Economic Perspective: Buying Versus Renting

Economist Mike Walden

MARY WALDEN:

“Today’s program looks at buying versus renting. Mike, it’s commonly said that buying a home is the biggest purchase most individuals will make. Interestingly it seems like many individuals, even those with adequate income, are forgoing purchasing a home in favor of renting. Does this mean owning a home is no longer a good investment?

MIKE WALDEN:

“Buying a home is probably one of the most complicated consumer decisions there is because it’s really two pieces. There’s one part when we buy a home that we’re looking at that economists call consumption; we’re going to live in a home, we’re going to enjoy it et cetera. Just like when you live in a rental unit you enjoy it, you get benefits from living in it.”

“So one part is consumption, but another part is investment. People who buy a home expect, and hope, it’s value is going to go up over time so when they sell the home they make some money.”

“And if you look at a home in this sense, and the two pieces, what we see is that whether it’s better to buy or rent has changed over time. For example, up until about the 2000s buying was clearly better than renting when you factor in the consumption value and the investment value. Then as we got into the housing boom and housing prices went up that made buying a home much more expensive, and then of course the decision shifted to renting.”

“Then of course we have the housing crash, and the benefit of the housing crash in this equation was it dropped prices dramatically. And so people could take advantage of buying homes that had been much more expensive in years past, get them at a bargain. Interest rates also came down. So after the recession, actually, buying became much more beneficial.”

“Now we’re shifting again. We’re seeing housing prices going up much more rapidly. We’re actually seeing mortgage interest rates tweak up a little bit, not dramatically. And so although those who look at this and come up with a yes-no answer still say that buying seems to be the better choice, as long as you’re going to stay in the house a substantial period of time, the premium there is not as great as it was a few years ago.”

“So bottom line here I think for the average person is take into account how buying a home is so different. Its consumption, its investment, and try to get a feel for what the investment value might be. Look at how much housing values are going up, compare that to your monthly payment, compare that to what you would have to pay if you rented a comparably sized unit.”

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.

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