Home ownership in the U.S. is at nearly 64%, according to a Census Bureau report released in April. While rates have fluctuated around the mid-60% range for decades, the percentage has been trending downward since touching an all-time high of 69.2% before the 2008-09 recession. Now, a growing number of people, and especially young folks, are choosing to remain renters, despite being financially able to buy a home.
There are many reasons why you might choose renting over buying—many of which are economic, but some are more about personal choice.
The Renting Argument: Financial Flexibility; Labor Mobility
Sometimes renting is the more practical choice. Recent college graduates may not have the down payment for a house.
“Even if they had the down payment, they’d still be better off renting because they’d be stuck with two big monthly payments; on a mortgage and their student loan,” said Dean Hedeker, owner/principal of HedekerWealth.com, and a veteran estate planning and tax attorney.
Additionally, for people who want to move within one to three years, renting often makes more sense, since any possible growth in a home’s value during the time of ownership might be reduced by commissions paid to a real estate broker.
For people who relocate for careers on a regular basis, renting might be the logical choice. “You don’t want to be locked into home ownership, and you probably shouldn’t be lured by the argument that you can rent out the home to vacationers when you’re away,” Hedecker said.
While renting out the place may seem like an alternative income stream, there are too many unknown variables.
“Often, the work involved is the equivalent of having another job, in addition to the hassles from the neighbors or potential violations of condo association bylaws,” Hedecker said. “Tread very carefully if you think you can use rental income to help you pay the mortgage.”
The Buying Argument: Planting Roots; Building Equity
For many people, though, home ownership is still a key component of the “American Dream.” Home ownership is about being lord or lady of your own castle, and having the ability to modify things to your own tastes and preferences. Plus, many people say they feel more a part of their community as owners than they do as renters. And owning a home can be a way to force fiscal discipline on oneself.
When Robert Siuty, senior financial consultant at TD Ameritrade, speaks to clients about their portfolio and long-term goals, like buying a house, he tells them it comes down to budgeting. When buying a home, there’s a degree of equity the purchaser is building up over time, which renters don’t have. But it has to make sense.
Fixed expenses like paying basic utilities and property taxes can’t be changed. Instead, think about some of your discretionary expenses—like vacation spending or other money earmarked for entertainment—that could potentially be directed to home ownership.
“You don’t want to be in a position where you’re living month-to-month. Sit down and put pencil to paper,” Siuty said, adding that he’ll take clients through detailed exercises to help them see the big picture by looking at income and overall expenses and where they can make modifications if necessary.
“You want to make sure you have your ducks in a row [and] a sufficient cash reserve for unforeseen potential emergencies. You don’t want to be in a situation where you have to dip into pools of assets like retirement accounts for those events,” Siuty concluded.
In the end, the choice of whether to buy or rent may come down to your views on flexibility and stability, and upon which one you place a higher value.
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