Renting versus owning is both an intellectual, financial decision and an emotional decision. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. It makes no sense to pay more than rental equivalence to own residential real estate. Many people still do because they are chasing the fantasy of endless appreciation and real estate wealth, but most of these people will find the increased cost of ownership over time negates any appreciation advantage they may obtain. Also, many people have found out painfully that property does not always appreciate in value.



The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one's mind a comparative rent that is higher than the market will bear. A person who is "in love" with a house will almost certainly imagine it will command a rent amount that exceeds the reality of the market. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once a realistic comparative rental rate is established, and a realistic evaluation of the true costs of ownership as outlined above is complete, a simple comparison of the two figures will reveal if a property is overvalued, undervalued or at parity.

Some people expend a great deal of effort evaluating the costs of ownership to determine if it is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge any financial analysis performed.

Another factor often called the "nesting instinct" causes both men and women to want a place to call their own, particularly when there are children in the family or on the way. There is nothing wrong with making decisions that are heavily influenced by emotions. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. Of course, this is easier said than done.

The fundamental value of all housing prices is equivalent rents because rental is a direct proxy for ownership. Unfortunately, during the Great Housing Bubble, appraisers used comparative-sales prices to establish value rather than an approach using rental income. This allowed prices to detach from fundamental valuations due to irrational exuberance.

To determine the value of a property, one must evaluate the local rental market to establish comparable rental rates, and one must carefully evaluate the true, total cost of ownership. A potential buyer can determine the maximum amount that should be paid for a property by manipulating the loan and downpayment amounts so the monthly cost of ownership matches the cost of a rental. Of course, in the real world most people do not bother with this type of analysis, but then, in the real world, many people mistakenly overpay for residential real estate.