The Modern 2011 Riddle of the Sphinx: To Rent or Buy

Look at current real estate blogs and news and you will see the 2011 version of the Riddle of the Sphinx. Everyone seems stumped. Here you go; “A person is about to move into a new home. Should he/she be buying or renting that home?” According to Greek tradition, the mythical Sphinx was merciless. Get the answer to her riddle wrong and you were gobbled up whole and eaten. (Kind of like all our underwater homeowners, you say?) In truth, answering today's housing riddle wrong won't result in carnal devouring, but given the state of the current housing recession one can't blame people for being scared! But, I bring up the Sphinx and her eternal questions because the mythical story does hold wisdom for potential homeowners asking themselves whether to rent or buy. The wisdom is this: a perplexing question is simple to answer, if you look at what is being asked, and then re-ask the right questions. Riddles are always solved with clear thinking. For example, since I have been a bear on home prices for a while now, people might naturally assume that I would be a big fan of renting. But, they would be wrong. Instead, the answer I would give is in the form of another question. Why do we insist on making a generalization upon answering a question which should be based on individual case by case answers? Confused yet? Here's my point. In my mortgage business, even during the boom years, it was clear to me that it would be ludicrous to tell all home buyers that they should buy a home. In fact, we now know what happens when everyone takes the generalized advice. Today, we can say the same about renting. True enough, some people are better off renting in today's market, or in yesterday's market, or even tomorrow's market. But not EVERYONE should avoid buying and be renting instead. Even today. The answer, then, to the 2011 Riddle is….there is no generalized answer. Each person must study their own case and situation. These are the points I would consider in advising a person whether we, he, she should be a buyer or a renter. 1. Can you buy a home? Will a bank give you the loan you need? This is the biggest problem prospective buyer's face today that nobody really wants to talk about. We do not have enough qualified organic home buyers to absorb the massive inventory now and soon to be available. 2. What are your short, medium and long term goals? Does buying a house, now, fit in with those goals? For example, if you are still in flux with your career and want to be flexible for relocation within the next five years, it would not be wise to buy a house. But, if you plan to stay where you are, and find the house that fits your family and budget, then it would be wise to buy. 3. Can you sleep at night with the size of your mortgage payment? Sleep is good. We all need it, to slay dragons, or sphinxes' or life's daily chores. So if buying requires you to take on too large a debt and payment, then don't do it. Even if a home buyer qualifies for a home mortgage loan. The mistake made by some is stretching themselves with their debt to income ratio to get into their dream home. With the economy the way it is, this might not be the best time. In fact there may never be a good time for that reasoning. However, if a home buyer's financial situation is stable, then buying, not renting, with these low mortgage rates would be financially beneficial for the long term. 4. If you are comfortable with the answers to the first three questions, then you ought to be a buyer. I say this for 3 good reasons. Rent is a constant liability on a person's own balance sheet, but you get nothing for it in return except for that month's shelter. Secondly, this might be the last time you can get long term cheap money in this country. If you can get today's incredibly low interest rates fixed for 30 years, then you ought to be a buyer. Not only are long term rates going higher in the future years, there is a chance that we might not have a 30 year mortgage product in the future. Finally, for now at least your mortgage interest is tax deductible while rent is not. This will continue to be true for most Americans even if the Simpson-Bowles plan goes into effect. 5. You will notice I have not mentioned the actual pricing of the market, in making a rent or buy decision. Nor did I mention the actual price of the home, in making the decision. And I do admit that home prices have the potential of dropping another 5- 17% from these levels. Simply put, if your comfortable purchase of a home depends on the price rising or falling, then perhaps you should not be in the market right now. But if your financial health allows it and your goals align with it, I would advise taking advantage of these low rates and buy the house you want. 6. But If house prices have the potential to drop so much, why shouldn't everyone rent right now? Rental rates rise and fall too. And currently, rent is forecasted to rise in this country for awhile. So, in many cases you will be paying more in rent now and in the future. Your rent payments can change over time. But if you lock 30 year low interest payment now, then it won't change. As rents rise your fixed payments will look better and better. 7. So it is always preferable to buy? Again, we must consider each case individually. Let us remind ourselves of the benefits of renting. In some cases it will be cheaper to rent than what you would pay to buy an equivalent home. Also, renters can be much more nimble about moving, and in today's job market that can quickly become important. There are many hapless people in this country who can't move or take a new job offer because their legs are stuck in cement foundation of their home. You can see, there is some advantage, financial and other wise, in renting. So, let the real estate Sphinx throw you that riddle, and you should know how to answer it. If you are an individual, or a family, with a strong balance sheet and plans to stay put for awhile, go for it! Twenty to thirty years from now, while you comfortably pay down your 4.5% mortgage and are about to take full title to your own home, you will be glad you did. Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987. LoganMohtashami.com