“There is no medicine like hope, no incentive so great and no tonic so powerful as expectation of something tomorrow.” – O.S. Marden
Earthquakes, hurricanes, and … homeownership?
Well, the first two have left us in a mixture of annoyance, grief (there has been real tragedy in the wake of Irene, I must say), and a growing cynicism over crisis alarms.
And well, the last issue — perhaps I threw it in so I could segue into what I want to write about this morning:). Though, in fact, it’s a topic which has continued to be thrown into real debate. The mortgage deduction is under fire from politicians and the housing market still looks shaky.
However, I’m really not interested in getting into debates with clients or friends over this issue. Because despite what I will write here, every situation is different. There are real tax implications for whatever you decide — and which might call for an expert opinion (ahem).
But 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” (considering the most recent dynamics over any others, simply because they’re closest to mind) and confirmation bias (whereby we naturally gravitate to arguments which confirm our own) to formulate their opinions.
I’d like to enter the fray for you.
Because these arguments dictate important lifestyle and financial decisions for you and your family. So, before I receive any quick-tempered emails for this thesis;), let me clarify a few things:
* 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.
* 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.
* Many people COULD own, but don’t. That’s my target audience here.
Read on … and remember that we are here for YOU. I mostly want to stir up your thinking, and show you how the planning decisions we help our clients make require multi-variable thinking.
“Real World” Personal Strategy
The Rental Decision
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:
Current Conception #1: It’s More Expensive to Own Than to Rent — This is probably the biggest myth out there that many proponents of renting continue to propagate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows, the rent-to-buy ratio is favoring “buy” in many parts of the country, more so than at any point in recent history.
Now this isn’t just a rah-rah “buy a home” Note, and I would concede that it is entirely 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 can be MUCH more economically efficient to own over rent, especially at this time.
Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm
Let me repeat: It is becoming cheaper to own and it is becoming more expensive to rent.
In my analysis, this trend will continue for years.
Why? First off, the Fed’s policy has been to reward debt holders and punish savers 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 and 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.
Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. 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. Simply 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? Do 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.
Current Conception #3: 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 then requires a calculus on your end as to how much of an increase makes it worth moving out, in order 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 perhaps not at all (not very flexible). So, you’re trading the slight 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 Note is critical of your situation. It’s not. It’s an economic reality that many Americans never have had, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get my clients and friends thinking who DO have the means to save for a down payment, and who may be better off financially as owners than renters… but who continue to muddle along in complacency because they’ve convinced themselves that homeowners get hosed and renters have all the perks.
If you’re especially interested in math, here’s a helpful exercise for you to consider.
Lastly, I’m here to HELP you, only and always. Let us help you through the important financial decisions in your life, while taking a holistic view of ALL of the costs.
To You and Your Family’s Peace of Mind!