Why Homeownership Always Beats Inflation • Home Price Appreciation

Buying A Home Versus Renting In Troubling Times

The most-vocal concern I hear about housing today is that our situation is “just like 2006.” Though I have produced numerous articles and videos showing that today’s housing market is in a very bad place, it is not in the same situation as we saw in 2006. There are some parallels, though. The housing market was very active, and home prices increased aggressively in both periods. But today, we have an inventory shortage, whereas in 2006, inventory was plentiful and growing.

To help you make a “buy vs. rent” decision today, I have produced the following graph that evaluates your cash positions for deciding to rent or buy a home today. For our regular readers, you have seen this graph in a different case study comparing buying a home versus renting a home.

Graph plots the outcome of buying versus renting a home in 2006

With so many people thinking the market will soon see plummeting home prices (like we saw in 2006), I have used historical data to show that if one could go back in time to 2006 and face a decision on whether to buy or rent, the answer would be determined by the length of stay in the home.

No answer is right for everybody (nor wrong for everybody). Instead, one must evaluate their own situation and react accordingly. Again, I want to remind the reader this is an analysis designed for somebody who must make a move today due to a significant life event.

The graph above plots the cash position of buyers in blue and renters in red. The cash position is merely the combination of what has been spent with equity gained, so renters continue to decline over time while owners, through leverage appreciation, have the ability to move above “zero.”

As a reminder, home prices peaked in 2006, so people who purchased in 2006 faced six straight years of declining home prices. It was the worst time to buy a home in the past eighty years. Before we get to the analysis, I want to pre-comment to those who think buying a home when prices are falling is a terrible mistake. Remember, I have twice reminded the reader that this buy-rent analysis is for people who HAVE TO MOVE. Buying might be painful, but renting is not free either. This analysis helps somebody facing this decision to have a good idea of what to do.

People who stayed in their homes longer than 3.75 years spent less money than those who chose to rent. Home prices were dropping, and rents were rising, so homeowners faced the worse housing market conditions in eighty years while renters faced fairly normal conditions. Either way, renters and buyers were out tens of thousands of dollars. It was so bad that buyers who sold their homes after 5 years had to bring cash to closing when they sold. Everybody selling at that time faced hardship, yet the money required to sell their homes (combined with everything else they spent) was less than they would have paid in rent.

If you are renting and think you’ll be relocating to another market in the next few years, you should continue to rent. You’ll need to be prepared for huge increases when your lease renewals come around, as rents are soaring right now due to the limited supply of housing. There is a non-recoverable cost to rent, but it likely is less expensive than buying and then selling in a short time period (as the graph above reveals).

But if you know you’re going to need to move (move up, move down, or move over), today’s “bad time to buy” will deliver a better outcome for you than entering into a lease (unless you can get a landlord to sign a long-term lease with minimal escalations each year). The housing market in most local US metropolitan areas is grossly undersupplied with adequate housing for our growing population, so we know the long-term trend is continued rent and price increases, though we’ll see some opposing trends along the way as the Fed increases rates to bring down inflation.

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