlow says, "you're probably not going to find that much
difference between renting and buying." Saving hasn't proved to be the
national forte, of course. But with the bloom off the homeownership
rose, it may have to be soon.

 

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