Danville Express

Real Estate - February 20, 2009

To Buy or Rent? - insights on a common question

by Evelyn Walker

"Should I buy or rent?" With decreasing home prices throughout the Bay Area, this is a question that is no doubt running through the minds of many. The decision to rent an apartment, condo or house as opposed to buying is complex and one that should be taken into great consideration.

There are many misconceptions when weighing the options to rent or buy. One of the biggest may be the notion that renting is simpler. When the refrigerator in a rental needs repair, the responsibility falls on the landlord. But once new homeowners sign their name on the dotted line, responsibility is theirs. Unfortunately, stating that renting is the "simpler" choice takes a narrow view on the total set of issues that go into the buy-vs.-rent decision.

Here are a few others:

* The tax benefits derived from purchasing a home take too long to offset all the other costs involved. You likely know that the tax write-offs of mortgage interest are among the biggest financial benefits of home ownership. But some question whether this benefit is really great enough to offset the "big picture" cost of ownership. Homes typically appreciate in value over time. That's why you should carefully evaluate how long you expect to stay in your new home. If you anticipate staying for several years, the scales should tip in your favor and the value of all that you will gain financially from homeownership is likely to outweigh those initial costs to get in the door.

* Renting a home isn't all that different from owning. If you are renting a house, you may already feel like a homeowner by making routine repairs, gardening or cleaning the gutters. But there is one fundamental difference. Unlike equity built with each monthly mortgage payment, the rent you are paying is producing zero future financial benefit. In fact, you are essentially paying the landlord's mortgage and likely additional utility costs. Since most homes increase in value over the long term, a home not only provides a place to live but will ultimately provide return on your original investment.

* It's better to rent and wait for the market to bottom out. By the time we will recognize the true bottom of the market, prices will already be on their way up. Buying a home should always be approached as a good long-term investment, providing equity accumulation, cost appreciation and tax benefits over time. The reason why many point to now as a smart time to buy is because of the historically low interest rates we are seeing coupled with the buyer's market which exists in most communities. When purchased with the longer term in mind, housing is one of the historically safest investments consumers can make.

* It's cheaper to rent. This may or may not be so. Because of the current state of the housing market, many are foregoing homeownership and turning to rentals. This influx of renters may be having an impact on the supply and demand of rentals and driving rents higher. A handy rent-versus-buy calculator to help break down basic money questions is at www.coldwellbanker.com.

* By buying a home, I'll become a victim of the foreclosure mess. It's important to remember that foreclosures account for just a small percentage of all homes sold. Mortgage money is still available for qualified borrowers and, to help prevent foreclosures in the future, lenders have returned to upholding higher standards. These may require you to demonstrate strong basic borrowing "fundamentals" such as proof of income, solid credit and ability to make a 20 percent down payment. It's also critical to be well-educated in terms of the various mortgage options available and to know what you can afford.

Over the past year, home prices, mortgage rates and subprime loan issues have been the subject of a lion's share of news coverage. It can be quite overwhelming for those debating whether now is the time to take the leap into home ownership. That is why it is so important to educate yourself on the pros and cons of buying and renting. Be sure to take the time to talk to a real estate agent, even if you're not planning on buying right away. With the correct information and tools at your disposal, you'll feel comfortable by making an informed decision.

Evelyn Walker, a manager of Coldwell Banker Residential Brokerage's Danville office, provides the above tips. She can be reached at 837-4100 or by e-mail at evelyn.walker@cbnorcal.com.


Posted by James, a resident of Blackhawk
on Feb 20, 2009 at 8:27 pm

This is a typical cheerleadering pep-talk on homeownership by a real estate broker. It offers no financial analysis on rent vs. buy and, therefore, not much credence on what the author is try to preach.

Counter arguments:

* "…the rent you are paying is producing zero future financial benefit."
A $900k home only collects $3500/mo of rent in Danville. You have to pay approximately $6k a month (prop. tax and insurance included) to own it. The large disparity tells you the price is still too high. I would not say an extra $2500 each month producing zero future financial benefit.
* "By the time we will recognize the true bottom of the market, prices will already be on their way up."
A "L" shape housing price for the next several years is more likely than a "V" shape. As any savvy financial person can tell you, it's better to get in when the price is the way up than on the way down.
* "It's important to remember that foreclosures account for just a small percentage of all homes sold."
If you keep getting in at the wrong time, the percentage will get bigger, and you certainly don't want to be in the statistics.
* "Homes typically appreciate in value over time."
Unless you stay in the same house "over time", you may get stuck and foreclosed if you get in at the wrong time.
* "You likely know that the tax write-offs of mortgage interest are among the biggest financial benefits of home ownership."
I just want to remind you the tax write-offs means paying $1 to get 25 cents back for most people.

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