Rent or Buy in L.A.?? A new Paradigm for the American Dream.

By
Real Estate Agent with Keller Williams Realty
Rent vs. Buy in L.A.

Rent or buy in L.A.?? You must be wondering by now. But how do you make an informed decision on this roller coaster ride of an economy, with declining home prices that seem to stall for a moment, bringing false hope for a turn in an upward direction, only to inch further into the abyss of negative value.

As a Realtor in Los Angeles who makes a living at selling homes, I have been having a 'coming to Jesus' with myself lately about what all of this trauma we've been through in the last few years means for our culture in the near and distant future, and how this American neo-Depression has altered and shifted our perception of what is valued and desirable. To that point, the New York Times recently published an article warning that we ought not continue to look at housing as a means to building wealth. What?! The very notion that real estate and attaining the dream of homeownership is no longer a cornerstone of building a firm foundation for you and your family is earth shattering. After World War II, high demand, inflation, a long and steady decline in interest rates, and unrealistic appreciation in home values made the goal of owning real estate almost a 'no brainer' for most of us. Our own perceptions of 'making it,' in fact, included home ownership as a considerable milestone. Now, it seems, the paradigm may be shifting...rent or buy?

I recently became engaged in a dialogue on Zillow.com about the rent vs. buy debate with another agent. I vehemently defended the fact that, depending on a buyer's short and long term goals and with loan rates at historic lows, now is the time to at least consider a home purchase:

'Really understanding the market you're looking to buy in is important so you can better understand the cyclical nature of buying and selling patterns in that market against the larger picture of the state of the nation's economic recovery. Real estate is always a risk, but is cyclical in nature, and over the long haul exhibits consistent trends. By studying these trends, knowing the market you're considering purchasing in, and really coming to terms with what your short and long term goals are for your life, one can make a qualified and well informed decision about making a home purchase in today's climate.' 

The response I received from one realtor on the site didn't change my opinion entirely, but he did raise some interesting and valid points that, along with other indicators, have fueled in me further deductive investigation on the rent or buy issue:

For instance, statistics show that inventory is increasing nationally. Surplus inventory means falling prices. if reduced interest rates make buying homes cheaper, but few homes are being purchased, then what happens to the buyer who does decide to purchase today? As interest rates increase, the offsetting effect is that home values wlll continue to drop, as this is the only way that affordability can remain the same. Since unemployment rates are at a historical high, it is unlikely that the affordability factor will dissipate any time soon.

So, a buyer who purchases a home at today's rates, would see the home remain underwater for many years if rates do, in fact, rise. If they have to sell, get divorced, become ill, lose a job, etc., the homeowner could find themselves in a very unfavorable financial position. That's why, in today's market, it makes the most sense to buy a home where the mortgage is significantly less than the projected rent, so that renting the home for the next decade or so becomes a viable 'plan B.'

Playing devil's advocate to my own argument in the 'rent or buy' debate, I still believe that the goal of home ownership for many people is an emotionally based decision as much as a financial one, and related to the pursuit of stability, the 'American dream' if you will, and the desire to 'plant roots.' I am, however, questioning whether this particular paradigm will be washed away and replaced by a new one, as our culture has the gradual realization that nothing, really, is permanent. If this is the case, and we collectively begin to embrace impermanence, transitory living, and flexible non-committment, how will this also change our understanding of the "American Dream," as it relates to home ownership and otherwise? is now the time to rent or buy in L.A.? What about other areas of the country and are certain homes a better value proposition than others in a global market of changing priorities? The times, they are a-changin'....

By the way, I sell real estate throughout Urban L.A., so please visit me at UrbanPulseProperties.com for a free list of homes for sale.



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Rainmaker
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Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

Bree, 

Excellent look at the debate.  I still truly believe in the long term value of housing as an investment and wealth building.  Having said that I lease and property manage homes in Atlanta and am seeing HUGE demand for executive lease homes.  In a number of cases we are having multiple offers for lease - like as many as 4 in a 24 hour period for $4000 and $5,000 a month homes.

Of these homes, almost 90% of my credit scores have been above 750, with a few over 800.  So, it's not like I am getting folks who cannot buy, but folks who choose not to buy.  

Interestingly, I think as the leasing market continues to heat up that will be part of what drives a stronger selling market, as when lease prices increase a bit and it makes sense to buy. 

Folks are just terrified of the uncertainty.  

Just heard Senator Isakson - a REALTOR speak this week, he thinks we have a 5-7 year recovery in housing.  (wrote a blog about his comments!)

The debate will rage on for some time. 

All the best, Michelle

Aug 27, 2010 03:12 PM #1
Rainmaker
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Lisa Delzompo
PRW Lending, Inc - Temecula, CA
VA, FHA, Conventional

Bree, excellent post.  I tend to focus on your point about the particular buyer's needs and situation, where they're buying, is there a strong rental market if the buyer is planning to move on at some point.  If that buyer qualifies (i.e., has a steady job that is likely to continue), and the buyer wants to stay in the area long-term or knows he will leave in a few years (military) but can put in a tenant who will cover or almost cover PITI, then buying provides tax breaks as well as paying down the mortgage using housing dollars the buyer would have spent anyway or else mostly the tenant's dollars.  Real estate is a market, so it has cycles, but the long term graphs show that it goes up over time.  That makes it hard to make a mistake in choosing to buy a home.  Great post, thanks!

Aug 29, 2010 11:37 AM #2
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Bree Long
Keller Williams Realty - Los Angeles, CA

Thanks for the feedback Michelle and Lisa. Yes, Michelle, people are terrified, but Lisa, you make great points that aid in overcoming some of this fear based thinking people have about jumping back in to the market. There really is no black or white, right or wrong answer to the question of rent vs. buy, since it really does depend on the buyer and their long and short range goals for their lives and the property.  Thanks again for your comments!

Aug 29, 2010 06:16 PM #3
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Bree Long

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