April Financial Fitness Challenge--Know When to Buy a House
Susan Tiffany, CCUFC
/ April 3rd, 2012
Before the economic crisis, the mantra was that buying a house was a better financial choice than renting—everyone, it seemed, bought in to that conventional wisdom. Then, as home values tumbled and people saw equity they'd built in their homes evaporate, the smart advice was that renting was the only rational decision.
The truth, as usual, lies somewhere in between. Your challenge is to decide which option makes sense for you.
Lessons learned the hard way
For decades, before the Great Recession, most financial counselors believed that owning a house was the way for average consumers to build wealth. That was true, and still is, if the house rises in value over time—called appreciation in the jargon of economics.
The combination of growing market value and declining loan balance, as you paid off the mortgage loan, assured that you were wealthier owning a house than renting. When you rent, your payments only enrich the landlord—you do not participate in the property's equity growth.
We've learned, though, that housing markets do not always rise. They can stagnate, and they can fall. And that doesn't make buying a house a bad idea—it just means we have to be more realistic about expectations and take more into account before making a decision.
Recent improvements in the economy and in most housing markets are making it smart—really smart, since home loan rates are so low—to think again about buying a house.
Housing turns the corner
Trulia, the online real estate company, recently reported that it's now more affordable to buy than to rent in 98 of 100 markets. Two standout exceptions are Honolulu and San Francisco (ironically, home to Trulia).
Three facts support the affordability argument:
Ken H. Johnson, a professor of real estate at Florida International University, Miami, told CNNMoney.com that he believes home prices nationally have hit bottom.
- Home prices are down.
- Mortgage interest rates are low.
- Rents are rising.
Not everyone is cut out for the do-it-yourself aspect of keeping up a property.
"The ship has turned," he says. "Markets should slowly start to recover. Housing will return to its traditional role of a safety investment."
Buying presents challenges
Those rising rents are a sticking point for consumers hoping to buy—you can't save a down payment if rent is taking an ever larger chunk of your budget. Consider these factors, too, when you face the rent-or-buy question:
The simple question—will it cost more to rent than to buy—does not have a simple answer. You can get a clearer picture by using the New York Times rent vs. buy calculator.
The people at your credit union are wonderful allies as you navigate these questions. Call and talk to a loan officer or a personal finance coach to sort through this big decision.
Financial Fitness Challenge
Your credit union money mentors bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Susan Tiffany, CCUFC