Opinion: Buying a home still beats renting, even as house prices rise
By Peter Morici
Spring is home-buying season, and many young people are grappling with whether it is best to buy or continue renting.
The burden of student debt and a shortage of suitable starter homes pose challenges for many first-time buyers. However, a recent study, published by the real estate website Trulia.com, indicates if they can manage the payments, it pays for most households to take the plunge.
The study estimated the monthly cost of owning the average home — factoring in property taxes, insurance, income tax deduction benefits, and the like — and compared those to comparable rental dwellings. Across the U.S. — including some quite expensive locales such as San Francisco and New York — generally, it is less costly to buy than rent.
While closing costs, realtor’s fees, and the like can wipe out those savings if you have to move within a few years, you don’t have to be in a home all that long to profit nicely.
Employing a handy calculator on the Trulia site, I estimated that for the Washington, D.C., metro area — with 10% down, a 30-year mortgage and a 4.40% interest rate — if the average home is occupied for five years after purchase, owning beats renting by about 11%. Extending the turnover period to seven years boosts the savings of owning versus renting to 23%.
A lot depends on what you do for a living. Most folks with stable employment don’t move between cities once they have settled in for a few years. Generally, teachers, accountants, and other professionals face state licensing requirements, have a family and develop social attachments, and pursue careers within regional job markets. Most people settle in and can reasonably assess if they will want to relocate in the next few years.
Even in a period of slower economic growth, real estate has proven a solid investment.
In this century, U.S. GDP and inflation have advanced about 2% a year. Through the end of 2016, stocks returned, as measured by the S&P 500 SPX, +0.07% about 4.5% annually, while homes appreciated 3.8%. Those figures don’t consider that the savings homeowners realize over renters can be invested in an IRA or an ordinary stock account. That should even the returns between houses and other investments over the long run.
Beyond the numbers, the freedom to customize an owner-occupied dwelling and avoid the risk of being required to move if the landlord decides to sell the property enhance the overall value homeowners obtain from this slice of the American dream.
You may have to stretch to buy a first home, or to buy up to accommodate a growing family, but it is important to be sensible in estimating the size of the dwelling and amenities needed.
Children can be comfortably raised without two rec rooms, a dedicated home theater, three-and-a-half baths and a huge backyard. And how much home you buy should be balanced against the need to save for retirement, college and other long-term needs.
In particular, the annual contributions to an IRA needed to retire comfortably will become much larger in midlife if families buy more home than they need in their 20s or 30s. Children raised in too lavish a home may be forced to borrow a lot more to finance higher education and start out their working lives in an unnecessarily deep financial hole.
My wife and I raised a family in a moderate-sized row home in the historic district of Alexandria, Va., albeit with a family room we added that served multiple purposes. While we didn’t live in a mega-mansion on a huge lot, we met many interesting people talking our children to city parks.
As empty nesters, we now live comfortably in the same dwelling with the prospect of retirement in a home not too burdensome to maintain.
Bottom line: Buy a sensible home in which to raise your family. Hold on to it for the long haul, and it will prove a sound investment.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.