Is it time for renters to become buyers?
We’ve been hearing a lot about reset buttons this year. Reset buttons on foreign policy, reset buttons on how Americans view their finances and, of course, a still to be determined reset button on health care. But the reset button that most concerns me is the one related to home ownership, and it’s a really big button.
It wasn’t too many years ago, four to be precise, that renting a home was more cost efficient than owning. In fact, there were homeowners all over the country who were selling their homes, cashing out their equity, banking their profits and moving their families to a rental. What stopped more homeowners from doing this was the promise of double-digit appreciation on their homes with no end in sight. Unfortunately, as we all now know, real estate carries risks just like stocks, bonds and all other investments, and the eventual end did come.
Now that we’re sitting among the ruins of the burst bubble, individuals who have been renting, even though they could afford to purchase, and renters who never thought they could afford a home are crunching numbers like crazy. When everyone was buying a home, even those who really couldn’t afford one, rental demand dropped, lowering prices and making renting attractive compared to carrying a huge mortgage on an over-inflated home.
Since we certainly don’t have too many over-inflated home prices any more, renters are reevaluating their situation. One way to determine from a strictly financial perspective if you should buy or rent is to use one of the many rent-vs.-buy calculators available on line. These Web sites will provide the price to rent ratios based on the information provided.
For example, I used one to calculate a home purchase price of $200,000 with 20 percent down, applicable closing costs and a fixed rate mortgage of 5.5 percent versus paying $1,300 a month in rent. I also assumed minimal appreciation of half a percent and little or no inflation. The calculation also includes the tax deductible benefits for owning a home. Based on this information the break-even point or price to rent ratio was 3.9 years.
Considering that in 2005, the price to rent ratio was 24.7 years, it would appear the time is right for anyone who has an interest in becoming a homeowner. Sweetening this up even more is the first time buyer credit of $8,000 which is still available until the end of November.
There are a lot of reasons to own a home that have nothing to do with return on your investment. The new old reality is that owning property is once again a home to live in and enjoy providing pride of ownership and stability. If it happens to appreciate in value great, but it will be a long time before we see our homes turning into piggy banks again.
If you’re a renter who is sitting with a reset button, now may be the time to set it off. Prices are 30 to 40 percent lower than four years ago, mortgage rates are still low and the price to rent ratios are looking good. Ready, set, push that button.
