Jean Sica-Lieber owned homes all of her life—when she was married and divorced, when her children were young and when they were grown. But recently, after selling her Rochester, N.Y., town house at a loss, she decided to rent. Sica-Lieber assumed it would be for a year and then she would buy a small place with a garden. But now, she’s rethinking that plan.
“Part of me, and I think this exists in most Americans, wants to be a property owner, despite the fact that unless we buy outright, the bank really owns most of it,” the 58-year-old publishing specialist said. “But when it came right down to it, I’m single and don’t have children to do chores. How do I want to spend my time? Would I rather do more travel or pay property taxes?”
So Sica-Lieber decided to hold off on buying that little house, and she renewed her lease on her town house for at least another year.
For Kelly Stettner, 41, who had rented all her adult life, buying a house brought unexpected joy. When their landlord put the duplex she and her husband were renting up for sale, they ended up purchasing a 1929 bungalow on an acre in Springfield, Vt. They, their two children, and their dog couldn’t be happier.
“Budgeting is different, but we’re exploring many options that we never had considered while renting—a solar panel, a vegetable garden, [do-it-yourself] landscaping, and much more,” said Stettner, an administrative assistant. “But the emotional end is what I couldn’t imagine. There’s a self-esteem from the responsibility of owning it. We’re responsible for keeping it energy-efficient, keeping it clean. We get to do what we want, when we want, on our own terms, and we directly benefit from it. That was something I hadn’t really anticipated.”
To buy or to rent? That was never much of a question for most Americans. Buy as soon as possible, of course, to show that you’ve grown up and made good. Paying rent, the thinking went, is just throwing money away; owning a house is an investment in the future.
Until the past few years, that is, when too many Americans who bought homes with too little down and at too high a price discovered that they couldn’t pay the mortgage and couldn’t sell either. That unaffordable house became an albatross. So now, potential homeowners are more likely to seriously consider renting. But which makes more economic sense in the short- and long-term?
In nearly three-fourths of the nation’s top 50 cities, it is better to buy than to rent, according to the real-estate website Trulia.com. The site, one of the most popular for real-estate research, offers a “Rent versus Buy” calculator that compares the costs of two-bedroom apartments, condominiums, and town houses. The data for January show that cities where the housing bubble burst with a vengeance—Miami; Las Vegas; Arlington, Texas; Mesa and Phoenix, Ariz.; and Jacksonville, Fla., in that order—were the best places to buy instead of rent. Renting was a far better deal in New York City; Seattle; Kansas City, Mo.; San Francisco; Memphis, Tenn.; and Los Angeles—less because of cheap rent than the continued high cost of buying in those cities despite the recession, according to Tara-Nicholle Nelson, Trulia’s consumer educator.
The website considers a home to be fairly valued, Nelson explained, if buying it costs about 15 times a year’s rent. So if you pay $10,000 a year to rent, you should be wary of paying more than $150,000 to purchase an equivalent piece of property.
The comparative advantages of buying versus renting aren’t easy to figure, though. Numerous websites offer calculators that have the user enter the requisite data and supposedly learn which course to pursue. But Russell James, who teaches personal finance at Texas Tech University, has researched these online tools and found them unreliable. When he plugged the same information into the top 10 online calculators, eight advised him to buy and two told him to rent. “At one extreme, I was told buying would save me around $61,500,” he reported, “and at the other end, I was told renting would save me $15,000.”
James also warned that online calculators may be particularly misleading for lower-income buyers, who are more likely to purchase older homes that need repairs and are less energy-efficient. These buyers are also less likely to itemize their tax deductions, losing the advantage of the federal tax break for mortgages.
Whether you rent or buy, some costs may not be obvious. Homeowners must pay property taxes, private mortgage insurance (if they plunked down less than 20 percent when they bought), home insurance, and all utilities—some of which landlords may have paid before. They’re also responsible for buying any needed big-ticket items such as lawn mowers, snowblowers, and washer/dryers. Renters, Nelson said, face the “opportunity cost” of lost equity and the prospect of never owning a home free and clear; they also could pay substantially higher taxes if their income is large enough to deduct property taxes and mortgage interest. And any improvements a tenant makes to a rental property belong to the landlord, of course. Tenants might also face unexpected rent hikes and evictions.
This article appears in the March 17, 2011 edition of National Journal Magazine.
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