I INSIST, Renting is Better then Buying

Not long ago, there was a legion of "economists" in sciforums who insisted that buying a house was better (economically) then renting one. Well, here's an article that disagrees (just like I did)!

"Why rent? To get richer
A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.

I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.
"

There ya go!

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Full article: http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx

 

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I disagree. I just bought a house. I think there are certain advantages to both. The rent at my previous house (a 2bdr, 1bath, 1000sq ft house) was $800. My current house payment is $1050. This house is 1200 sq ft, 3 bdr, 2bath. The house also appraised for $2100 more than what I paid for it (I paid 123,900 for it and it appraised for 126K), so I already have that much equity built in. Renters will NEVER see any return on all the money they throw away renting. Yeah, you might pay a little more in house payments, but the thing you are making payments on BELONGS to you. Oh, and if you factor in my two dogs (which would cost anywhere from $400-800 in nonrefundable pet leases, per year), makes owning sound even better.
So if you plan on staying somewhere for a while and have the means to buy a house, that IMO is the best option.

 

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Not to mention the fact that you end up in the end with a house, if you stay there.

 

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I don't want my children to have a good start in life so I rent.

It's a bit of a bullshit article since renting costs the same as buying since in most European countries buying a house is heavily subsidized by tax deductions.

So, you can buy just as many stocks with renting as buying a house.

 

Dont forget the tax benefits from owning a house and having a mortgage either.

 

There should be no benefits to buying a house, renting is also evil :shrug:

I say to you all now, owning a home does nothing but cause you grief, the repairs, expenses, and cost of maintaining it + children are not worth the investment. Renting is wrong to because land exists on the surface of the Earth, it should be free and you should be able to sleep or eat anywhere you want.

America is evil, rent is evil, paying for land is evil, things are free until humans become involved, then they cost us lots of money + time!

Humanity can burn in hell IMO

 

I see you took your daily does of vitamin EMO this morning.

 

I think that those who believe that renting is better than buying a house should do so. Afterall, I have interest in several rental properties and as long as that attitude continues, I'm making money and I'm quite happy about it. Thank you!

Baron Max

 

Kinda depends on the place you want to buy, and the place you are willing to rent, no?

Of my personal acquaintances who bought and sold houses, over my lifetime, about 40% lost money on the deal overall.

But that doesn't make them bad deals. Most people who buy and sell stocks lose money doing that, as well.

 

Which says, of course, that 60% made a profit, huh?

Baron Max

 

Good point. The old man trades in metals on spec. Loony, but he does pretty well.

 

Who selected and who paid for the appriser? (If real easte agent did either, do not believe that number.)

Also have you noticed that the average price of 3 BR house is dropping in the US, at an increasing rate? This said, it was probably a good move to buy if you have big >15 year mortgage - you are mainly paying interest now and when you are truely "gaining equity" / significantly reducing your debt in the mortage then if you still have a job, when the dollar has colapsed, you will get to pay off the balance of your mortgage with much lower value dollars.

As far as gaining equity now, think more clearly. If you purchase is at all typical, the value of your house will drop in the next 12 months much more than the amount you will reduce the principle of the mortgage - I.e. you are lossing equity with the current nation-wide trend to lower home prices, even if prices stop their current acceleration downward.

IHMO, because of these facts, it is a good time to rent with multi-year fixed price contract. You net worth would be increasing, not decreasing. If you want to own, buy after the housing price decline has clearly stopped.

 

I wonder about that, too. I rented for many years, and saved up alot of money, which I spent on a house. My reasons weren't financial, but had to do with privacy and space. If I were only concerned about saving, I think renting can be a good idea.

 

No, the housing market is dwindling, houses are still appreciating, at least here they are. I don't know what area you are getting your quotes from. I wouldn't confuse the two. I'll have the house appraised one year from today and IB it appraises for more than 126K.

The mortgage company selected the appraisal and I paid for it (included in closing costs). My stepdad (who has been a contractor for over 25 years) also said that the house could easily appraise for that much. Trust me. I did my homework when I bought this house.
Besides, that's about right for the neighborhood (Nashville, TN) that this house is in.

I'll be happy to post links to websites that state that houses had been overpriced to begin with; some areas didn't even experience a median housing price drop.

This isn't exactly a good time for the housing market, but the thing is, just like before, it will be corrected.

 

Nashville does seem to be a little different from most of the US - mainly because it did not participate in the housing boom much, so is not suffering the retraction as much either. It is however, like all most all of the US, finding that houses stay on the market longer, more are for sale at any one time, and “asking price is often significantly reduced to make the sale. etc. This despite the rapid growth of local industry and many new employers, including eight new corporate headquarters! For example:

“Housing in Nashville, the heart and soul of the country music industry, is still a bargain despite brisk sales in the past year. The area's third-quarter median home price of $164,300 was about 24% below the national level and about 11% lower than the median in the south, according to the National Association of Realtors, while the area's average monthly rent of $554.51 was less than half the national average, according to Property & Portfolio Research Inc.
Nashville's stable and diverse economy, driven by manufacturing, health care, the music industry and professional services, is expanding, which is expected to help the region finish 2005 with a record number of homes sold, said Christie Wilson, president of the Greater Nashville Association of Realtors. "We have a lot of big businesses here so it's a strong market," she said. In just about two and a half years, the region has gained eight corporate headquarters, bringing with them some 3,800 new jobs….Still, like many areas of the country, the number of homes available for sale in Tennessee's state capital is starting to rise slightly, which may be a sign of cooling demand. Inventory rose about 2% in November to 13,718 homes from the year-earlier month, according to the Nashville realtors association.

From: http://www.realestatejournal.com/columnists/livingthere/20060104-livingthere.html

A good point for your decision is that you bought house well below the local average price. The upper end of the market is hurting more than the lower end.

 

Yep, like I said, I did my homework. I wasn't about to get torched on buying a house. Plus, Nashville is awesome. The weather is good. We have fairly mild winters, and as you mentioned above, you can't beat the housing market here. My house would probably go for well over $250K in the Tampa, FL area and probably over $400K in LA or SF.
The house was originally going for $127K and the owners came down on it even before I saw the ad for it. I don't think I overpaid for the house in the least.
But the rent vs. buy debate will go on, even though it shouldn't. I don't think one is better than the other; it just depends on what your needs and finances are as an individual. I was tired of renting. I wanted my own house, and I could buy one, so I did. I couldn't be more happier with my decision.

 

To Mikenostic:

You did not comment on my guess that you are actually losing net worth by buying, not building equity already, by buying instead of renting. Perhaps you will check to see who is correct and tell us?

As we do not know what your house will sell for 12 months from the purchase date, (I think less than you paid and I am sure you hope more) lets neglect the appreciateion or depreciation and just compare the amount you will pay on the mortgage principle (Increasing net worth) to the amount you could have but in the bank each month: (your monthly mortgage payment) - (average rent in your area = $554.51). To keep it simple you can neglect the bank interest you would gain.

Tell me honestly, with this math model, would not renting have advanced your net worth more?

 

Let me go back to my mortgage paperwork and get the payment (which is around $1050). I'll check and see how much goes to interest and how much goes to principle. Also, $100 of that payment is PMI, which along with the interest, is also tax deductible. I can crunch numbers and make a hypothesis but won't be able to tell for another year.
Assuming that the value of the house goes down (if it's appraised for <126K next year), then yeah, my net worth possibly could go down. I really don't see it though. Unless the diverse and stable economy of Nashville just goes to shit within 12 months.

Oh, and as I mentioned before, the rent at the house I lived in before (split with roommie) was $800; the house was 50 years old, had only 2 bedrooms and one bath. That average rent of $555 seems a bit low to me. So really, the current house payment compared to the rent on the previous house is only $250 more; and you have to remember, this is a bigger, much newer house (built in '86 compared to '49 for the old house), with a bigger yard, more rooms, more bathrooms and more space.

 

I agree 100% with you on this. The Economics is only a factor, a relatively minor one, unless you are poor; However, it is a factor in every one's decision and thus people should not get it backwards, just out of ignorance! We can use your case, somewhat favorable to the "buy side" of the argument as you bought below average price in your area. Will you honestly tell us which way (in first 12 months) this factor goes? I.e does, in your (favorable to buy) case, buying or renting cause the greatest increase in net worth in first year? (also as the term of the mortgage is important, it that is not too nosy, tell facts about your mortgage.)

 

To Mikenostic:

Glad you will tell us. People should know which way the economics goes in the first year. If I am correct, even in your relatively favorable case for the "buy side" of the argument that renting is better in the first year economically, (and you are a very kind soul, gluton for punishment etc.) try to estimate how many years you must own the house before the buy side is better economically.

Again, lets assume as we do not know, neither appreciation nor depreaciation, neglect cost of repairs, cutting the lawn etc, but unless the simple model shows buying is better in only a few years, it is necessary to include the compounding effect of interest on the bank deposit. (No need to do it accurately every month, just say you gain 4% once per year on the sum at end of each year. - Many think they can do much better than that in stock market, but lets be conservative.)

I.e. If not in the first year, when will buying be the better way to increase net worth?

PS when I was 62 I did a similar analysis about taking my Social Security then (Only 80% as much for rest of my life but three extra years of monthly collections.) I assumed that all of it could be invested at 6% as did not need it to live on. It turned out that for about 17 years I would be ahead of the game if took only 80% at age 62 instead of the full 100% starting at age 65.

One's health enters into this and I was (and still am) very healthy for my age, better than many 30 years younger, so I waited until age 65 to start collecting SS$. In hind sight, I made the wrong decision. I have invested in many ADRS and their average in 5 years (or less years on ones bought 4 years ago) is up about 350%! I am too lazy to compute what annually componding rate that is, but is many times the 6% I assumed. - I.e. If I had taken the 80% at age 62 and invested it as well as I have - I would be even richer.