Wednesday, January 2, 2019

Is It Better To Buy Or Rent?

This stupid question gets circulation every once in a while. Generally, it surfaces when indicators suggest that renting is a better choice than ownership. I ask, do you want your ceiling to be another man's floor? If you like to play music loud, at least once in a while, do you relish someone pounding on your walls to turn it down? Do you like it when your landlord always says manana to repairs? How about this? The only correspondence you receive from the owners of the property is a rent hike? Your new neighbors are gang related, racists or possible terrorists? You are nervous about letting your kids walk to school as this once nice neighborhood is now part of the "hood."
If you save, your thriftiness is rewarded with shelter that you choose. If you have to rent, economics chooses your shelter.

The intrinsic message of the American dream is social mobility and owning your own home. Wasn't it one of the founders who said, "A man's home is his castle?" Doesn't matter. There is no comparison in the argument whether to rent or buy. However, there is a time and place for everything. According to a report by Florida Atlantic University, we are in one of those periods where it is financially better to rent than to buy.

From the period of 2010 to 2017 rents on a national average, rose by 4%. In many locations it was higher. During the same recovery period after the financial crisis of 2008, homes rose by double digits. The main driver for homes was the stimulus of super low interest rates and HARP loans for people who had purchased previously at a higher mortgage rate. One must also consider that homes devalued with the crisis. There was a large pool of homes offered at low prices. Together, low rates and affordability made housing a strong buy. The problem for housing is the stimulus of low mortgage rates is ending. One could make an argument that interest rates are still low if you compare to historical norms. I'm in the corner that says interest rates is a form of financial manipulation. Interest rates insure banking of profits. I am not against profits, but there is a difference between a yacht and a row boat. Anyway, the combination of higher interest rates and the rising price of homes has ended the affordability factor. Together, the end of low interest rates and affordability as well as the business cycle is indicating that if one was considering to buy a home at this point, you may want to adjust your timing to the economy. In addition to those fundamental factors many locations in the country for various reasons still face a crisis in housing. If you live in one of these 50 cities, it is definitely better to rent, while keeping an eye open for a deal on a home purchase. The top ten will appear at the bottom of this piece. The main culprit is underwater mortgages.

What is the economy of ask?

According to FAU, now is a better time to rent. Housing developers have avoided entry level homes for years because it was more profitable to work the high level market. There is a limited supply of these homes on the market. Since the value of all homes has risen substantially, a pause in price acceleration is expected. One reason will be the effect of higher mortgage rates. This presents an obstacle to housing. On the flip side to ownership is the rental market. Housing developers have over built this side of the market. New projects include underground parking and roof top play areas or dog walks. Older residential buildings cannot raise rents as tenants are leaving for the "come-ons" in new locations. To maintain full occupancy landlords are putting off rent increases as the glut of rental units rises. There is a battle for tenants and smart consumers could seek a long term lease with no rental hikes. Sebastian likes to add that this business cycle is ending to which will cause cheaper rentals. FAU says, renters could put this savings into the rising stock market or other investments as they wait and save a down payment. The wait is until housing becomes more affordable. The housing internet leader, Zillow agrees that in the near term, renting offers a better deal. They remind would be buyers that taxes on homes is rising while at the same time the federal government and some state governments are limiting the housing interest deduction. Renting frees you from repairs and new projects that offer perks like parking, dog walks or no rental increases make renting very attractive. Housing is always subject to local situations. For the residents of Denver and Dallas, renting is stronger than buying. This poses a real problem for owners who want to sell. If there are no buyers in the store, you will be out of business. Nationally, the high end market is seeing declines in pricing for the first time as evident in San Francisco and New York. Seattle, K.C. and Portland are experiencing rental gluts and as a result, rents are declining. This is spreading. With a glut on the rental side, housing will face a strong obstacle to maintain value. This is why Zillow sees renting in the short term as the best choice, but they agree with me that owning a home in the long run is the best possible choice a consumer could make.      

10 Crisis Housing Cities

As promised, if you live in one of these cities, it is way better to rent than own. Keep in mind that real estate is always regional as the mantra is, "location, location, location." Always do a quick internet check for real estate outlook in your area before making a decision. Countdown to worst:
10)New Orleans                                                                  5)Detroit
9)  Cleveland                                                                       4)Chicago
8)  Memphis                                                                        3)Birmingham
7)  Columbus                                                                       2)Toledo
6)  Baltimore                                                                       1) Newark