Time to Buy or Rent Housing

Florida apartment buildingBy David Wilkening

Conventional wisdom has it that rental housing is throwing money away. But is it really in these times? Not necessarily.

It depends in part on where you are located, but in many areas of the U.S. rents are being held down by the dramatic overbuilding of homes and condominiums.

In hyper overbuilt South Florida, for example, renters have their pick of places to live: a huge variety of apartments, condominiums and single-family homes. Many places in California and even Texas are the same.

“They’re competing with apartment complexes even if it means they only get 50 percent of what it cost them to own that unit,” said Jack McCabe of McCabe Research and Consulting, a company which does apartment market research.

Another factor is that some apartment complexes are offering free rent incentives.

With very little new building, the cost of renting in South Florida continues to fall.

–That “throwing money away” argument? When you buy a home, you are doing more than making a monthly payment. You still have to pay closing costs, interest on your mortgage, property taxes and property insurance.

The advantages of home ownership are three fold: (1) You lock in your monthly payment for anywhere from 15 to 30 years if you like. (2) Your house gets more valuable or at least it has in the past. (3) You get the home mortgage deduction off federal income taxes, which amounts to all the interest paid during the year and property taxes.

But in today’s sluggish home market, the bottom line is that apartments and even renting homes now in many markets are costing less than monthly house payments.

Let’s make a specific comparison: Compare paying $1000 a month in rent to buying an $180,000 home with 5% down payment. At 5 percent interest over 30 years, your monthly payment is $1025. But to buy you also have closing costs. Say that is 3 percent of the purchase price or $5400. You are also paying taxes and insurance (say $3600 a year at 3 percent of the purchase price) and maintenance ($1800 a year or at one percent of the purchase price). It all adds up to $360,000 rent in 30 years compared to $613,055 for a home. Of course, your rent is likely to increase over a 30-year period while your home loan costs are fixed.

There are other advantages of a home, however, such as a sense of security. And homes in the past have appreciated, making them a solid investment in the future. From 1976 to 1995, however, houses did not appreciate faster than inflation. And the huge surge in appreciation that happened recently, say 1995 to 2006, is not likely to reoccur, at least not in the immediate future, according to most real estate analysts.

Another problem with homes is that even people with good credit face difficulties in getting mortgages these days, according to mortgage brokers.

Still, another factor complicating the decision to rent or buy is that rents in the future could rise with the growing demand from people who can’t quality for mortgages or those who decide to rent their property, said Mark Obrinsky, chief economist at the Washington, D.C. based National Multi-Housing Council.

“Generally, renting is one of the most wonderful secrets the American public has yet to discover,” said Bruce Williams, a nationwide radio talk show host viewed as an expert in real estate. “By the time you get done figuring variables, renting is often a far better vehicle if you have the discipline to invest the differences on a monthly basis.”

Most real estate observers see the current desirability of the apartment market as a temporary condition or a window for some individuals. When job demand grows, apartment building will increase. The probable time frame for that is one or two years, observers say.

The best advice if you are in an overbuilt market: look for the lowest rent possible and save for a down payment later on a home or condo. Alternatively, take the money you save by renting and invest it somewhere.

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