Buying vs. Renting

Published in 2017 by: Peter Morici 
Chief Economist – U.S. International Trade Commission 1993 – 1995 
Economist & Professor – Smith School of Business, University of Maryland.

I estimated the monthly cost of owning the average home—factoring in property taxes, insurance, income tax deduction benefits and the like—and compared those to comparable rental dwellings. Employing a handy calculator, I estimated that for the Washington metro area—if the average home is occupied for 5 years after purchase, owning beats renting by about 11 percent. Extending the turnover period to 7 years jumps the savings of owning over renting to 23 percent.

A lot depends on what you do for a living. Most folks with stable employers don’t move between cities once they have settled in for a few years. Generally, teachers, accountants and other professionals face state licensing requirements, have family and develop social attachments, and pursue careers within regional job markets. Most folks settle in and can reasonably assess if they will want to relocate in the next few years.

Even in a period of slower economic growth, real estate has proven a solid investment. In this century, U.S. GDP and inflation have advanced about 2 percent a year. Through the end of 2016, stocks returned, as measured by the S&P 500, about 4.5 percent annually, while homes appreciated 3.8 percent. Those figures don’t consider property and income tax deduction benefits and the like. Factoring those in should even up the returns between houses and other investments over the long run.

Beyond the numbers, the freedom to customize an owner occupied dwelling and avoid the risk of being required to move if the landlord decides to sell the property enhance the overall value homeowners obtain from their piece of the American dream. Families may have to stretch to buy a first home or to buy up to accommodate a growing family, but is important to be sensible in estimating the size of the dwelling and amenities needed.

Bottom line: Buy a sensible home to raise your family. Hold on to it for the long haul, and it will prove a sound investment.

Peter Morici, who served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995, is an economist and professor at the Smith School of Business, University of Maryland.