To be or not to be … is not the question. It’s to buy or not to buy. And it is always better to buy, right? The answer is a definite maybe.
Clearly, home ownership has merit. There are tax benefits and the proverbial pride of ownership. The opportunity to build equity is also appealing.
But there’s also a dark side to home ownership, witness the Great Recession. Entire books have been written about that, including one by me, Cash In on the Coming Real Estate Crash. This book was published in January, 2006, so it was designed to address the crash that is already behind us. But the book also details the history of past booms and busts. Short story, real estate crashes are nothing new and they are going to happen again.
Setting aside cyclical price fluctuations, an important concern any buyer should have is the transactions costs of moving an illiquid asset like a home. There are title insurance, brokerage commissions and at least in Wisconsin, transfer taxes. A potential trip hazard is that the transaction costs to getting out – selling – are much higher than the typical costs to buying.
How Long Will You Be Staying?
A recent study in the New York Times indicated that buying is better than renting after five years. Interestingly, the national average length of tenancy is about two years. Which is to say that every one of these tenants that moved after two years almost surely made the right choice. Two years is just not enough time to recover the transaction costs. The same thinking probably applies to tenancies of three and four years.
Finally, the question of home ownership is hardly a function purely of number crunching. In my opinion, lifestyle plays an equal or greater role. Come back to this blog next time to hear more about the lifestyle debate between owning and renting.