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Key Takeaways
- In Austin TX, home buyers need almost 6 years to break even on purchase costs—selling after 3 years means losing $30,000 vs. renting
- Today's 'high' mortgage rates are still historically low—in 1986, a 14% rate was considered good
- Your lender, tax authority, and HOA all have claims on your home and can take action to remove you
- Home equity is at risk in lawsuits, but renters don't face that liability exposure
- National home prices up 21% year-over-year; Miami rents up 40%—both options are expensive
- The real question: are you making this decision with your emotional brain or your logical brain?
Full Transcript
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Steve Rhode: I’m Steve Rhode, your Get Out of Debt Guy. If you’re listening to this podcast, you probably want to learn more about money, credit, and debt, or you’re one of the many good people out there with bad debt and you want it to go away. But stick with me, together we can make that happen.
The Most Common Question
Steve Rhode: No question has been asked more often over my decades of helping people with money, credit and debt issues than if it’s better to rent or buy a home. The best answer to that question is yes, because arguments can be made on both sides of that issue. Ultimately, the real question should be if it is emotionally better to rent or buy or mathematically better to rent or buy.
A Typical Example
Steve Rhode: Let’s say you rent a home near a major metropolitan area. Home prices have been increasing dramatically over the past few years and trying to afford to purchase a home is out of reach for many people. Renting can make sense if you want to live in a specific area due to quality of life, schools, services, recreation, entertainment, etc.
Renting comes with a lot of advantages. For example, it’s not your problem when things break or homeowners dues, taxes or insurance needs to be paid. But renters lose out on building equity in the property and coast along on the coattails of rising property values.
The Numbers Right Now
Steve Rhode: Rent prices have been rocketing up in the past few years and so have home prices. According to recent data, rent prices have increased significantly in areas like Miami, Phoenix, Las Vegas, Orlando, and San Diego. For example, Miami has gone up about 40%. Nationally, rent for a single family home increased 13% over the same period last year.
Home prices in the last year have risen dramatically in Atlanta, Austin, Charlotte, Dallas, Las Vegas, Miami, Orlando, Phoenix, Seattle, and San Diego to name a few. Nationally home prices were up 21% in March compared to a year ago.
The Break-Even Problem
Steve Rhode: For people that purchased homes 5 or 10 years ago, the cost of owning that home on a monthly basis is much less than trying to rent it. But that exposes an issue we need to talk about. How long you live in a home after purchasing is an essential factor to consider.
Buying a home is expensive. It takes some time to recoup those expenses if you sell the home. In Austin, Texas, it now takes home buyers almost six years in their homes before they can break even when selling it. Philadelphia, Los Angeles, Honolulu, Charlotte, and Atlanta are near the same amount of time.
Interest Rates in Perspective
Steve Rhode: We hear so much about mortgage rates rising, and they are a bit. But the sky is not falling. Mortgage rates are still very low. Lower now than they were before the 2008 housing collapse. It could be argued that mortgage rates were held artificially low after that housing collapse.
For example, when my wife and I purchased our first home in 1986, we had good credit and we were lucky to get a 14% interest rate. Interest rates are low now. Relax. Fear of missing out on the lowest interest rates is not a reason to buy a home now. If there’s no reasonable expectation, you will stay there for at least about six years.
In Austin, Texas, a median priced home buyer would lose $30,000 if they sold in three years instead of renting. It would take eight years of home ownership in Austin to be ahead by $30,000 over renting.
The Uncertainty on Both Sides
Steve Rhode: Renting can feel uncertain. You never know when your landlord might stop renting the property or raise the rent. But home ownership is uncertain as well. You never know when a job loss, divorce, or illness might make the mortgage unaffordable. Unfortunately, many people lose their homes each year through foreclosure or short sales. For example, in 2020, there were 214,000 foreclosures, and that does not include transactions where people gave the home back to the lender and walked away.
Do You Really Own Your Home?
Steve Rhode: Homeowners often justify purchasing the home because it feels like it’s theirs. But is it? As long as you have a mortgage, the home really belongs to the lender. As long as you owe taxes, part of it belongs to the taxing authority. As long as you pay homeowners’ association dues, part of it belongs to the association. Those groups can initiate an action in most states to kick you out of your home if you owe them money.
If you’re a homeowner with equity in your property and get sued for any reason, you could lose your property. But if you’re renting, that won’t happen.
The Homework Assignment
Steve Rhode: Like many other money, credit, and debt issues, figuring out if renting instead of buying is better is complicated. However, there is more to it than just assuming home ownership is the holy grail.
I want to leave you with the following homework. Please take a few minutes to think about if it’s better to feel like you own your own home now, or use the savings of renting to save money for retirement and be stinking rich when you’re older. There are good positions we could debate on both sides of that issue. But thinking about this will help you to be more aware if you tend to make financial decisions with your emotional brain rather than your logical brain.
If you have a credit or debt question you’d like to ask me for free, drop by getoutofdebt.org and click the ask a question link in the top menu. And I’m always here to help because I believe in you. This is Steve Rhode, your Get Out of Debt Guy.
Frequently Asked Questions
How long do you need to own a home before it makes financial sense?
In most major markets, you need to stay in a home at least 5-6 years to break even on buying costs. In Austin, Texas, selling after three years would mean losing $30,000 compared to renting.
Are mortgage rates really that bad in 2022?
No. While rates are rising, they're still historically low. In 1986, a 14% interest rate was considered good. Today's rates, even with increases, are far below that.
What are the hidden risks of home ownership?
Your lender, tax authority, and HOA all have claims on your home. Plus, if you're sued, your home equity is at risk. Renters don't face these exposures.
Is renting really throwing money away?
No. Renting provides flexibility, eliminates maintenance costs, protects from foreclosure risk, and shields assets from lawsuits. The money saved can be invested for retirement.
Should I use my retirement savings to pay off debt?
Almost never. Retirement accounts are protected in bankruptcy and from creditors. Cashing out means paying taxes plus a 10% early withdrawal penalty, and you lose decades of compound growth. Even in difficult situations, there are usually better options.
