Sunday, April 28, 2013

The Home Ownership Decision ... To Rent or Buy, That is the Question

As Shakespeare might have put it, to rent or not to rent, that is the question. Or would it have been, to buy or not to buy?

Accordingly, how about simply asking ourselves if it's better to rent or to buy when making a decision about our housing needs?

My simple answer is that it depends on whether you're planning to stay put for ten years or longer. If so, then go ahead and buy.

That's because interest rates are at historic lows and monthly payments will compare favorably to renting. But if mobility is in your future plans, then maybe you should rent.

In other words, don't make this personal decision from the view of the mortgage lender. The banker will only be interested in the creditworthiness of the borrower and whether the loan's principal amount will be protected in the event of a future default. And to protect his interests, the banker will require a sufficient down payment and probably even transfer the responsibility of loan repayment to a government agency such as Fannie Mae, Freddie Mac or the FHA.

Looked at in another way, creditworthiness is a separate decision from whether to buy or not, and creditworthiness is only important if the potential buyer has first decided the time is right to make a purchase and is ready to take out a loan to do so.

Unlike the lender, the buyer's primary concern isn't his own creditworthiness. It's how long he'll likely stay put in his new home, and that's because the home's resale value is subject to market prices falling in the future. Because if prices don't rise or perhaps even fall, and factoring in the real estate commission on resale, the buyer turned seller may be unable to recoup even the amount of the initial down payment. Any risk of a loss on the home's resale value is the initial buyer's alone.

So don't buy a home as an investment is the best advice to any prospective home buyer. That said, if it's a nice house in a nice neighborhood, and you can comfortably afford the monthly payments and intend to make it your home indefinitely, now's a good time to buy.

Today's Dream House May Not Be Tomorrow's says this about renting versus buying:

HOUSES are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.
Economic and demographic changes may severely impair the value of a home when it’s time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially.
An ever-changing economy requires constant geographical repositioning. In the 19th century, for example, housing was often built near factories and warehouses, with apartments or houses containing numerous small rooms intended to accommodate many people per structure. In those days, before air-conditioning, these buildings often had large porches for access to cooling breezes.
Early in the 20th century, many houses were built around streetcar routes. Then, when the Interstate Highway System started in the 1950s, suburbs bloomed along the path of superhighways. With cheaper cars and relatively cheap gasoline (despite spikes in the 1970s and after 2005), housing developments became more dispersed. A culture that prized privacy and individuality left many neighborhoods without sidewalks or nearby community gathering places. Houses were cheaper to build this way, and they grew larger.
In the last century, shifts like these helped explain why inflation-corrected prices for existing homes typically changed by plus or minus 15 percent in a decade, even without national bubbles.
Further changes are inevitable, but hard to predict. . . .
Attitudes toward renting have also been changing. A MacArthur Foundation survey, conducted by Hart Research Associates in February and March, asked Americans if they thought that, “given our nation’s current situation,” buying a home had become more or less appealing. Fifty-seven percent said it had become less so, with only 27 percent saying it had become more appealing. When asked if they agreed with the statement, “For the most part, renters can be just as successful as owners at achieving the American dream,” some 61 percent agreed; 28 percent did not. . . . 
In the wake of the housing crisis, and amid shifting demographics, it’s plausible that a broad change in thinking is ahead, reducing demand for large suburban homes. After all, the national psyche has absorbed the tribulations of the millions of people who have been living in homes worth less than their mortgages, struggling to make payments and yet unable to sell. Smaller living quarters may become more socially acceptable. . . . 
Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.
If you want to settle down for a quiet life and watch your children grow up in a nice neighborhood, you might well act now to lock in an ultralow mortgage rate. Then again, if you’re restless, ambitious and determined to be mobile, it might be sensible to rent rather than own. Calculating the best economic return may not even be possible, given the uncertain investment potential.
Instead, it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford."
Summing Up
As is the case with all important personal financial decisions, what we should do about borrowing or not depends on what our concrete plans for the future may be.
When considering where to live, the likelihood of staying put or moving on should be a very big part of the individual's buy vs. rent decision.
That's my take.
Thanks. Bob.

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