The pros and cons of renting vs buying a home when inflation is high

6 Minutes

Owning a home has always been part of the American dream, and for good reason. There are many pros to home ownership, the most compelling perhaps being the financial benefit of owning property, and the strong sense of security and stability associated with that ownership.

There are, however, some cons to owning a home, which are amplified during times when inflation is high. This article weighs the pros and cons to help each individual renter figure out when the time is right for them to buy a home.

Key Takeaways

Owning a home is a great way to protect yourself against inflation.
There are potential financial benefits to owning a home that aren’t available to renters.
Deciding whether you should settle down or not depends on your personal goals and perspective.

The pros and cons of owning a home

The pros of owning a home can essentially be divided into two parts: emotional and financial.

On the financial side, a fixed-rate mortgage can bring stability and predictability to your monthly housing payment for the term of your loan. Not only does that make budgeting easier, but the principal paid builds equity in the home, which can be accessed again through a home equity line of credit, cash-out-refinance, or if the home is sold.

To be fair, the emotional benefit of owning a home depends on your perspective. For some, owning a home brings a feeling of accomplishment, security, and stability. There is some peace to be found knowing you have a place to live for the foreseeable future.

Others, however, don’t want to be tied down to a single location for the next 30 years. For people who fear their source of income isn’t very secure, owning a home could become an added source of stress and concern.

Growing roots can be seen as a pro or a con, depending on the individual.

The pros and cons of renting

On the flip side of the coin, we have renting. The main benefit of renting is that you don’t own anything! If a washing machine needs repairing, or the roof needs to be replaced, or a water heater breaks, it’s not the renter’s problem — at least not financially. The renter may have to deal with a few inconveniences until problems can be addressed and repairs can be made.

A big drawback to not owning the place you call home is your landlord has the right (in most areas) to increase your rent at the end of your lease. In a way, it’s similar to having an adjustable rate mortgage. The payment is fixed for an initial period of time (the duration of your lease), and after that it can adjust. A year later it can adjust again, and then again.

In fact, the average cost of rent has increased every year since 2005. Between 1980 and 2022, average rent prices have increased at a rate of 8.85% per year.

The last major con of renting is that once rent money is paid — it’s gone. While there’s no guarantee that a homeowner will be able to get back the equity built in their home, there is a guarantee that a renter won’t get back the money paid for rent.

The impact inflation has on housing inventory and prices

When inflation first hits, prices go up. When prices go up, people have less buying power. Less buying power means a potential homebuyer might not qualify for as large of a loan to buy the house that they want. This creates more competition for lower priced homes — which could be good or bad depending on your finances and the type of home you’re looking to buy.

After a few months of high inflation, home prices usually start to come down. This happens because consumer confidence usually drops, meaning there’s less buyers in the market for a home so the housing inventory is able to catch up a little bit.

According to Zillow, 74% of industry experts believe inventory levels will return to pre-pandemic levels by 2024.

Prices on the other hand are on a slow decline, but experts expect they will likely only drop about 5% this year. The fact that home prices tend to increase in value over time is why home ownership is considered to be a safeguard against inflation.

Yes, homes fluctuate in value. However, there is no recorded 30-year span in history where home values have not increased. If you want to settle down in the area where you live, buying a home is probably still worth exploring. Even if interest rates are currently higher than they used to be, they can, and probably will eventually fall again. When that happens, homeowners with higher rates can consider refinancing.

An example of home ownership protecting against inflation

In 2005, the average home cost $240,900. At the average interest rate of 5.87% for a 30-year fixed-rate mortgage, the monthly principal and interest would have been $1,424.24 if a 20% down payment was made.

That may seem like a deal today, but back then it’s likely a renter would have scoffed at that deal, given the average rent in 2005 was only $592/mo.

But that’s the point! Mortgage payments are typically higher than rental payments when compared to the same year. Inflation is the steady increase of prices over time. Fixed-rate mortgage payments don’t change over time, which means eventually, the rent catches up.

And today, the average renter pays about $1,320/mo.

So, should you buy a home right now?

It depends. Are you ready to settle down for the long haul? Do you have a stable income? Do you want to build equity in something you own, or does that not matter to you?

The truth is, the right answer has to be your answer. No one can answer these questions for you, but we can answer your mortgage questions!

Give us a call, even if you’re not sure if you’re ready to buy a home, and we’ll use our industry expertise to do our best to help guide you on your personal home buying journey.