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To Rent or Buy: What Does History Say?

In a recent blog post, I wrote that the decision to buy a home was something of a no-brainer. Well, I heard from some of you that felt that the merits of home ownership are oversold.

A look at back at historical data can help clarify matters. One study, from 2007, concludes that “all else equal, those who owned homes and owned for longer periods of time had significantly higher household net wealth.” And they add that home ownership proved to be the right choice, even when “stock gains were above and real rent increases below their long-run averages.”

Although the study is a decade old, it dispels the notion that bull markets for stocks makes investing-more-and-renting the better choice, rather than investing-less-and-home-owning (which carries higher costs than renting).

However, since buying home entails a lot of upfront expenses, you should really plan on owning that home for at least 5-7 years. The greatest benefits to home ownership accrue over a much longer time frame, when your monthly mortgage payments are going a lot more towards principal than interest.

Another study, from the May 2018 issue of the Journal of Financial Planning by Dr. Arthur Cox and Dr. Richard Followil revealed more ambiguous results. They cite clear advantages that renting brings in terms of the avoidance of costs associated with repairs and maintenance, as well enhanced mobility to pick up and leave for greener pastures.

What about now?  

And a more timely study from researchers at Florida Atlantic University note that as of June 2018, accounting for all of the changing rent vs buy variables, “renters who reinvest their money have an increasingly better chance at creating wealth than individuals who purchase a home.” That study breaks down the analysis for a number of metro markets.

To be sure, riding home prices and higher new construction prices are starting to alter the current math, offset by the fact that mortgage rates still remain below historical long-term averages. The Housing Affordability Index, tracked by Yardeni Research, stood above 200 after the Great Recession, fell to 166 in 2016 and now stands at around 145. 

A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.

As both interest rates and new home construction costs are bound to rise further, the affordability index may drop further in coming years. Food for thought if you’re contemplating home ownership right now.