Just over the last year, the phrase "nation of renters" has been used in dozens of articles and blog posts on major websites and housing portals. The press and many real estate market analysts are lamenting the dearth of home buyers and the disappearance of most of the first time buyers.
Articles are everywhere with statistics showing the Millennial generation staying in their parents' homes longer and generally uninterested in buying a home now. Some of this is economy and job oriented. Many younger generation would-be home buyers are hesitant when they read about "the five year rule." This new "rule" about buying a home states that you shouldn't do so unless you're sure you can stay in it for five years or longer. At current market appreciation rates, and considering the uncertainty of many younger buyers that they'll stay in their current job for five years, it's no wonder they aren't excited about getting locked into a mortgage.
But, it's cheaper to buy than to rent! There are plenty of articles out there with rent-versus-buy affordability statistics. Mortgage interest rates are still historically low, home prices are reasonable in many markets, and rents have been rising due to increasing demand. In many areas of the country it is indeed cheaper to buy than to rent if you restrict your comparison to considering mortgage payments, property taxes, and the mortgage interest deduction with a monthly rent amount.
There aren't any published studies of the numbers of recent home sellers who barely got out from under their mortgage, taking little or no equity away from the closing table. Factor in those who actually had to throw in some cash to get free of a home with good credit, and it does begin to influence perceptions. Buying a home is no longer a retirement savings vehicle, making it more difficult to dismiss renting as "throwing money down a hole."
There are many less obvious factors that can change our perspectives about rent-vs-buy. What if you end up having to sell at a loss, or worse, you lose the home because you have to move for a job and can't sell. Maybe you do a short sale, but that can still hurt your credit and you can't take money away from the closing table. All that sounds logical, but what if you have a choice between two identical homes, one you buy with a $1,200 monthly payment (taxes and insurance escrow included), and the other you would have to rent for $1,450?
If the home was purchased for $150,000 with 20 percent down, you're out of pocket $30,000 plus closing costs at move-in. If you're thinking of the "five year rule," you're concerned with staying long enough to get back that cash investment, and you probably have little expectation of a big profit when you sell. If you took out a second mortgage for part or all of that down payment, it's just more debt and a higher payment. If you had a low down payment, you start with less equity and have a lower expectation of any profit at sale unless you stay in the home a long time. It's a little stressful if you're not happy and secure in your job. How about another job-related factor; having to turn down a better job because it's too early to sell?
If you are considering buying that home and you do have the $30,000+, what will it earn in interest over five years? Savings interest rates are pretty low now, but you'll still have around $1,500 more in five years at 1 percent interest compounded annually. It's not much, but it's better than leaving the closing table with less than that $30k you invested upfront.
There's something we can't put a dollar value on in this discussion; freedom to move for lower rent or higher income. If you stay with one year or shorter leases, you can shop rents and move if you can cut your rent for the same value home. If you bought that home with the $1,200 monthly payment and have to turn down a job with a $500/month pay increase, it's no longer a flat rent-vs-buy monthly expense comparison.
It is not an easy decision in the best of economies, and these days buying or renting decisions are even more complicated than in the past. Weigh all of the financial, job-related, and personal preference factors. Above all, remember that renting doesn't make you a second-class American. You're in the good company of a very large group. Watch and wait for opportunity if buying is your goal.
