Do I rent or do I buy? It’s an eternal question, one that can’t be solved with economics alone.
This is a particularly fraught time to make such a seemingly monumental decision. Interest rates are rising, which means mortgage payments are going up as well. Lock in those rates now or face the prospect of their going back to, well, normal levels (over 6 percent, from today’s 4.5 percent).
The stock market, except for a few small corrections, has continued to soar. What that means depends on your outlook: It may be a good time to pull some money out of equity investments and put it into a more stable (and usable) asset like a home, or it may not be the right time, since stocks could continue to rise, increasing your wealth.
Unemployment is near historic lows, so people’s finances may look as good as they have in a decade.
But layer over all of this the current political environment and the fears — which have persisted for years — that an economic correction must be around the corner, and making what should be a straightforward financial decision becomes tougher.
So what do you do? The only thing you can. Draw up a list of pros and cons, just as real estate agents often suggest.
HOW LONG WILL YOU STAY? If it’s one or two years, then rent. The costs to buy and sell the house — like that pesky 5 percent to 6 percent brokers’ commission — will make it hard for you not to lose money, Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies, pointed out. But if it’s more than five to seven years, buy. Even if the housing market falls in value, your home is likely to rebound, at least to the price you paid, by the time you’re ready to sell. And you get to live there and accrue equity from paying down the mortgage.
ARE YOU SETTLED? If you have small children who want outdoor space to play — or you’re tired of bundling them up and taking them to the playground when you really just want to read the paper — a house with a yard probably looks appealing. You’re settled and are likely to be in the same place for a while, dream as you might for that carefree city life of your single days.
WEIGH THE COSTS Homeownership is more cost-effective than renting. Rent rises with inflation. You can potentially lock in your mortgage payment for the next 30 years. While rates rise, you have nothing to worry about. But if they drop below what you’re paying, you can refinance and pay less.
YOU HAVE FREEDOM You can do what you want with your home. “You get to paint the walls the color you want,’’ said Christopher J. Mayer, codirector of the Paul Milstein Center for Real Estate at Columbia Business School. “You get to have the funky granite countertop that no one else but you likes.’’
YOU’RE FREE You have no children, no responsibilities to anyone but yourself (or perhaps a partner or spouse), and no real ties to where you’re living and working. Rent away. It’s almost a classic example of what economists call sunk costs — the home — versus opportunity costs, which is the ability to move when and if you want, albeit at the price of uncertain rent.
HOME PRICES ARE RISING The supply of housing is low and house values are appreciating quickly. Renting is cheaper in this scenario because of what real estate economists call the price-to-rent ratio. Consider the San Francisco area, where tiny houses can cost big money. Mayer warns that people who plan to stay in a place like the Bay Area may find themselves continually priced out of the housing market. “In San Francisco, home prices have been going up faster than other cities for 60 years,’’ he said.
HEED THE WARNINGS The housing market is due for a correction, so now may be the time to wait. “There are a lot of reasons why there might be some red lights flashing on the dashboard,’’ Herbert said. “We’re coming off a period of very strong growth where house prices are beating inflation. What’s enabled them to grow faster is this longer trend putting downward pressure on interest rates.’’ With a bit of inflation, the cooling could surely start, so timing the real estate market in the short term is just as difficult as timing any other market
REALITY CHECK You don’t have the down payment for a home or a steady job to pay the mortgage. Your decision is made for you.