Wednesday, June 1, 2011

Buying or Renting?

That now famous housing bubble which popped a couple of years ago put a huge dent in the net worth of many individuals and lending institutions.  Yesterday's publication (May 31, 2011) by the Standard & Poor / Case Shiller Home Price Index informs us that we're still not finished. After a slight recovery period, we have dipped once again to 2003 levels.  Prices fell nationally by 4.2% in the first quarter of 2011 after falling 3.6% in the last quarter of 2010.  Minneapolis tops this undesirable list with a 10% reduction in average prices compared to a year ago. 

This housing bust has created a rental boom. 
People have left ownership in favor of renting - some by choice and others by necessity.  Is this a good thing?  There are those who promote the idea of permanent renting as positive for the individual and society.  They point out that as the job market begins to recover, renting allows more flexibility so that a person is able to "pick up their chair and move" (it's a Mom quote) to that next great employment opportunity.  There are no obstacles like market time and loss of equity to worry about since there is no real estate to sell before accepting the position.  Also, they claim that many of the costs of ownership (maintenance, taxes, insurance) are eliminated.  Some have analyzed ownership as an investment and determined that it has not proven itself to be an effective wealth builder. 

Yes and no, actually. Although I concur in some situations, especially as a temporary solution, it seems to me that there are still things to consider before making the determination to permanently rent.  Consider these points:

  • It is true that renting allows a person to be more flexible to move, if there is no lease or at a minimum, very little penalty for an early termination.  If you're looking at 6 months of rent payments in order to vacate next month, a person might have to think twice before taking that job!  And, there are those who are not renting by choice.  The market time and equity loss?  Already a memory.
  • Statistics can say many things.  I have noticed that those looking at investment strategies have been looking at the last 20 to 30 years in separate segments.  Some of those segments indicated housing was a good investment, some of the segments told a different story.  Historically, if you look at the Standard & Poor links, you'll find that with the exception of the bubble (an abnormal rise in prices followed by a huge fall - remember dot com) home ownership has been a worthwhile investment in individual net worth.  The strategy here is:  rent and invest in better opportunities.  OK.  Renters, did you?
  • As the rental market becomes saturated, rent prices climb.  It's simply supply and demand. In many markets, Minneapolis being one of them, this has already occurred.  Renters have fewer choices and are paying much more than they would have a year ago.  And, unlike a fixed rate mortgage, these montlhy obligations will continue to rise every year as long as demand continues to exist.  There is absolutely NO chance that in 30 years, you won't have a rent payment.  Just sayin'.
  • Although it's true that renters do not write checks to the county for taxes, or to the repairman for the plugged drain and they don't have to plow snow or cut the grass, it's not accurate to say they avoid these expenses. Within each monthly rent payment, landlords calculate all ownership costs and then add for management fees and profit. 
Everyone faces different situations and what is good for one, may be quite detrimental for another.  Add in all of the personal preferences and there is no right answer to the blog title question in a general sense.  Is renting right for you or should you buy?  Here's an interesting calculator to help you with your investigation.  And, of course, should your research determine that you should buy - Responsible Referrals will make sure you're working with a great agent!

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