To rent or buy housing? Watch tax bill

Maybe we shouldn't even be asking the question: Should you own or rent your home? With mortgage rates around 10 percent and some economists talking about a slight upward move for rates later this year (rates have already ticked up a quarter-point or so in a few places), it seems as though the debate should end with this: Do whatever it takes to buy that house or condo as soon as possible.

But even with the most affordable interest rates of the decade, the answer really isn't that simple. It's become even less simple with the presence of the Senate Finance Committee's tax overhaul proposal.

``If the tax bill goes through, I will reevaluate my situation,'' says M. Leanne Lachman, president of the Real Estate Research Corporation and, for now at least, a confirmed renter. ``A mortgage would be the only remaining tax shelter, though it would be worth less.''

The top rate of 27 percent proposed in the tax bill takes the mortgage interest deduction available to someone in the 50 percent bracket and almost cuts it in half, she explained.

Whatever bracket you're in, at least ``73 percent of the interest will come out of your pocket under this bill,'' notes Ralph Presutti, a financial planner with Advest Inc., a brokerage.

``The tax bill makes it even more economical to rent than buy, because the interest deduction would be worth less,'' said Jay Goldinger, an investment broker in Los Angeles.

Further clouding the question is the uneven appreciation rate of real estate around the United States. In 20 of the 43 areas of the country tracked by the National Association of Realtors, median home prices increased 1.5 percent or less from the first quarter of 1985 to the first quarter this year. In five of those areas, prices actually decreased.

Then there was the Northeast, especially New England, especially the Boston area. Here, prices went up 37.2 percent between those quarters, while in the New York-New Jersey-Long Island area the gain was 17.8 percent. Albany, N.Y., was up 20.5 percent, Hartford, Conn., went up 18 percent, and Providence, R.I., gained 14.1 percent.

Clearly, the clich'e about the three most important factors in real estate -- location, location, and location -- has some merit. If you live in one of these areas, the arguments for renting can quickly disappear.

For the nation as a whole, however, the gain was 5.8 percent. At that level or less, the pros and cons of buying your own home become more evenly balanced.

Some people have speculated that because passage of the tax bill as it now stands would make it less economical to own real estate, including income property, landlords would be forced to raise rents to make up for their loss. But that prospect probably isn't enough to warrant going in over your head to buy a house now.

Landlords may be able to get away with rent increases for a year, Mr. Presutti says. ``But they'll be hard pressed to get any appreciable rent hikes. Someone paying $500 a month now might be raised to $550 or $600. But then on a long-term basis, the market will equilibrate itself and rents could even end up lower than they were before.''

Owning a home, of course, involves many more costs than just mortgage and taxes. There's insurance, maintenance, utilities, new appliances on occasion, and the possibility of major expenses like a furnace, water heater, or roof.

If you're now renting, ask yourself what else you could do with the money that would be used for these expenses, plus a down payment and closing costs involved in buying a house.

``The yields on alternative investments have gone down,'' Presutti notes. But for prospective home buyers in some parts of the country, those yields -- on such things as municipal bonds and zero-coupon bonds -- are still better than the current rate of appreciation on a house.

``Of course, this assumes you will invest that extra money in other things,'' Ms. Lachman points out. ``A lot of people don't have the self-control to do that.''

If the tax bill in its present form passes and removes all interest deductions except for first and second homes, ``that's going to make a very strong case for ownership,'' she continues. For her, though, the rental arguments may win out.

``When you get down to a 27 percent top tax bracket, the value of the shelter is not as great'' from a tax standpoint, she says. ``I can be investing the money for earnings.''

Before heading for those open houses next Sunday, then, look carefully at your financial situation and habits. Could you get a better return by investing the money that might be spent on a home elsewhere? Would you invest the money elsewhere? Can you afford the other costs that go along with ownership -- costs the landlord is handling now? What's the appreciation rate for homes in your area?

These are long-term questions that have to be asked by anyone making a rent-or-buy decision, with or without the prospect of a new tax law.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.