Rent or Buy?

It Might Be Time to Rent

By Mellody Hobson

ABCNEWS.com

Sept. 30, 2004— Although owning a home is the American dream, in light of the current environment in certain metropolitan areas, individuals looking to buy may want to consider renting for a bit longer.

Why? Because while the housing market has reached all-time highs, the rental market is incredibly depressed in many markets creating lots of values for consumers — housing prices have risen 25 percent faster than rents since the mid-1990s. With the national vacancy rate for rental properties at a record high of 10.5 percent, many landlords are offering incredible deals to entice potential tenants — such as a free month's rent — in those same areas where home prices have soared.

Why Should You Consider Home ‘Rentership’?

• Record high existing home sales: Record low interest rates over the past few years have created an unprecedented housing boom. In 2003, Americans purchased 7.2 million new and existing homes, an increase of 10 percent over 2002, and this year sales are likely to add up to 7.9 million homes by year-end suggesting prices might be near a peak.

• Soaring home prices: The prices of homes have skyrocketed in many markets, including Washington, Boston, New York, Miami, Los Angeles and San Diego. In fact, on average, median home prices nationwide have risen 47 percent since 1995.

• Large price gaps: The price gap between the most expensive housing regions (mostly metropolitan areas on the coasts) and the rest of the country is larger than ever before, in part because of a shortage of land available for home-building in these high cost markets. According to analysis by Economy.com, the typical home price in the 10 metropolitan areas with the highest home prices — San Diego, Orange County, Calif., West Palm Beach-Boca Raton, Los Angeles-Long Beach, Fort Lauderdale, Miami, Washington metro area, New York, San Francisco and Boston — has risen to 230 percent of the national median from 155 percent five years ago. Again, indicative of a peak.

• Home prices versus median annual income: As we learned with the dot-com craze, this frantic pace is unsustainable over the long term, especially in light of the fact that many homeowners are now stretching even further to buy the home of their dreams. From 1975 to 2000, home prices remained within a range of 2.7 to 2.9 times median annual income, but today the ratio is 3.4, dangerously high.

• Increased inventory of homes for sale: The inventory of unsold homes has begun to rise in many parts of the country. For example, in Orange County, Calif., the median home price has soared to $655,000, an increase of 84 percent since 2001. Additionally, the housing market in Ann Arbor, Mich., for example, has swung decidedly toward the buyer as more homes are sitting on the market for longer periods and eventually selling at lower prices. July figures from the Ann Arbor Area Board of Realtors showed a drop in the median home price compared with July of the previous year from $239,000 to $230,000. Likewise, the data revealed a 25 percent increase in the number of homes pulled off the market.

• Vacation homes selling: Some vacation home owners are looking to cash out of the market as evidenced by the increased in inventory of homes for sale in resort areas. For example, the inventory of unsold homes in Great Barrington, Mass., (a popular Berkshires resort town) is up 40 percent from last year.

Mellody's Tips for Renters:

• Rent a condo: The condo boom in many major cities has spurred a hidden and affordable market for apartment renters. For example, in Chicago, it is not uncommon for downtown condo owners to lure renters with special incentives such as free parking, full utilities or complimentary Internet and cable service and one month free.

• Negotiate: Renters often assume the leasing price is non-negotiable — this is not true. Similar to how one would negotiate when purchasing a home, it is an excellent idea to do the same before you sign a lease.

• Think long term: The longer the lease, the more favorable the terms. As such, if you know you are going to be in a place for longer than the traditional 12-month lease, consider asking the landlord to write a longer lease — a win-win for both parties as the landlord is assured of having the apartment rented and you are likely the recipient of a less expensive monthly charge.

• Get it in writing: Not only is it important to get the pricing terms of your lease spelled out in your lease, but any verbal agreements made by a landlord should be clearly stated on paper as well. For example, if a landlord promises cable and utilities will be included make sure the verbal agreement becomes a written one.

• Consider using a free apartment finder: Similar to working with a real estate agent to buy a new home, apartment search firms are an excellent way to find some of the undiscovered apartment deals. Most finders do not charge the renter a fee — but pass along their fee to the landlord or management of the leased unit. Additionally, sign on to Craigslist.org — an online search engine/listing service which has a user base of 5 million people a month who are looking to sell or buy a variety of items. Think eBay for apartment finders. 

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.