If you’ve been wondering if it’s better to buy or rent, you’re certainly not alone. We have long been encultured to the idea that homeownership is an uncontested good, but the housing market took a serious hit during the Great Recession. Now that home values are making their recovery, will the American Dream of homeownership regain its luster?
Renters Tilt the Scales
The facts of the recent past are clear: Americans have flocked to renting. A March Federal Reserve report shows that 16 million Americans became homeowners between 2000 and 2006, while 700,000 became renters. However, in the following five years, 1.2 million stopped being homeowners and an incredible 4.2 million became renters.
Certainly, some of that homeownership exodus is a result of the national financial crisis a few years ago.
Millions of Americans found themselves under water in their homes, and lost them to short sales or foreclosures. But many of those mortgages were non-recourse loans, which meant that the lender couldn’t go after the defaulting borrower’s other assets. So, many who lost their homes were fortunate enough to be able to keep all of their other assets.
So, now that the economy and the housing market seem to have reset, what’s next for affluent Americans who are renting but can afford to buy?
Why I am a Renter
My fiancé and I live in a nice house in San Jose, CA. We are both business owners and have offices in our home.
His hedge fund used to have corporate offices around the corner, but when the financial markets tumbled he downsized out of the office space to prepare for lean times. Now his employee works in an in-law unit on our property and the hedge fund uses our home address as its corporate address.
The business pays for a decent portion of the rent, which is a tax deduction, and protects us from having to budget much for housing out of our personal cash flow.
**Here is the key to this scenario, though, because if you simply save yourself money but spend the savings, you’ve squandered its value: Because we’ve consciously directed the financial benefit into savings, we’ve captured what could have been the equity growth benefit from homeownership, and maximized the value of the situation to ourselves.
Good Reasons to Rent
- For older Americans, renting can truly give you freedom. It can alleviate the burden of home maintenance, and set your heirs free from the often emotional job of deciding whether to sell the family home.
- Renting preserves mobility if you move or change jobs often.
- If you’re raising children and the size of your brood keeps increasing, you may need more bedrooms soon.
- Buying and selling houses is expensive (as in almost 10% of your home’s value!), so if you know you need to save more of a down payment to purchase the right home for you, it’s probably better to wait.
- If you’re an entrepreneur or work from home, there are opportunities for tax savings.
Good Reasons to Buy
- You can earn a profit over time.
- Tax savings from the mortgage interest deduction.
- No landlord means…
- Consistency—you can plan for things like being in the right school district and buy that Labrador whenever you’d like.
- Security—no surprise visits from anybody but your mother-in-law.