Calculating the costs and benefits of home ownership versus renting is extremely difficult because many important factors involved in the decision can't be quantified.

Rent or Buy? A Question That Never Seems to Go Away

January 14, 2008, July 4, 2016

The question doesn’t go away because it is confronted anew by every new cohort of households. The letters I receive on the topic, such as this one, haven’t changed in the last 20 years.   

“I am a 48 year old divorced female. I have been renting for the last 10 years…My friends keep telling me that renting is "throwing your money away"… but if I buy, my monthly housing costs will probably double… I wonder if at my age I would not be better off putting the difference into a retirement account?” 

The rent-versus-buy issue has also spawned an extraordinary number of on-line calculators, which are designed to facilitate the decision process by quantifying the costs and benefits of home ownership versus renting.

I thought at one point that I would assess these calculators and recommend the best ones, but there are so many that it would become a life’s work. Instead, I developed my own, which has a slightly different twist than the others.  

To many new households, the issue of rent versus buy is really about buying now with a small down payment versus renting now and buying later with a larger down payment. This is the way I designed my calculator 6a, Down Payment Calculator: Small Down Payment Now or Larger One Later (Buy Versus Rent).  

In framing the problem as a comparison between buying now and buying later, this approach takes account not only of the cost of renting during the intervening period, but also changes in the cost of buying over the period. For example, the cost of mortgage insurance will be lower in the future if the buyer makes a larger down payment, which is in the buyer’s control and is a major reason for the purchase delay. On the other hand, the interest rate could be higher in the future, and that is largely a crap shoot outside of the buyer’s control.  

There are two major drawbacks in assessing the rent versus buy decision with a calculator analysis of costs and benefits. The first is that the prospect of accumulating homeowner equity is a dominant factor in the decision process, yet it is very difficult to quantify. House prices usually increase, but not everywhere, and sometimes they can drop precipitously, as we saw in 2006-8.   

Nonetheless, over very long periods, prices have increased by about 4% a year, and those who base a buy decision on that assumption are making a good bet. Homeowner equity has been a major part of  household wealth, and that should continue to be the case. With pension income shrinking, homeowner equity will become of increasing importance in maintaining living standards in retirement. The equity can be extracted later in life by selling the house or by taking out a reverse mortgage.

The second limitation of the calculator approach is that an owned house and a rented apartment are not comparable in terms of amenities, location, responsibilities, and even associated life style. Trying to place a dollar value on the differences is very difficult.

The fact is that most homeowners make the decision to become a homeowner with their gut rather than their mind. Indeed, the decision often resembles the selection of a spouse more than the selection of a financial investment. We have all heard the statement, “I fell in love with that house.” On the other hand, some people have never fallen in love with a house and prefer their lifestyle as a renter. That ‘s OK too.  

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