Whether to rent or buy a home is one of the toughest choices young people face these days.
A recent Deutsche Bank study compared renting vs. the cost of owning a home in 54 cities. It estimated the monthly payment on an average house, factoring in property taxes, homeowners insurance and the tax break for mortgage interest deductions. It concluded that in 20 metro areas—including some quite attractive locales like Orange County and suburban Long Island – it’s cheaper to rent than buy.
If folks need to move to another city for a new job or to be with a new spouse, realtor’s fees and other transactions costs can wipe out the savings many people realize from owning a home if they live in it for less than 5 years.
Still, for many that math is irrelevant.
Most people don’t move between cities once they settle into an occupation. Teachers, accountants, and most other professionals operate within regional job markets, especially where state licenses apply. Most can stay put if they like and know whether they will want to move to another city anytime soon.
Also, the investment climate has changed dramatically over the last 15 years, indicating that homes are a better investment than stocks.
Many people are scared, because homes have recovered only about forty percent of the total value they lost during the financial crisis, while stocks have set new record highs. That is a very short-term view.
In this century, U.S. economic growth has slowed to 1.7 percent or about half the pace set during the prior 20 years. Consequently, the S&P 500, which tracks 80 percent of publically traded U.S. equities, is up only 23 percent, while the S&P index of home prices for the 20 largest metro areas is up more than 60 percent.
Moreover, young folks like to live close to work near cities, where land is scarce and construction costs higher. If anything appreciation will be stronger in those locations.
Still families can’t collect dividends on their houses but they can do several things to make owning a home a more sensible investment.
Realtors are fond of advising young folks to plan on owning three homes during the course of their lifetime —a starter home, a larger dwelling for raising children, and then scaled back accommodations for retirement. But the resulting costs related to these sales and purchases can take a big bite out of the lifetime return on investment.