The pervasive myth of homeownership
The news has been awash lately in stories of the “new” housing market, and the dramatic increase in renting the last few years. As is usually the case, the news outlets are catching up to a story that’s already old news in the world of real estate. It’s no great wonder that with the collapse of the housing market since 2007 that renting is on the increase. Shock – people lose their homes through default and bankruptcy, and turn into renters. The difference this time is that’s it giving rise to many more questions about homeownership in general, as so many people have awakened to the reality that home prices don’t always go up. And, increasingly, people are beginning to question the common wisdom surrounding the ownership lifestyle. In last week’s article in USA Today about “Home Rentals as the New American Dream”, this excerpt towards the end was particularly noteworthy:
The Jacobsons aren't so wistful about home ownership.
For the past 19 months, they've rented in The Arbors. Their home is neat and clean, their furnishings are fashionable. Yet, their backyard is 200 square feet of dirt and weeds, just as it was when they moved in. They keep the shades drawn.
Instead of paying $2,100 on a monthly mortgage payment, they pay $1,243.38 to rent. Instead of spending weekends fixing up their home, they go to an occasional jazz club.
"I guess that was fun," says Jodi Jacobson, 38, when recalling the weekends spent at their former home. "But do we have any vacation memories from that time? No." Since their foreclosure, they've taken one vacation. They expect to take more.
If they ever buy a home again, they say they'll buy something smaller. "I would never put so much of my income again into a house," Steve Jacobson says.
Spending leisure time socializing and enjoying life – for shame? Don’t they know their duty as Americans is to spend their weekends at Home Depot and doing yard work?
But I digress…
A recent piece by Richard Florida, in the Atlantic Cities blog expanded on this sentiment. It detailed the rise of the “rentership” economy, and how it’s not just a reality of the times, but a good thing for America. An interview with author Daniel Gross produced this important nugget:
Owning a house makes sense and is a positive good for millions of Americans. But it’s clearly not for everybody. For mobile 20-somethings, mid-career people looking to pay down debt, or for people who need the flexibility to move where jobs are more plentiful (which is to say lots of people up and down the income scale) renting a house or apartment makes much more sense than taking out a huge mortgage and getting stuck. Owning a car costs the typical American several thousand dollars a year. But companies like Zipcar let people in urban areas get the full mobility associated with car ownership without having to pay for parking, lease costs, or insurance and maintenance….. and in an increasing number of instances (housing and mobility are generally the two biggest items in a household’s budget) it really makes sense for lots of people to rent than to own.
These articles are interesting as trend-followers, but miss out on one key factor that I think deserves exploration in depth - namely, that owning a home is by no means a “no brainer” when it comes to strictly financial measures. I’d suggest anyone considering purchasing a home run a variety of financial scenarios, based on their current market, historical averages, etc... I’ve run them for myself, and it’s clear that over the course of time, owning a home is at best a wash when it comes to simply investing in the stock market. And, if certain variables are added in (HOA dues, higher than normal maintenance costs, etc) then home ownership is a long-term loser financially. And, that’s using historical averages for increasing value – by no means a given in today’s housing market (in fairness, historical averages are not a given for stocks, either, but they do tend to recover more quickly as an asset class than real estate). If you choose a house in a neighborhood that doesn’t appreciate, you simply have tied up all your assets in an illiquid product, and garnered little if no return on it.
Here are some numbers to consider and use for yourself:
- Homes historically appreciate at the rate of inflation, about 3%
- Stocks generally appreciate at 10% per year, 6% according to gain and 4% to dividends
- Tax rates are hard to anticipate since they change, so take your best guess at cap gains and income tax rates
- Ownership costs include the down payment, insurance, property taxes, maintenance, closing costs and sometimes HOA
- Costs may also include major renovations or improvements you wish to make beyond basic repair & maintenance
- Costs of maintenance are often estimated at 2% of value per year
- Ownership benefits include tax deduction on mortgage interest. BUT – this is only if you itemize, and you only recapture at your tax rate. All in all, about 1/3 of what you spent, and interest benefit only works out in first 7 years or so of a 30 year mortgage
- Renting costs are only the rent itself and renter’s insurance, though you can assume an escalating cost to rent over time
Set up a spreadsheet – run your own scenarios. Certainly the benefit of owning is a “forced savings” plan. IF you buy a house at the right price, and IF it appreciates in value steadily, and IF maintenance/other costs are reasonable, you can use the time value of lending to create a nest egg of sorts 30 years + down the road. I think this makes most sense if you have a high degree of certainty that you’ll remain in a certain city for a long time, and come across the right deal. There are other reasons – emotional, sense of control, etc to factor in, but in this case I’m speaking more of the strictly financial side.
I’ve spoken more about all this and more, as well as some of the side effects, in my TedX talk titled, “Why the Real Estate Crash is good for the Future of America.”
I’ve also written about this earlier, with this blog post, “In defense of Alternative Lifestyles”.
I’d still like to see a 21st century model of renting evolve – one where renters by choice might work in cooperation with landlords to allow renters to “tinker” or do projects at their homes. I’m not sure how that would work or look, but I think there’s an untapped market of people who don’t really want to or shouldn’t own, but still like to customize their own place a bit.
In short… the idea of renting instead of owning should not be seen as a personal negative, or something that’s wrong with society. This particular housing depression is a great time for each of us individually to reconsider the notion of the so-called American Dream, and whether owning a home is really a good thing financially and for our own lifestyles. I’ve personally run this evaluation, and am very happy renting now and far into the future. Run the evaluation for your own situation – what do you think?