The homeless rate in the city of Los Angeles skyrocketed over the last year, leaving state and local officials frustrated at the precipitous rise. Matt Fisher reports.
By Ryan Brown
The 2008 housing crash is still having a huge effect. During the recession, Americans lost more than a quarter of their net worth. Housing prices dropped 20% and total home equity in the United States dropped $4.2 trillion. All told, losses during the recession totaled $8.3 trillion.
But some of the losses appear to extend beyond mere dollar value and penetrate Americans’ psyche. In 2011, 53 out of every thousand eligible young adult renters became a homeowner. That’s 38% lower than the pre-recession 85 per thousand, recorded in 2001.
It shouldn’t be a surprise, then, that so many young people pause when confronted with the question of whether they should rent or buy. Among an age group where only 43% respond that they are “very satisfied” with their current job, researching the question to buy or to rent is a tough situation.
That situation isn’t made any easier when a lot of experts agree that the best answer is, “it depends.”
Rick Harris is regional vice president for the National Association of Realtors and the owner and broker of Coldwell Banker Pro West Real Estate in Ashland, Oregon. He agrees that it does depend, but adds that there are a few criteria by which young people can base their decisions.
“It depends on some things that you can point out. It depends on a person’s financial situation and what their goals are. It depends on what kind of credit they have. It depends on where they live, what the market is like where they live, how long they plan to stay there, and really how flexible they want their lifestyle to be,” says Harris.
If a young person can’t give good answers to those questions, Harris says the best thing to do is wait and keep renting. That, in itself, he says, may have some added benefits.
“Renting gives you great flexibility. You can move for jobs more easily and you can live where you want to. Unless you have a lease you can be out of a rental and move to a different place relatively quickly. Up front it costs less to get into a rental investment and you can call the landlord if the roof leaks. If the paint needs to be redone a landlord will often do that, or if there are plumbing repairs they’ll often deal with that,” he says.
But when a young person is ready to sacrifice some of the flexibility of renting and buy a house, Harris recommends they remember one important fact from the recent housing crisis.
“Understand that real estate is a long-term, not a short-term investment. In the bubble, a lot of people were doing what was essentially day trading in houses. They would buy houses before they were built and flip them. It worked like the stock market works, but the same thing that can happen in the stock market happened in the housing market—the bubble popped,” he says.
As with any complicated issue, however, even when someone is ready to own a home after answering some of the important questions in home-buying, those questions open the door for even more questions. In renting and buying, many of those new questions focus on real estate’s biggest issue, location, location, location.
Jed Kolko is chief economist and vice president of analytics at Trulia, an online real estate site. He says where you plan on living might help you determine whether to rent or buy.
“When we look across the country and compare a similar unit for rent and for sale, similar-sized units in the same neighborhood, it looks more than a third cheaper to buy than to rent. But that’s only if you get today’s low mortgage rates and if you stay put for seven years,” says Kolko.
A closer look at the data shows that buying ranges from being just 5% cheaper per month than renting in Honolulu, Hawaii, to being 66% cheaper per month than renting in Detroit, Michigan. Kolko is quick to point out, though, that the length of time you plan on staying in an area is still the most important factor.
“One of the most important factors in deciding whether the math makes sense to buy or to rent is how long you’re going to stay put in a place. People who aren’t planning to stay put at least five or seven years, might be better off renting,” he says.
For young people who plan to stay for seven or more years, have a great job, and want to settle down, though, there are still hurdles they may face, simply because they’re young.
“There are a lot of obstacles right now for young people who might want to buy. The first of course is the down-payment. Qualifying for a mortgage is also a hurdle. And, as student debt is rising, debt might make it harder for some young people to qualify for a mortgage,” says Kolko.
To make sure that young people do all the necessary research and get all their facts straight, Kolko recommends they use a rent versus buy calculator to really make sure that the details all point in the direction of renting or buying.
“A rent versus buy calculator lets you compare for any two units whether buying or renting is going to be the better deal. The calculator lets you put in what your tax bracket is, how long you’re going to stay in the home, and your location, to get a very personalized calculation of whether it’s going to be cheaper to rent or to buy,” he says.
But using a rent versus buy calculator can leave some questions unanswered. Jared Gerlach is a software developer in Provo, Utah. He says that even after a lot of research, owning his first house came with some surprises.
“Before I bought a house, I didn’t realize all the different things that I would need to do. I have to worry about paying utilities and the mortgage on time, watering the lawn, taking out the trash—stuff like that,” says Gerlach.
Though the decision to rent or buy might seem to be subjective, by using rent versus buy calculators, taking into account the flexibility of their lifestyle, and looking at location, young people can navigate this difficult decision.