21 July 2009

Should I Buy a Home or Rent?

Buying a home is a good decision.  This advice has been around for a while.  It is wrong.  Plain and simple; wrong.  Buying a home is only a good decision when it is a financially sound decision.  Squawkfox has a list of 6 Mortgage Meltdowns; times when buying a home is not financially sound.  The first step in seeing if this is right for you is to look at a rent vs buy calculator.  I usually look at the one from the New York Times.  This calculator would be all you need except for one thing… risk.  Risk is why you can make money work for you.  In home ownership the risk is usually working against you.

If you are single.  When you are single you usually come out ahead in the rent half of the rent vs buy calculator.  You can rent a place with a roommate or two and come out much better with renting.  It is often not financially sound to buy as a single individual.  I’m not even going to compare investing the difference or add it into the calculations. 

If you are married.  Once you are married you might come out ahead buying, but your marriage is one of the largest risk factors in buying a home.  With divorce rates around 50% or higher in many countries you are taking a gamble on the purchase of your home.  The average divorce happens after 7 years.  At 7 years you have likely spent $23,800 more buying than renting.  It takes on average 16 years of a 30 year mortgage for a home to be cheaper than renting.  At 50% buying a home has odds comparable to putting $200,000 on black and knowing you will have to wait 7 years to know if you “lose”, 15 years to know if you “won” and 35 years for the payout.  Starting with over 50% chance of divorce or add in the likelihood of bankruptcy then your financial odds are better in Vegas.

You can increase your odd by looking at your real chance of divorce or figuring how you compare to divorce statistics.  If you are signing a prenuptial agreement then you should just forgo the home purchase.  A prenuptial agreement is just a plan for what to do in your divorce.  Chances are that divorce will happen before buying was cheaper than renting.  While you may want to buy a home it does not make sense financially for a number of people.  The thought that everyone should buy led the sub-prime market and is a partial cause of the current recession.


Even if the numbers do add up don’t forget risk.  Buying a home might just be more risky than day trading in the stock market and is more risky than gambling in Vegas.  Let us know what you think in the comments.

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