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Posted by on Jul 19, 2012 in Thinking of Buying? | 13 comments | Print Print

Rent Vs. Own

Commenter ‘D Man’ says that you can debate the Rent vs. Own until you’re blue in the face.  We should examine the differences from time to time to note any changes – here’s a link to our discussion two years ago.

Livinincali already left this comment in the previous post:

Of course there’s a new generation that’s been burned by the stock market, burned by the housing market, burned by college debt that are the next wave of producers.  Those producers are the ones you’re going to need to sell too and if they don’t value assets the same way you do it might be hard to get top dollar.

All previous generations believed in the American Dream of homeownership.

Will the trend be broken?


Today’s buyers have both the cash and confidence to feel comfortable buying – they must, because there are plenty of reason not to buy.  But is renting one of them?  How attractive is renting to those who are flush with dough?

Reasons Not to Rent

  1. Potentially-rising rents vs. locking into a low 30-year fixed rate.
  2. You wonder if the landlord is making his mortgage payment.
  3. You fear that the landlord might want to move back in, or otherwise make you move.
  4. You hope that he fixes stuff properly, and promptly.
  5. Fear of renting forever (not applicable to all).

Renting does offer maximum flexibility, freedom from home repairs, and tolerance of imperfections – you might be able to live with some stuff knowing that you will only be there temporarily.

Reasons Not to Buy

  1. Inhibits flexibility to move again.
  2. Difficult to secure the right house at right price.
  3. Repairs can be costly and very distracting.
  4. Ties up a big chunk of cash.

Homeownership does provide a sense of accomplishment/putting down roots, the ability to determine your own destiny, a decent tax write-off for now, and provide a work project for those so inclined.

But a factor that should get more attention is the haves vs. have-nots.  The affluent are buying at these prices, and keeping homeownership out of reach for the common man.  If the affluent are willing and able to hold properties in perpetuity, then there will be less reliance on future generations to pony up.


  1. Those are all very valid reasons to buy or rent.

    But from a purely economic perspective, it all comes down to inflation. If we get inflation, you definitely want to buy. If we don’t get inflation, you definitely want to rent.

    With 8% GDP deficits and neither party even hinting at austerity, and Zimbabwe Ben at the helm of the Fed monetizing the debt all the way, I’m betting on inflation.


  2. Jimbo, looking into your crystal ball, what do you think the real likelihood of the mortgage interest deduction going away is? I’ll ask around at work also and report back. I feel like lots of people, including myself, rely somewhat on the interest deduction as a mid-range reason to buy. Keep preachin’ the truth!


  3. osidecompass,

    Mortgage interest deduction is only likely to be phased out very very slowly if at all.

    Most likely scenarios are no change or gradually dropping the cap from a million to something like a half million or so.

    I think you’re pretty safe if you’re talking about mid-range homes.

    Congress is on the take from the real estate lobby, plus the last thing they want to do is hurt the economy more by delivering another blow to housing.


  4. Agreed, there are plenty of other things to fix before they get to the MID. It would take a full-scale revolt for for it to change anytime soon, and I don’t see any signs of Americans getting ready to take on the government.


  5. At these interest rates the MID really isn’t that much. Assume $500K purchase at 3.5% interest. In the first year which is the best year for the interest deduction you pay 17347 in interest. Assume you got your stuff together and make over $100K per year and all of this is the in 25% tax bracket so your tax reduction is 17,347*25% = $4336.

    Of course at the same time you’ve just committed to paying property taxes which are $500K*1.12% = $5600. You get to deduct those as well so let’s add 25% of $5600*.25 + 4336 = $5736. So your great tax deduction nets out to be $136. In CA with our relatively high income tax you make out a bit better, but it’s starting to become more of a shift in who you pay rather than an actual tax break.

    At 6%, 7% there’s a real benefit at 3.5%, 4% it doesn’t amount to much in net.


  6. “Will the trend be broken?”

    That’s a good question. There’s factors in play right now that we haven’t seen in previous generations but it’s also possible that that American Dream of owning will trump those factors. There’s a significant amount of college debt, there’s a lack of inheritance for the average folks, there’s significant under employment for college graduates, but that might not matter. A rational person would think that matters, but people don’t necessarily make rational decisions when choosing to buy a home so why would they start now.

    Personally I don’t see the value in buying now. Why would I want to trade 25% of a engineers productivity for 30 years to buy a place that a Elisted Miltary could have afforded 30-40 years ago in a place like Mira Mesa. The supply is certainly limited in central locations and the price has been driven up by demand from new families that have 2 college educated parents. Maybe it will always stay that way but my bet is that eventually demographics will take over and it won’t. I could very well be wrong.


  7. It is important to factor the standard deduction into your calculation of tax savings. Here are the standard deduction amounts for 2012:

    Single: $5,950
    Head of Household: $8,700
    Married Filing Joint: $11,900
    Married Filing Separately: $5,950
    Qualifying Widow/Widower: $11,900

    As livincali pointed out, there isn’t much incremental benefit when interest rates are so low.


  8. Home ownership will always be encouraged by government as it saddles people with debt and anchors them firmly into the worker bee class, which society needs to function.


  9. I’ve been both a long-time renter and a homeowner. They each have their time and place in a person’s life. I’ll never say that one is superior to the other – it all depends on what your particular situation is.

    Renting is great for young people and childless people, who enjoy the freedom of being able to up and leave, and who also like other people to maintain the property.

    Purchasing is great for people with young children who want stability and “roots”.

    I’m sure there are plenty of other pros and cons for each side, those are just my own personal experiences.


  10. @livinincali it’s true that the deduction is pretty much cancelled out by the property tax, but it still helps when you’re a single taxpayer. The deduction isn’t as useful for married, unless both spouses make the same level of income.

    But for single with $15k in deduction plus the state tax, property tax, and 401k, your taxable income goes down a lot. From $100k down to $60k. At that point, you’re paying something like 14% effective tax rate.

    Also if inflation ever pick up, then rent and prices are going to rise. Then long-term homeowners generally benefit in that case.


  11. “Also if inflation ever pick up, then rent and prices are going to rise. Then long-term homeowners generally benefit in that case.”

    This is probably the one thing that encourages people to buy more than anything else. The fear of inflation coupled with the ability to lock a super low interest rate for 30 years is very compelling to today’s buyers. Everybody thinks well inflation has to hit and rates have to go up, but we’ve been saying that for the past 2 or 3 years now.

    If we get a long slow deflationary recession or depression you better love what you buy because you could be there for awhile. That’s not so bad for some, but it could also be an unfortunate chain around your neck. Of course if we do inflate our way out of debt which isn’t a bad bet then you win by not waiting and buying now.


  12. After looking at a couple of houses, not going through the hell that is the process of buying a home is enough reason for this renter to remain mortgage free. Call this the “JtR was right” argument.

    Low rates and easy credit don’t make anything cheaper, I thought this was covered already.


  13. All I can say is that I am a renter (to other people) I own 4 houses and 4 cottages and at the age of 55 while not owning a new car need never work again at something I don’t want to for the rest of my life (barring political hoo has here in South Africa)



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