Is Owning or Renting Better For You?
There will always be a substantial segment of the population for whom owning a home does not make sense. This is for the simple reason that they are not secure in their job and/or family situation and therefore cannot count on being able to stay in the same home for a significant period of time.
This is important because the transactions costs associated with buying and selling a home are substantial. Realtors typically charge a 6 percent commission on the sale price. The points charged for taking out a mortgage are typically in the 1 to 3 percent range. Many states have transfer taxes that could reach as high as 3 percent. In addition, when buying a home it is usually necessary to pay for an appraisal, a title search, a lawyer at closing, a home inspection, a surveyor, and other odds and ends.
In total, the costs associated with buying and selling a home will typically be around 10 percent of the price. In many areas they could be considerably more. This is a huge cost if a person cannot spread it over a long period of home ownership.
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To take a simple example, suppose someone pays $160,000 for a house, roughly the median house price. If their transactions costs from buying and selling the home are 10 percent of the purchase price, then this comes to $16,000. If they live in the house for 10 years, this cost effectively adds $133 a month to the price of living in this house.
However if this person only lives in the home for two years, then the transactions costs effectively add $670 a month to the cost of living in the house. The added cost in this case is almost equal to what it would typically cost to rent a house with a $160,000 price tag. The basic story is that if someone does not reasonably expect to be in the same house for at least five years, they should probably be renting.
Dean Baker wrote this article for Making it Home, the Summer 2012 issue of YES! Magazine. Dean is co-director of the Center for Economic and Policy Research in Washington, DC. He writes a weekly column for the Guardian Unlimited, the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting.
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