To buy or not to buy? That’s the question many people ask—and there’s no easy answer. Both buying and renting have their perks and drawbacks. Let’s dig into the good, the bad, and the ugly of the housing market and find out once and for all if it’s better to rent or buy.
State of the Housing Market
Over the last two years, the housing market heated up—so hot, in fact, that many buyers found themselves unable to keep up with the skyrocketing prices. Both existing homes and new construction were in steep demand, but several factors have led to a sudden cooling of the market.
In March, CNN reported that home prices had risen over 20% from the previous year. “It was the highest year-over-year price change in more than 35 years of data,” according to the S&P CoreLogic Case-Shiller US National Home Price Index. Prices surged even higher in the Southeast. Tampa, Florida, became the city with the most rapidly growing home prices at 34.8%.
What has changed? In a word: inflation. The Federal Reserve has made moves to curb rising inflation, which is now the worst it’s been in almost 40 years. One of those moves is to put pressure on the housing market with higher interest rates.
As Forbes explains, “Rising rent prices and now higher mortgage rates—which soared from an average of just 3.2% at the start of the year to 5.81% by mid-June—have driven up the cost of housing, pricing many people out of the market. This has caused home sales to begin falling as more people can no longer afford homes at the current heated prices.”
Existing home sales have steadily dropped over the last four months. It’s not just existing homes that are struggling, though. According to Bloomberg, “New US home construction fell in June to the lowest since September after plunging the prior month, driven by a slide in single-family homebuilding that underscores waning demand. … On top of demand concerns, builders are also contending with ongoing production bottlenecks, labor-supply challenges and high costs.”
The result is a housing market that feels uncertain. Most experts are advising home buyers to proceed with caution. The near-panic rate of homebuying during the pandemic put pressure on buyers to make extremely fast decisions. Inevitably, some of those buyers aren’t going to be happy with the choice they made. While the market is still hot, available inventory is projected to increase. That means more choices and less competition.
So does that mean now is a good time to buy? Well, it depends…
The Case for Buying a Home
When you own a home, you build equity every time you make a mortgage payment. It’s an investment. As Quicken Loans points out, “buying a home is almost always cheaper in the long run and it offers you an opportunity to build equity. Hopefully, your home will have increased in value when you sell it.”
There are tax benefits to being a homeowner, too. While not every expense is deductible when you’re a homeowner, you may be eligible for multiple breaks on your taxes. Those tax breaks include deducting mortgage interest, property taxes, and even necessary improvements to your property. You can learn more about the tax breaks for homeowners at Rocket Mortgage, but make sure that you consult with a tax professional, too.
Owning a home means not having to worry about restrictions placed on you by a landlord. You can paint the walls whatever color you want, adopt pets without having to pay fees, and even remodel your space. You also won’t have to worry about sudden rent hikes—an increasing problem for renters across the country—or scrambling for a new place to live when the landlord decides to sell the property.
The Benefits of Renting
The strongest argument in favor of renting is the upfront cost. While you will likely need to pay first and last month’s rent along with a security deposit, that’s a drop in the ocean compared to the cost of closing on a home.
The cost of owning a home isn’t limited to the monthly mortgage payment. You’ll also need to pay property taxes and, in some cases, mortgage insurance. In addition, you’ll be on the hook for all repairs, maintenance, and upgrades. Homeowners insurance is a must, but you might not always be covered if something happens. You may also have to pay homeowners association fees—and be subject to the whims of an HOA.
If you’re not yet in a financial position to buy a home—more on that in a moment—then renting may simply be your only option. Renting offers more flexibility, particularly for single people who don’t need a three-bed, two-bath home. Conventional wisdom holds that owning a home is the best way to build wealth. However, with the rapidly changing housing market and current uncertainty regarding inflation, you might be better off renting for now.
You also won’t be tied down to one place when you rent. Yes, the majority of renters face financial penalties if they break a lease, but that’s still a better outcome than being stuck with a mortgage you no longer want. There’s always the risk that you might lose a significant amount of money during a housing crash, too. With prices as inflated as they are right now, it’s entirely possible that your home might not be worth what you have to pay for it.
How to Decide Which Option Is Right for You
As you contemplate whether to rent or buy, there are a few questions to ask yourself that may make things clearer.
First, examine your financial health. Cheryl Costa, a certified financial planner from Boston, told U.S. News & World Reports that she failed to be realistic about money before buying a home. “Too many people buy a house and fail to appreciate all the ancillary costs,” Costa said. “When we bought our first house, we used nearly everything we had saved on the down payment, and when the grass started growing in the spring, we realized that we hadn’t budgeted for a lawn mower. You don’t have those problems in a rental.”
Your credit score and debt-to-income ratio will determine the size and type of mortgage you can get and your interest rate. Many websites offer mortgage calculators, such as this one from Bankrate, to get a ballpark estimate of your buying power. Before you ever contact a lender or a real estate agent, know the numbers. If buying your “dream home” would mean cleaning out your savings, then you should either scale back or wait until you’re in a stronger financial position.
Make sure that you’re not buying a home just because it’s a common milestone for adulthood. Not everyone will buy property, either because they don’t have the money or because they simply prefer the flexibility of renting. Buying a home for status and clout is even worse. Only look for homes that offer what you need, not what you think will impress other people. Even if you qualify for a bigger mortgage, you don’t need to use every penny of it.
Real estate investor Sam Dogen recommends using the “BURL” rule to determine if you should rent or own. BURL stands for “buy utility, rent luxury.” What he means by that is if you currently own more home than you strictly need—extra bedrooms, access to community amenities you don’t use, or a big backyard with no one to enjoy it—then you’re probably better off downsizing to a smaller place and renting out the larger one.
“BURL helps you see that the true cost of living in a home that you own isn’t just the money you spent to live there. It is the opportunity cost of not renting it out at market rate,” Dogen explains. This is especially true in red-hot markets where
Perhaps the biggest deciding factor is whether you intend to stay in your current location for at least three to five years. If you think you’ll move out of the area before then, you might find that renting is ultimately better. If you move before you have a chance to build equity in your home, then you won’t get to reap the full benefits of being a homeowner. Of course, it’s not always possible to predict when things might change, but generally speaking, don’t buy a home unless you feel happy and settled in the area.