Will Renting Phase Out Homeownership?
The rent-vs.-buy decision isn’t always clear-cut.
Millennials accounted for the largest share of home sales last year, with 24- to 35-year-olds making up a full quarter of all homebuyers. Another 20% of buyers were 35 to 44 (older Millennials and younger Gen Xers).
But will the next up-and-coming generation of Gen Zers follow in their footsteps? Recent data seems to suggest so.
According to a report from TransUnion, the number of Gen Z mortgages more than doubled in Q2 2019.
Though the vast majority of the cohort hasn’t made the move just yet, Bank of America’s Homebuyer Insights Report shows nearly 60% of Gen Zers plan to buy a home in the next five years. More than half have already started saving up for their purchase.
Furthermore, economists expect Gen Zers to have a higher homeownership rate when they’re age 35 to 44 than Millennials did at the same age.
Still, the renting versus buying debate is never clear-cut despite where current trends seem to point. There are pros and cons for both situations. The right choice depends on your budget, location, long-term plans, and many other factors.
The Pros and Cons of Renting a Home
One of the biggest advantages of renting is that you don’t have as much financial responsibility to your home as a homeowner would.
Generally, your landlord or superintendent will handle the bulk of your unit’s maintenance and repair needs.
Renting is a more flexible option for moving, too. If your job changes or you simply want to move to a new place, it’s just a matter of putting in notice with your landlord.
Also, the startup cost of renting is usually the more affordable option. The cost of your application fee or security deposit is generally much lower than a down payment, closing costs, and other up-front costs of buying a home.
Renting isn’t without its faults:
- Usually, you can’t make any updates or customizations to your property
- You may have to live in close proximity to your neighbors
- You have to deal with a landlord
Most importantly, though, you won’t be building equity. While you may get your security deposit back, you won’t see a large portion of your renting costs ever again.
According to Apartment Guide’s 2020 Annual Rent Report, the average monthly rent for a two-bedroom apartment in 2019 was $1,808.70. Over the course of a one-year lease, your rent payments would total $21,704.40.
With a home, the money you pay into your mortgage likely will come back to you in part or in full when you sell the home.
The Pros and Cons of Buying a Home
There are some big benefits to buying a home, too. For one, you build equity. You can use that equity later with a home equity loan, HELOC, or just in cold, hard cash when you’re ready to sell the house.
You also get a number of tax benefits as a homeowner. You can deduct your mortgage interest and a portion of your property taxes. In some cases, you can reduce your tax bill with a mortgage credit certificate, too.
Owning your home creates peace of mind and pride. It’s all yours, there’s no landlord you answer to and you can truly make the place your own.
Owning a home comes with significant up-front and ongoing costs.
The two main financial commitments you’ll face are your down payment and closing costs. Your expenses for maintenance and emergencies likely will be higher, too:
- Average down payment in 2018: $15,490
- Average closing costs in 2018: $5,779
- Average yearly home maintenance/improvement spending: $1,521
Additionally, owning a home makes it harder to do a quick move. Homes were on the market for an average of 65 to 93 days in 2018.
If you want to move or your job changes, it might not be as easy to pick up and leave as it would if you rented.
Making Your Decision to Rent or Buy
Your location will play a big role in the rent-vs.-buy debate.
A recent report from real estate and property data firm ATTOM Data Solutions shows that buying a home is more affordable than renting in just over half of U.S. markets. Conversely, renting is the more budget-friendly choice in 47% of markets.
In addition to location, finances play a role in your buying-versus-renting decision, too
Buying a home requires you to make a down payment, cover closing costs, and foot the bill for things like homeowner’s insurance, property taxes, maintenance, and more.
With the average down payment and closing costs totaling more than $25,000, homebuying’s financial demands are high. If you choose to buy a home instead of renting, make sure your finances are prepared for the up-front costs.
The Bottom Line
It’s clear there are arguments for both renting and buying. Recent trends do point toward a higher interest in homeownership among younger generations. Future trends indicate Gen Z homeownership rates will outpace Millennials.
However, trends shouldn’t dictate your choice. The buying-versus-renting decision is a very personal one. It’s one you should make with careful thought and consideration of your finances, goals, and needs as a household.
National Association of REALTORS®. "2019 Profile of Home Buyers and Sellers." Page 10. Accessed Feb. 28. 2020.
TransUnion. "Consumer Credit Origination, Balance and Delinquency Trends: Q2 2019." Accessed Feb. 28, 2020.
Bank of America. "Spring 2019 Homebuyer Insights Report." Accessed Feb. 28, 2020.
Zillow. "Experts: More Gen Zers Than Milliennials Will Own Homes." Accessed Feb. 28, 2020.
Apartment Guide. "2020 Annual Rent Report." Accessed Feb. 268 2020.
National Council of State Housing Agencies. "Mortgage Credit Certificate Program Q&A." Page 1. Accessed Feb. 28, 2020.
HousingWire. "The Average Down Payment Is Much Smaller Than You Think." Accessed Feb. 28, 2020.
American Land Title Association. "ClosingCorp Reports 2018 Average Closing Costs." Accessed Feb. 28, 2020.
HomeAdvisor. "State of Home Spending Report." Accessed Feb. 28, 2020.
Zillow. "What Is the Average Time to Sell a House?" Accessed Feb. 28, 2020.
ATTOM Data Solutions. "Buying A Home Is More Affordable Than Renting In 53 Percent Of U.S. Housing Markets." Accessed Feb. 28, 2020.