Is Renting A Home Better Than Buying?

Last month, The Economist published a study (with Barclays Capital) claiming it’s better to rent than buy right now. The publication is eminently credible, but this claim warrants some Bay Area perspective. There may be property bubbles in “certain areas” as even Fed Chairman Greenspan has acknowledged. However, Greenspan and Economist editors tend to make macro observations. Bond markets and mortgage rates are national and global. Property prices are more localized. It’s true that when rates rise nationally, it can push local housing demand (and prices) down. But areas like San Francisco and Marin have geographic limitations and demographic composition that create a natural price floor. There’s not much land available for expansion. This keeps demand higher than national or even CA averages. And these are two of the world’s most exclusive areas. So even when prices start falling, there are always deep-pocketed buyers waiting for deals. This provides pricing support in a down market.

So is a potential buyer with enough income to invest better off renting a home? The Economist claims that homebuyers underestimate ownership costs like insurance and taxes. Instead they suggest renters put extra income into higher-yielding stocks and bonds. Yet there is no discussion of commission and tax costs here. And for some, securities markets are too daunting whereas a home is a tangible investment – and a place to live. We’re not saying the Economist/Barclays study is wrong, but they paint the issue with a vey broad brush. Their quantitative analysis (using price-to-rent as a mock P/E ratio) is relevant and important, but homebuying is just like any other investment. It depends on the overall financial objectives and time horizons of an individual or family. Evaluating each situation is a necessary exercise as the market shifts.