Housing in 2011: A Needed Change in Our Perspective

posted Aug 2, 2013, 7:58 AM by Willie T. Butler   [ updated Aug 2, 2013, 8:12 AM ]
(Originally Published | February 15, 2011)

What do you think makes the most sense today? Say you just accepted a job and were contemplating whether to purchase a home or rent in the new town where you will live. Homes average about $300,000 which would cost you approximately $1,550 a month assuming you purchase a 30-year Fixed Rate (PITI) mortgage at 5% APR and with a 10% down-payment. On the other hand, that same style home is renting in that town for $1,300 a month, a seemingly obvious savings of $250 monthly versus the mortgage option. Assuming you intend to stay in the area and your job proves a secure choice for establishing a home, which is really better?

Our mortgage option would result in payment outlays over 10 years totaling $186,000, of which approximately 85% or $158,000 was paid to the mortgage lender as Interest Payments. So, your equity—not including appreciation—in this home after 10 years is $28,000. Meanwhile, the renter would have paid out a minimum of $156,000—(or $1,300 x 120 mos.)—and possibly more since lease renewals often involve rent increases. For this example, however, assume no rent increases occurred and the renter saved the $250 difference earning 5% annually throughout the ten-year term, you would have the following comparison:

  Purchase Price Savings Equity
 Mortagee: $300,000 $0 $28,000
 Renter: $0 $39,696 $0

Now, this comparison leaves a lot of holes for the “what ifs,” which is clear. For example, the increased value of the home is certainly worth something to the homebuyer.  In ten years and at an annual rate of 4% (for national statistical) growth, the house would now be worth almost $444,000. That makes the equity for the homeowner closer to almost $200,000, or a 66% return on investment. The renter, on the other hand, still only has the amount they saved over the same ten years.

This was certainly the most logical reason to promote home ownership over renting for the better part of 40 years. However, in today’s market more than 15% of all homeowners are “upside down” on their mortgages. Another 13 million homeowners are on the brink of foreclosure without some sort of bailout and modification to their mortgage loans. Gone are the days when home ownership guarantees that year-over-year the owner will see values increase and properties appraise and sell for more than is owed on them. Said another way, what good is a home valued at $444,000 when you cannot sell it for more than $300,000, which is what you originally paid for it?

While many media reports say that loan modification programs have not relieved the suffering of homeowners who may be facing foreclosure or are simply “upside-down” in the mortgages, there are actual programs that work. This could prove to be one way that many homeowners determine whether keeping their home is a good alternative to selling in such a turbulent market.

The homeowner may have also invested in home improvements during this period which would reduce their return on investment. There is likely to be a substantial difference in utility costs versus renting if for no other reason than most rental-units include a utility subsidy of some type. Single family homes, however, usually expect a renter to pay all of the utilities as well.

Home ownership in the twenty-first century must be determined under different criteria than in times past. Rather than thinking solely in investment terms, home ownership must be based on its utility, that is, the actual purpose it will serve in other tangible ways.

If you prefer to raise a family in a home because you feel they will derive greater benefit from such an environment, then that is your criteria. If you wish to educate your children on the importance of purchasing a home and holding it for posterity sake, this too makes perfect sense in today’s uncertain economy. Purchasing a home with the intent to flip it after fixing it up or after just a few years of living in it, plays a huge role in why the housing market is in turmoil today. By the way, after ten years, if the renter chose to buy a home, they would have over $39,000 to use as a down-payment just from having rented instead of buying.

Assuming they regularly added to their $250 savings amount each month, it is possible they could afford to put as much as 20% down, thereby reducing their monthly mortgage payment in two ways: 1) by lending less on the purchase and 2) avoiding the private mortgage insurance (PMI) fee required by most lenders on most mortgage agreements.

In today’s economy, such factors make renting an equally viable option under the right set of circumstances, particularly when you consider how America’s real estate market has performed over the last decade, and how Americans have demonstrated more short-term home ownership over choosing life-long commitments.

Whether a change in our reasons for owning or renting will adversely impact the American economy or not is uncertain. What is certain, however, is that Americans will need to include comprehensive planning for a financially-affordable or even debt-free future.