Updated from June 21

Housing options essentially boil down to buying or renting, and these days that feels like a choice between boarding the Titanic or settling onto the Hindenburg.

For buyers, the days of easy money are drawing to a close now that Ben Bernanke and Co. at the Federal Reserve have passed 17 straight quarter-point rate hikes, bringing mortgage rates higher in tandem. Meanwhile, the rising rate environment makes "exotic" adjustable-rate, no-money-down options look downright foolish. Moreover, real estate brokers nationwide report that sellers are not yet willing to bring down home prices.

Renters lulled into complacency by years of stagnant or sinking rental rates also are in for a rude awakening. Apartment rents are expected to increase nationwide by an average of 5.3% this year, and even more so in high-density metropolitan areas, according to the National Association of Realtors. That's about double last year's average increase and the highest leap since 2000.

"The housing bubble has helped push rental prices higher," says Christopher Lobello, regional manager at the Las Vegas office of Marcus & Millichap, an investment property firm. "As the boom wore on and prices became less affordable, that made renting look more attractive and that created more demand, and rents rose. That's how it works. These prices often move together."

Lobello also says that a glut of condo conversions has boosted annual rents by taking supply off the market, and the NAR says that the 100,000 families displaced by Hurricane Katrina are also pressuring supply. The association also says that the amount of new apartments being built is down this year, exacerbating the problem.

"As the housing market begins to adjust to more normal growth, the rental market is adjusting, too, in the form of much higher rent," says Lobello.

Buyers Prepare

So what's a shelter-seeker to do? A recent report from Harvard's Joint Center for Housing Studies shows that buying may still be the best choice.

With interest rates rising and speculative demand cooling, the report says that the housing boom is under pressure, but prices will continue to climb as long as the economy keeps creating jobs and builders trim production to match slowing demand.

This means that as long as the economy is steady and oversupply is kept in check, there is still a good chance that your home will increase in value. While these seem like shaky suppositions, they are mitigated by the most important result of the study, which is that population factors will keep a floor under housing demand.

The center says the U.S. will add 1.37 million new households this year alone. The population is speeding toward 300 million by the end of the year from its current level just shy of 296 million, thanks in large part to a steady stream of immigration. The Census Bureaus says that about 40% of population growth comes from immigration, which has offset flagging birth rates.

There is also some good immediate news for home buyers facing down the twin villains of higher mortgage rates and high home prices. While overvalued markets may be turning into popping bubbles, nationwide the dreaded slowdown has yet to spiral out of control.

New-home sales for May, the most recent month for which data is available, rose 4.6% from April, though they dropped 5.9% from a year earlier. The results topped expectations, and the supply of homes on the market was down from a peak reached in February.

Housing start data for May came in a bit stronger than expected, showing a moderate year-over-year decline of 3.8%.

The reports suggest a housing market cooling rather than widescale implosion. While this would create conditions that are ultimately good for a long-term healthy market, it means that buyers and sellers need to readjust their expectations for the kinds of return to be had by buying a home.

"History over time shows that real estate is not a short-term investment and that the run-up in home prices is not normal, despite the activity over the past five years. Buyers and sellers need to adjust their expectations of what it means to buy a home," says Tom Stevens, president of the NAR.

Homeowners have seen their properties appreciate at mindblowing double-digit rates, but investors have forgotten that this is atypical. Since 1979, home prices have gained about 4.4% a year, according to the Joint Center for Housing studies. For sellers, that means it's no longer enough to jack up the price, put a sign in the yard and wait for the bidding wars to begin, even though many real estate agents across the country say it could take another six to 12 months for sellers to fall in line with lower prices.

For buyers, it could mean more choice at better prices. As the housing market softens, real estate speculators are unloading properties to realize projected gains, Stevens says. This is adding more inventory to the marketplace that he believes will take 12 to 18 months to burn through, and it should bring prices down in some areas.

In Defense of Rent

When weighing buy vs. rent, transience trumps the equity-building benefits of home ownership.

"If you're thinking of being in a location for the long run, you would want to establish the kind of stability and equity build-up that comes with ownership," says Richard DeKaser, chief economist at National City. "For someone moving into an area for a year or two, it's more of a straightforward financial calculation."

This means comparing monthly rent, renter's insurance and other related costs with the cost of a mortgage, taxes and, for buildings like co-ops, monthly maintenance fees. And don't forget the hidden costs of buying a home -- there's no super to fix pipes or landlord to upgrade a security system.

Moreover, homeowners who hang in for the life of a mortgage will likely build equity, but the National Multi Housing Council says that nearly one-third of all owners move within five years. In the first five years of mortgage payments, more than 80% of your monthly mortgage payment is interest.

If you buy a $200,000 house with a 5% down payment at a 6% interest rate, after five years of $1,139 payments a month, you'll have paid $55,152 in interest and only $13,196 in principal. Moreover, you will likely have paid between $10,000 and $20,000 in maintenance and repair costs to earn that equity, according to NMHC calculations.

In this scenario, it could make more sense to pay $1,200 a month in rent and have the flexibility to pick up and go, as well as the peace of mind that maintenance is factored in.

Moreover, years of record-breaking home prices have made it difficult for buyers to jump into the market. The gap between home prices and annual rents is widening. NAR research shows that the median home price was 12 times higher than the annual average rent between 1980 and 2000. Now, even as rents jump, home prices are about 21 times higher.

In this scenario, renting could be a more reasonable option for a family that cannot afford to buy in a town with high properties and better schools.

But at the end of the day, there are many compelling non-financial reasons to buy a home and financial gain may not be the best reason to jump into real estate's increasingly shallow pool.

Visions of financial windfall or depreciating assets aside, " homes are more than an investment. It's the place where you live," says Brian Carey, an economist with Moody's Economy.com. "The question is, can you afford to buy?"

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