You probably won’t be surprised to hear that the American housing market is very competitive. But many newcomers are trying to navigate the age-old debate of renting vs. buying a home. According to a Harvard study, the average new home was on the market for three months or less. The number of homes available for sale in 2016 was the lowest in 16 years.
The rental market is no better. The rental vacancy rate fell to less than 7%, its lowest level in three decades. That means that 93% of all the possible rental units in the country are occupied. Because of this limited demand, rents have gone up significantly. The Consumer Price Index for rent on primary residences increased 3.8% in 2016. Most new rentals are on the higher end of the market.
Between 2005 and 2015, the country added 1.5 million units renting for $2,000 or more per month. The number renting for under $800 fell by 261,000 units.
The Upsides of Renting vs. Buying
Home ownership is not for everyone. If you lack steady income or have poor credit, it can be difficult to make the leap to owning. Some advantages of renting include:
Understand Your Rental Lease
A rental lease is a binding legal contract between you and the owner. Once you sign, you are bound to the terms of the contract. That’s why it is crucial to make sure you read and understand the lease before you commit. You have the right to request changes on the lease. Although, this doesn’t mean your landlord has to accept your suggestions.
If you do negotiate a change to the rental contract, make sure you get it in writing. Get it initialed by someone with authority to make decisions.
We recommend you ask about:
- Security deposit and move-in costs: What is the total amount due at move in? How much is refundable when you move out?
- Length and terms of the lease: When is your lease up and what will happen then? Will the landlord give you the option to renew? Does the rent increase after the first year? Does the lease ever transition to month to month?
- Move-out expectations: How much notice do you have to give when you are ready to move out? What does the landlord expect you to do before moving out? For example, do you have to get the carpet professionally cleaned?
- Completing a walkthrough and move-in checklist: If possible, walk through the unit with the landlord or property manager. Take time-stamped pictures and notes of existing damages. If you document the condition, the landlord is less likely to reduce or hold the security deposit.
- Guest, subletting, and pet policies: It’s best to clarify the landlord’s rules at the beginning. Would they allow you to change roommates or sublet your room for a period of time? Are there any rules for how long guests can stay? Are you allowed to have pets? If so, is there a pet deposit?
- Maintenance expectations: Just because you don’t have to cover major repairs doesn’t mean that you don’t have any responsibilities as a renter. Are you expected to shovel walks in the winter or rake leaves in the fall? Do you have trash or recycling bins to take out and return?
- Alterations and improvements: Will they allow you to paint walls or plant a garden? If so, what are their expectations when you move out?
As with any contract, you should do your due diligence. Research the landlord or property management company before you move in.
Renting Tip: Look for complaints and reviews online. Have someone you trust look at the lease before you sign it. Don’t be shy about asking questions!
Should You Buy a Home?
Only 45% of renters in metro areas can afford the payments on a median-priced home in their market. But it really depends on where you live. It is much less likely for renters in popular areas like the Pacific Coast, Florida, and the Northeast to be able to afford a home. That’s compared to renters in the Midwest and rural South.
Renters are more likely than homeowners to be “cost burdened.” This means that they are spending more than 30% of their income on rent. The U.S. Department of Housing and Urban Development (HUD) defines being “severely cost burdened” as paying 50% or more of one’s income on housing. In 2015, more than 11 million renters were severely cost burdened. This is a 3.7% increase from the year 2001.
The Downsides of Buying vs. Renting
You might think homeowners would be timid after the housing bubble collapse of 2008. More than 3 million households received a foreclosure notice in 2008. 861,664 families lost their homes that year alone, an 81% increase over the year before. But that was then. Today’s home buying market is once again booming. If you’re considering taking the leap, here are some potential barriers to consider: