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Is it better to rent or buy?

I’ve been thinking a lot about this issue recently. There has been a lot of media attention being paid to the housing market and it is worth considering if one option is better than the other given your circumstances.

Americans in general think quite highly of owning one’s home. Robert Shiller mentions this at the beginning of this interview.  But this article makes a very strong case for the financial benefits of renting.  If one is only concerned about the financial aspect of this decision, one should consider the rent ratio in their area. The average rent ratio is about 15. What does this mean? If it would cost you $20,000/year to rent a home (about $1,666/month), then houses in your area should be about $300,000. (15 times $20,000.) Though housing prices have come down quite a bit over the past few years from the bubble years, there are still many parts of the country where home prices are still not in line with rents. Here is a link to recent rent ratios around the country.

What is my opinion on all this? If you own your home now it probably does not make a lot of sense to sell your home and rent unless you happen to live in an area with a very high rent ratio. If you are currently renting it probably does not make sense to buy a home unless you live in an area with a very low rent ratio.

I also think your particular circumstances matter. For someone who is single or recently married without a family yet, then renting is probably the best thing for now. I personally think that once someone is at the stage where they have a family, there is a strong desire to be owner.

What about empty-nesters or those in retirement? The decision is clearly an individual one, but I would strongly recommend considering your options. If you think you would like to travel a lot, then downsizing to a smaller place that you rent might not be a bad choice. It would dramatically reduce your housing costs which would free up more discretionary funds. Not to mention the ‘cash-out’ from selling your home and reinvesting those proceeds in a diversified portolio (expected real returns of 5-7%) compared to investing them in a house with an expected real return of zero.

This is a fascinating topic and one that will evolve over time as the housing situation in this country continues to change as a result of the housing bubble and bust. I suspect that policies towards homeownership may not be as favorable in the next 10-20 years as they have been for generations past.

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