Home: To Own or to Rent? (Part 2)

The question of whether it is cheaper to own or to rent a house deserves short shift. Few people actually seek the answer; the nearest issue is a matching of the satisfactions of tenancy related to its cost against the satisfactions of homeownership related to its cost. An attempt at direct comparison of tenants’ and owners’ costs is fruitless for these reasons: 

1- In real life, the comparison is not between equivalent dwellings and thus not between equal services received.

2- The costs of different dwellings types are not comparable

3- One of the largest costs of homeownership (depreciation) is not determinable without knowing the cost of acquisition and the proceeds from the sale at disposition. But the selling price will be strongly influenced by market conditions at time of sale, which is indeterminate

4- In a changing housing market, there are times when homeownership is a better bargain. There are also other times when market conditions favour tenancy. 

The true financial issue of home ownership is whether the family can meet the financial obligations without sacrifice of other officials. In many instances, sacrifice is required; undertaking the purchase and maintenance of house calls for reductions in other outlays, and the choice is open to each family. But in no event should the health and happiness of any member be endangered.

Certain financial advantages of homeownership are frequently presented by its proponents:

1- It is an excellent and safe depository of savings; a hedge against inflation.

2- Payments on the mortgage represent enforced savings which might not be accumulated but for the contractual obligation.

3- Home ownership is an aid in establishing a favourable credit standing.

4- Income tax regulations permit the deduction of property taxes and interest on the mortgage debt.

5- When the homeowner sells his home at more than he paid for it, he is subject to no capital gains tax provided that he purchases another home of at least equal value within a year.

On the other hand, the tenant retains greater financial flexibility. At the end of his lease term, he is free to adjust his housing expenditure to either a decreased or an increased income by moving to another dwelling.

The Real Estate Market (Part 1)

In one sense, the real estate market is the sum of all the transactions of buying, selling and renting real property. A broader connotation would include all the factors and forces of demand and supply which influence market price and which affect the rate or intensity of market activity.
Thus, the real estate market is not a particular place, nor would it be feasible to draw a geographical line around all of the market influences which come to focus on the market transactions. True, we recognize the local nature of real estate markets and we refer to them by the name of the locality in which the property is found and within which the most powerful of the many market factors are know to originate. But market factors may be regional or national; the price of a small house in a village may be largely the product of local factors, but the price of an office in Chicago is set in a market where national factors play an important role.
Perhaps, you would wonder, why is an understanding of the real estate market essential to sound real estate investment decisions?
In the first place, an investor needs to know how the market currently evaluates properties of the type which he plans to buy or to sell. Thus he proceeds to analyze recent transactions involving similar properties; and in order to evaluate these sales, he must understand the nature and significance of the current market situation which conditions the transaction.
In the second place, a sound investment decisions, requires two kinds of forecasts based on predictions of real estate market conditions:

1- In forecasting the productivity of a given property, say an apartment building or a retail store building, the analyst must predict the future pattern of the level of rents. Changes in the balance of demand and supply will affect rent levels as will certain institutional factors. An understanding of market reactions to various kinds of forces is therefore essential to predicting future rental returns.

2- The forecasting of trends in transactions prices is a necessary part of real estate investment analysis. Every buyer will prefer to buy at the lowest possible price; if he anticipates a drop in the market price of the kind of property he plans to purchase he will postpone his offer; if he believes prices will soon rise he will act promptly.

The seller of real estate follows much the same lines of action though in reverse; his eagerness to sell and his asking price will be influenced by his forecast of market trends. Investors with a view to capital gain act only when they are able to foresee a rise in market price. No useful forecast of trends can be made by an investor without understanding the mechanism of the market and the nature of internal market interactions. 

Home: To Own or to Rent? (Part 1)

Many families find it difficult to decide as to whether to own or to rent a house. Furthermore, in terms of long-run objectives, this alternative has no meaning for most families. Homeownership is the accepted way of life and the almost universal goal. True there are families in large cities across the worlds that prefer the convenience of location and the freedom of responsibility which rental quarters can provide.
There are people who were raised in the neighborhoods of flats, tenements or apartments and for whom homeownership is so foreign from their own experience that it has no appeal. There are those among lower-income groups who assume that homeownership is beyond reach. 
In every corner of every country and in every walk of life, there are those who simply do not want to be bothered with the homey jobs of maintenance and upkeep which so many homeowners truly enjoy. Finally, the aged and the physically handicapped may find rental dwellings less demanding on their limited strength and energy.
But at the same time almost every family considers the pros and cons of homeownership. Though there are many variations, the general choice in living accommodations is between a free-standing single-family house with a yard, and a flat or apartment in a multifamily structure with little or no attached open space.
The rental unit is typically located in the older, more central and more congested part of town, while the house in the suburbs in a newly built neighborhood crowded with families of similar age, composition and income level.
Family circumstances, particularly family composition will strongly influence the relative evaluation of these two ways of life. The family with growing children values suburban living above convenience; the old couple prefers to live close to downtown facilities and to be free from yard work and snow shoveling. In short, the choice of a way of life as conditioned by living quarters and their location is largely based on subjective considerations not to be judged by others.