Monday, November 24, 2008

RENTING MAY BE BETTER THAN HOME BUYING IN TODAY’S SHAKY ECONOMY

What do middle-age empty-nester homeowners and young college grads have in common? They both should consider the rental market to help solve their immediate housing problems with the state of the economy still in flux, Realtors and rental experts say.

“Homeownership may be the American Dream, but not everyone should blindly jump into the home-buying market, advises Judith Roettig, executive director of the Chicagoland Apartment Association (CAA).

“In today’s uncertain economic world, renting trumps buying in many cases,” said Roettig. The 300-member CAA represents more than 2,500 apartment professionals who own or manage more than 600 properties with more than 136,000 rental units in the greater six-county Chicago area.

“When homeowners must move out of a home, whether the reason is a job transfer, a financial problem or something else, a growing number are choosing to rent their home rather than continue reducing the price of the property until it sells,” said Jim Merrion, regional director of the RE/MAX network in northern Illinois.

In the Chicago area, homes that sold during the third quarter of this year were on the market for an average of 153 days, or about five months. However, a substantial number of homes take even longer to sell, according to Merrion.

“It is not a risk-free strategy, but if a seller thinks it is likely that home prices will rebound in the next year or two, it can be an effective way to deal with a difficult situation even if the monthly costs of continued ownership (mortgage, taxes and insurance) are more than the rent received,” Merrion said.

As an example of how a home rental might work, let’s assume a home purchased three years ago for $460,000 has a current market value of $410,000, and the homeowner’s monthly cost is $3,300.

If the home can command just $2,200 a month in rent, the owner would have to pay $26,400 out of his or her own pocket over a 24-month rental period. However, if the homeowner believes the market will rebound so that the home will be worth at least $440,000 in two years, the out-of-pocket costs of renting can be recaptured when the home is sold.

Moreover, because the mortgage principal will continue to be paid down while the house is rented, the balance due to the mortgage lender will decrease meaningfully over the rental period, allowing the seller to keep more of the sale proceeds, and still pocket write offs for mortgage interest and real estate taxes.

“If monthly rent covers the cost of the real estate taxes, insurance and mortgage interest, and the seller is just chipping in the monthly mortgage principal payment, that seller is well positioned,” said Merrion.

So renting can be an excellent alternative, which is why many RE/MAX agents are actively working with owners to rent properties, as well as with those seeking a home to rent, Merrion said.

With the economy in disarray, now may not be the best time for Chicago-area apartment renters to stretch their budget and try to buy that first home or condominium, Roettig warns.

“During the first five years, more than 80 percent of your monthly mortgage payment is interest. And nearly half of all owners move within five years—before they start building any real equity,” Roettig said.

“Add in the money they spent during the time on maintenance, taxes, insurance and the costs to buy and sell their house, and most would have saved money by renting,” she said.

However, first-time buyers struggling to save the down payment and closing costs needed to buy a home or condominium shouldn’t be disheartened.

According to Illinois Association of Realtors, buyers-market conditions now exist with low interest rates, an ample supply of existing homes and condominiums, and negotiating room on price.

Other positives exist for first-time purchasers. Between now and June 30, 2009 they are eligible for a new $7,500 tax credit. And, Uncle Sam recently increased loan limits on FHA-insured mortgages, which now require a down payment of only 3.5 percent of the purchase price.