Regardless of whether you own a home or rent, it’s likely that you aspire to one day achieve homeownership. Surveys indicate that a significant portion of Americans desire to own their own homes. For instance, in a 2020 survey conducted by the personal finance platform NerdWallet, 84% of participants indicated that purchasing a home is essential to them.
In the past, there was a prevailing belief that millennials were uninterested in homeownership and would be lifelong renters in urban locales. However, the largest group of current homebuyers consists of millennials.
“There’s no significant variation in the desire for owning a home across generations,” states Mark Palim, deputy chief economist at Fannie Mae. “All of our surveys reflect that the majority of individuals wish to own a home. We were taken aback by the fact that the appeal of homeownership didn’t significantly decline even after the housing market downturn.”
The transition from renting to owning tends to take place around the early 30s, according to Palim.
“As younger generations enter their 30s, we observe a new wave of buyers,” he explains. “Millennials took a bit longer to make this shift due to challenges posed by a sluggish economy. They often lacked sufficient income or creditworthiness to purchase homes and faced burdens from student loans and credit card debt, making it difficult to save for a down payment.”
According to the National Association of Realtors’ 2021 Home Buyer and Seller Generational Trends Report, millennials represented 37% of homebuyers, while baby boomers comprised 32% and Gen X accounted for 24% in 2020.
From the oldest baby boomers to the youngest members of Gen Z, as well as the millennials and Gen X in between, the preference for homeownership significantly outweighs the appeal of renting. Nevertheless, numerous individuals value the flexibility and lack of responsibility that come with renting, as well as the freedom from home maintenance expenses. So, how do you determine what’s appropriate for you?
The Argument for Renting
While it’s common to assume that renters are primarily younger individuals who cannot afford to buy a home, the Harvard Joint Center for Housing Studies report America’s Rental Housing 2022 indicates that wealthier households are increasingly opting to rent. These higher-income households were responsible for 70% of the overall growth in renter households from 2009 to 2019. Many are motivated by the challenges associated with finding homes for purchase due to skyrocketing prices and minimal inventory. Furthermore, numerous people prefer renting, especially if they can reside in a desirable location with amenities like swimming pools, fitness centers, and concierge services. Recently, an increased number of rental opportunities for both apartments and single-family homes have emerged in suburban and smaller city areas.
“Individuals may lean towards renting if they plan to stay in a location for less than five years,” remarks Jeff Tucker, a senior economist at Zillow. “Many appreciate the adaptability that renting provides, as moving in and out of rental units is far less expensive and complicated than buying or selling a property. Entrepreneurs, in particular, often wish to avoid being tied down to one location while they build their businesses.”
Another reason for choosing to rent is a lack of available time: “Owning a home demands maintenance, and even if you hire professionals for tasks like painting and gardening, coordinating and overseeing contractors takes time,” Tucker explains.
Home maintenance also incurs expenses, often exceeding what homeowners initially anticipate. A 2021 survey conducted by Bankrate highlighted that the most common regret among recent homebuyers was their unpreparedness for the ongoing maintenance and expenses linked to homeownership.
The Allure of Homebuying
Even though the desire to purchase a home remains unchanged, motivations shift in response to economic and social factors.
“People are increasingly recognizing the potential for property value appreciation and the benefits of low mortgage rates, leading them to view homeownership as a worthwhile investment,” comments Nadia Evangelou, a senior economist and national forecasting director for the National Association of Realtors. “Among millennials, 86% in a recent survey expressed that homebuying is a sound investment, and 44% believed investing in real estate is more advantageous than buying stocks.”
Individuals who purchased a home at median price levels in January 2021 saw their equity grow by over $50,000 by January 2022, as Evangelou highlights.
“In our surveys over the past 18 months, we’ve observed a significant shift, with many people who were previously hesitant about buying opting to purchase sooner rather than later,” notes AJ Barkley, a neighborhood lending executive at Bank of America. “The pandemic has made proximity to restaurants less critical, leading people to focus on having additional space, yards, and communities that they appreciate.”
For young adults aged 18 to 25, which includes Gen Z and the youngest millennials, surveys from Bank of America have found that many consciously choose to save for home purchases.
“The youngest survey respondents expressed their willingness to postpone vacations and wedding plans to expedite their home-buying processes,” Barkley states. “They recognize the wealth-building benefits that homeownership can provide.”
As reported by the Federal Reserve, the median net worth of homeowners is nearly 40 times that of renters. In 2019, homeowners boasted a median net worth of $255,000, compared to renters’ median net worth of $6,300.
“The increasing cost of rent is a major factor driving homebuying for all generations,” Barkley notes. “With a fixed-rate mortgage, homeowners can secure a steady principal and interest payment for up to 30 years, eliminating concerns over rental price hikes.”
Average rental rates climbed by 16% in 2021, according to Zillow. While this leap is exceedingly steep, rent increases are not uncommon. However, finances aren’t the sole motivator for buying.
“During the years 2004 to 2008, many sought homeownership with unrealistic expectations regarding price appreciation,” Palim reflects. “In the past decade, buyers are increasingly citing non-financial factors for their decisions, such as the desire for autonomy to personalize their living space and to establish roots within a community.”
Factors to Ponder
Several key aspects may influence your decision to buy or rent, including:
1. Future Life Plans
While no one can predict with certainty where they will be in five years, the substantial costs associated with buying and selling property suggest that experts typically advise owning for at least five years to accrue equity. If there’s a possibility that you may relocate to a different city or neighborhood, or if your family size may change in the near future, renting might be the preferable option. Alternatively, you may purchase a home and later convert it into an investment property if you choose to move.
2. Financial Feasibility
Even though mortgage rates are forecasted to rise to 4% by the end of 2022 according to the Mortgage Bankers Association, purchasing a home remains more feasible than renting in the majority of housing markets, Evangelou observes. The average monthly mortgage for a median-priced home in January was $1,260, in contrast to the median rent of $1,540.
However, in expensive markets like New York City, Seattle, and San Francisco, renting can be more financially practical than buying, Tucker notes.
Currently, over 35% of renters can afford to purchase a typical home, as estimated by Evangelou. The primary challenge for most potential buyers is locating a home within their budget, particularly for entry-level options.
3. Inflation Concerns
Homeownership can serve as a safeguard against inflation, according to Tucker.
“With inflation recently hitting its highest level since 1982, individuals may want to consider securing a fixed payment for 30 years with a mortgage,” Tucker advises. “Few financial instruments offer that level of assurance, which becomes increasingly attractive in an inflationary environment.”
4. Cash Flow Availability
You’ll require funds for a down payment of 3% or more, in addition to closing costs that typically range from 2–5% of the purchase price. Additionally, it’s wise to have emergency funds and money set aside for repairs. Many real estate professionals suggest allocating 1% of your home’s value every year for maintenance. Renting can enable you to save more money in preparation for a future home purchase or to invest in alternatives to real estate.
5. Overall Expenses
Renters typically pay rent, along with some utilities and parking fees. Homeowners bear extra costs beyond principal and interest on their mortgage, including property taxes, homeowners’ insurance, and possibly homeowners association fees.
6. Tax Implications
Homeowners may deduct mortgage interest and property taxes, subject to specific limits that fluctuate depending on changes to tax legislation. Additionally, current regulations provide exemptions from certain capital gains taxes upon selling if you meet residential requirements. Renters do not qualify for similar tax advantages.
7. Risk Tolerance
Both renting and buying involve some degree of financial risk. As a renter, you face the possibility of rent hikes and the chance that your landlord may choose not to renew your lease. However, if you reside in a rent-controlled area, you’ll at least have insight into the maximum allowable rent increase.
As a homeowner, it’s essential to remain aware that property values do not consistently appreciate, Palim cautions.
“Purchasing a home isn’t a guaranteed success,” he explains. “While property prices are not expected to drop, they are projected to appreciate more slowly in 2022 compared to 2021.”
Though real estate has a historical tendency to appreciate over the long run, homeowners must accept the potential risk of owning property that may decrease in value.
Ultimately, your decision to rent or buy hinges on various factors, including your desired living situation and duration, local market conditions, personal lifestyle preferences, and your financial situation and aspirations. Consulting with a mortgage lender and financial advisor can clarify the fiscal facets of your choice.
