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The Finances of Renting vs. Buying

Trulia reported this week that homeownership is 45% cheaper than renting in the United States. Jed Kolko, Trulia’s Chief Economist explained:

“Homeownership is cheaper than renting in all of the 100 largest metros, by a wide margin. Despite the recent price rebound, rents continue to rise faster than prices, and mortgage rates are near record lows.

Homeownership makes the most financial sense for people whose strong credit scores let them snag the lowest mortgage rate and who get the biggest benefit from deducting mortgage interest and property taxes from their income taxes.”

(Trulia’s methodology is explained here.)

This news did not come as a surprise to us as we have reported that today’s rental market definitely favors the landlord. Below is a graph of how rental prices have increased recently and where they are projected to go over the next few years based on a report from Marcus & Millichap.

It cost more to rent than own right now. And you don’t get any of your rent back in the future. History shows us, in the long term, you can build equity in a home. Dr. Ken Johnson earlier this year explained in a post on this blog:

“It appears that homeownership creates extra wealth mainly through its ability to force owners to save rather than through property appreciation. Thus, homeownership appears to be a self-imposed savings plan, which through time leads to greater wealth accumulation as compared to comparable renters. In short, buying a home makes Americans save.”

The Joint Center for Housing Studies at Harvard University released a study last year titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

What Does This All Mean?

We believe David Shulman, senior economist with the UCLA Ziman Center for Real Estate said it best:

“The American Dream of homeownership may be comatose, but it is not dead, and the wake-up call will come in the form of higher rents.”


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7 replies
  1. Steve Jolly
    Steve Jolly says:

    I agree that David Shulman said it best. There are so many people who are sitting on the sidelines waiting for the right moment. That moment is today! Years from now people will be saying, ” I should have bought in 2012″

    Reply
  2. Carlos
    Carlos says:

    Lots are not waiting on the sidelines. Just that the issues created by the Foreclosure mess or a divorce has messed up their credit. And they cant get a loan from the banks to buy a house.

    Reply
  3. Mike Griffin
    Mike Griffin says:

    Yeah owning is cheaper except for the fork load of money you need to cough up for a down payment to GET a lower monthly payment than one if you were to rent. Need to though adjust the monthly payment for water and trash bill or other utilities that weren’t required paying while renting.

    Reply
  4. Robert May
    Robert May says:

    There are definitely times when renting is still a better option than being a homeowner. The younger generation will be a big driving force in which trend is the strongest, and right now it seems they would rather rent than buy.

    Reply

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