Is Renting Your Home better than Owning Your Home?
Over the last several decades homeownership has been a given as a part of the dream and each family's goal for financial security. Has the recent housing crisis changed things such that the dream of homeownerships is not thought to be misleading?
Homeownership rate falling
Since 1960's the rate of homeownership in the US has risen from 63% to over 69% in the mid 2000's. In the last couple years that rate has dropped back to the level in 2000, around 67%. And the trend and economic reports seem to point towards even lower levels of homeownership.
The NY Federal Reserve recently made a distinction between the official homeownership rate and the effective homeownership rate.
The effective rate considers homeowners with negative equity - upside down in their homes. The idea is that these homeowners are effectively renters. This effective rate puts homeownership back to levels in the 1990's.
Home equity percentage falling
Worse, the percentage of homeowner equity is moving well below 50%. The first time equity fell below 50% since 1945 was in 2007. In June 2009, the blog Calculated Risk estimated the actual equity was even lower.
Even with the official estimate home equity has continued to fall since that 50% milestone was reached.
Data from the Federal Reserve June 2010 Flow of Funds Report (Z1)
This shows that since 2003 home equity has fallen from almost 58% to under 40% - a drop of almost 20%.
So Renting may be better than buying?
Home values have depreciated in most areas.
Many homeowners owe significantly more than their home is now worth.
Many homeowners cannot sell to move for new or better employment.
Many homeowners have mortgage payments that they cannot afford.
Renting would provide more flexibility to move, less impact on credit in the case of default, little requirement to maintain the home.
Is homeownership now seen as overrated? And renting is better?
Many stories are out today indicating that the decades long push to own a home may have been wrong, yet a recent survey indicates that despite all that is negative with the economy and with the housing market, 90% still are pleased with their decision to buy a home.
It is true that not everyone should own a home.
If you are likely to move soon, owning may not be the right choice, because of the initial cost of purchasing, the cost of selling, possibly any large ticket maintenance costs that might arise, and because being forced to sell an asset such as a home or a stock does not generally provide the best market for selling.
Stability is most definitely a consideration about buying a home - location stability and work stability.
"Not everyone should own. Some of us should. I do, and I certainly think it was a good decision for me, but it depends." Professor Joseph Guourko.
Is buying a home an investment?
In an NPR interview from December 2009 Professor Joseph Gyourko, Director, Real Estate Center, University of Pennsylvania's Wharton School, gives many arguments against the goal of homeownership. The article was entitled "Re-thinking the American Dream of Home Ownership.
Professor Gyourko says that real estate is not a "particularly good investment." It generally follows a little better than inflation. He states that after inflation, long term gain on real estate investment has been about 1%.
"You know, it is actually not a particularly great long-term investment. The RIOs(ph) are after inflation. So, adjust for inflation, average return in the United States since 1975 has been about one percent a year. So, it's - that's not zero. It's positive. That's a good thing. But it's not a particularly great way to build wealth. You would have done a lot better in a -even a one-year treasury bond index over that period of time, quite frankly. So, financially, no. It's not nearly as good as people think it is."
Well I find some fault with the professor's reasoning. The house payment is not an investment. The housepayment is a cost of having a roof over your head - whether renting or buying. The gain with buying is that overtime you gain equity and move closer to owning your home free and clear. That is not done with renting. This works with investors also purchasing rental property.
If you want to invest money each month, good. Go invest it. Dollar cost averaging can be a good technique.
We are talking about the right decision with your monthly housing expense. Rent forever? Build equity and eventually own your home free and clear? That is your decision, not whether the home is a good investment.
Not paying a monthly housing payment is a big step towards financial independence.
If the market adds better-than-stock market appreciation, then all the better. Even if the value does not appreciate, you, the buyer can still end with a free and clear home, and no housing payment each month.
The gain is that the homeowner is using housing expense to build equity, housing expense that will be spent regardless just to pay for having a roof. Buying a home means that that regular housing expense will also create for the homeowner a real asset, real wealth.
Get qualified and go buy your home.
Not everyone should own a home. Yes that is correct, but generally you may should not own if you will move soon or do not have stable employment. The arguments otherwise against homeownership so often tend to encourage lower income workers to remain renters. Sometimes the argument is subtle. "Owing a home is right for me, but maybe not for other people."
Mobility and job stability can be reasons not to own right now, but when a renter's employment and location are stable, it is time to buy a home.
The argument that some people cannot afford homeownership is just wrong. If they are renting, they are paying for homeownership. They are paying for the landlord's homeownership. The other costs associated with homeownership:
All these are covered by the rent check to the landlord. The renter is paying those expenses, only the renter is not paying them towards their own asset accumulation, their own wealth, their own rent free future.
We should not let the current housing crisis change thinking so that people believe renting is better. It is not. Owning your own home is still the better choice.
Home buyers in Chattanooga, Tennessee, and Georgia
In our local area the decision to buy is easy. Growth prospects in our area are strong. You get the positive goal of house payment free living, plus the very real likelihood that your home will appreciate as the region grows. For Chattanooga and it regional neighbors, home ownership is definitely the right choice.
And buy your home.
If you have questions about how to become house payment free call or email me. We can set you on that path. Today's low rates make that dream of house payment freedom even more achievable. You can find a rent vs buy calculator here, but the real choice is the decision to own.
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This blog represents the opinions of Richard Smith. The posts and comments written on the blog do not represent the opinions or positions of Sierra Pacific Mortgage.