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Rent or Buy? What You Need to Know

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You've seen the headlines: The housing market is beginning to stabilize. Home prices in some cities are down nearly two-thirds from the peak of the bubble. Mortgage rates are at historic lows.

Homeownership is cheaper than renting in three-quarters of America's cities, according to Trulia, a company that provides housing-market analysis. In the Seattle-Tacoma region (within a stone's throw of Joint Base Lewis-McChord), for example, buying a house hasn't been this affordable since 1994.

So if your family receives PCS orders, you might figure it's a no-brainer to buy a house at your new duty station. Not so fast.

According to a chorus of housing professionals, renting can be better for the budgets of military families who move often (nearly every military family, in other words). If you're only going to be in a home for three to four years, you have a strong possibility of finding yourself underwater on your mortgage or simply unable to sell when your next PCS orders arrive.

"Anytime that you think you're only going to live in a home for three or four years, it's probably not a good idea to buy, even under the most normal of real estate circumstances," says June Walbert, a Certified Financial Planner ™ with USAA.

Why? Home prices are continuing to fall in many cities. Seven out of 12 housing markets near major military installations are projected to see drops or anemic growth (less than 2%) during the next two years, according to Fiserv, a consulting firm that maintains the industry-standard Case-Shiller housing price index.

And don't forget about the costs of selling your home: Real estate commissions and other fees can cost you 6% of the sale price. That's more than $10,000 on a $170,000 home -- which is a lot of cash to spend every three years (or less).

One of the most widely quoted measures of the housing market is Trulia's Rent vs. Buy Index. It provides the price of an average house and divides that price by what it costs to rent a house for a year in the same city. If the number is well under 15, it indicates that buying is cheaper. Over 15? Try renting.

In Trulia's latest survey, Las Vegas came in at a 6 -- the lowest score in the country. So an airman stationed at Nellis Air Force Base would be a fool not to buy a house, right? Wrong, says Trulia's Daisy Kong. "Homes are so cheap over there, but it is also very difficult to sell right now in Vegas."

Las Vegas had a huge bubble and a huge pop -- it spent 22 consecutive months as the worst foreclosure city in the country -- which has led to rock-bottom prices. In fact, Fiserv projects that prices could drop another 17.4% through 2013. That trend means sellers are competing with thousands of foreclosures, short sales and desperate homeowners.

Of course, military families generally have access to VA loans, one of the only remaining zero-percent-down mortgage programs. This offers both opportunity and danger. If you buy a home with a small down payment and prices drop, you could easily find yourself underwater and have to bring a check to closing when you sell. Think of it as a delayed down payment.

"Plan for the eventuality that you may need to make one [a payment], even if it's an exit fee rather than a down payment," says Keith Gumbinger, vice president of mortgage broker HSH.com.

So before you buy, try a financial fire drill. "I'd encourage families considering buying to model out what would happen financially if they sold in three, five or seven years," says Jane Hodges, author of the new book Rent vs. Own. "I like to call this the equity crunch test."

This article has been a real downer, hasn't it? Are we saying the American dream is closed to the people who defend our country?

Not at all. Military families receive the (tax-free!) Basic Allowance for Housing and plenty of other perks and tax breaks (tax-free combat pay, the military retirement system, the military Savings Deposit Program and so on). A family that saves diligently and whose service member gets out after their 20 years could find themselves in a position to do something most Americans can only dream of: Pay cash for a house.

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Contributor

USAA, a diversified financial services organization, is the leading provider of competitively priced financial planning, insurance, investments, and banking products to members of the U.S. military and their eligible families. Rated among the highest among financial services companies for customer advocacy in a Forrester Research survey, USAA provides convenient and accessible financial products to its more than 9 million members. For more information about USAA, or to learn more about membership, visit usaa.com
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