One of the commonly stated reasons for buying a home now, as opposed to renting, is that “I can own (a home) cheaper than I can rent.”
This is no doubt the case in many areas of the country, especially those that have experienced large declines in residential real estate prices.
Is this condition, where one can own cheaper than renting, a valid justification for buying a home?
I would argue that it is not, for many reasons. Here are three of the many reasons:
First, “I can own cheaper than I can rent” usually refers to the condition that the monthly mortgage payment is cheaper than the monthly rent payment. Is this the main criteria that one should use when evaluating what is likely the largest financial commitment one will ever make, that of buying a house? Of course not – there should be many factors that weigh into such a decision.
Second, as indicated in the real estate valuation story in my last post, historically when house prices fell to or below the equivalent rent levels, a “bottom in (home) prices” had either been realized or was close. However, as I have written in previous posts, our national real estate situation is far dissimilar to that of prior years. As such, comparisons need to be adjusted accordingly.
Third, one should be very mindful of one’s ability to sell real estate in today’s real estate market, should one need to. Normally, the ability to sell real estate in a timely fashion, and at a “decent price,” is not a major issue. However, for many people currently looking to sell a house, it has become a very significant factor. While I could post some statistics with regard to unsold home inventories and the like, I will not do so as I feel these statistics are significantly skewed (and as such unrepresentative) due to a variety of factors.
For these three reasons, as well as many others, I feel that on an “all things considered” basis, the fact that one “can own cheaper than renting” in many areas is to be considered more of a “red flag” than a “green light” as far as buying a house is concerned.
SPX at 1118.79 as this post is written