Renting vs. owning
Ever since the financial crisis left many Americans in dire financial straits, the debate over renting versus buying a home has heated up. American households’ spending on housing is on average 33% of their annual expenses, but until recently we didn’t have data to show the differences in costs between monthly mortgage payments versus rent.
Now, the Bureau of Labor Statistics has released a report detailing Americans’ average annual expenditures on housing and related items and how they differ between renters and homeowners. There’s a lot we can learn from this look at national data. Read on to find out more.
Renting vs. owning
The following chart shows average annual housing expenditures by homeowners and renters as of 2012, which is the most recent data available.
On average, renters pay more on an annual basis for shelter, but they pay less in every other category. The biggest difference between the two is in maintenance, repairs, and insurance. This only makes sense, because it is the landlord’s responsibility to pay for maintenance and repairs, and renters insurance is dirt-cheap. The second-biggest difference also shouldn’t surprise you: Renters spend far less on household furnishings than homeowners. Renters likely spend less as it is a pain to move furnishings. Second, many landlords prohibit homeowners from making permanent changes to a residence, such as making expansions and installing major appliances, so these costs will naturally be less.
Renters also spend less on housekeeping supplies than homeowners. Research has shown that people with an ownership stake will take better care of property. This is one reason that many investors like to see management teams with a significant portion of their wealth invested in their own company. As the saying goes, “When’s the last time you washed a rental car?”
The main advantage of being a renter is not being tied down to a particular place. As many people discovered in the financial crisis, your ability to move elsewhere to take a higher-paying job is limited if you are unable to sell your house.
Second, not having to make a large down payment frees up capital that can be invested more productively. There are also significant costs to buying or selling a home, but the transactional costs are far lower when moving to a new rental house or rental apartment.
Third, many people assume buying a house is a sound investment strategy. The reality is that over the long term, houses do not return much above inflation, while the stock market has soundly beaten inflation over long periods of time. Yale economist Robert Shiller has collected home price data in the U.S. as far back as 1890. On an inflation-adjusted level, home prices have not risen significantly, while the stock market has consistently beaten inflation. For most people, buying a home is not the best way to increase your wealth.
The difference in cost between renting and buying a house greatly depends on your individual situation. The key determinants will vary based on home prices in your local area, rent prices, how much you spend, how long you live in the home, what mortgage rate you can get, and so on. Trulia provides an easy-to-use calculator to help you make estimates of the costs.
Renting vs. buying and investing
Warren Buffett once said, “All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks.”
While Buffett believes that his home was a great investment because of its “52 years of terrific memories,” Fool analyst Anand Chokkavelu believes homeownership is better than renting for most people for financial reasons. Anand argues that buying a home acts as a commitment device for people to save money. By being forced to sock away money every month for a home, people build equity in that home, rather than spending it on things they don’t need. This forced savings can be seen in the median net worth of homeowners, which is 30 times greater than that of those who don’t have a house.
Tax advantages of housing
Another advantage of owning a home is that the government allows homeowners to deduct the interest on their mortgage from their reported income when filing taxes. This is just one of the many tax-advantaged ways you can keep more of your money.
Photo credit: RentingWell
Via The Motley Fool