As Americans closely analyze every dollar they spend to make ends meet in today’s economy, some people are wondering what they should do about housing.
Real estate prices and interest rates are high, but so are rents. At the same time, many people are conditioned to believe that owning a home is better financially than renting.
But is that true?
The Mortgage Note spoke to three economists at the University of New Haven in West Haven, Connecticut, and all three had very different views on the economic situation of people who rent versus people who pay a mortgage.
We asked them the question: “Are you throwing your money out the window when you rent?” Here are their answers:
Patrick Gourley – No
Patrick Gourley, associate professor of economics, says the idea that someone is throwing money away when renting is wrong. Instead, he encourages people to think of renting as a free economic exchange or a mutually beneficial transaction.
“It’s like eating out and not cooking yourself,” Gourley said. “Anyone can cook their own food in the comfort of their own home, and anyone can go out and have someone cook for them and serve them. Just like renting and owning, there are advantages and disadvantages to both.”
Gourley also warns consumers to be careful of those who spread the idea that renting is a waste of money, as there may be ulterior motives behind it.
“When a mortgage broker says, ‘Oh, renting is a waste of money,’ that’s not objective. They make their living from people who decide not to rent. If the same message comes from a homeowner, be careful because the value of their property increases with each person who decides to stop renting. Just to keep perspective, remember who is giving you the advice.”
When asked how best to decide whether renting or buying is the better solution, Gourley said that several factors come into play and there is no one-size-fits-all answer.
“Part of the decision is how long you plan to live in one place,” explains Gourley. “If you rent the same property for 20 years, then that would indeed be a poor use of your money. On the other hand, it’s not a good idea to repeatedly own homes for a year or two and then move just to buy again.”
An additional benefit of renting, according to Gourley, is that people may be able to afford additional amenities that they cannot afford when purchasing a home.
“My wife and I rented a one-bedroom apartment in a complex with a swimming pool, ping pong table and rooftop deck. There’s no way we could have afforded a house with all of these amenities in New Haven, Connecticut. You’d have to be a millionaire to do that. There are times when it pays to rent, especially for those just starting out.”
James Mohs – Sort Of
For James Mohs, associate professor of accounting and taxation, the answer to this question is not so simple.
While there are financial benefits to owning a property, Mohs believes that the decision to buy or rent a property should be made on a case-by-case basis.
“If you own a home, it’s absolutely true that you build equity in a home and enjoy certain tax benefits that you don’t have as a renter. But for every advantage there is a corresponding disadvantage,” Mohs said.
“Renting, for example, is much more flexible than buying. Breaking a lease isn’t great, but selling your home and taking your equity with you is a much longer and more complicated process.”
He pointed out that people may not have a choice about when to sell and that if the real estate market in their area is down, they may not get the price they expected for their homes.
In addition, Mohs said, owning a home comes with many more unexpected expenses.
“My home insurance just went up 50% compared to last year. That’s a risk you take as an owner that doesn’t exist as a renter,” Mohs said.
For this reason, Mohs advises people not to change their schedules for fear of “wasting money” on rent.
“Don’t just buy for the sake of buying,” Mohs said. “Make sure the economics fit your circumstances. An important part of that is also making sure you don’t overbuy. The same goes for cars – do you need transportation? Yes. But do you need a Porsche Turbo Carrera? No. Stay within your means so the purchase makes sense.”
John Rosen – Yes
John Rosen, associate professor of economics, views renting from the same perspective as many mortgage experts: He says it’s a waste of money.
“You’re not building equity or long-term wealth. You can’t sell your rental property in 30 years and retire,” Rosen said. “Don’t give your money to your landlord, give it to your bank, because at least the value of your home will increase.”
Rosen said that if people have to rent because they cannot afford to buy a home, they should save so that they can eventually afford to own a home.
“The important thing is to buy a home you can afford, because any real estate investment you make is almost certain to make you money. Many people ask, ‘Can I afford a $600,000 home?’ That’s the wrong question. It’s, ‘Can I afford the mortgage payments on a $600,000 home with interest and everything?’ If the answer is no, then keep saving.”
Rosen added that there are also cases where renting can make sense. And he agrees that someone who isn’t ready to commit to an area shouldn’t buy, since closing costs and realtor fees are nonrefundable.
Renting is also better suited for people who are not interested in the responsibilities that come with owning a home.
“If you want to minimize hassle and keep life simple, renting can have its advantages because someone else is responsible for all the upkeep,” Rosen added. “When you own, it feels like you’re writing a check every month for something unexpected. Something needs painting, the gutters need cleaning, or a window is broken.”
