On Sunday, I noticed yet another new article describing the benefits of renting over buying a house. I’ve been following these articles with interest as my lease is getting closer to its end date six weeks from now, and I’ve been thinking about what to do. In this article, Liz Pulliam Weston provides 3 reasons not to buy a home. Here’s what she thinks:
1. It’s not always a good investment. Neglecting abnormal returns from 2000 to 2005, real estate has appreciated only 1% over inflation since 1969. Also, home appreciation figures don’t take into account all the money people pour into their houses in the form of repair in upgrades, which I’ve mentioned quite a bit lately. “A home is primarily a place to live. Its value as an investment is secondary and certainly is no replacement for a well-diversified portfolio of stocks and bonds.”
2. Renting isn’t necessarily throwing your money away on rent. It’s funny, some of the people who tell me I’m throwing money away on rent are people with interest-only mortgages. They’re not building equity. Even if they were paying some principle, they’re still counting on appreciation to build equity, and that’s a risky proposition. Liz Pulliam Weston explains renting isn’t throwing away money, and it’s actually a better deal than certain mortgages. When you rent, you’re not responsible for maintenance, and you have the flexibility to move whenever you want. Although you may be penalized for breaking a lease, the hassle and expense is less than trying to sell your house quickly.
3. The tax deduction isn’t the benefit most people think. “Buying a house just for the mortgage break would be like giving somebody a buck just to get 35 cents or less in return.” The tax deduction argument doesn’t make mathematical sense. If you normally pay $100 for a Widget A, and someone gives you a coupon for $50 off Widget B, it sounds a good deal at first, until you realize that if you want Widget B which costs $100, you also have to pay $100 in extra costs. Even with the coupon, you’re paying more than if you had just chosen Widget A as you originally intended. The coupon (tax deduction) is nice, but you end up paying more anyway.
Before you jump into the home ownership pool, Liz suggests being able to agree to these statements:
* I plan to stay put for at least three years.
* I can swing all the costs involved.
* I want to be a homeowner.
Like I said, there seem to be a large number of articles in the media lately about the benefits of renting over buying a home. When it comes to the market, I tend to have a contrary viewpoint. This would explain why when the equity markets were flying high lately, I started allocating less to equities. It’s mini-market timing, but I’m comfortable with it. Once a frenzy over the benefits of renting is here, you can bet rents will go up and it will be much less of an advantage.
Updated February 10, 2011 and originally published May 14, 2007.