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Renting is More Expensive Than Buying – Does That Mean You Should Buy a Home?

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Once upon a time, it was generally assumed that homes were cheaper to rent than to buy. It varied by market, of course, but it was assumed that buying a home meant a large down payment, costly insurance, and a hefty monthly mortgage payment. But then debt got cheap and lenders were willing to finance homes for 100% of the purchase price and with creative terms, allowing virtually anyone to buy a home without putting much, if anything down. As real estate prices trended upward, the “buying is more expensive than renting” trend continued.

cost of renting vs buying

Renting a home is more expensive. Should you buy?

Then we experienced the real estate bubble and 2008 financial crisis. After the bubble burst, many people were stuck with homes they couldn’t afford. In some cases, people chose to cut their losses and walk away from their mortgages. The result was a glut of unsold homes on the market, a rash of foreclosures, and a precipitous fall for housing prices. Somewhere along the way, lenders were forced to change their lending practices which further slowed the housing market.

And as banks tightened their purse strings and people lost their homes, fewer people were able to buy homes and more people were forced to rent, leading to higher rent prices. According to CNN, it is now cheaper to buy a home than to rent in 98 out of the top 100 markets in the US (Honolulu and San Francisco are the two exceptions).

Do Higher Rental Prices Mean I Should Buy a Home?

So now the question looms – with rentals being more expensive in many parts of the nation, are you throwing away your money if you spend more on rent than you would if you bought a home? Since it costs more to rent, you should just go ahead and buy a house, right?

Stop right there! Buying a home is one of the biggest financial decisions you will ever make, and not something you should rush into. Even though rents are rising in many locations, that doesn’t mean buying a home is right for you. Each financial decision, especially as major as buying a home, needs to be made based on more than one factor.

You still need to keep the following things in mind when deciding to buy a home:

  • Do you have a large enough down payment? Or are you willing to pay PMI?
  • Is your credit score good enough? You need a top notch credit score to get your mortgage approved.
  • What are your short and long term goals (personal and professional)? Does buying a house fit within these goals?
  • Will the house you want to buy now (or can afford now) be the right house for you in 5 years? 10 years?
  • Can you afford homeowner’s insurance, property taxes, and home improvements?
  • Do you have a large enough emergency fund to pay for large repairs which may pop up?

Buying a house is more expensive than most homeowners realize, and this was a contributing factor to the mortgage bubble. Many people stretched their limits to buy a house the bank told them they could afford, only to find out that they really couldn’t afford the mortgage payments when they factored in the insurance, property taxes and other expense.

Buying is Not for Everyone

There are some advantages to renting. You aren’t on the hook for most large home repairs, you aren’t locked into one location long term – which gives you more personal and professional freedom, you don’t have to worry about selling your home in a down market, and you don’t have a host of other problems that arise from home ownership.

Do What is Best for Your Situation

It doesn’t matter if buying is more or less expensive than renting. What matters is what is right for your personal situation. If now is not the right time to buy a home, then don’t buy into the mantra that you are throwing money away if you rent. You aren’t. You are avoiding a costly mistake of buying a home when you aren’t ready and losing money when you go to sell.

Photo credit: nikcname


Published or updated April 9, 2012.
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{ 5 comments… read them below or add one }

1 Terry Pratt

In the long run, renting has never been cheaper than owning a home. During the long historical run-up of home prices, it was always initially cheaper to rent than to buy, but with fixed-rate mortgages which lock in a homebuyer’s principal and interest (P & I) payment, mortgage payments stayed flat while rents just kept going up and up.

As a low-income person, I am generally averse to risk, and renting entails a lot of risk, especially for those living on lower incomes. When you rent you cannot lock in a long-term payment; the best you can do is lock in rent for a year or two. Even this has no guarantee; I lived in a house which was foreclosed and everyone had to move.

And it always amuses me when someone – especially a blogger – questions a homeowner’s ability to pay property taxes. In many states, property taxes are even higher on rental property than on owner-occupied homes. For example, in Michigan the school property tax rate on rental property is four times the rate on owner-occupied homes. A more appropriate question is whether a renter could afford the property taxes included in the rent.

Similarly, when someone asks Can You Afford to Buy a Home, I always reply Can You Afford NOT to Buy a Home – can you afford to keep paying higher and higher rents?

Owning a home should never be about the possible appreciation in value, but about the security of knowing your housing costs are stable long-term and you will never be displaced by unavoidable rent or property tax increases. (Another benefit of owning your home is that many states have programs which protect homeowners from being taxed out of their homes, while no such protection exists for renters.)

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2 Ryan Guina

Terry, as I wrote in this article, I’m not against buying a home. I’m a homeowner and happy I made that decision – but only because it was the right decision for me. My point is that people shouldn’t look at rental prices and make the assumption buying a home is the best decision because it might cost less right now. Buying a home is the largest financial decision most people make, and it should only be made for the right reasons (which can be numerous). There are many benefits of buying a home, and the fixed costs you mentioned are a good example of that. But there are also many benefits to renting. In the end, the decision is personal and needs to be made on a variety of factors which are specific to the person buying or renting.

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3 Brad

I think the latest real estate bubble (there have been many, by the way), has shown, if nothing more, that buying a house is most definitely not for everyone. It is most often spoken of as an “investment.” That is correct. However, the assumption with this investment is that it will go up. But investments also go down — and they can stay down for many, many years.
I purchased a previous house at the peak of an earlier real estate bubble, in 1986. I held onto that house for the next 12 years, during which time real estate prices in that market remained flat. When I sold, I made $20,000 more than I paid. The next year, another real estate bubble began. And the price of that house went way up, though I missed out on that profit.
That recent history shows that bubbles can take many years to build up.
If you buy a house today, there is no guarantee that you will even make your money back, if you need or wish to sell. You could lose money on it, despite the advantage of being able to deduct mortgage interest and real estate taxes from your federal tax bill.
One pitfall of buying a house is that, inevitably, you cannot sell the house when you need to sell it, due to market conditions at the time.
Renting, though disadvantageous in many ways, gives you freedom of movement, and freedom from bills for unexpected repairs and real estate taxes. At least half of your rental cost is tax deductible in many states. And renter’s insuurance is far cheaper than homeowner’s insurance.
I am holding onto another house I purchased in 2002 just before the latest bubble. I still have equity, but it has diminished hugely since the price spike of 2005-6. I probably could not sell the house today if I needed to. Think very carefully before buying a house that could very well anchor you in one spot for many years, whether you wish or need to move, or not.

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4 Nick

Oh yeah – it’s totally not about what’s cheaper. It’s about what’s best for you in your situation for sure. Despite having enough money to buy, I’ve been renting where I live since I moved to NYC in 2004 (turns out it was a blessing not to have bought… but that’s not why I did it). We didn’t know how long NYC “would last” and couldn’t commit for enough time. So we didn’t buy. We do own 2 rental properties, in full disclosure… but then got smarter :)

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5 Ryan Guina

Owning rental properties is a completely different ballgame! It’s something I’ve thought about, but I’m not ready to jump into that game at this time!

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