Deciding whether to rent or own a home has always been a complicated decision involving lots of variables, like the relative strength of housing markets, mortgage loan rates, and the length of time owners plan to stay in a home.

But as the home shopping season hits a fever pitch, deciding whether to rent or buy has been further complicated by the increase in empty apartments.

In many markets, the surge in buyers has left rental units vacant, forcing landlords to offer all kinds of perks to entice renters. At the same time, housing prices have skyrocketed, meaning some buyers get less bang for the buck than they did just a few years ago.

"During the mid-to-late 1990s we saw big gains in rental units fueled by the strong economy," explains Andrew Wright, a senior consultant with real estate industry tracker REIS. "But in late 2000 and early 2001, things really cooled off. People decided not to take on new leases and moved into single-family housing."

Wright says the national apartment vacancy rate in the top 50 metropolitan markets jumped to 5.8% in the second quarter of 2002, up from 3.4% in the year-earlier quarter. By the end of the year, REIS expects the vacancy rate to hit 6.4%, up from 4.8% in 2001.

The upshot? In 2002, the average rent in the top 50 metropolitan markets dropped 0.4% in the first quarter and gained a paltry 0.4% in the second quarter. "I wouldn't call it a crash in rental prices," says Wright. "But there's clearly a slowdown to stagnation in rental prices."

Compare this trend with the overall strength in housing markets, where demand is high because mortgage rates are at record lows and supply is tight because of restrictions on new construction.

From 1999 to the first quarter of 2002, the median price of an existing single-family home rose 13.3%, according to the National Association of Realtors.

"Inventory for sale is quite lean. There's half as many homes on the market as there were in the last recession," says Walter Molony, spokesman for the NAR, adding that there are only 4.5 months of supply on hand nationwide. This means that if demand stayed constant and supply didn't increase, the supply of homes would be depleted in 4.5 months.

"Back in 1989, the last recession, we had more than nine months of supply," he says. "In the 30-plus years of collecting the data, only a month or two has been lower than 4.5 months of supply."

Think About Buying First ...

While national statistics tell a story of slumping rents and rising home prices, buying usually makes the most sense. For starters, mortgage interest and property taxes are tax deductible, which reduces the cost to buy a home. And buying a home is a great investment, especially given the current stock market struggles.

"From April 1992 to April 2002, if you took a $20,000 investment in an existing home and compared it to a $20,000 investment in the

S&P 500

... an investment in a home appreciated 42.6% more than one in stocks," says Molony. "And both those beat the heck out of a drawer of rent receipts."

So if you have the money to buy a home, despite the rising prices, it usually makes sense to do it, especially now that interest rates on a 30-year fixed-rate mortgage are in the 6% range, well below the historical average of 8%.

"If the option is to wait two years, interest rates might be at 7.5%, plus houses go up in value," says Randy Johnson, author of

How to Save Thousands of Dollars on Your Home Mortgage

. "When buying an appreciating asset, it's always better to do it sooner than later. Otherwise, you'll lose out."

... But Don't Overlook Rentals

In markets where rents have been stable while home values have soared, buying a home is not such an easy decision because landlords have sweetened the pot.

In San Jose, Calif., REIS statistics show the average monthly rent increased just 4.1% from 1999 through the first quarter of 2002, while the NAR's data show median home values increased by 24.1% over the same span. As a result, landlords now offer an average rent discount of $58 a month, the third-largest discount in the country, according to REIS.

Just consider the effect rent discounts have had on the Orlando market, which had an apartment vacancy rate of 10.6% in the first quarter of 2002, according to U.S. Census Data.

"The current monthly asking rent is $720, while the current effective rent in Orlando is $684 a month," says Wright. "That's $36 cheaper than what landlords were asking for. If you look back at 1999, when the market was strong, the gap was only $9. It's a clear sign of heavy concessions."

Not only have prices come down, but renters have more apartments to choose from, which isn't true for the housing market, where supply is limited and competition is fierce.

At Rent.com, a three-bedroom, three-bathroom property has a listed rent as low as $713 a month, which includes access to a playground, pool, fitness center, clubhouse and business center. For $40 more each month, given a 20% down payment on a 30-year fixed-rate mortgage at the current rates, a homebuyer could get a three-bedroom, two-and-a-half bath single-family home listed at Re/MAX Properties. And that doesn't include access to any of the amenities that the apartment offers.

While the previous example can't possibly illustrate the situation at every price point in every part of Orlando's real estate market, it does show how deciding between renting and buying has been made more difficult, especially if you plan to move within three years. Leave too soon and you might not recoup the origination costs on that mortgage.

"Most first-time homebuyers have champagne tastes and beer pocketbooks, and they're going to have to compromise," says Molony. "Ownership always beats a rental, but if you've got lifestyle considerations, maybe you are better off renting."

The Bottom Line

Sure, buying a home usually makes the most sense, but savvy home shoppers shouldn't overlook the rental market. To make sure you're getting the most bang for your buck, call a real estate professional and do your research.

"It all gets down to individual needs and desires," Molony says. "If you want to buy a home, now is still an excellent time to do it."

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