Does Buying a House Make Sense Again?

By Lee Bellinger / November 12, 2013

Four years into the great real estate downturn, is now finally the time to buy a house? Or is it still safer to rent? Of course, no one can offer a single answer for all people in all situations in all regions of the country.
30-year Fixed Rate
But whereas a few years ago, renting clearly made better financial sense than buying for most people, today a comparison of buying vs. renting does not overwhelmingly favor renting. A lot depends on your time horizon.
If you are concerned about housing values potentially falling over the next couple of years, then buying probably isn’t the right move to make at this time. The market is nowhere near being out of the woods. The backlog of foreclosures being carried by lenders is so large, according to Realty Trac, that it will take four years to process. It’s difficult to be optimistic about housing prices over that period.
On the other hand, the carrying costs of owning a house for the long-term generally look favorable compared to renting for the long-term. Prices are down dramatically, and mortgage rates are ultra-low, but they surely won’t remain so for forever.
Two Likely Scenarios and Their Implications for Homeowners
Median Home Price Chart
Scenario 1: Mortgage rates rise, making housing less affordable, putting downside pressure on house prices. In this scenario, buying wouldn’t make sense if you anticipate needing to sell into a falling market. But buying now could still make sense if you are able to ride out the downturn and reap tremendous savings over time by having financed at low rates that may never be available again. In other words, even though the price of the house in dollars is falling, the monthly cost of purchasing/owning the same house could actually be going up.
Scenario 2: The feds keep interest rates artificially low, and their inflationary policies put a floor under house prices. In official inflation-adjusted terms, home prices are already all the way back to where they were in the 1980s, so it’s not far-fetched to believe that the potential for more downside is now limited.
Think Cash Flow Like a Pro
But even under scenario 2, instead of moving higher, the next major trend in house values could be years of moving sideways. So buying a house on the assumption that you can later flip it for a profit, like you could in the late 90s and early 2000s, is not prudent.
That doesn’t mean you can’t make money as a real estate investor right now. But you have to think cash flow (as professional real estate investors do), not capital gains (as amateurs and speculators do) and/or have strong tax reasons for buying rental property (such as being able to utilize passive losses on your tax return from real estate depreciation).
Except in rare circumstances or during aberrational periods, real estate is not a get-rich-quick opportunity. What it can be is a great get-rich-over-time opportunity, because even during downturns, good rental properties can produce positive cash flow.
One final point: while we generally caution our readers against taking on much debt (particularly if they do not have strong and reliable sources of income), borrowing money to buy a house – assuming it’s financed with fixed-rate loan at low interest rates, can be an effective inflation hedge over the long term. Putting aside location and other factors such as a local decline in employment, you are buying something tangible that generally goes up in nominal terms over the longer term, and you are paying for it over time with cheaper and cheaper dollars.