Contact Name: Mark Obrinsky
Contact Phone: 202/974-2329
Contact E-mail: mobrinsky@nmhc.org

It has been widely reported that the nation's home-ownership rate rose in the third quarter of this year to its highest level ever -- 66.0 percent. During the past three years, ownership has increased in all age groups, but the gains have been especially pronounced among young households.

It is a sign of national progress that so many Americans have the financial wherewithal to choose among housing alternatives. While homeownership may be the right economic choice for many, the transaction costs of buying and selling a house are substantial. Consumers with short expected durations of residency can make a serious financial mistake in choosing to own rather than rent. Unfortunately, many home buyers -- especially young, first-time buyers -- fit this profile.

Classifying the Costs of Homeownership
The costs of homeownership are commonly underestimated. The costs of owning include:

• monthly cash costs for mortgage interest, property taxes, utilities, and repairs (net of income tax savings, if any);
  
• the "opportunity cost" of equity funds tied up in the house that could be invested elsewhere (net of increase in house value, if any); and
  
• the transaction costs (fees, commissions, taxes) of buying and selling a house.
  

All homeowners are aware of their monthly cash costs, but few owners, or prospective home buyers, fully consider the other costs.

Depending on time and place, the opportunity cost of homeowners' equity can be substantial. Since the beginning of the 1990s, for example, the median price of existing homes sold has increased only 32 percent, while the stock market has risen nearly 200 percent, as measured by the S&P 500 index. In some other past periods, houses have fared better relative to other investments.

Costs of Buying and Selling a House
Transaction costs are another often-overlooked part of the calculation of homeowners' costs. While both owners and renters incur expenses for moving their belongings, only owners typically face brokers' fees, legal costs, taxes, loan origination charges, inspection expenses, and other transactions costs. Some of these costs are incurred when the home is bought, others when it is sold, and some at both ends.

The transaction costs of home buying and selling are substantial. Fully 81 percent of all home sellers use an agent, according to a 1995 survey by the National Association of Realtors. In 1990, the typical commission paid (including homes sold without an agent) was $5,832, according to a Price Waterhouse study. The average sales price of existing homes in 1990 was $119,000. Combining the two estimates, the average commission on all home sales was 4.9 percent.

The sales commission usually is paid by the home seller. However, other expenses -- such as inspections, credit checks, title searches and insurance, and legal representation -- are normally borne by the buyer. Other costs are sometimes shared by the buyer and seller. The Price Waterhouse study found that loan origination costs averaged $1,383 and other miscellaneous costs averaged $913. Together with the sales commission, these expenses bring the total transaction cost to 6.8 percent of the house price.

Many Short-Term Owners
In estimating the annual costs of homeownership, the one-time costs of buying and selling a house should be "amortized," that is, spread across the period of ownership. If someone lives in a house for 20 years, the annualized transaction costs are moderate. But if she stays five years or less, the annualized costs are substantial.

Most people who buy a house probably think they will be there a long time. In fact, many leave soon thereafter. The most recent national evidence comes from the U.S. Census Bureau's American Housing Survey (AHS). NMHC tabulations of unpublished data from the survey show that 16 percent of all those who bought a house in 1993 moved out within the next two years. The AHS also shows that 27 percent of those who bought in 1991 moved out by 1995 -- within four years of purchase. As shown below, these short-duration homeowners were disproportionately young.

Percentage of Home Buyers Who Move Out

Within 4 Years of Home Purchase

Source: NMHC tabulations of unpublished data from the American Housing Surveys for 1991, 1993, and 1995. The overall sample size of home buyers is 1,161; the subsamples by age range in size from 184 to 413.

These results are corroborated by surveys conducted by the National Association of Realtors (NAR). The NAR found, for example, that 26 percent of all repeat home buyers in 1995 had been in their previous home three years or less. Fully 60 percent had been in their previous home seven years or less. Only 28 percent had been there 10 years or more. Over 90 percent of these previous owners either sold their house or tried unsuccessfully to sell.

Risks of Short-Term Ownership
Like any investment, homes can go up in value as well as down. Short-term owners, often with little control over the timing of their move, can find themselves needing to sell when market conditions are not conducive. The risk of financial loss is amplified if the buyers have leveraged their investment by mortgage borrowing.

Many short-term owners move for job-related reasons. For these owners, the alternative to moving and selling the house at an inopportune time is to forego a superior job opportunity elsewhere. Those at the beginning of their careers, in particular, need to be free to move to opportunity.

Adding Up The Costs
Computing the total expense of homeownership is not easy. The costs vary from person to person, from city to city, and from time to time, because of both market conditions and tax treatment. A recent NMHC research paper (available upon request) offers one method of summarizing this diverse national experience. The study estimates how the housing costs -- properly measured -- of the typical home buyer in the mid-1980s would have compared with their costs had they rented identical housing.

That research concludes that, when all the costs of owning and renting housing are considered, a majority of all families and individuals that bought a home in the mid-1980s would have saved money by renting comparable housing. Specifically, the study estimates that the average homebuyer in 1985 paid six percent more for housing during his residency in that house than if he had rented.

The costs of owning were particularly high for short-term owners, according to the study. Buyers who sold within four years of purchase on average paid 19 percent more as owners than they would have paid as renters. For these short-term owners, transactions costs averaged 23 percent of their total costs of owning.

These cost estimates make no allowance for the home-owners' time spent in the process of buying and selling, which typically far exceeds the time spent by renters in securing their housing and subsequently moving out.

Bottom Line
The advice for prospective home buyers, especially young individuals and families, is to think hard about how long you will be in the house before you decide to buy it. You cannot forecast exactly where your career and personal life may take you. But if you think you may be moving again within the next several years, renting deserves serious consideration.