Conventional wisdom suggests that buying a house is always better than renting one. That in the long run, owning is a wise investment because it will leave you with a commodity to grow, appreciate, and sell.
But these, of course, are not conventional times. Mortgages are hard to come by. Housing prices have at best stalled and at worst dropped. The number of houses bought and sold is higher than it was a year and two years ago, but not at all where it was five or six years ago. And there is no guarantee that you will be able to sell your house for what it’s worth, much less what you’re asking.
When it comes to Princeton the old maxim “Why rent when you can buy?” bears a closer look. Low interest rates aside, banks are stingy about granting mortgages. Combined with Princeton’s high (even for New Jersey) property taxes, potential buyers might ask: why buy when you can rent?
At first blush, renting looks to be the cheaper option when considering houses. Consider the house at 51 Cleveland Lane, which is listed by Susan Gordon and Ingela Kostenbader of Coldwell Banker. The house, which features six bedrooms and 3.5 baths on nearly a half-acre, is for sale ($1.795 million) or rent ($7,000 per month).
To buy this property would require monthly payments of nearly $11,700, based on a 30-year mortgage with a 6-percent interest rate, 20 percent down, and annual property taxes of $33,551. Per-month, the difference is close to $5,000.
Yet in a place like Princeton Borough’s western end, such numbers can be deceiving. In the wealthiest part of town, Gordon says, there are usually no large mortgages. Someone with the money to buy a $1.795 million house in this end of town usually has enough money to put down more than 20 percent (which would leave a buyer with a $1.436 million mortgage loan). So the odds are that the buyer of a home like the one at 51 Cleveland Lane would not be in a position to have to fork over $11,000 a month for the next 30 years.
Renting rather than buying might have little to do with the simple act of saving money month to month. Gordon says a large number of renters in Princeton are new to the area, yet still have ties to where they came from. “They’re people moving in from wherever who haven’t sold their homes,” she says. So while they await the fates of their houses in California or Michigan they rent here, with the intention to buy once things are settled elsewhere.
Another group that often has the money to buy but chooses to rent is the pre-retiree, Gordon says. These are professionals nearing the ends of their careers who have downsized now that the kids are gone and in anticipation of less money coming in. But since their lives have too many variables — will we stay here or move to a less expensive area? How much space will we need? — they do not want to commit to buying a home just now.
Marty Stockton, president of Stockton Realty at 32 Chambers Street, sees still another motivation for renting in today’s market — the bargaining chip. “People trying to get a bargain are waiting sellers out,” Stockton says. Potential buyers know what they want to pay, and if a seller doesn’t come down to meet the price, the buyers walk away. Renting now — when rents have increased to the point that they are not always far off the cost of buying, month to month — allows buyers to sit tight until they get the prices they are after.
A lot of this has to do with post-crash reticence to overspend on anything, Stockton says. Buyers do not want to pay a dime more than they are comfortable paying. It also has a lot to do with the new world of mortgage loans. A lot of people who traditionally would have been able to get mortgages and become true buyers are caught in the quicksand that is the lending process. “Mortgages are tight — and they should be tight,” Stockton says. “You want to make sure the people buying homes are qualified. The sale market needed a correction. But I don’t know if it needed such a correction.”
Among renters Stockton sees a difference in the generations when it comes to their lease commitments. “The old school would sign a lease and be obligated to it,” she says. “Now they’re signing a lease and saying ‘I can get out of that.’”
Stockton says she recently worked with an older woman who “took the leasing process very seriously. The younger buyers, though, are very cavalier.”
Savvy younger buyers are using their ability to rent not just to wait out a better price, but to low-ball sellers, she says. As a result, a lot of people she feels should have sold a year ago are experiencing sticker shock when they hear the offers they are getting.
The traditional appeal of renting is flexibility and freedom from responsibility. When you rent, you’re not on the hook for nearly as much money should you break a lease or if something goes wrong. If the neighborhood turns bad for you, it is easier to leave a rental than to sell a house. Renter’s insurance is cheaper than homeowner’s insurance, and as a renter you do not have to worry about doing or paying for major repairs.
The traditional counter-argument to renting is that in the long run buying is cheaper than renting. And often it is. But the definition of “long run” changes depending on how much a house is listed for, the size of the down payment, property taxes, and the asking rent.
In May the New York Times posted an online real estate calculator that uses cost inflation estimates to project how much money someone will save year-by-year by buying or renting over 30 years.
At its most basic, the calculator considers monthly rents versus the home price, a down payment, the mortgage rate, and annual property taxes. It projects a 2 percent home value increase and a 3 percent rental value increase by default, though the rates and values can all be customized. It also factors in the return of your investment if you hold the money instead of using it as the down payment on a house.
Filling in the numbers for 51 Cleveland Lane shows that renting is indeed a cheaper option for 29 years, when factoring in a 20 percent downpayment. At the 30-year mark, the difference between buying and renting is $1 for the renter.
At the extreme end of the residential/rental spectrum is the six bedroom, 22-acre Pretty Brook House at 300 Pretty Brook Road. This property, which features a wine cellar, in-ground pool, five-car garage, and its own movie theater room, is for sale by Henderson Sotheby’s International Real Estate for $9.75 million, with property taxes totaling $156,205 a year.
The Pretty Brook House, listed by Judson Henderson, is also available for rent — $21,000 a month. Henderson says the rental option came this summer as a way to increase interest in the property, which has been for sale for a few years now. Originally listed at $14.5 million, the house got few nibbles until it came down below the $10 million mark. Henderson says there is currently some interest from potential renters and buyers.
If you were to plug in Pretty Brook’s numbers to the New York Times’ calculator (factoring for a 20 percent downpayment) you would save $13 million after 30 years over a buyer.
These numbers, however, do not factor in the two-bedroom apartment that sits atop the garage at Pretty Brook. If the owners were to rent this apartment out, it would likely offset a renter’s savings over time. They also compare a 2 percent annual increase in sale prices to a 3 percent annual increase in rental rates. Were rental rates to increase at a faster rate than 3 percent or home values to increase even 5 percent, buying would become more economical in the long run. And if the residential market does bounce all the way back, the estate you bought for less than $10 million might be worth $14 million.
If you’re wondering who would rent when they could afford to spend $21,000 a month, Henderson says a potential renter for Pretty Brook would be motivated by the same thing that draws a lot of potential Princeton-area renters. “It’s an opportunity for people to come into the market and set up in the area,” he says. Henderson says his firm has brokered a few $10,000-plus rentals this year from the type of renter Susan Gordon mentioned — those who have yet to sell properties elsewhere and do not want to own two houses.
But things are looking fairly stable on the higher end of the sale market in Princeton, Henderson says. Top-level buyers are indeed closing on homes — such as a $5.95 million property Henderson just sold in Montgomery a few weeks ago — and this year has seen record sale prices in Princeton Borough and Township.
On the other end of the real estate continuum are houses within the grasp of average working people. The default downpayment on houses below $500,000 is about 20 percent, and using this as a starting guide to calculate the eventual savings renting has compared to buying shows that buying indeed is the more fiscally sound choice after only a few years.
330 Washington Crossing-Pennington Road, Hopewell: Listed by Barrington Cross of Weidel Realty, this four-bedroom, two-bath Cape Cod with a garage is on the market for $277,000 (taxes: $8,409). Or you can rent it for $1,950 per month. If you stay for three years, renting is the better option, but after that, buying means significant savings. After 10 years a buyer will save about $42,000 over a renter, and after 30 years a buyer will save more than $550,000.
2113 Old Stone Mill Drive, East Windsor: Listed by Linda Feldstein of Weidel Realty, this two-bedroom, two-bath condo is selling for $139,000 (taxes: $4,273). A three-year renter will save $1,600 over a buyer, but after 10 years a buyer will save $44,500 over a renter. After 30 years a buyer will save $416,000 over a renter.
Renting versus selling is a question real estate agents are asking themselves as well. Some firms, such as Stockton, Coldwell Banker, and Gloria Nilson, have sales and rental arms — something Michelle Needham of Gloria Nilson says is a good practice in unstable or unpredictable markets. When the sale market is down, she says, an agency can capitalize on rentals, and vice versa. Rentals might not make as much money as sales for agents, but they are an effective stopgap and a good foundation for the future. “It’s the handshake that gets you to the next level,” Needham says. “A lot of my rental clients end up buying.”
Needham started out in real estate in the rental market and property management. She rented properties for people who got relocated for their jobs and expected to come back; professionals who did not want to come back to a more expensive housing market in which they would have to start over.
Such professionals now are more eager to put houses up for sale, Needham says. But renters are still abundant, and many of Princeton’s renters are those like one of her clients from the university who has been renting a $3,500-per-month house for five years. Needham says the professor is too unsure how his future will play out. There are offers for sabbaticals, for example, that make buying a larger question mark.
The other question is time. In a down market like this, Needham says, agents are telling buyers to stay put for seven to ten years before selling will make fiscal sense. “We never used to say that,” she says.
And with that timeframe in mind, she says, potential buyers do their own math and often conclude that they do not have the financial depth to withstand such an investment. The days of buying a house to flip are on hiatus.
This outlook has changed how people view the value of houses, Needham says. She recently read that while buyers used to view homes primarily as an investment and secondarily as a place to live, the order has now reversed — place to live first, investment second.
Renting also has affected real estate agents’ relationships with large companies. Needham has worked with large firm such as Firmenich and Bristol-Myers Squibb, which historically have helped imported talent find a place to live.
But since the sales market is now a seven-to-ten-year market and many professionals are brought in by companies for a three-to-five-year hitch, companies are seeing little incentive to help employees settle into houses.
Needham says big corporations are still offering financial perks to help transfers get settled, but they no longer get involved in the real estate transactions.
So while renting can be an effective tactic for treading water, renting brings its own set of questions with it. Rents, for example, have risen in the choked real estate market, Gordon says. “Landlords aren’t stupid,” she says. “They see the demand and they’ve raised rents accordingly.”
When it was relatively easy to qualify for mortgages and buy homes, Gordon says, landlords had no bargaining chip of their own. But as it has become more difficult to buy, landlords have seized the opportunity to charge premium rents, knowing that many once-qualified buyers have little recourse.
Needham adds that she is expecting an increase in rental properties now that it is autumn and the houses that hit the market (but never sold) in the spring and summer are facing a vacant winter.
More homeowners are opting to rent the property in addition to its sale just to make sure the house is occupied in the winter and to make some money on a property that isn’t moving.
Gordon expects things to change once the mortgage market opens up again. She just doesn’t know when that will be. But she is confident enough in the market to know that it will bounce back. And, she says, if you can land a mortgage, now is a good time to get one. Interest rates are low and sellers are willing to negotiate.
“The market always bounces back,” says Stockton. “This one’s just not bouncing back quickly. I’ve been through six cycles of the real estate market and this is by far the worst one.”