Rent vs. Buy: Millennials Weigh In
by: Smith and Howard Wealth Management
As the economy continues to shake off the effects of the Great Recession, the real estate market in Atlanta seems to have found its footing again. Home values in Atlanta are up 14% over 2014(1). Many neighborhoods are characterized by low inventory, and prices continue to rise.
It’s now more of a seller’s market than at any time since the downturn – which may lead some first-time homebuyers to conclude they are better off renting and waiting out the market. However there’s little evidence to suggest that we are approaching any sort of bubble burst that would bring prices down significantly any time soon.
Whether you are a millennial or are the parent of one, you know that home buying is not as high on the list for this age group as it was when Baby Boomers were in their 20s and 30s. The reasons are many.
For those trying to choose between renting and buying, there are several factors to consider. Here’s a debate held between two of our team members:
She says: I think Atlanta is a great place to own a home. At the same time, I recognize that the right choice depends on each individual’s situation. For instance, I’m planning to stay in Atlanta and know that my job is extremely unlikely to take me out of the area.
He says: And that’s not the case for everyone. Especially for people who are single and focusing on their career; those people need to be able to go where the jobs are. If you think your job may move you in the next three to five years, you’re better off renting. Or you may just be interested in exploring life in another city. Some people may want to be in Atlanta for a couple years and then move on.
She says: True, but if your plan is to stay put, I think this is a good time to buy a home: by historical standards, interest rates are still very low. And if you’re earning a significant salary, it can be to your advantage tax-wise to write off the interest on the mortgage loan.
He says: But it’s less of a tax-advantage if you’re in a lower tax bracket, and it makes even less sense to buy if you don’t have at least five percent of the purchase price to devote to a down payment. Without that minimum you won’t be able to get a loan. For high income earners, the tax advantages could be phased out if your adjusted gross income passes a threshold.
The other thing to be aware of is that private mortgage insurance (PMI) rules for FHA loans have changed since 2013. Now, if you can’t put down at least 20%, you’re on the hook for PMI for the life of the loan, which costs between .5% and 1% of the purchase price. On a $100,000 house, assuming a 1% fee, PMI will add $83.33 to your monthly payment.
She says: Another point to consider is the city you’re living in. Atlanta’s a little unusual in that it has a high population growth rate and a big portion of the influx is millennials, who are younger and tend to gravitate toward renting, which is at least partly responsible for driving up rents. I bought a condo and could rent it out today for 50% more than my homeowner expenses (mortgage, homeowner’s association fees, taxes and insurance). A similar dynamic is happening in Chicago, where it’s still cheaper to buy than to rent. But other cities might be different. It’s worth doing some research and analysis to determine if renting or buying is a better deal for where you want to live.
He says: On the plus side of renting is the opportunity cost. If you look at the S&P 500 from 1983 to 2013, average return was 11.3%. Real estate just can’t match that rate of return. Instead of tying up down-payment funds in your house, you can rent and put that cash in the stock market.
She says: Fair enough, but I have a different stat. It says from 1952 to 2005, the real rate of return on home ownership was 6.9%, while large cap stocks returned 7.3%. That .4% difference is not much – and then when you figure in the tax write-off on the mortgage interest – and the ability to invest those savings – that fraction of a percent is made even smaller.
He says: Risk is something else to consider. If you had bought a house in 2006, you would have been at the height of the market, and if you had needed to sell in 2008, it’s unlikely you’d have been able to do that without losing money. Between the years of 2007 and 2011, there were an unusually high number of sellers who had to bring a very large check to closing to pay off the difference between their mortgage loans and the price a buyer was willing to pay for their house.
Another plus for renting is that renters can’t get foreclosed on – which means they won’t suffer the expense, legal hassle or seven-year moratorium on taking out another real estate loan. And taking out a loan hits your credit score, so if you have any plans to buy a car on credit or make some other kind of a leveraged purchase soon after you buy a house, it’s unlikely you’ll be able to secure the additional loan.
She says: A lot of that risk can be avoided if you don’t buy more than you can afford – plus with a house you are building your credit, and eventually you will have proven yourself more credit worthy. And the sense of pride and sense of community that comes with home ownership is an intangible that I find very valuable.
What we’re saying is the answer to the question of whether to rent or buy is: It depends. This is a decision where financial planning and careful consideration should be core to the process.
Smith & Howard Wealth Management guides clients to making wise, well-informed decisions about many aspects of their financial situation. We are a team of experienced, dependable and approachable experts. We can help in the fields of investment management, tax planning, financial planning, estate planning and portfolio administration. Driven by a core set of values, we strive to fulfill our mission: We provide financial peace of mind.
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