(Republished here with the permission of the National Multi Housing Council)

Rent vs. Buy

“You need to buy a house." How many times have you heard that? Turns out that could be bad advice. Here's why:

Every year, thousands of Americans jump into homeownership for the wrong reason, usually pressure from friends or family. It turns out a lot of them could actually save money by renting.

MYTH# 5: Investing in a house is a safe investment.

Reality: There are very few risk-free investments and a house is certainly not one of them.

House prices are not a one-way escalator going up. They can also go down. Predicting whether a specific house in a specific market will appreciate is very difficult. As financial columnist Jane Bryant Quinn noted, “any single [house] sale is as much a lottery as trading stock is."[10] If prices do fall even slightly and you have taken out a low or no-down payment mortgage, you could find yourself owing more on your house than it is worth.

Plus, experience suggests that even in a booming housing market, you'd probably earn more on your money in stocks than in real estate. According to the editors of SmartMoney magazine, “compared with the average share prices or even bond returns, house prices plod up at a very slow rate: since 1979, about 4.4% a year.

If you can't do better than that in the stock market, you need to fire your broker."[11] In 2001, Harvard University's Joint Center for Housing Studies found that “in many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning."[12]

Reality Check

“In short, this investment [homeownership] is not a slam dunk. For decent returns on any home, you need either stupendous luck or a holding period long enough to amortize your many costs."[13]

Jane Bryant Quinn
Newsweek Columnist

“In many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning."[14]

Harvard University
Source: National Association of
Realtors; CRSP: Lehman Bros.

MYTH# 6: I can't afford not to buy with these low interest rates.

Reality: Low interest rates may actually serve to make buying more expensive.

It sounds counterintuitive, but low interest rates can actually make housing more expensive, not more affordable. How? Well, if low rates bring a lot of new buyers into the market, housing can turn into a seller's market. Now that there are more prospective buyers competing for the same houses, sellers can demand higher prices.

So, interest rates may be low, but they haven't made housing more affordable if they have also pushed up sales prices. Plus, if interest rates increase, the seller's market could quickly turn into a buyer's market.

If you paid the peak prices commanded during the seller's market, you could find yourself having to sell your house for less than you paid for it if higher rates reduce the number of prospective buyers. The lesson here is that while interest rates matter, you should not feel compelled to buy just because they are low. You may be overpaying for that house just to lock in a low rate.

Don't buy the myths

“I feel safer in an apartment, because other people are around and I like the planned social activities, which are on-site so I don't have to drive."

Tracy Harper
Elementary School Teacher
Atlanta, Georgia

MYTH# 7: I know I'll make money on my house because I plan to stay there at least five years.

Reality: Nearly one third of all homeowners move within five years and many end up losing money.

Most people who buy a house plan to stay there for a long time, but many end up moving sooner than planned for job and personal reasons. Short-term homeownership can be a costly proposition. The cost of a round trip into and out of homeownership can be as much as 10% of a house's sale price.

If you move in a few years, those costs could easily exceed whatever equity and appreciation you've realized. In a worst-case scenario, you might have to write a check in order to sell your house.

Or you could find yourself needing to either sell your house at a loss or forego a superior job opportunity elsewhere.

Reality Check

According to one research report, buyers who sold within four years paid, on average, 19% more as owners than they would have paid as renters.[15] If you think there is any chance you may be moving again within the next several years, renting deserves serious consideration.

“I have owned three homes previously and dislike the typical owner headaches, such as mowing the lawn, painting, replacing roofs, etc. I like the sense of family, friendly surroundings and professional atmosphere associated with apartment living."

Don Grainger
Account Executive
San Antonio, Texas

MYTH# 8: Buying a house will force me to save and help build a nest egg for retirement.

Reality: This is a risky and unwise investment strategy.

Mortgages can work like a forced savings program. Instead of paying rent, you pay your mortgage and build up equity, assuming you stay long enough to cover the costs of buying, maintaining and then selling the house.

But remember, nearly one third of all owners move within five years, before they start building any real equity. But even if you stay, is this really a wise investment strategy? First, it's risky. It's like putting all your wealth in a single stock. Second, over time, you are likely to earn a better return in the stock market (See Myth# 5).

The editors of SmartMoney magazine came to the same conclusion in a February 2002 article. They wrote, “For most of us, building wealth with our residence is a slow and inefficient process, if it works at all. It's especially hard in this era of low inflation, simply because the underlying asset, your home, typically doesn't appreciate very quickly…The fact is, when it comes to outsized returns, equities win walking away."[16]

Reality Check

“Forget what your friends say. Owning a home is hardly the best way to save for retirement. How do we know? We ran the numbers."[17]

SmartMoney, February 2002

MYTH# 9: I know buying is better for me because I used an online “Rent vs. Buy" calculator.

Reality: Most of these calculators are overly simplified and seriously flawed.

An economic analysis of the leading calculators found numerous problems. Some fail to include basic costs like maintenance, insurance or property taxes. Others leave out the transaction costs of buying and selling a house.

Almost all of them assume you will itemize your tax deductions, when only 34% of all taxpayers actually do. Most do not factor in the returns you could earn by investing your savings instead of using it as a down payment.

The end result is that consumers who rely on these tools may make one of the most important decisions of their lives based on misleading data.[18]

The Bottom Line

RENTING IS EASIER.

Apartments offer maintenance-free, hassle-free living.

RENTING IS MORE FLEXIBLE.

When you rent, you can relocate for job opportunities without incurring the cost of selling a house.

RENTING IS LESS RISKY.

When you rent, instead of tying all your wealth up in a single investment, you can invest in a variety of stocks, bonds and mutual funds. In fact, you can still invest in real estate through Real Estate Investment Trusts (REIT), either individually or in REIT mutual funds.

APARTMENTS OFFER A LIFESTYLE ALTERNATIVE.

Today's apartments offer amenity packages that rival (and often surpass) single-family houses as well as access to new technologies that may be unaffordable in single-family houses.

Apartments often are located in neighborhoods with convenient access to transportation, employment, retail and entertainment.

RENTING OPENS DOORS

Renting allows you to use your “down payment money" for other investments, to start a small business, to travel, or even to change careers.

“We wanted to be free of the responsibility of a homeowner and to be able to invest all of our money in the business. Apartment living is ideal because it is maintenance-free, convenient and worry-free."

Rose and Gary Trousdale
Sports Management
Business Owners
Phoenix, Arizona
www.naahq.org

NOTES
1. “Unwise Wisdom: Buying a house is better than renting." The Wall Street Journal, January 29, 2001.
2. NMHC tabulations of 2003 U.S. Census Bureau/Bureau of Labor Statistics Current Population Survey March Supplement.
3. Magali Rheault, “Tax Time: How America Files." Kiplinger's Personal Finance, April 2004.
4. June Fletcher, “Every House is a Money Pit." The Wall Street Journal, September 4, 1998.
5. Liz Pulliam Weston, “The hidden costs of home ownership." MSN Money Web Site. on April 13, 2004. http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37628.asp

6. Ibid.
7. Jonathan Cohen, “The American Dream, Revised as a Rental." The New York Times, July 12, 1995.
8. NMHC tabulations of the U.S. Census Bureau's American Housing Survey for 1997 and 2001.
9. Insurance Information Institute. Found at www.iii.org/media/facts/statsbyissue/homeowners/ on April 14, 2004.
10. Jane Bryant Quinn, “Home Prices Bounce Back: But a third of buyers won't hold their property long enough to make money." Newsweek, March 16, 1998.
11. Jersey Gilbert, “Is Your House Really a Good Investment?" SmartMoney, February 2002.
12. The State of the Nation's Housing 2001. Joint Center for Housing Studies of Harvard University, 2001.
13. Ibid
14. “Rent vs. Buy Calculators: How Helpful Are They?" Research Notes, National Multi Housing Council, June 29, 2001. www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1159&IssueID=80
15. “The High Cost of Short-Term Homeownership." Research Notes, National Multi Housing Council, December 1, 1997.
16. Jersey Gilbert, “Is Your House Really a Good Investment?" SmartMoney, February 2002.
17. Ibid.
18. “Rent vs. Buy Calculators: How Helpful Are They?" Research Notes, National Multi Housing Council, June 29, 2001. www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1159&IssueID=80