to buy or rent a home is among the biggest financial decisions most of
us make. It is basically a complex math problem in which the reward for
getting it right can be tens or hundreds of thousands of dollars — and
the punishment for getting it wrong similarly enormous.
Fortunately, there are many tools to help you work through the math, including The New York Times’s excellent calculator.
But as someone who worked on that calculator and who has spent a lot of
time examining the economics of homeownership, I have a confession:
There are some dimensions of rent versus buy that are really important
but difficult to account for in dollar terms.
dimensions have inherent but hard-to-calculate value. They have to do
with how owning a home lets you stop worrying about rent increases,
forces you to save money and gives you certain tax benefits, and on the
flip side, how renting means you don’t have to worry about the
unpredictable costs of maintaining a home. Anyone trying to make a
housing decision should at least think about them a bit before taking,
or not taking, the plunge.
Protection Against Rising Rents
you live in a city that you find desirable and could envision living in
for a very long time. Suppose you work in a field in which you can’t
plausibly expect your income to rise significantly in the decades ahead.
That makes a case for buying over renting.
don’t know the future of rents and home prices, either nationally or
for any particular region. But one thing we do know is that sometimes
rents and prices will skyrocket in a particular place. It has happened
in New York and San Francisco since the 1990s; the same happened in
Los Angeles from the 1960s to the 1980s, and a century ago one could say the same of Chicago and Detroit.
a home is a way of locking in an affordable place to live, essentially
an insurance policy against escalating rents. If you rent, you are
forever at risk of your region’s becoming newly popular, attracting an
influx of people and high-paying jobs that drives up your cost of living
beyond what your income can support.
course, your region may not be one of those new boom areas, in which
case this insurance policy would prove unnecessary; you could even end
up in a place with falling rents and home values, like Detroit in the
last couple of decades. But that’s the nature of insurance: You may pay
for it but turn out not to need it.
and some places have rent control laws that might protect a long-term
renter. But keep in mind, those laws can always be changed — and they
can create inflexibility, making it impossible to move to a more
suitable home in the same location without seeing a steep rise in rent.
much is this insurance policy worth? If taken to an extreme, it could
lead you to make bad decisions. During the housing boom at the middle of
the last decade, people used “If I don’t buy now, I won’t be able to
afford to buy tomorrow” as a rationale to overpay for homes.
Two factors that might help shape your decision:
disruptive would it be for you to move somewhere else? The more
disruptive, the more you should value this insurance against higher
freely does your city allow new home building? Rents are less likely to
increase sharply if the housing supply can rise to meet new demand.
people say that renting is “just throwing money away,” which is a
little misleading. You could just as easily say that when you buy a
home, the mortgage interest and property taxes you pay are throwing
that line of thinking does get one dimension of home buying right: When
you buy a home with a standard mortgage, you gradually pay off the
balance — slowly at first, faster as time goes on. Someone who takes out
a $500,000, 30-year fixed-rate mortgage at 4 percent has paid down
about $8,000 of debt after one year, and $47,000 after five years.
terms of a personal balance sheet, less debt is equivalent to more
savings — assuming the value of the home is stable or rising. People who
buy houses while in their early 30s with a 30-year mortgage and stay in
it will own a valuable asset free and clear when they hit retirement
age. They could either live rent- or mortgage-payment free during
retirement, or sell the house, move somewhere cheaper and have a nice
pile of cash savings.
one could construct the same strategy while renting, putting money away
into a savings or investment account while paying a landlord for a
place to live. The beauty of owning is that it happens automatically, by
virtue of paying your mortgage. That means less temptation to spend the
money instead of saving in a given month; you can get access to it
home-equity loan, but that requires making the active effort of going to a bank.
if, psychologically, you find it hard to save and are always tempted to
take a vacation rather than plow money into a brokerage account, buying
a house with borrowed money is a way to trick yourself into doing so
and help ensure you have a meaningful net worth when retirement rolls
Owner’s Hidden Tax Benefits
you had plenty of cash and were trying to decide whether to buy a home
outright, or invest most of the money in stocks and bonds and use some
of it to pay rent on a home.
first glance, renting might make sense. The stock market, for example,
has a higher return than real estate historically, so in theory that
portfolio could pay the rent and keep growing rapidly.
a quirk of the tax code tends to obliterate that advantage. When you
invest money in financial assets, you have to pay taxes on the returns
they offer — the interest paid by corporate bonds, for example, or the
dividends from stocks, or the capital gains when you sell either for a
you buy a home for your own use, the return it pays you — namely,
giving you a place to live, not interest or dividend payments — is tax
free. This is what economists call “imputed rent,” and it is one of the
subtle advantages to buying that is hard to account for in standard buy
versus rent analysis.
a little more complicated if you buy a home using a mortgage, but the
same dynamic applies. Your down payment could earn a fully taxable
return as an investment, but give you a tax-free return — free rent — if
used to buy a home.
not the end of the favorable tax treatment, though. If you buy a
portfolio of stocks and then sell them at a profit 10 years later, you
pay capital gains tax on every dollar of what you made. But when selling
a primary residence at a profit, the first $250,000 in profits for a
single person and first $500,000 for a married couple is tax free.
home mortgage interest deduction gets a lot of attention as a
distortion of the tax code that makes home buying more attractive, but
these more subtle dimensions can be just as significant.
Volatility of Maintenance Costs
have all been quirks of homeownership that tilt the economics in favor
of buying. But here’s an important one that points in the other
renters and homeowners pay costs for maintenance on their properties;
they just do so in different ways with very different implications.
you rent and the dishwasher breaks, your landlord is on the hook to
repair or replace it. You may ultimately pay the bill in the sense that
expected maintenance costs are built into the rent you pay, but you have
no risk of that number varying depending on luck.
on the other hand, face not a set monthly payment covering the costs of
repairs and maintenance, but a great deal of volatility.
urgent $2,000 air-conditioner repair bill, or even a $15,000 roof
repair, might arise at any time. Other things, like replacing a shabby
carpet or applying a fresh coat of paint, allow the homeowner more
control over when the transaction happens, but still, it’s a lumpy
pattern of expenditures.
rent versus buy calculators ask users to put in an estimate of monthly
maintenance costs for the home they would purchase. But the issue is not
the expected average of those costs but the possibility of their
lumpiness and unpredictability. That can be especially problematic for a
person who empties savings to buy a home only to need to pay for an
expensive repair a few months later.
of these factors alone should be decisive, and the basics that you plug
into online calculators — like the monthly mortgage payment, rent on a
comparable place and closing costs — are more important. But when it’s a
close call, weighing these factors carefully — and how much they apply
in your particular case — can help you make a smarter housing decision.