Homeownership has always been held up as the American Dream. But it took a major hit during the Recession, slamming home values. As a result, despite a rebound in much of the country, even some affluent homeowners are weighing whether it makes sense to become permanent renters - and are asking planners for guidance.
Many former owners have already joined the ranks of renters. According to a March report from the Federal Reserve, 16 million Americans became homeowners between 2000 and 2006, while 700,000 became renters. However, in the five following years, 1.2 million left the ranks of homeowners, while 4.2 million new renters emerged.
The report also found that an apartment building boom followed. Remarkably, the report added, this happened "even with housing affordability near historic highs."
The fact that people flooded the rental market during a period when one might have expected a rise in ownership, due to a combination of depressed home prices and historically low interest rates, indicates that other factors are at play.
CHANGING THE MATH
Homeownership still makes sense for many affluent clients. Yet given the economic and political climate, "the prospect for increased taxes, decreased deductions and slow growth in housing is driving many people to consider the rental alternative.
While buying has many advantages, homeownership requires a substantial down payment, typically 10% to 20% of a home's purchase price, and will generate an annual property tax bill as well as hefty annual maintenance costs - anywhere from 1% to 4% of a home's total value, according to HSH.com, a real estate publisher.
That changes the math for some. Because the cost of buying and selling a home can be close to 10% of its value, ownership makes sense only if a client plans to live there five to 10 years. You need enough time to ride out a market cycle if necessary to cover these costs.
Of course, it's not always possible to coordinate market cycles with the need to move - so there's no guarantee that homeowners who stay put will recoup their costs or do better financially than if they had rented.
Renting is more common among younger adults - 43% of people younger than 30 rent, compared with 22% of those 45 to 64, and 16% of those older than 65. But while young adults in the past might have stretched to become homeowners as soon as they were able, they are now more cautious.
Some consider renting to be a long-term lifestyle choice that gives them more mobility and freedom from maintenance chores. Having reached adulthood during the Recession, they saw home prices plunge and carry no illusions that appreciation is guaranteed.
Younger affluent clients tended to concentrate on the relative difference in net after-tax payment between buying and renting. Now, many are more pessimistic, and are "factoring in either zero or negative short-term growth."
For clients 45 and older, the primary concerns may be different. At midlife and beyond, people often make the decision to buy or rent based on lifestyle preferences or health issues rather than financial concerns, particularly if they already have substantial assets.
For older clients in particular, renting may also offer estate-planning benefits. "Trustees and estate executors are alleviated from having to sell a property, which can require improvements in preparation for sale, selecting an agent, negotiations and differences in opinion among estate beneficiaries.” "Renting also alleviates a potential liquidity drain if the house doesn't quickly sell."
For more information renting an apartment in Garner, NC, contact Abberly Place Apartments.
Excerpts – Financial Planning