Is the Falling U.S. Housing Market Making Renting Better then Buying a Home?

Here's part four of my thoughts on the recent U.S. News series on the slowing real estate market. Today we'll talk about renting versus buying a home -- and which is better given the current state of the U.S. housing market. In the past, I've noted that often homeowners get rich and renters stay poor, but are the current economics making this thought obsolete? Here's what U.S. News has to say:

Not long ago, the decision to rent or buy seemed like a no-brainer. With interest rates near historic lows and home prices still rising, last year more than a million new homeowners ditched their landlords and bought into the American Dream. But all that has quickly changed as home prices reverse course and rising mortgage rates make buying a home less affordable than anytime since the mid-1980s. Even worse, with sales skidding and inventories surging in many areas, what felt like a sure bet a year ago now seems like anything but.

Here are the issues I think potential buyers/renters need to consider:

1. Home prices seem destined to fall more in the next year or two -- depending on where you live, they could be falling big-time. Why buy now if you can buy at 30% of the current prices in 18 months?

2. Buying can still make good sense, but you need to be committed to the home for a good period of time. I personally wouldn't buy anything unless I was willing to live there for five years or more.

3. Prices for rentals could come down, making it even a better deal. Here's what U.S. News has to say:

Rather than trying to sell into a glutted market, some condo builders are adding new inventory to the rental pool, instead. Frustrated home sellers, too, may take their houses off the for-sale market, "which could mean a lot more 'For Rent' signs popping up," notes author June Fletcher, who thinks rental prices could reverse course in areas where unsold home inventories are high.

Shanbron tested her landlord's resolve recently, asking him to go month to month when her one-year lease expires this month. "He was like falling all over himself to keep me here," she says.

She may have even more leverage with sellers. With unsold inventory up by more than 300 percent in Miami over the past year, "she can go out and really bargain them down," says Robert Bruss, author of The Small Investor's Guide to Real Estate.

All I can say is that I'm glad I don't have to deal with this issue right now. It seems way to fraught with financial risk at the moment and it's likely to get worse. If you are having to make a decision in this area any time soon, please proceed with extreme caution.

Click here to read part 5 of this series.

Click here to read part 1 of this series.

Comments

[Duane Gran]

Point #3 about declining prices for rent raises my eyebrows. I have no crystal ball, but two factors lead me to expect rents to increase:

1) Increasing foreclosures (of which there is plenty of evidence) will push home owners into the rental market

2) Rents have risen historically as interest rates have risen, based on the assumption that tighter access to credit reduces the option to buy a home for some.

There may be other factors at play and rent and home value may both decline while equilibrium is re-established, but I would expect rents to rise.

[FMF]

You're right, in part. It's either this article or one other in the series that noted rents are increasing -- but then this one notes they are poised to decrease. It's too soon to tell which will prevail as we're early in the housing "collapse" (used for the lack of a better word).

[Blaine Moore (First Time Homeowner)]

I am happy to have just bought a home for (what I think) is a fair price; I may have gotten something similar for cheaper in a year or year and a half, but our income will be half what it is now at that point and we would not have gotten as decent a rate (most likely).

We plan on staying here for at least 10 years, maybe longer, and will hopefully have 70-80% equity by then.

[Matt]

Are there really people buying houses to live in who don't expect to stay for 5 years or more? Are there really people buying houses in markets where the housing stock is going to lose 3/5 of its value in 18 months, who aren't already being committed to insane asylums?

The house my fiancee and I are in the process of buying is the house we want to die in. We're getting it for $300,000, and it's worth every penny. It's a house at least three times as good as the $110,000 house my grandmother bought in the 80s (most recent appraised value: $675,000, and definitely not worth that), and hence I don't see the value dropping so sharply that we'd be in serious trouble. And since we won't have to borrow the money (she's paying cash, and I'm going to pay my share of the purchase price over time, to _her_) at unfavorable terms, we're feeling pretty confident.

Most people aren't as financially fortunate as we are, and have to go into external debt to buy a house. But of course, that only makes it even _more_ senseless to do so when the house you're buying isn't one you're planning on keeping.