Don't Know Whether to Rent or Buy? This Guide Will Help You Decide

Nadav Shemer
Can’t Decide Whether to Rent or Buy? This Guide Will Help You Decide
Ready to ditch your landlord and buy a home? If you answered yes, you’re not alone. Housing sentiment in the U.S. is at its highest point since before the 2007-8 mortgage crisis, according to Fannie Mae’s National Housing Survey for August 2019.

Interest rates were the main driver of improved consumer sentiment toward owning a home. In August 2019, 16% of survey respondents said they expected interest rates to go down, compared to 33% who said they would go up. While this translates to a net balance of 17% who think rates will go up, it is a dramatic improvement from one year earlier, when a net 52% saw rates going up.

According to Zillow’s 2018 Consumer Housing Trends Report, 47% of renters who had moved home in the previous year considered buying a home. The top 3 reasons renters thought about buying were: 

  • Concerns about paying rent instead of buying or investing in property
  • Desire for a home of their own
  • Wanting more control over where they live

Whether you’re currently leaning toward renting or buying, it’s a good idea to consider big picture economic details as well as your own personal financial considerations before making a decision.

Economic Details to Consider When Deciding to Rent or Buy

Mortgage rates

The roughly 1 in 6 people who told Fannie Mae they expect interest rates to go down have been paying attention. As we reported recently, 30-year fixed-interest mortgage rates are at the lowest level since late 2016. In July 2019, the US Federal Reserve lowered its benchmark interest rate by 0.25% - the first cut in a decade. Investors are pricing in a 97% probability of one and 67% probability of 2 additional Fed rate cuts by the end of the year, according to CME Group’s FedWatch tool.

Changes in renting and buying costs

Home values rose 5.2% and rent prices just 0.2% in the 12 months to August 2019, according to data from Zillow. This helps explain Freddie Mac’s finding in April that only 18% of renters consider homeownership more affordable than renting, down from 33% at the beginning of 2018. Respondents to the Fannie Mae survey expect rental prices to rise faster than home prices – at a rate of 4.6% vs 2.4% per year – although it should be noted that the expectations are little changed to a year ago. 

Cost of renting and buying in your area

While it can help to understand national economic indicators, it’s also worth looking at the cost of renting vs buying in your area. In Idaho, prices have risen 14% in the past 12 months and are forecast to rise 7% in the next year. In California, Delaware, and Louisiana, prices rose around 1% in the same period. In San Jose, California, where the average home is worth $1 million, values have fallen by 9.4%. In Salinas, less than an hour’s drive away, homes are worth half as much but have risen by 5.6% in the past year. As for rent, Phoenix, Arizona saw rent prices grow 8.5% while in Houston, Texas they barely moved, according to RentCafe. House and rent prices are affected by many different factors, many specific to the location. For example, Harvard Business Review recently published a study showing that when Airbnb listings in a city increase, rent prices go up.

The economy

When the economy is strong, people are more optimistic about buying. Sentiment on the economy is good, albeit slightly down from a year ago, with 50% of Fannie Mae survey respondents saying the economy is on the right track and 41% the wrong track.

Personal Details to Consider When Deciding to Rent or Buy

Your financial situation

However good or bad the economic picture may be, the decision of whether to rent or buy ultimately comes down to your own financial situation. Before deciding whether to buy, weigh up whether you have money for a down payment (minimum 20% of the house price, except for FHA loans, VA loans, and low down payment mortgages). Also, check that your credit score is good enough (minimum 620 for conventional loans, but 750-830 credit scores get the best rates). The good news for renters is that nowadays you can improve your credit score just by making rent payments on time. All you have to do is opt in to TransUnion’s ResidentCredit and ask your landlord to have you make rent payments using PayLease.  

How long you plan to stay in your home

Most people don’t stay in their home for the full duration of a 30-year mortgage. For two reasons, first-time buyers should plan on living in their new home for least five years after purchasing. The first reason is closing costs: upfront, non-refundable fees for things like loan origination, home appraisal, and title insurance that you must pay every time you take a mortgage. The second is monthly payments: the proportion of interest to principal is highest in the first few years and it usually takes around five years to have paid down enough of the principal for your home purchase to make sense.

Taxes and tax deductions

All homeowners pay property tax, but the good news is these payments are tax deductible. Under the federal tax reforms introduced in 2018, these deductions are capped at $10,000. Renters can’t deduct rent payments from their federal income tax. However, if your lease requires you to make property tax payments, those payments are tax-deductible.

Comparing Your Options

Whatever you decide, don’t forget to compare your options. While it can often seem like renters are at the mercy of landlords, slowing rent prices give consumers more power. As for buying, always shop around between lenders before getting a mortgage. You never know which lender can offer you the best rate.

Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.