What makes people want to rent a home?

So why rent? During this most recent economic downturn, housing lost value for five straight years, illustrating the risks of homeownership. In 2013, despite a dramatic turnaround in housing prices and sales volume, a study by the Joint Center for Housing Centers at Harvard University found that buyers are still skittish. PBS reported, “Recent reports suggest that the recovery in the nation’s housing market might be starting to slow down, with both existing and new home sales down in the last months. How will this affect the overall economic health in the country?” Not good. Wall Street Journal reported, “This is the first flat report we’ve had in quite some time,” said David M. Blitzer, chairman of the Index Committee at S&P Indices. Still, “while there has been improvement in some regions, housing prices have not turned” everywhere, he said.”As reported in March by MSN.com, “With the steepest price declines in three years plaguing the real-estate market, buyers are understandably squeamish about home shopping.

Tight credit, a lackluster employment picture and a huge number of vacant, distressed properties are keeping most markets from a recovery. Prices have tumbled for eight months in a row, according to real-estate data firm CoreLogic. Prices dropped 7.5% in March from the same period a year earlier, when the homebuyer tax credit was still in effect.”

The Joint Center for Housing Centers at Harvard University also stated that, “Unemployment has remained stubbornly high and incomes have fallen, straining household budgets,” wrote researchers. “In this environment, renting offers a flexible housing choice that enables households to adapt to changing financial circumstances—including the need to relocate quickly, whether to find a more affordable home or to take a job elsewhere in the country.”

For most households, Pyramis Company has found that renting is less of a financial stretch than buying a home. Even in the best of times, homeowners must come up with a substantial amount of cash to cover the down payment and closing costs, as well as be prepared for upcoming repairs and maintenance. While renters typically have to pay a security deposit plus the last month’s rent, the total outlay is usually more modest than the upfront costs of buying. Equally important, renters who want to move do not incur the steep costs associated with selling a home.

Renting also brings greater certainty to household budgeting because tenants do not have to cover the costs of unexpected but necessary home repairs. Owning a home, however, requires money, time, and skill to manage its upkeep. Renting transfers responsibility for maintenance to a landlord, reducing risk and worry for those who prefer to avoid these obligations.

Renting was the best harbor in the thunderstorm, particularly when rental prices dropped in many areas as well. For many, the freedom from maintenance issues and the ability to move when and where they want is preferable to the long-term commitment to owning a home.

So how do you know if renting is the better choice?

Calculate the true numbers

To make your rent-vs-buy analysis accurate, you must compare similar home sizes in the same area.
For example, if your area’s homes rent for $.95 a square foot, then it will cost you about $1,900 to rent a 2,000 square-foot home. But if homes in the same area are selling for $125 per square foot, then to buy will cost $250,000.

Your monthly house payment depends on how much you put down. If you put 5% down, you are financing $190,000. At an interest rate of 5.5%, your monthly payment is $1,079, or about $1,479 adding in property taxes and insurance. Now you must consider monthly maintenance and upkeep. At an estimated annual expense of 5% of value, you’re looking at an additional $833 per month. Considering your PITI at $1,479 plus the monthly maintenance expense of $833, your monthly cost to own that home could run as high as $2,312.

Another consideration is the acquisition costs to get into that home you’re buying. With our $200,000 example, you will need a minimum of 5% down payment ($10,000) plus closing costs estimated at $5,000. Out of pocket, acquisition cost would be $15,000. One of the advantages of renting is that rents can go up but only marginally compared to the rising cost of taxes, insurance, and maintenance.

To find out what rents and sales prices are per square foot in our area, ask our real estate professionals at Pyramis Company. We can provide you with a rent VS buy analysis customized for you and your budget.