Whether you own your home or rent, you probably spend a significant percentage of your income satisfying your basic human need for shelter. If you rent, writing that check every month can feel like tossing money out the window—you’re not making payments toward something that will eventually be yours, you’re not getting anything new, and you won’t get the money back when you move. If you’ve bought a house, chances are good that you make mortgage payments every month, and you alone are responsible for maintaining your home. No matter what your lifestyle is like, you may find yourself feeling as though the grass is greener on the other side of the fence. Or, if you live in an apartment, the grass is just plain green.
Is Home Ownership the American Dream?
But what’s really your best bet? If you can buy a home, should you? Homeownership is the American Dream, after all, and the 2010 Census (PDF) shows that in all the occupied homes in the country, twice as many people own than rent. That’s over 111 million homes, out of which 75 million are occupied by the owner, and 36 million by renters. We also know that people don’t always make the most perfect financial decisions, so let’s take a look at some of the factors that can help you determine whether to buy or rent.
Economists have developed numerous equations that predict the long-term consequences of buying or renting homes. In a 2010 article for the Federal Reserve Bank of Kansas City (PDF), economist Jordan Rappaport studied data on home ownership, rentals, and investments to find patterns over the past three decades. Looking at factors including housing prices, interest rates, investment returns, and spending, Rappaport concludes:
…for ten-year occupancies beginning during most of the 1970s and 1990s, homeowners built more wealth than renters. In contrast, for ten-year occupancies beginning during most of the 1980s, renters who invested their savings from lower house payments (than owners) built more wealth. For other periods (about a quarter of the ten year occupancies), it is unclear whether owning or renting built more wealth.
The key to his analysis is the rent-to-price ratio, the comparison between how much it costs to rent a home versus buying a similar one in any given geographic area. The New York Times offers a Buy-Rent Calculator that can show you how the numbers line up.
Renting, Buying, and Location
When it comes to finding a home, however, there are certainly factors to consider besides your long-term costs. Since the Baby Boomer era, suburban development has created more homes for purchase outside of urban centers, while many homes in cities are rented. So, even if it’s cheaper to own a home in the suburbs than rent in the heart of a city, you’ll also need to consider your travel expenses. A recent article for Slate describes the cost of commuting in more ways than one: Studies show that longer commutes can be a detriment to your mental and physical health, it costs money to travel by car or mass transit, and the time you spend traveling to and from work represents lost productivity. As early as the 1960s, economist John Kain described some of the nuances of rent-or-buy question. He pointed out:
Since time is a scarce commodity, workers should demand some compensation for the time they spend in commuting. Both the commuting distance and time a central business district worker will spend thus depend on his valuation of commuting time, the money cost of his commuting, and the savings in housing cost he is able to obtain from a longer journey to work. He will extend his distance only so long as his savings in location rent offset or just equal his increased expenditures of time and money.
Kain’s article illuminates several problems for the strict rent-to-price analysis model, many of which seem obvious to those of us who live in large cities. Homes for rent and homes for purchase in the same area are not always comparable, and socioeconomic and urban planning factors dictate the landscape when we look for new homes. On top of that, The Economist’s Free Exchange blog reminds us that people sometimes need to move for job opportunities, and that home ownership affects the flexibility of the labor market.
The tangible economic factors that analysts use to determine whether it’s better to rent or buy at a given time and place are a great starting point for your decision-making process. What we do know is that, all things being equal, it isn’t always better for your wallet to buy a home even if you have the means. Home ownership offers a feeling of stability and permanence that renters simply don’t get, and investing in a home has long been considered a sure path to wealth. But the factors are numerous, and your own personal lifestyle and spending are as much a part of the equation as the price tag.