Is it cheaper to rent a place to live?

Is it cheaper to rent a place to live? Or buy? A lot depends

on where you live.

Until the housing collapse in 2007, conventional wisdom held

that buying was a no-brainer: Home prices never went down,

the tax code offered generous savings to buyers and

homeownership amounted to a kind of forced savings.

Now, as the housing market stages an uneven recovery, the

decision to buy a home is no longer a slam dunk.

"You have a lot of folks out there who got burned by the

housing crisis and they may not have desire to buy," said

RealtyTrac Vice President Daren Blomquist.

The collapse of housing prices also upended the idea that

buying a home is a sure-fire investment. In fact, over much

of the last three decades, you would have come out ahead

renting, according to a 2011 study.

"Our study disputes the commonly accepted wisdom in the

United States that renting is always 'throwing away money,'"

said Ken Johnson, a Florida International University fellow

and one of the study's authors. "If renters exercise

disciplined investing over time, they can be more successful

in accumulating wealth than those who own a home."

That's a big "if." But the study also found that there have

been exceptions when buyers end up better off financially.

In most parts of the county, that's true today. But not

everywhere.

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An analysis of home prices and rents by RealtyTrac found

that in more than 90 percent of the counties it looked at, the

average rent is higher than the cost of buying a median-

priced home. The exceptions are in the handful of highest-

priced housing markets in the country—places like San

Francisco, New York and Arlington, Va. (The list also

includes some out-of-the-way housing hot spots like Teton

County, Wyo. and Gallatin County, Mont.)

On the other extreme, renters come out way behind in

places like Baltimore, where the average renter pays $1,600

a month—roughly 3.6 times the cost of buying a median-

priced home. Other high-rent counties include Clayton, Ga.

(where rents are 4.5 times the cost of buying) and Wayne,

Mich., (4.8 times the cost of buying.)

Still, there's more to the buy versus rent decision than the

basic monthly costs comparison. So before you call a real

estate agent and deliver the news to your landlord, here's a

little more math.

For starters, RealtyTrac's numbers assume you can come

up with a 20 percent down payment. For many first-time

buyers, that's a major hurdle. The rent-versus-own analysis

also figures you'll spend 0.35 percent of the amount of your

mortgage on homeowners insurance and another 1.04

percent on property taxes.

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But it doesn't include monthly costs like utilities—or the

occasional but inevitable cost of upkeep and repair—that

come with homeownership.

And just because it's cheaper to buy doesn't mean you'll be

able to qualify for a loan—especially if you're one of the 7

million former homeowners who lost their property to a

foreclosure or short sale.

"They may have the income to qualify but if they have that

foreclosure or short sale on their history, in the short term

that will disqualify them from buying," said Blomquist. "That's

a hurdle in this market beyond the monthly payment

numbers."

Even if you're credit is solid, rising interest rates are lifting

the income level you'll need to cover your monthly mortgage

payment.

Homebuyers shelled out $865 a month for a 30-year fixed-

rate mortgage on a median-priced home in the fourth quarter

of last year, up from $714 a month a year earlier, according

to RealtyTrac. The difference: the average interest rate

jumped from 3.35 percent to 4.46 percent.

The income needed to qualify for a median-priced home in

the fourth quarter of 2013 was $41,500, up from an average

minimum income of $34,250 a year earlier. (That minimum

assumes you'll spend no more than 25 percent of your

household income on your mortgage.)

But those are just the averages. In the priciest markets, you'll

need to show a lot more income on your tax returns to get

the nod from a mortgage company. In San Francisco, you'll

need to earn $228,500 to buy a median-priced home. Other

high-cost counties come with high minimums to qualify,

including Marin County, Calif., ($178,000), San Mateo

County, Calif. ($170,000), Arlington County, Va. ($158,500),

Santa Clara County, Calif. ($149,500) and Hudson County,

N.J. ($142,500).

What about retirement? I read an article in USA Today which

spoke about whether you could live comfortably in retirement

if all you had was $1,000,000. It turns out that while it’s a lot

of money it’s not quite enough. It could be, but it depends on

things like whether you still have a mortgage or not. If you’re

headed for age 60, we’ll say, and you’ll still have a

mortgage, you may want to think again.

How to Cut Your Debts in Half

You can show me how to cut my debts in half? Really? I know it sounds a bit fanciful,

but let me share a story: I was at our bank depositing some foreign currency checks.

The teller was a guy in his 20s and he had served me several times. After some small

talk he worked up the courage to ask about our company, Wealth Solutions. I told

him we helped people get their financial lives in order. To which he replied: “Well,

then can I ask you a question?” Mindful of being in a bank I replied quietly: “Go

ahead, shoot.”

He told me about a laptop he had purchased from a major electronic retailer about a

year ago. He said that despite the fact that he had dutifully made all the required

payments on time each month, his balance was still the same. It had gone down only

fractionally after a year of payments. “What am I doing wrong?” he pleaded.

I asked him whether he used the retailer’s credit card for the purchase and he told

me that he did. “It was ‘free’ and I only have to pay $25 every month” he said. Did he

know what interest rate he was paying? “No” came the reply. “The problem is that

all you’re paying every month is the interest on the loan they gave you. At your

present rate you’ll still be paying for this laptop long after you’ve abandoned it for a

newer model [10 years].”

“Well, what do I do?” he asked hopefully. I said, “You work in a bank. Surely you

qualify for a low interest credit card from your employer.” “Maybe” he replied.

“Trust me, just do it. Then transfer the debt from the retailer to your new card, and

instead of paying the minimum each month, try paying an extra $25 or more.”

A couple of weeks later he reported that he had been approved for a low rate card

with an introductory rate of 0.99%. After 6 months it resets to 11.99%. By

transferring his debt to the new card and increasing his payments from $25 to $50

per month, his $1,000 laptop would be paid off in less than 2 years. If he increased

his payment to $75/month it would be paid off in a little over a year. It’s not rocket

science, just math.

Financial Literacy is a Life Saver

Of all the challenges in promoting a culture of Financial Literacy, I think the biggest

is in making the mental paradigm shift from that of spending to saving. Once you see

the importance of saving for the future, your life will change. For some it’s easy,

while others may never see it until they’re living in subsidized housing completely

dependent on the government for everything they consume, including all of their

health needs. Making that switch involves looking at the future and seeing your

place in it. What’s my place in it? How can I make it better? How can I prepare for it.

One of the challenges of youth is the inability to look into the future which seems

like a million miles away. Hence the number of teens addicted to tobacco; that drink

and drive, or drive while texting. In youth there is a feeling of immortality. Cancer,

fatal car accidents, it happens to others but it won’t happen to me. I certainly lived

by that creed and imagine most everyone does at that age.

Looking into the future is something that usually takes place in one’s thirties or

forties, by which time your chance to massively effect it is already compromised. If

we could get teens to think about their financial futures, by holding out the carrot of

being able to afford all the things they want – nice homes, cars, TVs etc. then they

are much more easily convinced of the folly of smoking or texting.