The question of whether to rent or buy a home is a decision that has changed for many Americans as the economic landscape has changed. The old rule of thumb was to expect home appreciation right at or just above the rate of inflation, but U.S. home prices have gone up 423% in the last 40 years1. These increases are even more dramatic in some parts of the country. California housing prices have increased by over 11% per year since 20002. This is versus a 6.6% increase for the United States as a whole3.
This fact has moved home ownership out of the realm of possibility for many who would have been able to move into home ownership if they had been living in the economic reality from 20 years ago. This doesn’t change the fact that for individuals and families considering a move, a decision must be made whether to rent or buy, but it can make the decision more difficult. For instance, many older homeowners who no longer need a 4-bedroom family home and would like to downsize, find that the economics simply don’t make sense. Even with incentives to make the process easier like Prop 19 in California which allows homeowners to take their tax assessments with them to their new home, the sheer cost of a new home when taking taxes and commissions from the sale into consideration can force a decision to stay put in an unnecessarily large family home. As well as renters being affected by home price appreciation. When renters move due to landlords selling to lock in real estate profits, they are generally forced to rent similar properties at higher prices as properties pop up to market rates during tenant turnovers.
The benefits of buying are as clear as ever. Buying a home is the opportunity to build equity through the combination of house appreciation, while paying down a mortgage. With each mortgage payment, a portion goes towards paying down the principal balance of the loan, effectively locking in a portion of your housing cost. Equity can grow over time as the property appreciates in value, providing potential financial benefits in the future like a parachute, if needed, in retirement.
However, renting offers flexibility and freedom from the responsibilities of homeownership, such as maintenance, property taxes, and insurance. Renting allows for greater mobility and the ability to easily relocate without the constraints of first selling a property. Additionally, renting can be more cost-effective in the short term, as it may require a lower upfront financial commitment compared to buying a home and doesn’t put you at the whim of the fluctuations in real estate prices.
The tax benefits of home ownership have also shifted due to changes from the Tax Cuts and Jobs Act of 2017 (which disproportionately benefitted society’s highest paid workers)4. As a result, many taxpayers who might have benefitted from tax cuts have found their deductions capped, or not worth taking at all. The New York Times has created a Rent or Buy calculator that takes these tax situations as well as costs, fees and timing into consideration to give a well-rounded comparison.
Ultimately, the decision to rent or buy a home depends on individual financial objectives, lifestyle preferences, and long-term goals. While buying a home offers the potential for building equity and benefiting from real estate growth, renting provides flexibility and financial freedom. Considering factors such as market conditions, personal financial stability, and long-term plans can help individuals make an informed decision that aligns with their needs and priorities in the housing market.
If this sparks any thoughts or questions, don’t hesitate to reach out to us to discuss and learn more.
Photo by Tierra Mallorca via Unsplash.com
