Recs

11

Is Renting the Smart Move Now?

You'd love to have a place you can call your own. But with the housing market looking increasingly unstable, you might think you ought to wait for the dust to settle before taking on six-figure mortgage debt.

Few personal finance topics create bigger arguments than the question of whether to rent or buy a home. Buyers argue that those who choose not to buy miss out on the steady appreciation that real estate has historically provided, instead throwing money away on rent month after month. Renters respond by pointing to the rising number of foreclosures that have resulted from homebuyers overextending their finances in an effort to buy a home, as well as cheap rental rates that have resulted from a glut of supply in many areas.

Falling home prices add a new element to the debate. The rate of price appreciation in recent years has been well above the historical average. Renting, in this environment, avoids ownership risk of falling prices. On the other hand, homeowners have to consider whether owning remains profitable even if prices stay flat or decline further.

When in doubt
The typical rule when making large purchases is that if you're not sure that the conditions are ripe for a good deal, wait until they are. Housing prices have fallen substantially in some areas, but just think how much more you might be able to save if you wait a bit longer. Conversely, do you really want to buy a house now, only to see its value fall below what you owe on your mortgage? Depending on your financial situation, that could trap you in your house. Ideally, you'd buy at the exact moment prices bottom out.

But picking the bottom in the housing market isn't any easier than picking a bottom in the stock market. Sure, you'd like to buy the perfect house at the perfect time. However, high demand in past years has stymied prospective buyers and their efforts to negotiate favorable deals, instead forcing them to compete in bidding wars that often escalated out of control. In contrast, buyers currently have an attractive array of choices, with sometimes-desperate sellers needing to take offers at which they would have scoffed just a couple of years ago. Homebuilders like Lennar (NYSE: LEN  ) have been offering big incentives to buyers, forcing competitors such as Ryland (NYSE: RYL  ) and MDC Holdings (NYSE: MDC  ) to decide whether to follow suit or risk losing market share. Like a traveler on an overbooked flight, you have to wonder: Could you get even more goodies if you wait a while longer?

How to decide
In the end, you have to choose whether to buy or rent based on both objective and personal reasons. Keep the following in mind:

  • Run the numbers. You'll find a number of financial calculators designed to help you decide whether renting or buying is the smarter financial move, including this one right here at the Fool. Tax deductions often prove to be the deciding factor in favor of home ownership, so make sure you look closely at your taxes to put in the proper rate for the calculations.
  • Think short- and long-term. You may hope to stay in a new home for decades, but you never know when an unexpected opportunity or setback will require you to relocate. If you can't count on substantial price appreciation, it can take years to make up for the upfront costs of buying a home.
  • Consider the intangibles. Most people think of a home as more than just a place to live. If you find the perfect place, you can't expect the owner to let you choose between renting and buying. Although you shouldn't let your emotions get the better of you, there's always an element of gut feeling that goes into a home purchase. If you can afford the home you're considering, don't ignore your instincts.
  • Don't panic. Unless you're getting kicked out of your current quarters, you don't need to rush to make a decision about whether to rent or buy. Wait until you're comfortable with the entire buying process before you start looking in earnest.

If you decide you want to buy but are feeling intimidated by all the things that buying a home involves, take time to learn the basics. Our Home Center walks you through the ins and outs of real estate transactions. You'll learn about getting the best financing, making the best deal, and avoiding tricky pitfalls that lie in wait for unsuspecting homebuyers.

Deciding whether to rent or buy will make a big difference throughout your lifetime. Just as short-term stock market drops shouldn't keep you from investing, falling house prices shouldn't stop you from buying a home. You just have to be a bit more careful.

Related articles:

To learn more about making big money decisions, check out our personal-finance newsletter, Motley Fool Green Light. It offers helpful advice, investing recommendations, and pays for itself with hundreds of dollars of money-saving ideas each month. You can try it free for a whole month -- you'll get access to all past issues.

Fool contributor Dan Caplinger just bucked up and bought a house, so he's got his fingers crossed. He doesn't own shares of the companies mentioned in this article. MDC Holdings is a Motley Fool Hidden Gems recommendation. The Fool's disclosure policy works well in any market.


Read/Post Comments (0) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 530091, ~/Articles/ArticleHandler.aspx, 11/23/2014 12:11:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 1 day ago Sponsored by:
DOW 17,810.06 91.06 0.51%
S&P 500 2,063.50 10.75 0.52%
NASD 4,712.97 11.10 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/21/2014 4:07 PM
LEN $47.29 Up +0.32 +0.68%
Lennar Corp CAPS Rating: **
MDC $25.87 Down -0.09 -0.35%
MDC Holdings, Inc. CAPS Rating: ****
RYL $38.81 Up +0.44 +1.15%
The Ryland Group,… CAPS Rating: ***

Advertisement