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Buy To Rent

“Renting Is Cheaper Than Buying, Almost Everywhere,” said a recent headline in <a href="https://www.nytimes.com/2021/06/10/realestate/renting-cheaper-than-buying.html">The New York Times</a>. The paper of record explains that “according to a new study, renting costs less per month in the 50 largest metropolitan areas in the United States.”
On a monthly cash basis, it can no doubt be cheaper to rent than to own. But the unstated question is whether it’s better to buy or rent. Looking at monthly cash costs is just one measure of many — and perhaps not the most important.
“Renting,” says the Times, “doesn’t tie you down, nor does it require a huge down payment. On the other hand, buying can be a profitable long-term investment with tax benefits. And let’s not underestimate the peace of mind that comes from knowing that your home won’t be pulled out from under you by a landlord.”
The Urban Institute adds that “contrary to popular belief, owning one’s own home is frequently more affordable than renting. It is cheaper to buy a home than it is to rent in two-thirds of American counties. Even now, as America is grappling with systemic racism that impedes economic opportunities for people of color, homeownership is still often more affordable than renting for people of color.”
The question of rent-vs-buy has been hotly debated since our ancestors began thinking of caves as a commodity to buy, sell, and rent, but with soaring home prices the argument is once-again worth re-examining.
The question is important for real estate investors, homeowners, and those who rent because the real topic is future wealth and how to get it.
<h2>Monthly cash costs</h2>
The new study mentioned by the Times comes from LendingTree. The company lists 50 metro areas where it’s cheaper on a cash basis to rent rather than own. For instance, it found that tenants in Washington, DC can expect to save $709 a month when compared with mortgage-paying owners.
No doubt the various calculations correctly measure what they measure, but are they measuring what we really want to know?
“Monthly payment differentials may well be an important concern if the need is to hold down cash costs,” said Rick Sharga, Executive Vice President with <a href="https://www.realtytrac.com/">RealtyTrac</a>. “However, there are other values to consider, such as the security of fixed-rate financing at today’s rates, the ongoing demand for property in most markets, and the potential for higher rental rates.”
LendingTree explains that “renting might be the best option for someone who doesn’t plan on staying in one area long term or is having trouble saving for a down payment. On the other hand, buying a home can be a valuable long-term investment.”
It also says that “renting is usually cheaper than owning a home — until a person has paid off their mortgage.”
According to the Census Bureau, property owners with a mortgage are likely to pay $1,595 a month for housing. Those without a mortgage? Just $500.
Rather than look at renting-versus-buying through the lens of monthly cash costs, it might be better to consider other measures.
<h2>Cash savings versus equity</h2>
According to the National Association of Realtors, first quarter prices in the DC metro area increased 13.5% in a year, going from $438,900 to $498,100. So yes, a renter might have saved $8,509 in cash costs ($709 x 12) during the past year, but owners didn’t do badly either: their equity grew by $52,200 or $4,350 a month.
There is, of course, no guarantee that real estate values will rise and certainly no promise that values will increase by 13.5% or any other number. Alternatively, when price increases exceed the rate of inflation it means that property owners have gained additional buying power, the real measure of wealth. That’s a potential benefit unavailable to tenants.
<h2>Affordability</h2>
The reality is that rent-versus buy comparisons are irrelevant for millions of households. To be an owner requires such requisites as savings, sufficient and ongoing income, a rational level of debt, and credit scores that do not cause lenders to shudder and run.
Consider income. Growth has been painfully slow. According to the latest figures from the Census Bureau, median household income amounted to $68,703 in 2019, up from $51,863 in 1969. That’s an increase of $16,840 over a period of 50 years, just $336.80 a year.
Meanwhile, the typical home sold for $22,637 in April 1969 according to <a href="https://dqydj.com/historical-home-prices/">Don’t Quit Your Day Job</a>, versus the $341,600 reported in April 2021 by the National Association of Realtors (NAR). Is it any wonder that affordability is an issue? And is it a surprise that for those who own real estate, equity is a major source of inter-generational wealth?
This is not just an issue in high-cost metro areas. In Kalispell, near the Glacier National Park, the <a href="https://montanafreepress.org/2021/06/03/priced-out-of-house-and-home-in-flathead/">Montana Free Press</a> reports that tenants there are feeling the squeeze.
“While housing prices have been rising in the area over the last decade,” said the paper, “the pandemic has fueled what some have called a ‘land grab.’ That inflated demand is now starting to push renters out of the market as property owners cash in, either by selling or by turning their property into lucrative short-term rentals to house the hordes of tourists expected to arrive this summer.”
The pandemic has also made the issue of large-scale financial fragility more visible. According to NAR, “there are 5.8 million renter households who were not caught up on rent as of May 2021.“
The number of renter households that might face eviction is unclear. In many cases, rents have not been paid because of COVID-related job losses. At the same time, nationwide moratoriums have prevented evictions as a result of the pandemic. But now the federal government has set aside more than $46 billion for rental assistance. The government money means many landlords are likely to soon get make-up checks.
Like many brief questions, the rent-versus-buy debate leads to only one universal answer: it depends. Whether near Capitol Hill, Kalispell, or the California coast, we each have to consider such things as personal finances, individual preferences, whether we’re buying for ourselves or investing, and how we think the market will evolve. And if it happens that monthly cash costs are a big part of the discussion process, that’s fine, a worthy issue to evaluate — along with other worthy issues.

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“Renting Is Cheaper Than Buying, Almost Everywhere,” said a recent headline in The New York Times. The paper of record explains that “according to a new study, renting costs less per month in the 50 largest metropolitan areas in the United States.” On a monthly cash basis, it can no doubt be cheaper to rent […]

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