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Home buying vs. renting: five key rules

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(Read caption) This photo shows a house for rent and for sale sign in front of a home in Portland, Ore., last month. Deciding between home buying and renting used to be so easy, you could do it with an online calculator. Now, it's more complicated. Here are five key questions to ask before you decide.

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Before our nation’s housing crisis began in 2007, the rent vs. buy question wasn’t really a question at all. Because the answer was: If you can afford it and you’re going to stay put long enough to recoup the transaction costs, you buy. Simple.

That’s because for the generations leading up to the Great Recession, buying was always superior to renting for two reasons – one societal and one financial.

As a society, the belief was virtually universal that owning a home was simply what normal, stable adults did. Homeownership has traditionally been known as the “American dream,” and anyone not in pursuit of it was assumed to be either transient or not able to measure up financially.

Owning a home was also the right idea financially, because there had never been a time in modern memory when home values, at least nationally, didn’t increase over time. In addition, Uncle Sam was contributing to the gains by subsidizing mortgage interest via tax deductions.

What a difference one housing crisis can make.

There are plenty of online calculators you can use to try to determine whether you should rent or own. For example, here’s one from mortgage guarantor Ginnie Mae. And here’s a really souped-up version from The New York Times.

But I wouldn’t waste too much time on these types of calculators. Why? Because the answer you get will totally depend on the information you provide – and it’s information you can’t possibly know. For example, among other variables, most calculators will ask you how much the house you’re buying will appreciate annually, as well as how much equivalent rent will increase over time.

If you know the answers to these questions, you don’t need a calculator; you need to get a job on CNBC.

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How should you decide?

The rent vs. own question only became popular again for one reason: Many people were wiped out financially by the housing crash of the last few years. If housing was still appreciating, it wouldn’t be much of a question at all.

But the falling prices of the last few years shouldn’t be that big of a determinant. After all, if not buying a house for fear of falling prices makes sense, then it also makes sense never to buy stocks, since they too can decline. But that’s not good logic for either stocks or houses. What falling prices of any kind teach us isn’t that it’s dumb to buy – it’s that it’s dumb to speculate. Over-leveraging by gambling on short-term price swings or otherwise biting off more than you can chew has always been a bad idea, whatever the asset.

I’ve been buying both houses and stocks for more than 30 years. Here’s my advice: When it comes to houses, use the same rules that have always applied:

Bottom line? Forget the calculators and consider the factors above. If this is the right time and you’re in the right place, go for it.

Stacy Johnson is a journalist, author, and executive producer and publisher of Money Talks News, a consumer/personal finance TV news feature that airs in about 80 cities as well as around the Web. This column first appeared in Money Talk News.

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