For ages the sign of becoming a responsible adult has always been the purchase of a home. Renting an apartment was fine in college or when you started your first job but once you could afford to pay thousands of dollars in mortgage payments, that was a sign that you made it.
But is signing away your life to a long-term mortgage really the best move in a down economy?
That answer depends on your situation and where you live.
Buying a home makes sense if the housing prices have dropped significantly since the market downturn of 2008. Compare the purchase price to the rental price of similar properties. Take into account the applicable tax credits and/or property taxes and with some simple math you can see which scenario will cost you less money over the years.
Or you can use the rent ratio, which is the purchase price of a home divided by the annual cost of renting a similar property. When you do the math, if you get a number above 20, you should consider renting, especially if you’ll be moving within five years.
With rent ratios less than 20 plus the decreased mortgage interest rates, purchasing a home in some markets makes a lot of sense because it will cost less than renting and buyers will only end up worse if the prices drop even more.
Buyers are encouraged to do their own math rather than relying on the information from a real estate agent or broker. After all, they will earn a commission on what they sell so very few of them want to see a sale turn into a rental.
Owning a home has many advantages, including earning equity in the property, but there are multiple benefits to renting. Measure what’s important to you, how much you have to spend, and do some simple math to see how far your dollar will stretch buying vs. renting.
