There are many legitimate situations in which it makes a lot of sense for someone to rent rather than purchase a home. But there are several commonly-cited reasons that simply are not true or are not viewed through the proper perspective. Let’s dispel a few of these myths.
Myth #1: The Rent vs. Own Financial Comparison
Let’s be clear: there is no financial comparison. You can compare the monthly cost of rent versus the monthly costs of paying a mortgage, making repairs, and other homeownership expenses until you are blue in the face, but at the end of the day, week, month, year, and decade, you have nothing whatsoever to show for all the rent you paid at the end of your lease.
Depreciation can happen, but it is not common and is typically a short-term situation. Yes, many homes depreciated significantly as a result of the housing crisis that began in 2008. But let’s add some perspective. For nearly a decade prior to that downturn, homes were appreciating at an astronomical rate. The average sales price of a home in the U.S. at the end of 2000 was $212,100. By the first quarter of 2007 it was up to $322,100. Over the next 4 years, the average price declined from that peak to $259,700 (still more than $45,000 more than the 2000 average) before it began increasing again. In the first quarter of 2017 the national average sales price was over $374,000. National averages do not tell the story of all local markets, of course, but they do provide some insight on general trends. (All sales price data retrieved from: https://fred.stlouisfed.org/series/ASPUS.)
All of this is to say that, historically, the odds of losing money on a long-term home purchase are pretty small and require a set of circumstances (declining market, buying at the top and selling at the bottom, etc.) that are atypical for a lot of people. On the flip side, rents go up. It’s what they do. Search online for any chart of national averages of rent and you will find chart after chart of data all showing the same thing: rent increases; often every year or two. In fact, a recent consumer price index report indicated that rents topped the list of fastest-rising prices.
It boils down to this one simple question. Even throwing in the 2008 recession and the depreciation period that followed, and looking at the national data, who would be in a better position financially today? The person who has been renting for the last ten years or the person who bought a home ten years ago? Ten years of rent is a lot of money that is, well, gone.
Myth #2: You Need 20% Down
This myth originates, most likely, from a couple of sources but probably sticks because 20% is the “magic number” to avoid paying mortgage insurance on most conventional loans. Sure, it would be great to be able to put 20% down. You know, it would be great to be able to pay cash and own your home mortgage-free, too.
In truth, relatively few people put down 20%. In fact, the national average is about 12% and that figure has been dropping for years. Sixteen percent of homebuyers under the age of 36 put $0 down to purchase their home in 2016.
Something you should consider when deciding whether to wait to save for a big down payment or put less money down and possibly have to pay mortgage insurance is which will end up costing you more in the long run. Is a slightly higher mortgage payment with mortgage insurance more or less expensive than paying tens of thousands of dollars more for a home in a year or two; not to mention the rent you will pay and never get back.
Myth #3: You need to wait for rates to come back down
You hear it in the news. The Fed is considering raising interest rates, mortgage rates are going up, or some other commentary about rising rates. Again, some perspective is in order. Recent history has seen interest rates at all-time lows. In other words, they have never been as low as they have been over the last several years. Take a look at this chart containing average interest rate information going back to 1971 and you will see that we have been far off what is normal for interest rates. In fact, prior to this span, rates in the 5.5% – 6% range were almost unheard of.
The point is this: even if rates do continue to rise incrementally, it is not unreasonable to assume that the rates available over the next couple of years may be the best rates you will see over the rest of your lifetime. Buy now and take advantage of them. The worst case is rates do go down again and you refinance into the lower rate. Actually, no, the worst case is you keep waiting for rates to go back down and cost yourself a lot more money in the process.
If you are thinking of buying a home, contact me to get all the information you need to make informed decisions about your financial future. It would be my pleasure to assist you in achieving your goals.