It’s en vogue now to be “anti-homeownership” given the recent crash in home prices and all the shenanigans the mortgage companies, banks and Wall street firms pulled over the past several years. People tend to use the recency effect and confirmation bias to formulate their opinions which dictate important lifestyle and financial decisions. Before you jump all over me for this thesis, let me clarify a few things:
a) Many people CAN’T own – that’s a fact of life. If owning a home isn’t an option for you for numerous reasons ranging from finances to career, then making a choice between renting and owning isn’t something that mandates weighing the options.
b) Many people SHOULDN’T own – perhaps during the days of easy credit or even today, you have the funds to buy a home, but there might be some factors that would make this a poor choice. Perhaps you need to relocate every couple years due to your line of work, perhaps you’re in the middle of a divorce or child custody battle or perhaps your income is quite variable. It might make sense for you to rent until there’s more stability in your financial situation.
c) Many people COULD own, but don’t. That’s the target audience.
Long-time renters often cite all the negatives of home ownership, and there are some to be sure. But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:
- It’s More Expensive to Own Than to Rent – This is probably the biggest myths out there that many proponents of renting continue to propogate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows (insanely low mortgage rate list after Treasury Yields just crashed) the rent-to-buy ratio is favoring “buy” in many parts of the country moreso than at any point in recent history. Now this isn’t just a rah-rah “buy a home” post and I would concede it is totally plausible that home prices continue to decline for several more years. But if you’re not buying to sell, but rather, buying to live, it is MUCH more economically efficient to own over rent, especially at this time. These are the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below.
Let me repeat: It is becoming cheaper to own and it is becoming more expensive to rent.
This trend will continue for years.
Why? First off, the Fed’s policy has been to reward debt holders and punish savors with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low. This in turn, is pushing up gold prices, equities prices and investors are pricing in future inflation. This bodes well for landlords, and poorly for renters. See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers. This makes homes more affordable, while landlords are embarking on higher annual rent increases.
Which end do you want to be on? The winning or losing end?
- Homeowners Have to Pay to Maintain a Home Instead of the Landlord – Here’s another big misnomer. Primarily, you get what you pay for. Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary. Just baseline the same property and look at renting versus owning it. Everything you pay for as a homeowner, the landlord has to pay for as well. Who do you think pays for that? You think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart? No – you pay for it! It’s all priced in over long-term rent trends. Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords. You are paying to put their kids through college and for their Caribbean vacations.
Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent – PLUS a tidy profit to the landlord.
Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are – it’s just not itemized out in tidy fashion for them. It’s all in the rent. This is logic – and reality.
- Renting Provides for Much More Flexibility to Move – This is a major (and legitimate) reason NOT to own. After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at. However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move! They end up renting for years on end when they could have owned. And that flexibility? Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose – which is a calculus on your end as how much of an increase makes it worth moving out to just rent somewhere else. Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission or at all (not very flexible). So, you’re trading the mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.
To reiterate, if you’re a current renter, you may feel this article is critical of your situation. It’s not. It’s an economic reality that many Americans never have, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get people thinking who DO have the means to save for a down payment, would be better off financially as owners than renters, but continue to muddle along in complacency because they’ve convinced themselves that homeowners get screwed and renters have all the perks. I’ve laid out what I believe to be valid arguments to the contrary.
Disclosure: I’ve been a renter, an owner and I’m about to be a landlord.
I’m Interested In Your Thoughts.