Money Magazine's Tips on Buying vs. Renting a Home

Home prices are expected to keep falling in a lot of areas this year and to flat line for several years to come, so you might want to rethink the merits of home ownership for the time being. As a renter, you won’t spend money on eroding equity and the market for renters is pretty good right now – considering homeowners who can’t sell their homes are looking to rent out their space.

You’ll probably spend less money renting too. According to the U.S. Census Bureau and real estate research firm Property & Portfolio, U.S. Rents slumped in the fourth quarter of last year and they are projected to fall again this year.

Though renting is a short-term decision, it could be one that proves very helpful for your savings account. Home ownership is a better long-term decision since you will get to enjoy tax breaks, build equity, and have the pride of owning your own home. Renters also have to deal with the risk of faulty market timing. Experts don’t expect the real estate market to bounce back quickly, but if it does, prices could also bounce back before you buy a home. Keeping all of these things in mind, here are Money Magazine’s tips on how to decide whether renting is for you.

Calculate your Time Frame

If your current housing situation is in transition, you might consider renting. If you’re relocating for a new job, you can rent a home and “test” a new neighborhood and location. If you’ve already decided to sell and trade up, renting could also be your best option. Retirees who want to downsize, relocate, or both should also consider renting.

Price Out the Tradeoffs

It can be difficult to determine the real costs of owning a home vs. renting on the same size, style, location, etc. Property taxes and maintenance costs in addition to mortgage payments are a part of home ownership costs, but these also come with tax advantages. If you decide to rent a home for a while, you could have to pay a broker for this move and again when you decide to buy.

To calculate whether or not renting is a better value for you, you should investigate your area’s price-to-rent ratio, says Dean Baker of the Center for Economic and Policy Research. He says, to calculate this, divide the price of a home you’d buy by the annual rent you’d pay on a comparable home in the same location. If the ratio for your market is above 15, the historical average, Baker says renting is a better value.

Assess your Market

The longer the price-to-rent ratio stays in your favor, the better. Look at trends in foreclosure rates and home prices to see the direction in which your local market is headed. You can use the Stats & Trends tool on sites like Trulia.com to get average listing prices, median sales prices, and other zip code-specific information for a given area. Also, RealtyTrac.com has a tool that will help you find out how the rate of foreclosures is changing by county. Also, consider the local economy as a market indicator. If the major employer in your area has just announced mass job cuts, home prices in the area are probably going to slump for a while.

Weigh the Intangibles

Money isn’t the only factor that contributes to your decision to rent or buy. If you rent, you are at the mercy of a landlord for miscellaneous home improvements and new paint jobs. This tradeoff could be worth it, however, if renting will save you money and allow you to buy an even better home in the future.