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Buy or rent? How to decide in a turbulent housing market

Home prices are reasonable and interest rates are at near-record low levels. It's the perfect time to buy a house, right? Maybe. Learn about some of the benefits — and drawbacks — of home ownership.

College, career, family... some things in life feel inevitable. Buying a home may be one of them, but is now the time? Real estate expert Jane Hodges, author of Rent vs. Own (Chronicle Books, March 2012), discusses whether or not to take the financial leap.

Consider your tie to the area.

Life is unpredictable, especially when you're in your 20s and 30s. If you can't say where you're going to be in five years, wait to buy. "The housing market is still fragile," Hodges says. "It's a bumpy road. Buying a home tethers you financially. If you move, you might have trouble renting it out or selling."

Study local housing trends.

Examine your housing market with a critical eye. "In coastal cities, and also Chicago, rents are expected to rise," Hodges says. "There was a construction slowdown in 2008 that lasted late into 2010, so vacancy has gone down — meaning landlords can ask for more rent." This spurs many first-time home buyers. "Rent hikes motivate people to consider owning, but it shouldn't be your sole motivation," Hodges warns.

Look at the hidden costs.

Renting doesn't build equity, but it may offer cost benefits that are less apparent. "One perk with renting is that a lot of the new buildings have features you'd have to pay for separately on your own, like wireless access and gym memberships," Hodges points out.

Meanwhile, recognize that ownership comes with hidden costs. Simply paying utilities can induce sticker shock in some new homeowners — added to the costs of upkeep, including lawn care, home repair and cosmetic improvements, Hodges notes. "Maintenance tends to be 1 to 4 percent of home price annually." If you do purchase, make sure you'll have money left over to pay your bills and save for retirement.

Get creative.

With home prices and interest rates so low, home ownership can be tempting. Start your search by going to a mortgage broker and finding out what you qualify for. If the financial commitment feels slightly out of your reach, Hodges suggests getting creative. "Find a roommate," she suggests, or consider buying a less-expensive home and use your own sweat equity to fix it up.

Understand the risks as well as the opportunities when buying a home.

Try one of our Financing Your Dream Home calculators to better understand your options.

Fast Facts: The rate of home ownership in the United States peaked in 2004 at 69.2 percent; in 2011 it was down to 66.3 percent in the third quarter, according to the U.S. Census Bureau.

U.S. Home Ownership Rates, 2001-2011

Source: http://www.census.gov/hhes/www/housing/hvs/qtr311/files/q311press.pdf (November 2011)

 

Jane Hodges is not affiliated with the Principal Financial Group or any of its member companies.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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