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Buy vs Rent: Knowing the Right Time to Buy a House

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Home ownership is at an 18-year low of 65 percent. In California, only 44 percent of adults can afford to buy a home at today’s median price.

According to the S&P Case-Shiller Home Price Indices, home prices in May were 12.2 percent higher than one year earlier, the biggest annual gain since March, 2006. Dallas and Denver reached record levels and surpassed their pre-bust peaks set in June, 2007 and August, 2006.

Is it better to buy or rent?

Buying almost always holds strong advantages over renting. (This interactive calculator illustrates the break-even point, with customizable variables.) Indeed, some buyers feel a sense of desperation right now, in light of prices and mortgage interest rates going up so quickly, and are jumping off the sidelines to make their purchase. But others, especially those in bubble markets, are choosing to rent. (In fact, for investors, rental units might be a good move right now.)

Dallas and Denver are not the bubble markets in which buyers should postpone or forego a home purchase. “I wouldn’t make too much of the Dallas-Denver records because they weren’t really boomy cities in the past and they don’t look that boomy right now,” said Robert Shiller, Economics Professor at Yale University and co-author of the Case-Shiller indices, in a Fox Business News segment. The cities that bubbled in the past are the ones that are bubbling again – San Francisco, Phoenix, Las Vegas. Dr. Shiller notes, “a lot of people are choosing to rent now, rather than buy. And… they might be right.” In bubble markets particularly, the choice to rent might be the one that makes the most sense.

The right time to buy a home

Home ownership makes sense for certain people: those who are at the right age and who are ready to settle down, as well as those ready to upgrade (such as for a growing family), and even those ready to downgrade (such as for retirement). But in recent years even more buyers have been snatching up homes simply because prices and rates were at rock bottom and real estate looked like a good investment. Investors were largely responsible for the overall rise in prices from their lowest levels. Now, these gain-seeking buyers have, for the most part, changed their minds, perhaps permanently.

Home ownership really depends on traditional factors. Are you financially ready to make the purchase? Are your credit scores good enough to get the best loan? Do you plan to stay put for at least a few years? Do you expect your income to remain stable?

Unless you’re in a bubble market, buying will almost always save you money over renting.  Market conditions don’t warrant panic, but every percentage point rise in interest rates causes a 1.35 percent reduction in affordability. Those who buy sooner will see more financial advantages than those who postpone.

 

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