Renting vs. Owning - Is the Balance Shifting?

A few days ago I found a site called Rentometer on Get Rich Slowly, one of my favorite personal finance blogs. The site lets you compare your rent to the prevailing rent in your area for comparable houses. Using this site, I found that our rent of $2,000 for a 3 bedroom townhouse in the heart of Silicon Valley was on the very low end of the rent scale.

Living in Silicon Valley, it has long been my opinion that owning a house is tough to justify economically. I even wrote a post about it recently ("Why Your House May Be a Bad Investment"). Even though my wife and I can afford to buy a house in this ridiculously expensive area, the house we can afford would not be a very nice one, and would consume an obscene portion of our portfolio.

However, I am starting to get the feeling that the economics may be changing. For one thing, real estate prices are flat and trending down, making a purchase more attractive. My thinking is that nominal prices will likely continue to decline slightly for the next two to three years, while inflation reduces the real prices more significantly. At the same time, my hunch is that rents will be increasing in the next few years. While interests rates were low and financing easy to obtain (even with a so-so credit score), many people opted to buy. Now buying may be more difficult for many, and those will be forced to rent. This means more demand for rental properties and a likely increase in price.

While the cost of owning a home is likely to decrease in the next couple of years, the cost of renting is likely to increase. This may be especially true for renters who are paying less than market rates, such as my wife and I (apparently). We will see how this whole thing plays out, but it may be that owning will be the financially sound decision of the next few years.