What’s your personality? Are you a buyer or a renter?
Yes, personality could be the deciding factor in whether you are better off renting long-term or buying.
That's my take on new research, soon to be published in Real Estate Economics, by Eli Beracha of East Carolina University and Ken H. Johnson of Florida International University.
The title says it all: "Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise?"
And the short answer, after getting a chance to read through the entire paper the other day, is that renting can indeed trump buying, at least on a purely financial basis. But it's also clear that to make renting a successful financial strategy for you, you need to have the right mix of personality and personal circumstance as well.
The study looks at the returns home buyers would have reaped when it came time to sell at various points from 1978-2009. That, in turn, is matched up against the returns earned by renters who invested their extra savings in the market.
In all cases but one, the potential returns of renting and investing your additional savings trumped the potential returns gained from selling a house after owning it for several years.
The only exception to this rule was the case of homeowners who bought during the early stages of the real estate bubble and then managed to sell at the peak in 2006.
For their part, the good professors don't beat around the bush when it comes to the intent of their study, which is to challenge the conventional thinking around homeownership.
There seems to be an almost national obsession with ownership, resulting in a paradigm that favors ownership. This work challenges this homeownership paradigm. The result of this paper show that renting was preferred to buying, from a monetary perspective, during most of the 1978-2009 time period.
So does this mean we should all put our homes on the market and rush out to find apartments?
Well not so fast. This would not only push rents through the roof, it is also a strategy that may not work for many people.
Basically, for renters to come out ahead, they need to be disciplined savers, pumping money they would otherwise be blowing on home repairs, local property taxes and insurance into mutual funds and other investments. That means being able to save more and spend less on vacations, Starbucks and the other small and not so small pleasures of life.
Moreover, as a long-term renter, you have to be willing to put up with living environments that may not be perfect for you - and that will change as well as you move from one rental unit to another. That may work better if you are single than if you have a family and need, say, an extra bedroom or two for the kids.
Here's the final twist: Given the decline in home prices and mortgage rates, the profs contend that we may actually be entering one of those periods where it now makes more sense to buy than to rent.
Also, if you have checked lately, the stock market hasn't exactly been producing big returns either.
Here are the profs again:
Presently there are indicators in place that strongly favor buying over renting. These indicators include higher than average rent-to-price ratios, near record low mortgage rates, and less favorable reinvestment opportunities.
Go figure.
