Why It's True: You Should Own, Not Rent

By Jeff Brown

The "American Dream" means owning a home rather than renting. And despite the huge losses millions of homeowners suffered in the past decade, the dream is still alive and well. But what, exactly, do people value the most in owning over renting? A study by Fannie Mae shows that most renters aspire to own someday, though they feel it may be more difficult to buy than in the past. The strong appeal to owning is rooted in the sense of control.

A full 90% of renters said they expected to own at some point in the future. Of those renters surveyed, 84% cited "having control over what you do with your living space" as a reason owning is better than renting. "Having a sense of privacy and security" was cited by 80%, "having a good place for your family or to raise your children" by 78% and "living in a nicer home" by 71%. Many also cited the presumed financial benefits of owning over renting, with 78% citing "having the best investment plan," 70% saying "building up wealth" and 69% saying "saving for retirement."
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Still, renting did seem to offer some advantages over owning, with 57% citing "living within your budget," 52% "having less stress" and 50% "making the best decision given the current economic climate." This last figure reflects the especially high hurdles facing would-be homeowners today, including high down payment requirements and tough loan-approval guidelines. A decade ago, loans were easy to come by and buyers had to put little or nothing down.

"Renters who prefer to own perceive potential financial hurdles, and many of them think it would be difficult for them to get a mortgage today," Fannie Mae reported. "Compared to the owners they aspire to become, renters are more likely to have fewer assets, higher debt stress, and less income."
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Asked their primary reason for renting now, 49% of those aged 18 to 34 cited making themselves "financially ready to own." Of those aged 35 and older, 26% cited that reason. In the younger group, 15% said they rent because it is more affordable than owning, while 23% of the older renters cited that reason. In comparison, all the other reasons for renting were relatively unimportant. Renting as a protection against a possible decline in home prices, for instance, was cited by just 1% of those 18 to 34, and 3% of those 35 and older.

So do renters' survey responses reflect a sound understanding of the benefits of owning over renting? For the most part, yes. There's no doubt owning is preferable for anyone who values control. Not many landlords will let tenants change paint colors, let alone knock down the wall from the kitchen to dining room.
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Financially, owning is preferable so long as one will stay put long enough. Generally, it takes four or five years for a home's price to rise enough to offset the various costs of buying and selling, such as transfer taxes and real estate agent's commission. Over longer periods, owners build equity from appreciation and the gradual reduction of mortgage debt.

But homes have not proven to be terrific investments. On average, prices grow at about the inflation rate of around 3% a year -- while alternatives such as stocks earn much more. So when those renters do look to buy, the best move is to buy the least expensive home that satisfies their needs and to invest the savings in some other way.

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