Around the country, many would-be homeowners have found that the costs of owning a home now exceed renting. While many economists beg to differ, when it comes to calculations, the details seem to make a significant difference.
The Problem of Outdated Assumptions
One problem we have found is that publications claiming that owning a home is less expensive than renting are usually based on outdated assumptions. For instance, many such calculations assume that buyers make a down payment of 20 percent. In reality, that is hardly the case. This is particularly true in the case of first-time homebuyers, who often make down payments of 10 percent or less.
Another outdated assumption often contributing to the erroneous belief that owning is less expensive than buying is that any future home appreciation is considered when making the decision of whether to buy or rent. While statistics indicate that home prices have appreciated faster than incomes, such appreciation has also occurred over a period of time in which mortgage rates have declined. As a result, assuming that prices will appreciate could be somewhat of an aggressive assumption.
While home ownership certainly presents some excellent long-term benefits, especially for consumers with a stable employment situation, which does not necessarily mean that owning a home is less expensive than renting.
Home ownership costs must also be taken into consideration in determining whether it is less expensive to own or rent. These costs often are not included in published reports. They are also costs that many prospective buyers may not realize until they have actually purchased a home. Such costs might include home maintenance and repair costs, HOA fees, and other costs that are typically not required when renting an apartment or home.
It is also important to keep in mind that not all real estate markets across the country are the same. The premium that a homeowner pays to own a home compared to renting tends to vary across the country. In many areas of the country where real estate prices have soared, the gap between the cost to own a home and rent can be quite significant. By comparison, in other areas, such as the Midwest, home prices have remained relatively affordable. As a result, in those areas, it is often still less expensive to own a home than to rent.
The Bottom Line
In considering the reality of whether it is more or less expensive to own a home than to rent, keep in mind that headlines can oftentimes be misleading. It is important to consider all of the various factors that can affect the cost of home ownership as well as renting. The bottom line is that if it were really less expensive to own a home than to rent a home, there would be far more renters making the leap to homeownership than is currently the case.