Buy or Rent? Play Chess, Not Checkers

A number of pundits are saying that now is NOT the time to buy a home. They look at how prices have fallen over the last four years and claim that investing in real estate is too risky. However, we must also look at the gamble one takes in not buying to determine which is the riskier of the propositions. The cost of renting today verses the cost of purchasing a home today must be compared. We must also consider probable future costs in order to fully calculate the risk. We must think a few moves ahead. 

We must play chess, not checkers.

There is much to consider in the rent/buy decision. If you own a home, your mobility is curtailed to some degree. If you rent, there is less stability in the household as the landlord, not the tenant, determines if or when the house must be vacated. For the sake of today’s debate, we will only look at the financial aspects of this decision.

Renting

In a growing number of regions, homeownership is already less expensive than renting. And, it looks like rents are headed even higher. The WSJ, in an article on their online resource Market Watch,titled Double Digit Rent Hikes Are on the Way reported:

Apartment dwellers could be facing double-digit rent increases in the coming years as a shortage of new multifamily units coupled with a rise in prime renter-age households gives landlords clout they haven’t see since the mid-1990s.

“Demand pressures are building. It’s not bad today because rents have been down the last two years,” said William McLaughlin, an executive vice president with Avalon Bay Communities.

“But it feels a lot like 1992, when we were coming out of a deep recession … and we ended up seeing double-digit rent increases after that,” he said.

…Already there are signs the apartment market is tightening and in some cities rents are already going up 7% or 8% per year.

Does it make sense to pick a form of housing that will dramatically increase in cost over the next several years? You may think you are being forced to pick the ‘lesser of two evils’ knowing that house prices are still falling. Realize, even with prices still softening, the cost of purchasing a home is determined by both the price and the financing.

Buying

Although prices are falling, interest rates are on the rise and that can have a huge impact on your cost. The monthly mortgage payment (COST) you can negotiate today may be the lowest it will ever be in your lifetime.

John Paulson, one of the smartest housing analysts in the country, recently made it a point to say that if you don’t own a home – BUY ONE! Stan Humphries, chief economist of Zillow, explains that Paulson is talking about COST NOT PRICE.

Paulson is not just betting on house prices, but also on the ability to lock in low financing now with the expectation that it will be easier to pay it back in the future because of inflation.

Bottom Line

Don’t play checkers! If you want to make the best financial decision regarding your housing, think ahead a few moves. Play chess by considering future costs.

[Thanks to the crew at KCMblog.com for this great article.]

Be Sociable, Share!

Leave a Reply