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Renting vs. buying in a hot real estate market – Twin Cities

These are portraits of Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and Pioneer Press business columnists
Bruce Helmer and Peg Webb

For most Americans, a house is often their biggest single expense. Inflation has been soaring across most sectors of the economy, but it’s hitting the housing market especially hard. Should you rent or buy in this hot real estate market?

INFLATION IS COOLING, BUT HOUSING IS STILL HOT

While almost everyone has been focused on the astronomical price of gas and groceries these days, shelter costs accounted for 40% of the increase in the core Consumer Price Index (CPI), according to the Bureau of Labor Statistics. Rents have risen dramatically across the country, but home-sales prices rose even more. According to CoreLogic, a provider of property data, year-over-year home prices rose 18.3% in June. Changes in rents tend to lag increases in home prices, so we may expect rental rates to continue to grow for some time.

If you are a prospective first-time home buyer, you may well wonder if it makes sense to wait out this period of elevated prices.

In an effort to quash inflation, the Federal Reserve has aggressively raised interest rates four times so far this year. Because mortgages are indirectly tied to these rates, the cost of mortgages recently increased to more than 6%, before drifting back to the mid-5% range. That has had a slight cooling effect on home prices, but also has done little to encourage homeowners to list their properties for sale. Only 17% of Americans think it’s a good time to buy a house right now, according to a July survey from Fannie Mae.

Keep in mind that a drop in inflation doesn’t mean falling prices, it just means a slower pace of growth in prices. If you can’t make the numbers work for your situation, it’s probably OK to wait things out, instead of locking in today’s higher prices and interest rates. If you decide on renting instead of buying in today’s market, you won’t build home equity, but you could be putting yourself in a better position to qualify for a lower cost mortgage in the future. For one thing, you have more time to come up with a bigger down payment. In addition, if you have less than stellar credit (which affects the interest rates banks will offer you), you have some runway to repair your rating. Finally, by putting off a purchase, you may have more income that may improve your borrowing position.

TOP FINANCIAL REASONS TO RENT

There are many ways to justify the decision to rent over buying.

You are uncertain about your job or location: If you’ve just moved to a city, expect to make a job change soon, or don’t expect to stay in the community, it may make more sense to rent.

You don’t have enough saved for a down payment. You usually want to have at least 20% of the purchase priced saved for a down payment, so that you avoid private mortgage insurance.

You don’t want the hassles of maintaining a home. Owning a home is a major investment, and a serious responsibility. Kidding aside, in a tight labor market with supply chain problems, the cost of repairs is going through the roof. Plus you have to pay taxes, utilities and insurance, which can eat up a serious percentage of your fixed expenses each month.

TOP THREE FINANCIAL REASONS TO BUY

There are just as many good reasons to decide to buy over rent, depending on your individual financial picture and circumstances.

You believe in the power of home equity. Although there are significant costs associated with home ownership, the equity you build in your home can become a meaningful component to your personal net worth. As an investment, of course, real estate is a long-term play that can rise and fall in value. Still, you need to live somewhere, and living in your own home is a great way to force yourself to save.

The cost of a mortgage is about what you’re paying in rent. Unless there are more compelling reasons for you to rent, paying the same amount to build value in your home rather than paying a landlord is, for most people, a no-brainer.

You plan to stay put. If you want to improve your odds of selling at or above what you paid for the home, be sure that you’ll stay in the home for a while (3-5+ years).

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