Most people plan on living in their next Honolulu home forever. However, that's usually unrealistic. A job change, more kids, children growing up and leaving home, the desire to move on, illness, financial problems, or other reasons may make your term of ownership shorter than you originally anticipated. If you can foresee moving within the next two to three years, renting may be more financially advantageous than buying.
Except when the market is extremely hot and prices are shooting up, you don't want to be buying and selling homes very often. The reason is the transaction costs. Buying a home, including the finance charges, can cost 4 to 7 percent of the purchase price. Selling a home including an agent's commission can cost 8 to 10 percent. The reality is that it can cost 12 to 17 percent of a home's value to buy and resell it. The question becomes, how long must you live in the house to recoup your transaction costs?
The answer has everything to do with the rate of appreciation. During the early 1990s, there was negative appreciation—homes went down in value. During those days recent home buyers not only did not break even, many lost significant amounts of money when they resold.
Recently, housing prices have been going up. While the appreciation has been higher than 10 percent in some few areas, that type of increase tends to be a short-lived spike. More reasonable increases in a good market are 3 to 5 percent annually. If we assume a healthy 4 percent a year, that means that it will take three to five years to just break even when you sell, after paying closing costs.
Another way of saying this is that financially speaking, if you're looking short term, it's probably cheaper to rent than to buy. This is particularly true when you add in the potential interest you could receive by sticking the down payment and closing costs money in the bank instead of in the house.
Of course, home owners have the advantage over renters in that they can deduct property taxes and mortgage interest (up to very high maximums) from their personal income taxes. However, that is usually more than offset by the fact that, generally speaking, renting is almost always cheaper than buying. Often you can rent a house for about two-thirds of what it costs the owner, monthly, to own it. For example, if you're renting a house for $1200 a month, chances are it's costing the owner about $1800 to keep it (including loan payment, taxes, insurance, repairs, and utilities). These costs usually amount to more than the income tax deduction for property taxes and mortgage interest that the owners get.
This is not to say that home ownership isn't wonderful. There's also the issues of privacy and security that owning affords. Many people feel that those intangibles are worth every penny. It must be said, however, that if you're looking at it short term, ownership may not be as good a financial deal as it has been cracked up to be.