Rent or Own a Home to Save?

picture of Rent Buy street signThe great rent or buy debate is never settled as much as it fades away until market and economic forces alter the equation and push it to the fore again. Now is such a time.

Though it depends greatly on local market conditions, in many parts of the country there are clear advantages to buying a home. The saying, "It's all about location," could not be truer. Many experts believe that the housing market correction as a result of the financial crisis that began in 2007 means that current home prices represent a real opportunity for those entering the market.

As the United States' population continues to grow, demographics tend to drive housing demand and the likelihood that house prices will appreciate. For those who see inflation as a factor in the years ahead, the security of fixed payments on standard mortgages for the next 15 or 30 years are a reassuring thought when contrasted with the prospect of rental fees that track with other cost of living increases.

But the debate is not clarified by recent housing difficulties. In fact, it has arguably become more complicated. The average national vacancy rate for rentals fell 17 percent in 2010 to 6.6 percent, according to Reis, Inc., which tracks rental performance data. What that also means is that rents are going up and getting tighter as foreclosures have left many former homeowners with no recourse other than renting.

Rent or Own a Home: The Buyers

One of the first and most compelling scenarios advocates of buying cite are the thousands of dollars spent on rent with no return on your costs. Assume a rental cost $1,000 a month — in 30 years that's $360,000 (not calculating any inflation). That's $360,000 with no return. For many, that alone is a deciding factor in the rent vs. buy dilemma.

Add the fact that in many cities hit hard by tough economic times, former homeowners have entered the rental market in large numbers, causing renting to become relatively more expensive. At the same time, the housing crash has made homeownership more affordable in most major cities.

Rent or Own a Home: The Renters

Many rental advocates suggest that the idea of a 30-year mortgage probably reflects an era in the past when jobs and opportunities were on a longer horizon. Today, the average length of time sellers are in their home is eight years. For those wanting the flexibility to pick up and relocate or who don't expect to stay in a home beyond the short term, renting certainly has its appeals. Rental advocates will also point out that it will require a steady home appreciation to cover all the costs of owning — down payment, property taxes, closing costs, mortgage interest, repairs and other expenses.

Looking at the rent ratio — the ratio of a house price to that of annual rent costs — the tipping point starts about 15-20 times annual rent. For example, in a neighborhood where the average house rental is $12,000 a year and the average comparable house cost is $180,000, buying a house for much more than that gets you into debatable territory. As a starting point of comparison, real estate websites like Trulia.com's offer handy lists of rent ratios in major real estate markets around the country.

The Rent to Own a House Debate: The Conclusions

This perennial discussion begs the question: is it a topic because as economic situations change, the balance tilts accordingly to one side or the other, like a seesaw after adding or removing weight? Or is it at the core, as much of a philosophical debate as it is an economic one where your conclusions are predicted ahead of time by your individual perspective? It's probably a bit of both. So, to figure out which option will save you the most money, start with Regions Bank's rent or buy calculator. For those wanting an intricate rent vs. buy tool, see The New York Times' calculator.

Look online at specific neighborhoods to compare the monthly cost of renting and the equivalent for sale listings. Rent in communities where prices remain high (New York, Memphis, Kansas City, San Francisco, Fort Worth) and buy in areas impacted by the housing crash (Miami, Las Vegas, Dallas, Jacksonville, San Antonio, Atlanta). In an undervalued housing market, the allure of buying is a compelling one.

And no matter which decision you ultimately make, you'll want to shop around for home insurance. An independent insurance agent at Regions Insurance Group can simplify the process, saving you time and money by getting quotes and comparing coverage from a variety of carriers.

Yet for those considering buying, the questions are often simpler than any rent or buy calculation: what is best for me, my family, right now? Buying a home is certainly more than a purely financial consideration. It is emotional. It involves life cycles like births and retirement. It involves the American Dream.

* Insurance products purchased through Regions Insurance are not guaranteed by Regions Bank or any of its affiliates and are not insured by any governmental agency.

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This information is general in nature, is provided for educational purposes only, and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Regions neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.