Home ownership vs. renting: What’s right in today’s market

Q. Where does homeownership fit in with today’s depressing news?

A. There is no question that we are in a period of unprecedented economic uncertainty. Jobless claims are up and home sales are way down, and it seems harder than ever to borrow for any worthwhile purpose, including buying a house. So does it still make sense to buy a house? Here are some thoughts:

» Buying a house today is likely a long-term investment. The days of buying a house this year and selling it next year for a big profit are behind us, and will likely stay that way for a while. So it probably doesn’t make sense to buy a house unless you are fairly certain you intend to stay in one place for a few years.

If your employment situation dictates that you may be transferred in a few years, or if you expect a job opportunity to open up elsewhere in the next several years, you may be better off renting than buying a house of your own.

Remember that the principal pay-down on your mortgage in the first five years of ownership is almost nothing, and that we simply cannot predict any rate of appreciation for the foreseeable future. Yes, most economists believe that this current malaise will end, but there is no general agreement on when. And there is a real chance that your home will be worth no more then than it is now.

» One of the downsides of real estate is that it tends to have high transaction costs. By that I mean that there are substantial expenses associated with the purchase and sale of real estate that you may not be able to avoid. For example, when you buy a house, there are likely fees paid to the real estate agent and to the lender and closing attorney. These fees often run into the thousands of dollars. And even though you may have talked the seller into paying these fees, they are effectively included in the price of the house and cannot be recovered.

Likewise, when you sell, today’s buyer expects you to pick up the tab on many of the costs associated with the sale. Unless your house has appreciated more than has occurred recently, you may have to bring cash to the table simply to make a sale.

» Renting is not just for financial idiots. In years past, buying a home was such a no-brainer that renters seemed like your dimwitted cousin who ate white paste in first grade. Not so today, as the freedom to end a lease and move where a job calls is smart planning. In addition, because so many homeowners can hardly afford their mortgage payments, many have turned to renting as a way to supplement their income.

So if you shop around, you may very well find yourself in the position of renting a very nice house where you are paying less than the actual cost of ownership. In other words, the owner may actually be subsidizing your rental.

Know that the day may come when renting is once again regarded as a less-than-savvy financial move, but that is not the case today.

» When you buy, consider multiple exit strategies. In the best of all worlds, the home you buy will serve you well for many decades, allowing for inevitable family changes and giving you joy and satisfaction along the way. But if that isn’t the case, and if the home selling market happens to be rotten when you need to sell, consider alternative strategies.

In other words, could you rent the house to cover the payments, if you had to do so? This is more realistic with lower-priced homes than higher-priced ones, giving more weight to the argument for entry-level homes instead of palatial ones.

» Take advantage of market weaknesses. The other side of the coin is that today you can take advantage of reduced prices and the lowest interest rates we have seen in a generation. If owning makes sense, then now is certainly the time to buy.

The concept of value always boils down to supply and demand, and right now there is a huge supply of “ugly duckling” houses owned by banks that are under pressure to sell them, sometimes at discounts of 50 percent or more.

If you are willing to spend some time and money on cosmetic improvements, you can save a bundle on purchase price, but this game is not for the weak of heart. You’ll need patience, deep pockets, time and more patience.

» Use professionals to your advantage. Today is no time to go it alone in the real estate market. A diligent search coupled with experienced professional representation and plenty of patience can yield remarkable bargains. But it’s critically important for you to have a “beginning to end” game plan that includes advice from your agent, your attorney and your lender.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.