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Buying vs Renting a Home: What the Math Says

Paul Ausick

There are plenty of arguments favoring both sides of the rent versus buy choice of how you are going to pay for shelter. Probably the main reason to buy a home is to create personal wealth. After all, for most Americans, it's the most expensive item we'll ever acquire, and typically it increases rather than decreases in value.

For the more than 75 million U.S. homeowners, the Federal Reserve estimates the total value of the equity in their homes at $13.1 trillion dollars. That works out to $175,000 per household. According to Realtor.com, the median net worth of a homeowner is nearly $200,000 compared with just $5,000 median for renters.

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A simple way to understand that huge difference is to think of buying a home as a forced savings plan. Buying a home with a 30-year fixed-rate mortgage means that every month you are adding some portion of the mortgage payment to a savings account (your house) that is growing at least at the rate of inflation and usually even more than that.

A 2013 report from the Harvard Joint Center on Housing Studies makes the point:

While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.

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What are the downsides to homeownership? Well, as we learned during the recent meltdown in the housing market, what goes up can very well come down, and with very bad effects. The housing crisis, however, was the worst economic event since the Great Depression of the 1930s, so we can take some comfort from that.

Buying a house also limits a person's or family's mobility. As homeownership rises, unemployment rates tend to begin moving higher within five years, at least partly due to homeowners who are unwilling to sell up and move.

Then there are the other costs of homeownership: property taxes, homeowners insurance and maintenance, to name the most obvious. A renter does not have to pay for a new roof or a new furnace while a homeowner does. And these things aren't cheap.

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The rent versus buy decision depends mostly on personal goals. As a creator of wealth, homeownership ranks at the top for most Americans. By the time we reach 65 years of age, about 80% of us will own a home, compared with less than 40% of Americans under the age of 35. That's how needs and priorities change.

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