After completing her medical residency in Buffalo, N.Y., she had landed a new job at the local hospital in the seaside city where she grew up. Roettinger, 35 (pictured), knew she'd be staying awhile. To save money for a down payment, she lived in a rental condo. Then the buying bug bit. After looking at eight properties this spring, she found a house with the size, location and price she wanted.
"I don't think this will be my forever and forever house, but it will be for the next five to 10 years," she says.
What Is Your Five-Year Plan?
Roettinger's story highlights the most important question for home buyers: How long are you planning to live in the house? At the minimum, real estate professionals and financial advisers agree that buyers should plan to own a home at least five, if not seven years, to make it worth it. Less time than that, and the transaction fees and payments typically don't make money sense.
During the housing boom, extraordinary home-value appreciation distorted the conventional wisdom of the five-year rule and many people rushed to buy regardless of their time horizon. The recession and housing crisis sent the pendulum in the other direction. Many are now starting to ask the question: Is buying a house worth it? Is it still the solid economic and social investment it once was?
"There has been an over-correction in terms of psychology and home buyers are overly suspicious," says Stan Humphries, chief economist at Zillow.com, about the current home-buying market. "But they need to get into a place of pragmatic decision making. Break out a pencil and run the numbers, use calculators, look at the price of the house, value and estimate for rent. That can help people think through the decision more."
Run the Numbers
For potential buyers whose time-frame is hovering around that five-to-seven-year time horizon, finding the tipping point between when it's smarter to rent or buy depends on the metropolitan area and local price-to-rent ratios, says Humphries. Some cities such Los Angeles, New York and San Francisco historically skew toward renters, while others like Miami and Detroit don't require much time living in a property to make home ownership worth it.
There are many tools online (Zillow.com, Trulia.com or Realtor.com) and books to walk potential buyers through the jungle of metrics. One place to start is the price-to-rent ratio. The ratio represents the price of the house divided by the annual cost of renting a similar one. For example, in a market where a three-bedroom house costs $500,000 and the monthly rent for a similar home is $2,000 or $24,000 annually, the price-to-rent ratio is about 21. Generally, if the ratio is above 20, the scales tip toward renting, especially if there are other factors that could cause you to move sooner. If the ratio is below 15, then home ownership starts to be more attractive.
Another metric for gauging a local market is the transactional velocity, which is a fancy way to say the length of time it takes to sell a house. Houses may be affordable where you're looking to buy-- but if your plan includes moving after five years, selling one may take longer than you can afford. For renters, vacancy levels can indicate where the prices are headed. A high vacancy rate means better deals for tenants.
Omid Kahangi, 37, recently moved to New York City for his career as a television producer (you can thank him for the The Real Housewives of New York City and The Ultimate Fighter) and he wasn't sure whether to rent or to buy. He had budgeted between $2,500 and $3,000 a month for an apartment. In Manhattan, that can fetch approximately 700-square-feet in a chic neighborhood.
"My accountant suggested renting," Omid says. But several factors started to nudge the scale toward buying for him: lackluster rental inventory, low selling prices and the long-term prospect of property-value appreciation in the city.
The real tipping point came when his broker ran the numbers for him. With a selling price of $505,000, a one-bedroom apartment in New York's West Village was cheaper to buy than to rent. A 20% down payment and a 30-year fixed-rate mortgage at 4.5% interest-factored in with the monthly maintenance of $701, brought Omid's total gross monthly cost to $2,748. His monthly tax savings added up to $672, lowering his total cost of ownership to $2,076 per month -- well below his rental budget of $3,000.
"It made financial sense to me since I had the cash to do this, especially with the threat of inflation today," Omid says about the new one-bedroom apartment where he plans to live. "This is my way of investing. This is my retirement. I don't have a 401(k) because I am a freelance employee. I can always rent it out and have it be a source of income to me in the future."
Make a Sustainable Decision
Jane Hodges, author of Rent Vs. Own (Chronicle, 2012) emphasizes that the decision whether to buy a house or continue renting must be a sustainable one, both in terms of finances over time as well as with quality-of-life issues.
"Consumers not only need to be qualified and educated to buy a home," she says. "They also need to stay in their home and have a basic level of financial literacy to make decisions." Buyers can typically afford a home that costs around two-and-a-half times their annual household income.
She ticks off a list of questions potential home buyers need to ask themselves: Is the commute realistic? Can I make the purchase without draining every last drop of my savings? Does the neighborhood offer what I need? What are the peripheral costs for maintenance and utilities? Can I still save money and invest in addition to pay for my house? Do I have an exit strategy if I need to sell?
Ongoing costs in time and money for homeowners shouldn't be underrated. Insurance, property taxes, maintenance and repairs, home owner association fees add up. Owners should budget 1% of the cost of the home for maintenance each year. For renters and owners alike, the sweet spot for total housing costs shouldn't be higher than 25% to 28% of monthly expenses.
Stay Mobile With Renting
Peggy Alford, president of Rent.com, says renting suits people who value mobility and have lifestyle demands beyond their neighborhood. "While renters may be able to afford living in nice neighborhoods, when it comes to purchasing, they often must look farther afield," she says. "That might mean distant suburbs that take them away from a quality of life they love." (Read also Apartment Hunting Essentials: 6 Online Tools)
One-third of Americans rent their housing, according to the National MultiHousing Council, and renting is increasingly being seen as a viable financial long-term alternative to owning. Blended families, the possible need to move for work, other mobility requirements and gasoline prices are other factors that are increasingly playing into the debate over whether to rent versus buy.
Audra Jones, 36, embodies the push-and-pull between the value of home ownership and the flexibility of renting. As a divorced mother of three teenagers in the Atlanta area, she moved her family several years ago to a suburb of the city in Clayton County to share the house her partner owned. But problems with the local school system, along with her $150 weekly gas bill, recently sent her back into the city looking for a rental, where she will be closer to work and better schools for her teens. She says her budget for a rental is $1,200.
"The rental is fine as long as you have a landlord who is easy to work with," Jones says. "It's nice to own your property, but there is a lot that comes with that, like maintaining the lawns and taxes."