What Rent vs. Buy Analyses MISS!

Rising Rates Alter Calculus of Buying vs. Renting

The above headline is a link taken directly from the WSJ.

I am blogging about it because rent vs. buy analyses are often ridiculously misleading and they miss so much!

A typical rent vs. buy calculator like Freddie Mac’s will look at the total cost of renting (including renter’s insurance) over a period of time against the total cost of owning a home over the same period of time (and account for closing costs, total housing payment, appreciation, and maintenance costs, among other things).

The analyses, however, are far too “financial” and objective, and here are just a few of the things they miss:

  1. Forced Savings/Housing = Nest Egg: Housing payments are very effective “forced savings plans” because missed payments will destroy credit. And each payment is both paying down a loan and paying off an asset that will appreciate over time. In August, I blogged about some middle-class friends who bought homes at the worst possible times from a market perspective (Housing As A Nest Egg/Why Homeowners Have Far Higher Net Worths) but still ended up with $1.5 million in equity that they retired on.
  2. Refinance Opportunities: Anyone doing a rent vs. buy analysis now should do another based on 2% lower rates because I think there is a 95% chance they will be able to refi into a much lower rate. Rent vs. buy analyses, however, never account for refi possibilities.
  3. Stable Housing Payment: Rents always go up, but housing payments are fixed. Given how much rents have increased lately, the importance of this factor also cannot be overstated.
  4. Equity For Emergencies: Homeowners eventually build up equity (no matter what happens in the market) that can be tapped into for emergency needs, such as tuition, home repairs, medical bills, or temporary help if there is a job loss.
  5. Pride of Ownership: I see this come through in spades with the young people at JVM who have recently bought homes. They love their homes and turn them into showplaces for their own enjoyment and to entertain their friends and family.
  6. FREEDOM: This is probably the most significant missed item because it came up in a survey a few years ago as the biggest single factor that new homeowners appreciated the most: the freedom to renovate and/or to just do whatever the heck they want to their homes. The survey respondents indicated that they didn’t fully appreciate just how strong this factor was until they actually owned their homes.

Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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