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Personal finance

Rent vs. buy: It’s all about how the numbers crunch

The conventional wisdom — that renting is a waste of money — isn’t always true. Above, a $2,600 rental unit at the Kensington in Boston.

Aram Boghosian for The Boston Globe/File 2014

The conventional wisdom — that renting is a waste of money — isn’t always true. Above, a $2,600 rental unit at the Kensington in Boston.

WEDNESDAY — Before the housing market crashed during the Great Recession, homeownership was considered a no-brainer.

People were told to buy a home as soon as they could because it was the financial route to the middle-class American dream.

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Renting was a waste of money, conventional wisdom said.

Now, some people who would have jumped at buying a home years ago are weighing their options. Attitudes about homeownership have shifted, according to “How Housing Matters: The Housing Crisis Continues to Loom Large in the Experiences and Attitudes of the American Public,” by the MacArthur Foundation.

“The American people believe that the country’s housing environment is changing,” the report noted. “While most non-owners aspire to own a home some day, homeownership is not viewed as the vehicle to building wealth that it once was, and the public believes that renting has grown in appeal while owning has declined.”

When asked how likely it is for families today to build equity and wealth through homeownership, two-thirds of respondents to a poll accompanying the report said it’s less likely than in the past. And that sentiment was pretty consistent among all income and age groups.

Furthermore, an overwhelming majority believed that renters could be just as financially successful as homeowners at achieving the American dream.

It’s a good thing that renting isn’t seen as being a financial failure. Here’s a question I received recently during my weekly online chat from someone doing exactly what should be done when faced with the rent-vs.-buy decision. The reader wrote:

“I’ve been living in a shoebox apartment, less than 400 square feet, for more than three years. While I enjoy many aspects of this apartment, I’m starting to feel cramped. If I decide to move to a larger place, I’d need to pay at least a few hundred dollars a month more. That may be worth it for me. What I’m stuck with now, though, is the question of rent vs. buy.

“Part of me (perhaps the emotional part) feels like buying makes sense for investment, stability, etc. The logical part of my brain keeps reminding me of the incredible expenses of buying and the reality that I probably wouldn’t develop much equity in a property unless it’s a long-term investment. I’m not sure I’d necessarily want to live forever in the type of place I could afford today. I know I’m overthinking this and my overthinking is leading to inertia. What do you think?”

Now that things are improving in the housing market, people may be tempted to rush into homeownership because they want to take advantage of lower home prices. Or they are afraid of missing out on still fairly low interest rates for home mortgages.

But if the time isn’t right and the numbers don’t work, better not buy. Keep on renting.

Let’s say you could get a great deal on a home at a very low interest rate. But if, like the reader participating in the chat, you aren’t sure you want to stay in a particular area and having a home would complicate a future move, you might want to reconsider a decision to buy.

Most importantly, if you can’t afford the payment even at the low rate, it’s definitely not the right time to buy.

In the MacArthur poll, some people had to get a second job, stop saving for retirement, or rack up credit card debt to cover their housing expenses.

I understand that in high-cost areas, families are spending 40 to 50 percent or more of their net monthly income on housing. But after working with lots of people and their budgets and looking at data from credit counseling agencies, I’ve found that if you are spending more than 30 to 36 percent on housing, you’re probably headed for trouble.

I heard Bishop T. D. Jakes, a minister and best-selling author, recall that during a business meeting, he once heard someone say, “When you don’t know what to do, do something.”

Jakes said he thought that was an idiotic comment. And so do I.

I have been in workshops in which people were arguing that it would be financially foolish for them not to buy a home even though housing prices were, as we now know, unsustainably high. Look at the damage that thinking produced.

I’m still a huge advocate of homeownership. When it comes to something as important and expensive as a home, however, you should take it slow.

Inertia can be a good thing. Take as much time as necessary for you to become comfortable with a decision to buy.

Remember: Fools rush in.

Michelle Singletary can be reached at michelle.singletary@washpost.com. Follow her on Twitter @SingletaryM.
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