Own? Rent? Things To Consider When Home Values Look Sweet

This is a major investment that clients are making and it is important to present them with the whole picture, according to Elyse Foster, a certified financial planner with Harbor Financial Advisory, Inc., Boulder, Colo. For example, a planner should run a projection of growth rates and inflation and keep in mind that there are still pockets of very good value in the U.S. if a client is willing to relocate.

Before deciding on whether or not to sell and then rent, a client needs to decide on a time line. Will they rent while parents are still living in the area or until children finish up school? she asks.

If a client is going to remain in an area for less than 5 years, it probably will make more sense to rent than to buy because of fees and expenses related to selling and then buying another property, Foster says.

Liquidity is another consideration, she adds. "Stocks are much easier to unload. Real estate is much more expensive and cumbersome. It is a big asset."

While appreciated real estate prices may encourage an individual to rent rather than buy after they sell a home, Foster recounts the experience of a woman in Tucson, Ar., who sold her home, rented and lost ground to inflation. "Rents ate up her reserves," she adds. And, according to Foster, she lost control over her ability to remain in a location. She ended up moving three times, according to Foster. Her income consisted of Social Security, a small pension, and the equity she held in the home that she sold, Foster adds.

The National Association of Home Builders, Washington, says that data in fourth quarter 2004 suggests that the rental market, particularly the mid-range rental market is gaining momentum.

But if a baby boomer downsizes and relocates to a less expensive community, then they can have a reserve of cash and continue to participate in a real estate market she says on average, nationally has experienced a 6% return.

In addition to financial considerations, Foster says that there is also the psychological factor of how important it is for a client to own a home.

One of the worst things that a client can do is to buy too much home, she says. A client needs to ask, "Am I sacrificing too much to own an expensive home?"

Ricky Grunden, a certified financial planner in Dallas, says that he would start by producing a spreadsheet comparing the cost of renting with the cost of buying.

Lifestyle can be a big factor on whether to stay in a home or downsize, he notes. He says that he is working with a couple that has just downsized and loves the fact that they no longer have yard work.

And, if money is ultimately needed for either long term care or assisted living, there is an asset that could be sold, he adds.

But, when most people leave a house, it is usually because they cannot keep up with the maintenance and renting takes care of that, he says. But, rents may also escalate because the higher cost of housing has kept people out of the market, he says. Most clients find comfort in buying rather than in renting, Grunden says.

Whether a client uses the proceeds on the sale of a home to pay for a new home or assumes a mortgage really depends on the temperament of the client, according to Grunden.

If a client wants to keep money available but also guarantee that they will be able to pay off the new home, then he'll recommend investments such as municipal bonds, a fixed annuity or laddered government bonds, he adds.

With interest rates so low, he says that a client may want to consider a 30-year fixed mortgage and let inflation eat away at the payments over time.

Michael Kitces, director of financial planning with Pinnacle Advisory Group, Columbia, Md., says that if a boomer's geographic area is in a bubble, then it might be worth downsizing to a smaller home or to rent in order to "take equity off of the table."

Such options can be ways for baby boomers to make the numbers that will get them to retirement, he adds. But, Kitces continues, the discussion has to be broached carefully because for many clients, a home represents safety or holds emotional ties.

And, if a decision is made to downsize and to purchase a new home, boomers may have different reactions to assuming a new mortgage rather than paying for the home with proceeds from the sale of the first residence, according to Kitces. Boomers' parents, products of the Depression, taught them that a mortgage should be paid down, he says. So, although "boomers are more comfortable with mortgages, they did get the lesson that you should make a mortgage go away."

He also says that advisors have to temper a boomer's enthusiasm to buy a lot of house and end up "house rich and cash poor."

In some areas, home prices have outpaced rents and it may be better to rent, Kitces says. But, he adds, "the reality is that people do not make decisions just on money." So, it may be difficult for someone in their late 50s who hasn't rented for over 25 years before they got married, to decide to rent, he says.

"Should I stay or should I go?" is the question boomers are facing