Have the money to buy a home? If you follow through, it may not be money well spent.
For generations, Americans have thought of homeownership as a hallmark of success. Even today, 74% of U.S. adults say owning a home is a cornerstone of the American dream — ranking higher than milestones like retiring, having a good career, getting a college degree or having kids, according to a recent Bankrate poll.
But there are reasons not to buy a home, even for those who can afford to do so.
“I don’t think it should be an automatic for everyone,” said certified financial planner Jude Boudreaux, senior financial planner with The Planning Center in New Orleans and a member of CNBC’s Financial Advisor Council. “You could live your whole financial life renting and be very happy.”
Here are three reasons it may be smarter to rent.
1. You're unsure about the long term
Prospective homebuyers should have conviction about where they want to live, said Kamila Elliott, a CFP based in Atlanta and a member of CNBC's Advisor Council.
For example, would they enjoy living for several years in a particular city or suburb, or in a specific neighborhood? If they had relocated for a job, would they still want to live there if they lost that job?
If the answer to any of those questions is no, renting is likely best, said Elliott, co-founder and CEO of Collective Wealth Partners.
"If you can't commit to being there [at least] three years, don't buy," said Elliott.
Flexibility is a big plus for renters, Boudreaux said.
For example, if you move to an unfamiliar place, "renting can be a nice pathway," he noted, in order to avoid buying and then discovering you don't like the location.
The benefits can be both psychological and financial.
Home prices can be volatile, making it more likely a buyer wouldn't make a profit if selling after just a short period of ownership, Elliott said.
Upfront transaction costs like realtor's fees are also generally "very expensive," making it harder to break even on a short-term home purchase, Boudreaux said.
2. You don't like the 'nuisance' factor
There's also a certain lifestyle benefit to renting instead of buying, advisors said.
Renters don't have to deal with the "nuisance factor" of scheduling appointments with landscapers and exterminators or paying for home repairs, Elliott said. That's typically a landlord's responsibility.
"You don't have to worry about fixing the dishwasher, garage door, or HVAC unit," Elliott said.
Depending on the building, renters may feel safer if there are additional security cameras or a doorman, or get convenience and social benefits if there are amenities like a gym or pool, she added.
Conversely, a house may be the right lifestyle choice for someone who wants a big yard with a nice garden and room for a dog to run around, Boudreaux said.
3. Benefits of ownership are 'vastly overstated'
Richard Newstead | Moment | Getty Images
The financial benefits of homeownership are "vastly overstated," Boudreaux said.
"Buying a home because you feel it's the thing you should do can be [financially] dangerous" and lead to regret, he added.
For one, a financial assessment of affordability is incomplete if consumers only compare monthly rent and mortgage costs. The true cost of homeownership also includes costs for utilities, home improvements and maintenance, property taxes, and homeowners insurance, advisors said.
The average homeowner paid more than $15,000 a year in addition to their mortgage to cover these costs in 2022, according to Clever Real Estate.
Secondly, a tax deduction for mortgage interest isn't as valuable as it once was, Boudreaux added.
A 2017 tax law passed during the Trump administration reduced the mortgage interest threshold; married couples can claim a tax deduction on the first $750,000 of their mortgage, down from $1 million.
In a general sense, it's also more difficult to get the financial benefits of a tax deduction. The law doubled the standard deduction (it's $27,700 in 2023 for married couples) and capped a deduction for state and local taxes at $10,000.
Taken together, a tax break for mortgage interest "is not the benefit it used to be," Boudreaux said.
Of course, owning a home is often seen as an investment, as well as securing a place to live.
Homeownership "allows families to build wealth and serves as a measure of financial security," according to a 2018 paper by Laurie Goodman of the Urban Institute and Christopher Mayer of Columbia University. Home equity can play an important role in retirement savings, for example, if retirees are able to tap that wealth, they wrote.
But there are "substantial variations" in homeowner experience based on factors like purchase timing, holding period and location, they said.
For example, wealth building depends on one's ability to hold on to a home during downturns; lower-income and minority borrowers are less likely to do so, and thus benefit less from homeownership, Goodman and Mayer wrote. Additionally, homeowner returns "have been less favorable" in areas like Cleveland and Chicago relative to other metro areas like Los Angeles, Dallas and New York.
Historically, residential real estate returns and those of stocks have been "very similar and high," according to a paper published by the Federal Reserve Bank of San Francisco, which examined global investments from 1870 to 2015.
But in the U.S., investors have gotten a better net return on stocks relative to housing during that time: 8.3% versus 6% a year, on average, after accounting for inflation, according to the paper.
Source: 3 reasons it can be smarter to rent, even if you can afford to buy
https://www.creconsult.net/market-trends/3-reasons-it-can-be-smarter-to-rent-even-if-you-can-afford-to-buy/
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