The Risk of Renting vs Buying

The Risk of Renting vs Buying

Is the Market too High to Buy??

Is the market too high to buy a home right now? We get this question constantly, and it makes sense given recent history. The crash and recession of 2008 is all too fresh for many of us. But what if we told you the math may not play out how you are thinking? What if we told you even with a 10% drop beginning just two years after you buy, you would still be better than renting and waiting for the market to mellow? Instead of just telling people that, we decided to play out a scenario with actual numbers for you! And we are excited to share!!

We recognize your preferred numbers may be above or below these figures for your purchase price/rent, or maybe you want to adjust the percentages we used for market growth and decline. Unfortunately, we can't play out endless scenarios here, but if you want adjustments, reach out with the numbers that are more applicable or relevant to you and let us run the scenario for you!! 

Housing Market History

So here’s what we did: We began researching market behavior in and around recessions and around supposed dips in real estate value across the country. The results were interesting, to say the least.

Did you know that the housing market as a nation experienced a nearly 50-year run of growth from the 1940s-1990s? There were a few very minor and short lived dips, but they were mostly just periods of values flattening out that would be followed by years of growth again. If adjustments are made for regions and inflation the dips grow, but as a whole, the trend is undeniably up. This isn’t proof that a dip can’t or won’t happen again, because it certainly will. However, it does tell me that ‘fear’ as a product is sold successfully through the media. I can’t begin to count the number of people I have heard say that the market has peaked in the last 5 years. I bet you've heard it too.

Breaking Down Buying Now vs Waiting 

Let's just say for a minute that we do see a dip in the near future. We began exploring what that might look like for a buyer who’s considering shopping right now. I think and hope that if you consider these numbers, it may help calm some of that fear.

(These figures are for illustration and not a quote for a loan or a prediction of the future.)

Ready?! Bob buys a home for $600,000, and his brother, George, decides to continue to rent for $3,200 a month. Bob puts just 5% down and has great credit, locks in 3.25% interest, and his all-in payment including taxes and the dreaded PMI (private mortgage insurance) totals $3,324.93. 

The year 2022 is projected to see home values grow by just 5.2%. 2023 is generally considered to be a flatter year at this point, so we factored in just 2% growth (actual projections).

Then the dreaded and expected dip in home values begins in 2024, and we see a 10% drop in median home prices. (Again, this is a scenario created for illustration of numbers.)

Even after the crash hit its valley at the end of 2024:

Bob’s equity = $44,819

Bob’s tax deduction over the 3 years = $76,891

Oh, and Bob got to have the peace of mind of settling into his home and not being forced to move.

Meanwhile, George spent $121,056 on rent, had to move once, and had $0 tax deductions for his 3 years of renting… Also, that same home he could have purchased at $600,000 is now for sale at $579,441 (this reflects the 10% drop). In theory, this lower price point sounds like a win, but based on historical trends, interest rates will move up to help control inflation. Now interest is at 4.25%, for example. George's monthly payment with 5% down = $3,531. That is $206/month more than if he would have purchased the home at the beginning in 2021 when the market was hot. Sorry, George.

Hopefully this illustration helps you feel clear and confident to make the best and most educated decision for you and your family. As always, let me know if you have any questions or want help with anything!

Contact me for your customized senario!!

*We realize some of you may like to see a table and how we arrived at the numbers. We're happy to show you, but we felt it may be overwhelming to share all the math here. Please reach out for any additional resources or specific numbers.