The debate over why households choose renting over purchasing a home in the United States has been a hot topic lately. Analysts have indicated the young generation of millennials are not interested in being tied down to home ownership and prefer renting over buying. However, an article published by CNN by Daniel B. Kline, points out that it is not just millennials who are opting to rent instead of making a home purchase. Kline also notes that the decision to rent may not be a lifestyle choice, but a financially driven decision.
It is true that the number of households renting a home has increased over the past decade; almost by 10 million. It is also true that 65 percent of household headed by those 35 years old and younger rent their homes. However, it’s the heads of households aged 35-44 that made the biggest increase over the past decade. In this age group, “the percentage of renters jumped from 31% in 2006 to 41% in 2016”. Heads of households between 45-65 renting homes also increased over the past decade.
However, these households may not all be renting based on lifestyle choices. In fact, research indicates that many who rent homes would actually like to purchase a home someday. Further, surveys show that 65% of renters indicated that they are renting homes due to circumstances, not purely by choice. Circumstances such as increased home prices and tougher mortgage standards may be partially to blame.
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When deciding to buy a home or rent a home, the lists of pros and cons for buying or renting can be overwhelming. Depending on the current market conditions, it may seem obvious which choice is more economical. When rates are low and prices are low, buying a home appears to be the best choice. However, as mortgage rates and housing prices begin to increase, renting a home is an option that might seem more economical.
However, an important factor should be considered before deciding to rent instead of buy, even as mortgage rates increase and home values begin to rise. According to an article published by Realtor.com, The Misleading Math Behind the Rent vs. Buy Calculation, “…homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.”
A closer look at the comparisons between the cost of buying versus renting reveal some long term advantages to owning a home and uncover some details worth considering. It is common knowledge that part of each monthly payment go toward the equity a homeowner has in their property with a fixed 30 year mortgage. Additonally, as the home owner gets further into the lifetime of the mortgage, the amount they are paying into their own equity begins to increase. An important detail to note, which may not be a common consideration, is that the payment amounts are actually “frozen” for the lifetime of the mortgage. It is unlikely that a renter could expect such a guarantee.
Homeowners know what their housing payment will be for the next 360 months, not many landlords are willing to lock their monthly rental rate beyond a year or two. Further, homeowners are, in essence, locked into a “forced savings plan” where they pay some percentage to their own equity each month. This reason, alone, is the primary factor which makes it more feasible for homeowners to accumulate wealth.
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