Buy instead of rent. Here’s why:
Are you unsure if now is the right time to buy? Before you look to rent a home, read this article. It might be a good idea to buy instead of rent for many reasons.
It’s cheaper to buy than rent in almost every major U.S. housing market, and over the long term home prices appear likely to rise substantially. There’s no guarantee, of course, that home prices will escape another dip next year, especially if there’s a recession or any sort of economic slowdown. And it may take some time for real estate prices to recover fully.
In addition, not everyone who might want to buy today will be able to get a mortgage. But for people who can afford to buy a home and expect to stay in it for at least a decade, there’s a compelling argument that the current housing market offers an exceptional opportunity.
- Buying a home right now is cheaper than renting. Both home prices and rents have risen a little bit from their post-recession lows, but rents are up more. Mortgage rates are at their lowest levels in more than half a century. And given current prices and tax benefits, owning a home is cheaper than renting in almost every major U.S. housing market.
- The mortgage interest deduction is unlikely to be eliminated. Comprehensive tax reform schemes often call for curtailing the income tax deduction for mortgage interest. That’s understandable, since the tax benefit costs the government $80 billion to $100 billion a year that could be used instead to reduce overall tax rates.
- Home prices are very cheap but appear to be past a bottom. On a national basis, home prices are down more than 30% from their 2007 peak. Since the recession ended prices have recovered only a bit – the best one can say is that they aren’t getting any worse.
- Eventual economic recovery will almost certainly boost housing prices. Following the recessions of 1973-75 and 1981-82, home prices rose by about 20% in real terms (i.e., not counting price increases from inflation) within seven years or less. The drop in home prices in the most recent recession was at least four times as large as the declines in those two previous recessions. As a result, the recovery is taking longer to get going, but the eventual rebound could be proportionately greater. Price increases resulting from inflation would be on top of those real gains.
- A substantial amount of inflation seems likely at some point. Since 2008, Fed policies aimed at revving up the economy have more than tripled the basic money supply (including currency but excluding checking and savings accounts). In a simplistic sense, that means the potential exists for the dollar to lose up to two-thirds of its value. The reality is more complex, of course, and inflation pressures won’t begin to build until people and businesses feel free to start spending the excess cash they have. But as the recovery proceeds and spending picks up, the recent increases in the amount of money outstanding could begin to cause quite substantial inflation. To prevent that, the Fed would have to drain much of money that it has added over the past three years. And that would be difficult to do quickly, because it would risk jacking up interest rates to a level high enough to cause another recession.
In short, since owning a home is typically cheaper than renting after tax benefits are considered, today’s buyers would come out ahead unless housing prices fall substantially. In fact, though, prices figure to rise, either because of an economic recovery or because of inflation (or more likely, both). Yet while buying a home today is a safer bet than it was before the recession, most people are more hesitant to buy a home today than they were five years ago.
If you would like to start looking at the market to buy, call up The Lawhead Team.