DC’s Young Professional Dilemma: RENT or BUY?

As a realtor, I get asked all the time about the state of the DC real estate market and my answer is always the same, “It’s strong…to quite strong” (shameless “Meet the Parents” reference).  DC home prices are up almost 11% since the bottom of the market in the summer of 2009 and up 6.5% in the last year alone.*  DC continues to be one of the best housing markets in the nation and a strong argument can be made for the role of young professionals in helping to drive up both the region’s rents and its home values.

RENTS ON THE RISE

Since 2000, young professionals have accounted for the majority of DC’s population growth (the number of 20- to 34-year-olds living in DC has increased 23%!).  Since young professionals are more transient and tend to prefer renting to buying, the influx of young professionals moving to DC has had a dramatic effect on rental rates.  DC’s rental vacancy rate is among the lowest in the nation and rental rates have increased almost 15% since 2010 and 10% in last twelve months alone.**  If any of you have engaged in hand-to-hand combat to rent a subterranean efficiency with six foot ceilings and rats for roommates then you know the drill.  While some experts expect rental rate increases to flatten out in the short term as new apartment units come online, others feel that the trend of rising rents will continue as the pent up demand of the Boomerang Generation (i.e. all those friends of yours that are living in their parent’s basements or in overcrowded group houses) will be unleashed as the economy continues to improve.

MORE YOUNG PROFESSIONALS LOOK TO BUY

The combination of rising rental rates, historically low mortgage rates, and a housing market that is rebounding from recent lows has led many young professionals to leave renting behind in favor of entering the marketplace for a single family home or condo.  With first-time homebuyers traditionally comprising 40% of home sales, increased demand among this key demographic, coupled with tight housing inventory levels (current listings are at their lowest level since 2005), have contributed to the price appreciation that we continue to see in the DC housing market.  So that brings us to:

SHOULD I RENT OR BUY?

While most economic indicators point to “buy”, my unsatisfying answer is….it depends (I know, I know…way to go out on a limb, Dave).  According to a recent breakeven study by Zillow, buying in DC becomes a better financial alternative than renting after just 3.5 years. While this analysis is much more robust than most of the rent vs. buy calculators that litter the internet, it still relies on a variety of assumptions with regard to home price and rental appreciation that may or may not come to pass (my crystal ball is in the shop).  These calculators also focus strictly on the financial aspect of the rent vs. buy dilemma.  A calculator cannot capture the qualitative aspects of both renting and buying that, from my experience, drive the majority of purchase decisions.  Is the flexibility of renting more important to you than pride of ownership and setting down roots in a community?  Do you prefer to live somewhere where you can put that 50” flat screen on the wall you just painted the Redskins’ colors (I am officially on the RGIII bandwagon!) or is it more important to you to not have to worry about the costs of maintenance and upkeep?  Do you feel like renting is throwing money down the drain or do you feel that the money you would spend on a deposit would do more for you invested in that hot new tech IPO (not Groupon or Facebook, I hope)?  In the end, while the argument in favor of buying in DC is compelling, the decision to buy vs. rent is a highly personal one that depends on your financial situation, your future plans, and what is important to you about how and where you live.

*Zillow Home Value Index

**Zillow Rental Value Index

David Abramsa new GTJ contributing columnist, is a native of the Washington DC Metropolitan Area.  He received his M.B.A. from Emory University in 2009 and currently works as a realtor specializing in DC’s emerging neighborhoods with the BergerSandler+ team (www.bergersandlerplus.com) at Evers & Company Real Estate.  David is licensed in DC, MD, & VA.