Though a Long Term Investment, It Is Better to Rent Because of Cost and Mobility - Essay Example

? Though a Long Term Investment, It Is Better to Rent Because of Cost and Mobility Introduction Though housing offers a long term investment, it is better to rent because of cost, mobility and plausible alternatives available with us. It will be interesting to investigate the pros and cons in detail as to how renting becomes more acceptable alternative. Some Quick Facts: The renter assumes no responsibility so far maintenance of the house is concerned. On average, maintenance cost is considered around 2 percent of the cost of house. Owning a house means every year one need to fork out that much money. If lawn and garden is a part of the house; it requires some extra cost for its maintenance. Maintaining the garden means need to have some tools and tackles for daily gardening activities. It needs putting daily labor on planting, cutting, and other gardening activities. Is home ownership an excellent path to wealth? Current economic and housing scenario needs to be examined before coming to any conclusion. Lending market terms and conditions changed substantially after subprime mortgage crisis that took place in 2008. Since then the rules of lending has changed dramatically. No easy credits are available. Banks and other lending institutions have made it mandatory for 20 % down payment at the minimum. Ruling long term interest rates for borrowings are hovering high at around 4.5-5.0 percent. A housing scenario in US is on a decline. Economy is in slump and shows no sign of recovery. Some of the factors at the national level can be outlined as per the following. 1. Unemployment rate in US for last several months is hovering around 9 percent. The high unemployment rate prevailing since long does not augur well for the investment in housing. (Economic News, 2011) 2. US GDP numbers appear to be accelerating but it has not yet shown continuous improvement to believe that economy has come out from doldrums. 3. The crude oil prices are ruling high above $95 per barrel. Historically, when crude oil prices rule high, US are found to be in recession. Experts opine that the crude oil price is not likely to go below $90 at any case; that means the economy will be at tenterhooks for some more time. Housing Inventory in United States As per Berg (2011) the excess housing inventory as on December 2010 was found to be around 1.2 million units. According to him the excess inventory is not likely to be absorbed until 2012 end or so. Demand and Supply in Housing The market price of housing depends upon the demand and supply equation or for that matter that is true for any commodity. Housing demand was in upswing since January, 1993. The median housing price from $125,000 in 1993 doubled to 250,000 by 2006. This was due to burgeoning demand that came through cheap credit that was available from banks and other lending institutions. Demand is either from genuine investors who want it for their own living or from speculators who just look at short term or medium term investment. That is true in most markets. Speculative investors will leave the turf as soon as they notice first sign of weakness in the market for their only objective is to make profit. These speculators will now turn sellers and huge supply of housing will start in the market. Market is not ready to absorb such huge supply. Result will be decreasing prices until equilibrium of supply matching demand is created. Applying above phenomena, currently, housing market is in downward trend after reaching its peak in 2006. Constant reviewing the housing index give us some indication that this downward fall has not reached its nadir. The fall between 2006 and 2010 in housing index has been somewhere around 30 percent. (Median and Average Sales…) The following graphic shows how the housing price behaved in last 20 years. Median Price (Logarithmic U.S. Real Estate Graph)   Source:http://www.investmenttools.com/median_and_average_sales_prices_of_houses_sold_in_the_us.htm#median_log This downward correction is still not over and likely to fall further for the reason that accumulated housing stock has not yet been absorbed by the market. Property Taxes and Insurance Home loans are available at the interest rate between 4.5 to 5 percent or more. Usually, the lending institutions prefer to lend for the maximum duration of 20 years for mortgage loan. Another deterrent for owning a house is property taxes and insurance. Property taxes are under 1 percent of the total cost of the home per year that is an additional burden. That of course, depends upon the state laws. Insurance cost adds further 0.50 to 0.75 percent of total home cost which is a cost on per year basis. In a current economy of slump, it is quite likely that one may have to move to a different city. Renting the house then, remains an only option. The disposal of house is also a long and tedious affair that often takes months. When house remains vacant for a long time, it deteriorates fast and renovation becomes necessary and that is a drain on your resources. Alternative Avenues for Investment Instead of buying a house fund can be invested in different avenues; some of them are: Dividend yielding stocks that are a good avenue to invest money where regular stream of income can be had apart appreciation in the stocks. 401 K provides safe and decent yield year after year. Interest bearing saving account where money earns some fix interest return and liquidity is excellent. Bonds of reputed companies give good return and they are traded in the market providing easy liquidity. Conclusion Thus, in a current scenario buying a house is not safe particularly, after the subprime crisis when accumulated housing stock is huge and it will take years before fresh demand outsmarts supply. Instead, renting is a better option for the varied reasons as discussed above including easy mobility, promising alternative avenues available for investment and more than that a long term downward trend in US housing that will take years before stabilizing. References: 1. Economic News Release 2011, Online from http://www.bls.gov/news.release/empsit.nr0.htm [Accessed on 7/21/2011] 2. Berg, Robert (2011), Housing Inventory Data, Online from http://www.woodbiomass.com/woodbiomass/news/North-America/Wood-Energy/RISI-VIEWPOINT-UPDATE-US-Census-fourth-quarter-2010-housing-inventory-data.html [Accessed on 7/21/2011] 3. Median and Average Sales Prices of New Houses sold in US, Online from http://www.investmenttools.com/median_and_average_sales_prices_of_houses_sold_in_the_us.htm [Accessed on 7/21/2011] Read More