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Should you rent or buy? That depends on crucial factors

Being financially prepared is crucial for home ownership,

Being financially prepared is crucial for home ownership, experts say. Credit: iStock

Three years into the national housing recovery, activity and price increases are moderating. While the unusually severe weather across the country has contributed to the recent weakness, the effects of last year's rise in mortgage rates and the incremental increase in inventory have slowed things down. As a result, it is a perfect time to consider one of the age-old questions that plagues would-be homeowners and equity-rich near-retirees: Should I buy or rent?

Let's start with some post-housing crash statistics. According to the Census Bureau, home ownership peaked in 2004 at 69.2 percent. Since then, the U.S. home ownership rate has fallen for nine consecutive years, down to 65.2 percent at the end of last year.

Obviously, the housing boom and bust and subsequent recession reversed the trend. But something else happened over the past 10 years: The "dream" of home ownership was called into question by every age group.

The under-35 set watched with dismay as their parents were crushed by the housing crisis. As a result, they are spooked by home ownership, with just 36.8 percent taking the plunge. Some of them have been forced to live with their parents longer, rather than forming their own households, while others are content to rent.

Meanwhile, their parents, ages 55 to 64, saw their share of household ownership at its lowest point since record-keeping began in 1976. Where did they go? Also to the rental market, according to Harvard University's Joint Center for Housing Studies.

The number of renter households ages 55-64 grew by 80 percent between 2002 and 2012, compared to 50 percent growth among all households. As the housing recovery continues, the ranks of pre-retiree and retiree renters may continue to grow because many will seek to finally recoup home equity that could be vital during their retirement years.

The calculation of renting versus owning, like most financial decisions, is an intensely personal one. The best lesson of the past 10 years is that each potential homeowner must be financially prepared. I recommend putting down at least 20 percent and having an ample emergency reserve fund to pay for the routine maintenance a home requires.

If you have squirreled away the necessary funds, the next question is whether it is better to rent or buy. On a national level, monthly mortgage payments dipped below rent payments in mid-2008, after the housing meltdown, making owning cheaper than renting. But every market is different, which is why you need to run the numbers.

There are online "rent or buy" calculators that can help your decision-making, which require you to do some market research to compare the cost of renting and owning in your area.

All of these calculations have a caveat: Even if it makes financial sense for you to rent today in certain locations, if inflation picks up in the future (which it probably will), so too will your rent. That may make the rent versus buy calculation tip in the other direction over time. On the other hand, the benefit of not being tied to a house can mean the ability to grab a better job in a different city. And maybe renting in retirement can free up much-needed liquidity, which may be more valuable to you than keeping the family home.

And then there is the emotional equation. Many feel that renting eliminates the worries that come with home ownership. Instead of stressing over a new roof, a broken stove or refrigerator, a leaking water heater or other home repair, renters can pass those problems to a good landlord.

While renting can instill a sense of freedom, many homeowners will tell you about the great psychic benefits of owning their own place, of nesting and creating a "home" rather than simply having somewhere to hang your hat for a while.

All of these factors are important variables in your decision on whether to buy or rent.

Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.

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