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High cost of homes can make renting an attractive alternative

Every now and then, Steve Schueth says, he takes a ``run through the numbers.'' This exercise, which sounds only vaguely like an athletic event, does require keeping his calculator in shape. The exercise helps Mr. Schueth decide whether he should continue to rent the Pittsburgh-area house he and his wife live in or whether they should buy one. So far, they are still renting.

``I had a house, but I sold it a couple of years ago. My after-tax monthly outflow is still less,'' says Mr. Schueth, director of marketing for Prescott Realty Services Inc., a wholly owned subsidiary of Prescott, Ball & Turben Inc., a brokerage.

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He is joining a growing number of otherwise enthusiastic homeowners who are deciding that increasingly expensive homes, high interest rates, and lower appreciation, along with the usual expense and bother of maintenance and repair, have made renting more attractive than owning.

``In today's residential market, you just don't have the appreciation there to justify'' buying, Schueth says.

``Interest rates are still historically high, which means debt-service payments are getting pretty steep,'' notes George Lentz, a professor of real estate at the Indiana University School of Business. ``Also, the cost of homes, though down somewhat, are still high in relation to expected appreciation.

``In the '70s, you could expect to get back these high costs through appreciation. But in general, housing prices have not increased as fast lately.''

Also, Dr. Lentz says, while adjustable-rate mortgages do often offer a low enough initial rate to make a purchase affordable, the uncertainty of future increases has been a factor in keeping others out of the housing market.

Meanwhile, the supply of rental housing is quickly catching up with demand, thanks in part to heavy flows of investment dollars from a variety of new or more active sources. These include pension funds, foreign investors, and savings-and-loans.

The result, observers say, is a glut of apartments in many areas, keeping rents down for now and into the foreseeable future.

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Still, says Larry Goldstein, a tax principal with Arthur Young & Co., the accounting firm, there are good arguments for either renting or buying. Apart from the emotional argument for home ownership, which can be a convincing one, there are some dollars-and-cents reasons for buying a home.

First, Mr. Goldstein says, there is capital appreciation. On average, he says, a home will appreciate enough in about four years to cover the down payment and real estate costs and to provide enough yield to match most any other solid investment.

Then there are the income-tax deductions. Unless they have mortgage interest and property taxes to deduct, many people are unable to itemize deductions. But once they can, all kinds of other deductible expenses, including job-related education and medical expenses, can be deducted.

As for disadvantages, Goldstein first lists the costly down payments. With the average cost of a new home now over $100,000, and many lenders asking for 20 percent down payments, that's $20,000 that is either going into the house or is invested elsewhere. If it's invested elsewhere, it might go into tax-free bonds currently paying over 10 percent. That return may not only be higher than you could get from a house nowadays, but it might be easier to get at the money in the future.

In the meantime, Goldstein says, you can be renting a house or apartment. One advantage of this, he says, is flexibility. ``You can leave when your lease is up or, if you have to, you can break the lease. But you can leave.''

You might also leave with a lot more cash, says Arthur Wright, director of the Texas Real Estate Research Center and a professor at Texas A&M University.

Dr. Wright figures a late-model 1,600 square-foot house might rent for about $700 a month, a figure Mr. Schueth in Pittsburgh also used.

Now, assume that same house costs $100,000 to buy and there's a $20,000 down payment. An $80,000 mortgage at 13 percent interest leaves a monthly payment of $885, he figures. Add $125 for property taxes and you have a total monthly payout of $1,010. The annual difference between mortgage and rental in payments comes to $3,720. Then you can add in homeowners insurance.

The arguments for renting assume you are living in an area where homes are showing just average appreciation (some areas are still much stronger), that your particular home appreciates at an average rate (some neighborhoods do better than others), that you are only going to stay in a home two or three years (higher prices and interest rates have slowed the moving business), and that you want to go hunting for investments that can provide a better yield (many people have neither the time nor knowledge for this).

The emotional arguments for buying often do outweigh the financial arguments, Goldstein says. ``The people I talk to like the psychological satisfaction of owning property,'' he observes. ``And if they're young and moving up, they're anxious to buy that first home.'' Chart: Rental vacancy rates in selected metropolitan areas

Change in

vacancy rate

1983 1984 1983 - 1984 Chicago 5.4 3.5 -1.9 Detroit 4.9 3.3 -1.6 Los Angeles/Orange County 3.2 1.8 -1.4 Mobile, Ala. 6.0 4.8 -1.2 Miami/Fort Lauderdale 5.6 5.1 -0.5 San Diego 3.1 2.6 -0.5 Richmond, Va. 2.7 2.3 -0.4 Minneapolis/St. Paul 5.2 4.9 -0.3 Portland, Ore. 5.7 5.6 -0.1 San Francisco/Oakland 1.1 1.0 -0.1 Dallas/Fort Worth 9.0 9.0 -- Houston 20.0 20.0 -- St. Louis 4.2 5.0 +0.8 Charlotte, N.C. 5.1 6.6 +1.5 Sacramento, Calif. 2.4 4.0 +1.6 Charleston, S.C. 2.1 5.8 +3.7 Seattle 2.8 7.0 +4.2 Phoenix, Ariz. 6.6 11.2 +4.6 Denver 2.0 7.4 +5.4 Source: Real Estate Research Corporation

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