If rising interest rates are keeping you on the home buyer sidelines, you’d be wise digging a little deeper into the financial consequences of buying versus renting, both in the short and long term. Millennials certainly find it a big challenge buying a first home, and it’s not getting any easier. Still, none of the generations that came before Millennials found it easy either.
The importance and financial intelligence of owning a home has not changed. Waiting for the “perfect” time and opportunity only results in more time passing when you could be building equity. In another year, two years, or five years, hurdles will still need to be overcome. The only substantial difference is you will not have been building equity.
As Time Passes
One common obstacle facing many millennials is crushing college debt. This is a tremendous challenge. However, consider the prohibitive interest rates that first time buyers in the early 1980s faced. In 1981, the average interest rate was about 17%. This was truly the beginning of when two incomes became necessary to buy a home. Was it fair? Certainly not, but the point is that sacrifices are part of the history of gaining homeownership.
It’s not getting any easier. Recent facts are:
Owning is cheaper than renting. An older Trulia Trends study of the 100 largest metropolitan markets found that on average it was 44% less expensive owning a house or condominium than it was renting . February 2019 data shows that Atlanta had an average rent increase of 6.37% (1, 2, 3, 4, 5 bedroom rentals). Three bedroom rental rates topped the chart with a 9.85% increase with two bedrooms up 8.52% year on year.
Home prices are still rising – but rising slower. According to Zillow, average prices increased 13.7% over the past year, but are now on pace to rise only 6.6% in 2019 (less than most rents will increase). Don’t you wish you bought five or six years ago?
Interest rates continue rising but are still relatively low. Rates are near one-year lows [March 2019] but expected to rise as the spring buying season progresses.
The Pros of Buying
The process of buying is more complex than renting, but the financial benefits make it worth the time and effort. Building equity is like having an automatic savings account that is difficult from which to make impulsive withdrawals.
The 2017 tax law changes didn’t eliminate the mortgage deduction, it only modified it. Interest on mortgages up to $750,000 for your principle residence is still deducible – but rents are not. Private mortgage insurance is still deductible. One of the biggest tax benefits is that a mortgage often enables you to itemize many other deductions that most renters can't write off. Examples are charity donations, home office expenses, and property taxes (note: your rent pays the landlords property tax without you being able to deduct it).
The Cons of Buying
There aren’t many drawbacks to becoming a homeowner other than fear. With reward comes risk, but homeownership is just about the smallest risk you’ll ever take. I know that sounds weird because it is the biggest purchase of your life. It’s true that the 2007 bust left some homeowners underwater and some in foreclosure. However, the millions who rode through the down turn are the same homeowners who are now benefiting with year after year of equity growth as the market continues rising.
Some people fear becoming responsible for maintenance and repair costs. And yes, these can be costly expenses. Landlords often maintain a reserve fund from rent profits for these expenses. Conservative homeowners also maintain an emergency reserve fund. Having a home equity line could help in case of emergencies and reduce stress when you do have an issue with the home.
Now is the Time to Buy
If you are still a renter, you missed the best opportunity to become an owner when the market bottomed out back in 2010 and 2011. That’s understandable because unemployment rates were off the charts and the economy was in complete turmoil. However, that’s also the same time landlords scooped up the bargain properties that they have been raising rents on ever since.
Today, with employment steady, wages rising, interest rates reasonable, mortgages easier to qualify for, and home price increases modest, you may never see a better opportunity to become a homeowner.