Before our nationâ€™s housing crisis began in 2007 the rent-vs.-buy question wasnâ€™t really a question at all. Because the answer was: If you can afford it and youâ€™re going to stay put long enough to recoup the transaction costs you buy.Â Simple.
Thatâ€™s because for the generations leading up to the Great Recession buying was always superior to renting for two reasons â€“ one societal and one financial.
As a society, the belief was virtually universal that owning a home was simply what normal, stable adults do. Home ownership has traditionally been known as the â€œAmerican Dream,â€ and anyone not in pursuit of it was assumed to be either transient or not able to measure up financially.
Owning a home was also the right idea money-wise because there had never been a time in modern memory when home values, at least nationally, didnâ€™t escalate over time. In addition, Uncle Sam provides investment incentives in form income tax deductions.
What a difference one recession/housing crisis can make.
How should you decide?
As I mentioned above, the rent-vs.-own â€œquestionâ€ only became a question again because property appreciation became a question. If housing was still appreciating it wouldnâ€™t be much of a question at all.
But consider this: If not buying a house for fear of falling prices makes sense then it also makes sense never to buy stocks, since they also periodically decline. Thatâ€™s not good logic for either stocks or houses. What falling prices of any kind teach us isnâ€™t that itâ€™s dumb to buy â€“ itâ€™s that itâ€™s dumb to speculate. Over-leveraging yourself by gambling on short-term price swings or otherwise biting off more than you can chew has always been a bad idea.
Iâ€™ve been buying both houses and stocks for more than 30 years. Hereâ€™s my advice: Use the same rules that have always applied to owning a houseâ€¦
1. Buy only if youâ€™re confident youâ€™ll be staying put for at least four years. Thatâ€™s because buying a house has very high transaction costs, and because the longer you own it, the more likely you are to make money.
2. Hope for appreciation, but donâ€™t count on it. Youâ€™ll gain equity in your house by paying off the mortgage. If past is prologue â€“ and thatâ€™s usually a good bet â€“ youâ€™ll gain additional equity via appreciation over time. But the beauty of a house is that itâ€™s an asset that you live in. Making a home into something that reflects you isnâ€™t something you can take to the bank, but it is rewarding.
3. Donâ€™t get in over your head. The average house in 1950 was less than 1,000 square feet. Today itâ€™s more than twice that. Whatever you buy, youâ€™re going to have furnish, heat, cool, and maintain.Â Owning a house can cost 35 percent more than renting one, and owning takes more of your free time.
4. Wait until youâ€™re ready. If you have bad credit and as a result are forced to take on a high-interest mortgage it will likely cost you tens of thousands of dollars over the life or your loan. Also, the more money you put down the less you borrow and the less risk you take. So donâ€™t just be ready emotionally, be ready financially. Build your credit and your savings before you build your house.
Consider the factors above. If you donâ€™t feel that youâ€™re ready to own thereâ€™s certainly no shame in renting. But if you do feel like youâ€™re ready, Iâ€™d encourage you to go for it.
I live in one of the biggest former bubble markets â€“ South Florida. When many of my friends were betting the farm and flipping houses five years ago, I was sitting on my hands. Now that prices are down 40 percent, theyâ€™re wiped out â€“ Iâ€™m looking to move up.
Stacy Johnson is a personal finance author, speaker, and television news personality. His Money Talks News series has aired for more than 20 years on dozens of network affiliates nationwide.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.