Novak: In Austin, rent vs. buy debate heats up

“The real estate industry has done a great job persuading the American people that the American dream starts with homeownership. It’s the greatest lie ever sold.”

“A home is the farthest thing from building equity; it’s one of the greatest expenses known to mankind.”

I’ve wanted to get those contrarian nuggets from Patrick Bet-David, a financial advisor formerly with Morgan Stanley and Aegon, into the newspaper ever since they came across my email this month. They run counter to the mantra from most real estate agents, homebuilders and housing proponents, for whom there usually has “never been a better time to buy.”

Bet-David casts a skeptical eye on the so-called “American dream” of homeownership. Bet-David, president and chief executive of California-based PHP, which markets life insurance and financial products, contends the real estate industry has perpetrated an “incredible propaganda campaign” that the American dream begins with home ownership.

Bet-David’s soap box, along with two recent conflicting studies on renting vs. buying, got me thinking anew about the rent vs. buy dilemma many people face and its ramifications in a market like Central Texas, where both rents and home prices are rising.

While arguments can be made both for buying (building equity, locking in your housing costs, getting a mortgage-interest tax deduction, etc.) and renting (more flexibility to move, no property taxes, homeowner’s insurance or repair and maintenance costs), I asked some housing experts their for views and advice.

They say the choice generally boils down to individual circumstances — financial and otherwise — lifestyle preferences and other variables.

“When someone asks me whether they should rent or buy, my first question is always: How long do you plan to live in your next home or apartment?” says Eldon Rude, a local housing market analyst and consultant. “If the answer is more than a few years, I usually encourage that person to buy rather than rent.”

Local market data is key in making the decision, Rude said. In Austin, average apartment rents have increased 28 percent in the past four years, while average home prices rose 17 percent during that time, Rude said.

From 2003-2013, the average home price in Austin increased from about $205,000 to $293,000, a 43 percent jump. “And that includes the recession years we just went through,” Rude says. “While someone might have a better return had they rented and invested the difference, they would have to have the discipline to invest that money every month and not spend it.”

The average rent citywide now tops $1,000 a month, an all-time high, according to Capitol Market Research, a local real estate consulting firm. Rents soared 50 percent from 2004 to 2013, its research shows, even as the median income went up only 9 percent during that time, according to the Texas A&M Real Estate Center.

Mark Sprague, a longtime housing market analyst, said the numbers simplify the choice. Austin’s 50 percent rent growth during the past decade, its home appreciation rate of 38 percent during that time and low mortgage-interest rates means “renting seems a poor choice.”

None of that would sway Bet-David, who says he has never owned a home.

Bet-David insists he’s not pessimistic about home ownership. It’s just that American’s spending habits have gotten out of balance, having shifted from an era when people bought on cash to now financing purchases from wedding rings to cars and houses. He says the true American dream is not about owning a home, but about entrepreneurship — the ability to start and “build it as big as you want and become financially free.”

No matter which side of the argument you take, you can find data to support your position.

In a recent analysis in The Wall Street Journal, Deutsche Bank found that in many cities, rising home prices have made renting less expensive than buying. Austin was one of five metro areas where the monthly cost of renting recently became cheaper than buying, according to the analysis. The study found that a new renter in Austin spends 95 cents for every dollar a new buyer spends on housing each month.

But another study came to the exact opposite conclusion. In its latest “rent vs. buy” report, Trulia found that buying was cheaper than renting in all of the 100 largest U.S. metro area.

Why the disparity with the Deutsche survey? Deutsche uses a 5 percent down payment in its calculation, while Trulia uses a 20 percent down payment, which Trulia spokeswoman Korina Buhler says is more in line with what someone will need to qualify for a mortgage.

“And using the assumption that buyers will get a 4.5 percent mortgage rate on a 30-year fixed-rate loan with 20 percent down, are in the 25 percent tax bracket and will stay in the home for seven years, buying a home is actually cheaper than renting in the 100 largest U.S. metros,” Buhler said.

Of course, Austin-area homeowners and renters alike couldn’t be blamed if they put little stock in either report — because both groups have watched their cost for shelter rise.

In the real world, of course, the rent vs. buy decision involves real dollars. And that was part of what led Austinites Mike and Jodie Baldwin to sell their two-bedroom house in Aldridge Place, near the desirable Hyde Park area in central Austin, and to become renters.

The Baldwins sold their 2,500-square-foot home in November and headed east, downsizing into a brand new upscale apartment with 1,400 square feet overlooking Lady Bird Lake.

Among other costs, they said, the move eliminated expenses for lawn care, upkeep on an older home, homeowner’s insurance, payments on a home improvement loan and a $12,000-a-year property tax bill.

The Baldwins estimate they are saving about $1,300 a month by renting instead of owning.

They also say the decision to rent has opened up new experiences as they sample life in an up-and-coming area along East Riverside Drive, and one with an easier commute for Mike, a co-owner of ZAX Restaurant and Bar just south of downtown.

“It was kind of like a reset in Austin,” said Mike Baldwin, who said the couple had gotten into a bit of rut after 13 years in their 2,500-square-foot house, which he and Jodie, a health care industry consultant, bought after relocating from the Bay Area. “You get a little different experience, in a different neighborhood,” he said of the area, which is transforming with new housing, retail, recreational and entertainment options.

Jodie Baldwin said the couple didn’t really think about how much the move would affect their day-to-day life when they made the decision.

“We didn’t realize how much time we spent on home chores and maintenance projects that we now have free,” she said. “We use some of that to explore our new neighborhood and search out the hidden gems, like the trails, services and restaurants. It gives us an entirely new perspective on the city of Austin.”

While you can make arguments for either renting or buying, local real estate consultant Charles Heimsath says the issue is a complex one that is best answered at the individual level.

“Every homebuyer or renter has to make a choice about what’s best for their circumstances, and rent vs. buy is only one aspect of a person’s lifestyle,” Heimsath says. “How important is minimizing commute time? What is the best school option for my 6th grader? Do I want to live near where I go for entertainment or live closer to my employer? How important is building up my savings account? Where does my girlfriend live?

“All of these factors influence a person’s choice of residence, and that choice can be very complicated.”

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