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by Last night, as I was sitting at The Table having grilled salmon and mixed greens, I saw an abandoned New York Times on the table next to us. After grabbing it I flipped through and found the business section expecting to see another article about the rising gas prices, the less-than-spectacular stock market, or some other news negatively affecting my investments, but there was an article on the front page that directly discussed the housing situation in which I find myself.
Let me briefly explain. My wife and I sold our home in suburban Houston last Thanksgiving in preparation for attending graduate school this fall. Our home sold for approximately the same price we paid for it nearly 5 years earlier. In the meantime we have been in an apartment closer to work, and although our square footage is greatly reduced, we are actually saving quite a bit of money. This is exactly what the article in the Times discussed.
My question is whether it is a better financial decision to rent or purchase a home. Here are the major points of the article:
- Home price increases of the past half a decade have made renting more amiable for your pocketbook as you could often get more for your money renting than buying.
- Renting involves a reoccurring expense (the monthly rent payment) but owning involves multiple reoccurring expenses (mortgage principal, interest, upkeep, property tax, and closing costs).
- Home prices fell 14.1 percent from early 2007 to early 2008 nationwide.
- Owning a home limits your ability to invest your down payment and closing costs.
- The article also had a tool to compare renting and buying based on monthly rent, the purchase price of a home, down payment, interest rate, and property taxes.
So, my question is should I continue to rent, invest my down payment, and wait for home prices to go down, or should I look to buy again soon?
For the engineers out there like me here are some details:
- Previous home appraised value: $143,900
- Down Payment: 20%
- Interest Rate: 5.5% on a 30 year loan
- Harris County Property Tax: ~4.5%
- Square Footage: 1915
- Current apartment monthly rent: $970
- Apartment Square Footage: 910
The question remains: rent or buy? Is renting - even in a bigger home at a higher monthly payment - a better financial decision than buying?
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4 Nerd-Its
Landlord Default
Unfortunately, I can't seem to grab the CNN article from a day or two ago. But you should also look out for the financial health of your landlord. Renters have no protection if their landlord isn't paying their mortgage and defaults on the home.
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1 Nerd-It
Interactive Graph
The New York Times has published an interactive graph pertaining to this subject.
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It’s All About Timing by gnifyus :: NR7 :: Show
As far as I can see, the prices of homes in most areas, though dropping are still much too high. If you find you are saving money right now by evidence of a rising bank account, I would wait it out as long as you can stand it until prices drop to an acceptable ratio. When my wife and I were first married in 1989 we bought a house and paid the market value, but what turned out to be paying too much when we needed to move because the prices had dropped significantly in 1995. The ratio was between 16 and 17 using the method from the link. Of course it’s all relative when you are buying and selling because the house we are in now is worth twice what we paid for it at this point, while at the same time, the interest rates are low enough to have allowed us to go from a 30 year to a 15 year mortgage. The first house was also a two family which more or less paid the mortgage each month. (Another fine option, if you have the heart to be a landlord yourself!) We wound up keeping it and renting both apartments for a few years until prices came up enough to finally sell it. Don’t forget, the less you pay for a house the more potential equity you will have in the future which can come in handy if you need it.
I think the rent/ home price ratio method is a good indicator, because monthly rents in my area don’t seem to be much higher than they were 10-15 years ago, maybe a $100 more or so for a two bedroom apartment. House prices on the other hand have almost tripled in some neighborhoods making for a significantly larger mortgage payment with much less in return value. I'm roughly guessing that the 'ratio' for buying our second home in 1995 as opposed to renting an equal space was somewhere near 7 or 8.
To sum it up, renting at this time may be a better temporary financial decision than buying. It also frees you from the stress of having to sell a home at the same time as buying one when you find the one you want.