By
msnbc.com contributor
updated 1/28/2008 1:20:22 PM ET 2008-01-28T18:20:22

When it comes to the home, the standard advice is simple: Over a lifetime, it’s better to own than to rent. As a homeowner, you build equity until you own the property free and clear. Renters are never free of monthly payments.

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Owning is a no-brainer, right?

Not so fast. Today, with the real estate market in turmoil from the subprime mortgage debacle, many people may be better off renting — for the next few years, at any rate.

The rent-or-buy decision has two parts — the mathematical and the personal. It’s the math that has changed. Home prices are falling in much of the country. That should be good for buyers, except that many experts think prices will fall even more — by 10 to 15 percent, according to some projections.

Buy today and you could soon find your home is worth less than you paid — and less than you owe the mortgage company. Imagine if you had to move for a new job, to get more space for a growing family, or to get a cheaper place after losing a job or spouse.

Meanwhile, rents have fallen in many places, mainly because real-estate speculators who bought during the recent boom find they cannot sell the properties they’d hoped to flip. They’re trying to rent their properties instead, and the surge in supply pushes rents down. Some landlords are reducing security deposits, offering the first month rent-free or even throwing in utilities, not a small incentive considering high energy costs.

Recently, three Federal Reserve economists — one former and two current — looked at the long-term relationship between home prices and rents. They found that from 1960 through 1995 annual rents averaged from 5 to 5.25 percent of home prices. Then the figure started falling, reaching 3.5 percent at the end of 2006. In other words, rents are unusually low relative to home prices, and to get back to normal rents would have to soar or prices to plummet.

Imagine a typical case: In buying a home you pay real estate transfer taxes, lawyer’s fees, mortgage application fees and other closing costs that altogether come to 5 percent of the property’s sales price. And assume that if you were to sell the home you’d pay a 6 percent Realtor’s commission. The property would have to appreciate about 11 percent before you could sell it for enough to offset these costs and break even.

If the home appreciated at the average long-term inflation rate of 3 percent a year, you’d have to own it about four years to break even. But if the property’s value fell by 10 percent over the next year or two, you might have to own it twice as long to break even – for eight or 10 years, maybe longer if the downturn were prolonged.

As a result, renting starts to look more appealing.

That’s the big picture. But to decide whether to rent or buy you have to look at specific properties — one for sale and one for rent. (Unless, of course, you find a place offered for sale or rent.)  Once the specifics are available, you can key the numbers into an online calculator like the one you can access at Bloomberg.com.

Good calculators go far beyond comparing the monthly rent on one property to the monthly mortgage payment on another. They also look at investment gains you might make if you rented and invested the money that would have gone to a down payment had you bought.

They will take into account the fact that rent is likely to rise year-by-year while the principal and interest payment on a fixed-rate mortgage will stay flat for decades. They’ll factor in the tax deduction you’d get on your mortgage interest payment and real estate taxes, and they’ll figure the rising value of the home you buy – the “equity” you build up.

In the end, these calculators tell how long it will take to break even on a home purchase. That’s the point at which the benefits of owning, such as growing equity and flat monthly payments, outweigh the extra costs of owning vs. renting, such as closing costs and, perhaps, higher monthly payments for a number of years. If you expect to own the home past this break-even point, buying makes sense. If not, it doesn’t.

The problem is that many of the key figures you put into the calculation are no more than guesses. You don’t know how fast rents might rise, how your real estate tax will change, how fast the home will appreciate or what return you could make on any money used for investments instead of a down payment.

So it’s best to run the calculation five or 10 times, ranging from the best case to the worst. If you have to be extremely optimistic to make buying pay, think seriously about renting.

There also are personal issues in the rent-or-buy decision. Some people just don’t feel like grown-ups until they own their own home. Many like to be in charge — to make decorating and remodeling decisions without asking the landlord. And for many, having the perfect house justifies the added expense and risk of owning.

On the other hand, as a renter you won’t have to worry about an unexpected outlay for a new roof, furnace or water heater. If the place isn’t absolutely perfect, it doesn’t matter as much because you know you can move when your lease is up. In fact, you might even get a better place as a renter, figuring you can get out easily if you decide the cost is too high.

Real estate markets are very different from place to place, so there’s no telling how the neighborhood you want to live in will be affected by any decline in home prices nationwide. But it’s safe to say there aren’t many hot markets like there were two or three years ago — places where people felt compelled to buy quickly before prices rose even higher.

Today, you can afford to be picky and to take longer to shop around. And with rents down, it’s worth your time to poke around the rental market before you decide to buy, especially if you think you’ll want to move in the next eight or 10 years.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 2.48%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.57%
13.57%
Cash Back Cards 17.91%
17.91%
Rewards Cards 17.15%
17.15%
Source: Bankrate.com