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The Rent vs Buy Tradeoff: How Many Years of Ownership?

In 2005 it seemed common sense that buying a home was the easiest choice out there. Real Estate Prices were certain to rise, and financing was cheap and easy to get. It seemed like you could afford a great home and stand to build wealth from appreciation in the real estate prices. It would be foolish to rent given how much return you could make on the equity in a home. Fast forward just a few years to 2009 and you would see that home prices in some areas have dropped more than 40% in just a short two years from 2007-2009.

It's impossible to have not heard the harrowing news out there about the subprime collapse, people walking away from their homes because they can no longer afford their mortgages, or because their homes were worth so much less than their mortgage value. You might be thinking that perhaps buying a home isn't such a good idea. However, that really isn't the lesson that should be learned from the precipitous rise and fall of the Real Estate Market.

While the thought of losing 40% of a home's value in just two years is frightful, it's important to keep in mind that over the course of 30 years. (A typical home mortgage period) Home prices have still appreciated considerably. That combined with the tax benefits provided for mortgage interest still provides a compelling argument to buy a home - Should you plan to stay there for at least 7 years.

Why 7 years? For most people, buying a home is the largest financial commitment they will make. There are many costs associated with a home transaction - and taking a taking a mortgage to finance a house leaves much less financial flexibility once they are committed. If you plan to move in less than 7 years, you leave your finances to the whim and cycles of the real estate market and it's natural (and sometimes unnatural fluctuations. Having the time to ride out the fluctuations in the market means that when you need to sell your home, you won't find your home valued at thousands or tens of thousands of dollars below what you paid for it.

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