The (Surprising) Case for Renting

By Barbara Kiviat

Michael Choe believes in homeownership. He bought his first place fresh out of college. Yet these days he's doing something he never thought he would do again: renting. With a new baby, Choe, 39, and his wife badly wanted to buy a larger house. But, says Choe, "the market has gone too high too fast. Compared to owning, rent is cheap."

Is he serious? Choose to rent when owning seems a sure way to riches? On closer view, he just may be on to something. The Choes sold their tiny ranch in Sacramento, Calif., for $369,000, or nearly twice what they had paid three years earlier. But rather than plow his money back into a sky-high market in which people were bandying about the word bubble, Choe rented a bigger house in a better neighborhood--at a monthly expense similar to his old mortgage and for less than half of what it would take to buy the new place.

The Choes aren't alone in finding value in the rental market. With so many people buying homes in the past few years, landlords in certain frothy markets, like San Diego, Miami, Las Vegas and Washington, have gone begging. Not a few are collecting less in rent than they are paying in mortgage expense. Their bet is that in the end, rising values will make up for their losses. And it may work out for them. But for now their gamble is giving tenants the upper hand. In the San Francisco suburb of Menlo Park, Patrick Killelea, 39, rents a two-bedroom house for $2,350 a month--a 13% cut from the $2,700 he paid when he moved in five years ago. "I asked for a rent reduction," he says. "Everyone gets a reduction."

Experience and the nation's million or so real estate agents tell us that in the long run, owning a home makes the most financial sense. But today, with so many rushing to own, the math often works out in favor of renting. In Boston, as prices have jumped since 2000, the monthly mortgage payment for a median-price house has risen 23%, to $2,079, according to Torto Wheaton Research. (That assumes a 30-year fixed rate with 10% down.) Meanwhile, the average apartment rent has edged lower by $4, to $1,391.

That tells you two things. First, you should have bought in Boston in 2000. Second, right now renting there is a comparatively good deal. "It's important to ask, 'Am I making the right decision to buy today?'" says Gleb Nechayev, senior economist at Torto. "The balance has shifted so much in favor of renting, people should pay attention."

Dartmouth professor of real estate John Vogel Jr. did a study of two similar Chicago apartment buildings, a rental and a condo, erected across the street from each other in 2001. At that time, the rentals were projected to be $1,800 a month, while the condos were expected to sell for $270,000. Now the rentals go for $1,700 a month while the condos sell for $450,000. "Things have gotten totally out of synch," Vogel says.

Of course, there are trade-offs either way. As a renter, you don't pay transaction costs, property taxes, insurance and maintenance. But you also miss out on a tax deduction for mortgage interest and property tax--often a substantial amount. Then there is the mother of all arguments for buying: building equity. Last year 25 out of 50 states plus the District of Columbia saw double-digit appreciation in house prices. That's a heck of a return. But it's also backward-looking. If interest rates rise, the housing market will almost certainly slow. And in that case, the gap between renting and buying will start to close.

This reversal may be in its early stages now, as rents have picked up in places like the capital and South Florida. But we have a long way to go before we reach economic equilibrium in the hottest markets, leaving renters at least temporarily in a good position. Says Choe: "Right now, I love my rental." --With reporting by Sonja Steptoe/Los Angeles

With reporting by Sonja Steptoe/Los Angeles