Is a Home Still a Good Investment?

Most baby boomers have had good experiences owning homes for the last 30 years. I bought my first house in 1977. When I sold it in 1982, I joked to my friends (but it was almost true) that I'd made more money from my house than I had from my job. Despite a substantial loss in the past four years, over the last three decades I've still made a lot of money owning my own home.

For most of our lives and our parents' lives, owning a home was the American dream. Your house centered you in a stable community and provided a school for your children. In the long run, it was a good financial decision as well. The mortgage and taxes were subsidized by the tax code. And the value of your house generally increased, except for a few brief recessionary periods, and was on an upward trajectory over the long term. The rule of thumb was that is was better to own than to rent, as long as you planned to stay in the house for at least five years.

But that was then. What about now? Housing prices have been falling since 2006, and owning a home has become more of an albatross than an opportunity. People now seem more interested in mobility than stability. They want to retire to a warmer, less expensive place, but they can't sell their home. Some people also want to move to take a job, but their mortgage is under water.

Consider a single woman in her 30s making a good salary who now wonders if she should buy a townhouse. But she's worried. The prices could continue to drop and she might lose her investment. Maybe she'd be better off putting her savings in the stock market, rather than making a down payment. The upfront costs are high, including a down payment, the mortgage, the lawyer, the insurance, and the taxes.

On the other hand, she feels like she is throwing away $1,000 a month to rent an apartment. Renters are not building equity. Plus, many of the people who live in her apartment complex are transient and she'd feel more comfortable if her neighbors were more settled in. Also, while it's nice she doesn't have to worry about maintenance, the landlord often does a quick fix instead of doing the job right. She'd like to fix up the kitchen the way she'd like it, rather than the way the landlord has it.

Whether or not young people should buy homes right now is a difficult decision that doesn't have an easy answer. Above all, the choice of whether to rent or buy is a lifestyle decision. What kind of home and neighborhood does she want to live in, and how long is she going to stay there?

The New York Times offers a calculator that compares the costs of renting and buying. You plug in the price of the property, along with the taxes, your down payment, and the mortgage rate, and compare it to the rent you'd pay for the same place. But as with any calculator, you have to make certain assumptions, chiefly about how much the property will appreciate over the years, and how much the rent will rise.

But, to me, any calculation fails to answer an obvious question. In the long run, how could it possibly be cheaper to rent than buy? When you rent, somebody else owns that property. They're not going to rent it to you for less than what it costs them and they get the tax benefits.

I did the calculations for my old condo, which I sold in 2007, and which now happens to be for rent. If I assume the value of the property will go up 2 percent a year and the rent would increase at the same rate, then the line crosses at four years. If someone moves in and stays for over four years, it's cheaper to own than rent.

In other words, the new rule of thumb is the same as the old rule of thumb. Rent if you think you're going to stay less than four or five years. Buy when you're ready to settle down.