6/28/08

Buying vs Renting

I came across an article from US News on Yahoo's front page today. The author argues that while it may have been different in the past, it is better to rent than to own your home.

The author's main points are:

During a soft housing market, "homeownership becomes little more than rent, from a bank." Buying a home "can turn into an expensive, potentially money losing proposition." For the value of the property, at times like the one we're in now, can drop.

The author claims that putting the down payment into the stock market can get you better returns than using it to buy a home. Homeownership comes with various drawbacks, like property taxes and maintenance expenses. If you rent, and save the difference between your rent and the ownership expenses you would have had, it can add up to a lot of money over time. So, the author concludes, renting is better than owning.

Although this strikes me as plausible, I think that in most cases it's not true.

There are a number of assumptions here that are not necessarily correct in all cases. For instance, why assume that your mortgage payments would be more expensive than rent on the same property? I'm sure this is true in some cases, but is it true in so many as to make renting cheaper than owning in general?

The landlord is trying to make a profit, right? Doesn't he have his own mortgage to pay, or at least the incentive to recoup the expenses he incurred in buying the property? Wouldn't this be reflected in the rent?

And guess who's paying the property taxes and for maintenance in most cases? The tenant! If these expenses are not included in the rent, the landlord is not a very good businessman. If the landlord is to break even, expenses related to the property must be passed on to the tenant.

Since there is a homeowner in there somewhere (or else there'd be no landlord), renting cannot be cheaper than owning for long, if it ever is. If renting is cheaper, more people will do it. This rising demand will drive rents higher.

Put another way, some landlords will charge lower rents than their expenses. But most won't. Either they'll become renters themselves, or charge higher rents. In the end it will be cheaper to own rather than rent.

But is it cheaper to rent than to own now? Let's say you buy a house for $400,000 with an $80,000 down payment. At current rates, 7% in the NYC metro area, for example, you'd pay around $2,128.97 a month in mortgage payments on a 30 year fixed mortgage (on the $320,000 you borrowed). Adding in reasonable property taxes, insurance rates, and your down payment, let's say you pay $2,800 a month.

This is about as much as you would pay for a two to three bedroom apartment, depending on the neighborhood. Renting the house would be significantly more expensive, if only because you'd get more space. And again, why would the landlord charge you less than he's paying?

When the house is paid off, the homeowner's monthly payments are reduced significantly, for all he has to worry about is insurance, property taxes, and the occasional repair. The renter, on the other hand, continues to pay the same (probably steadily rising) monthly fee for the rest of his life.

There are other benefits to homeownership. While a house can lose value, unless it becomes worthless, the owner can recoup at least some of what he has put into it when he sells. We can't say this for the renter.

Also, the homeowner has greater flexibility with what he can do with his property. For example, he can rent it out to others (in whole or in part) and can leave it to someone when he dies. The renter cannot do the latter, and usually has more difficulty with the former.

Historically, houses appreciate in value over time. Slumps don't last forever. Also, when you buy a house you get an income tax benefit, and you can deduct your mortgage interest payments. Unless you rent for business purposes, no portion of your rental expenses can be deducted. Rents rise over time. Tenants obviously don't benefit from that.

Another of the author's assumptions is that the currently decreasing home prices make it more expensive to own a home than to rent. This is true for those who already own homes (and bought them during the bubble). But what about prospective home buyers? Housing prices are going lower. Rents are holding steady or are rising. How can it be that buying a home now is more expensive than renting the same property?

Whether it's better to rent rather than to buy depends on how much money you'd save over owning during the period of the mortgage, and whether this would be enough to cover future rent payments as well as leaving something for your heirs. There are scenarios where this can happen. (Most of these involve disciplined saving, which most people don't do.) I don't dispute that. But are they common enough to make the benefits of home ownership over renting a "myth"? I hardly think so.

Update here.