Through multiple generations and market gyrations, home ownership is a goal of many young professionals. The question I hear asked the most from the current group of aspiring buyers is “Can I afford it?” Affordability is often the hurdle to be cleared for ownership, but that doesn’t necessarily mean that affordability is the only factor. Home ownership has it’s benefits including tax deductions and gaining equity in your living space. Renting typically offers lower monthly payments and flexibility, the later of which is often overlooked by would-be buyers.
If a prospective buyer isn’t sure they could live in their house for several years they are rolling the dice on whether their investment will break even. This is due mostly to the one-time costs for buying and selling houses including lawyers’ fees, broker fees and title insurance, which can eat into any equity built over short periods of time. It is also due higher expectations of price appreciation. In “The New Math of Renting vs. Buying”, in the Wall Street Journal on May 2nd 2014, the author make the claim that in the last 30 years ending 2013, national housing prices rose at a 3.6% annual rate, while the U.S. stock market rose at 11.1% annual rate. This isn’t exactly an apples to apples comparison since your stock account can’t double as shelter, but does provide some perspective on how home values hold up as an investment.
A great tool to use when deciding to buy or rent is the Buy vs. Rent Calculator on the New York Times website. It does a great job showing the breakeven point of buying and renting (hint, hard to do it in less than 5 years!).