Unlike the stock market, which is setting at record highs, the housing market has yet to recover from the depths of the last recession. While real estate sales and prices are trending higher and are clearly better off than they were a few years (or even months) ago, a full recovery is still far off.
That's not necessarily a bad thing, since it gives more people more time to take advantage of still low prices and interest rates. Nor is it a good thing, since it means as much as one-third of current homeowners are still underwater with their mortgages (eg. they owe more than the property is worth).
But with prices up, inquiries on the rise, and the spring selling season in full gear, it remains to be seen how this uptrend will play out.
For this installment of Investing 101, Shari Olefson, noted real estate attorney and author of the new book Financial Fresh Start, walks us through the basics of renting versus buying when it comes to making the investment of a lifetime.
1) Follow the "Rule of 15"
Before you make the decision to rent or buy, Olefson offers this rule of thumb: "If you can buy a home in your area for less than 15-times what your annual rent is, than financially it makes much more sense to buy than to rent."
For example, if you pay $2,000 a month in rent (or $24,000 a year), she says the basic buy-rent cutoff price would be $360,000.
However, she warns that if rental rates in your area are abnormally high or the home you are looking at will need repairs, you must factor that in. Of course, she says "this is only one of several factors to consider," but adds it is still "a great line in the sand" for narrowing down your initial search.
2) Determine What You Can Afford
Olefson says affordability is another key variable to consider. As a rough guideline, she suggests looking at properties that cost no more than 2.5 to 3 times your annual income on housing.
More...Even if you wanted to spend more, she says the mortgage market has changed drastically and financing requirements are much more strict.
"How you look on paper, what your credit looks like, and do you have the 20% down payment," are also going to be factors of affordability to consider, as will your employment history.
3) Market Conditions
Whether you rent or buy, the laws of supply and demand certainly apply to housing prices. Right now, Olefson says for a number of reasons, there are simply fewer houses for sale than usual.
"We have four months worth of inventory right now, normally we have over six months," she says, "that's about a 25% decrease from this time last year, which is huge and what is driving those prices up."
To be fair, she conceded part of the reason there are so few listings is because so many sellers are unsure about the market right now and whether or not they want to be in it. Still you have to be careful since national statistics smooth over some of the big statistical differences that vary from market to market, such as foreclosure and unemployment rates.
4) When to Become a Tenant Again
"The same formulas apply," Olefson says, but that is really "a lifestyle feature" type of question; such as whether or not you may be moving or retiring in the near future. Even so, she says it's a good idea to look at the local market and familiarize yourself with prices and rents and then run the numbers to see if ''it makes more sense to rent or to own your own home."