Should you rent or buy your next home?
It is a question that millions of people — especially younger adults who don’t own a home — wrestle with. It’s also a subject that I have written about in The Times for almost 20 years. Today, I want to revisit it, inspired by the interest of my colleagues on The Daily, many of whom are millennials trying to figure out what to do in their own lives.
(Today’s Daily episode is a discussion between Michael Barbaro and me about renting versus buying.)
Now is a good moment to examine the question — because the answer is clearer than usual. “This is not the time to buy for most people,” Mark Zandi, the chief economist of Moody’s Analytics, told me. “Mortgage rates are extra high, and house prices are extra high, and there’s not much to choose from in the market.”
Zandi added: “If you find the perfect place, then by all means buy it. But most people are not going to find it.” A recent analysis by The Economist magazine came to a similar conclusion.
I know that some readers will be surprised by this argument. Renting still brings a stigma. People equate it with throwing away money each month rather than investing in their future. The real estate industry promotes this idea because it makes far more money from a home sale than a rental.
(Broker commissions are significantly higher in the U.S. than in many other countries, as Veronica Dagher of The Wall Street Journal has reported. The average sales commission here is 5.5 percent, compared with 4.5 percent in Germany, 2.5 percent in Australia and 1.3 percent in Britain.)
In today’s newsletter, I want to explain why people who are frustrated by the state of the housing market shouldn’t feel bad about renting. In the long term, renting now may help you own the home you want in the future.
Defying gravity
If the housing market behaved as many other markets do, prices would have fallen over the last several years. Mortgage rates have risen sharply since the Covid pandemic receded, as the Federal Reserve has raised interest rates to lower inflation.
Higher rates make monthly mortgage payments for new homes more expensive, which reduces demand and, in turn, should cause home prices to fall. But prices haven’t fallen.
Why not? Many homeowners feel an emotional attachment to their home value. They come up with a price they think they deserve and are unwilling to sell for less. Rather than cutting the price to make a sale, they pull the house off the market. That’s partly why home sales have plummeted recently, but prices have hardly budged.
The result is the worst of both worlds for would-be buyers: Home prices in many places are even higher today than they were when mortgage rates were very low.
The Bronx exception
The rent-versus-buy decision always involves trade-offs. Buying allows people to invest in an asset that they can later sell instead of paying a landlord each month. It also brings the security and comfort of living in a home you control.
On the flip side, buyers effectively pay tens of thousands of dollars to real estate agents. (Technically, the seller pays the agents — using the money the buyer paid — but the broker’s fee inflates the cost for a buyer.)
Buyers must also pay to fix leaky roofs and broken plumbing. They must tie up money in a down payment, instead of being able to invest it elsewhere. They must bear the risk that house prices will fall — and prices really can fall. Take another look at the home-price chart above; after the housing bubble of the early 2000s, prices didn’t return to their previous peak for more than a decade.
And buyers must pay mortgage interest to banks, especially in the early years of a mortgage when payments mostly go to cover interest, not the loan’s principal. The mortgage-interest tax deduction does reduce the effective cost of these payments, but it doesn’t eliminate it. The 2017 tax law signed by Donald Trump reduced the mortgage deduction in many places.
Most of the time, these dueling factors argue for buying a home if you can afford to do so and you plan to live there for a long time. If you think you will move in several years, renting often wastes less money than buying.
The current housing market has made renting even more attractive. Only if you find an affordable house where you’re confident you will stay for a decade or longer does buying make sense in many places.
There are exceptions: Prices in parts of the Midwest and Southeast seem reasonable, according to Moody’s Analytics. Much of the Bronx is also affordable, The Economist noted. A good rule of thumb, Zandi told me, is to lean toward renting unless the rent ratio in your neighborhood — the purchase price of a house divided by the annual cost of renting a similar house — is below 18. In many cities, the average ratio is now above 25.
I understand why many people are eager to own their home. But keep in mind that the current market isn’t permanent. Many economists expect both home prices and mortgage rates to fall in coming years.
On The Daily, Michael and I talk about a real estate mistake I made when I was in my 30s: I bought a home too soon.
Related: Young people are renting out parts of their homes for additional income while interest rates are high, CNBC reports.
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