Because most philosophies that frown on reproduction don't survive.

Tuesday, December 29, 2009

Rent or Own

Home ownership hath its tired and grubby moments, as I've had time to meditate on over the last few days as a playroom to bedroom conversion project has dragged long over the expected timeline due to general holiday business (and perhaps laziness, but we'll ignore that). On the other hand, if we rented our house we doubtless wouldn't have the wood floors, the newly blue bedroom, the green kitchen, the red walled living room with finished wood trim, or the re-tiled (though admittedly still un-mantled) fireplace.

This morning I was reading over Megan McArdle's reaction to a New York Post column which pushes the benefits of renting over owning.

It strikes me that there are really two trends which make owning a house look less attractive to many people these days:

1) Perpetual Debt: A great many people seem to have no intention of ever paying off their mortgages and owning their homes outright. Mounting equity is taken as a sign that it's time to move to a more expensive house, or take out a second mortgage. At that point, I can see how home ownership would be unattractive. However, if you actively work towards the day when you own your house free and clear (and make that an absolute condition for retirement) then there are huge financial reasons to own.

2) Geographic Mobility: In certain layers of society, it's become increasingly common for people to move pretty regularly, not only in a region (from starter home to larger home) but from one region of the country to another as career changes demand. When you move frequently, especially due to circumstances that have nothing to do with your real estate finances, you're invariably going to get clobbered by regional market fluctuations and the costs of selling/buying a home, and if you tend toward 30-year-very-little-money-down mortgages, the clobbering can be very bad indeed.

These factors aside, I'm always a little perplexed by the "it's actually more economic to rent than own" arguments. While perfectly efficient markets don't exist, it still stands to reason that rent must generally be higher than the cost of buying an maintaining a house -- otherwise there would be no landlords because they'd all lose money. So unless there's some major difference between how you approach house buying versus how a landlord would do so (and holding a house for only a few years and taking out more debt whenever your equity builds would definitely count as acting differently from a landlord) it stands to reason that you'd spend less money buying than renting.

21 comments:

Paul Zummo said...

To me it's a simple calculus: at some point my mortgage will be paid off, and if my salary increases appreciably, sooner rather than later. If I continue to rent, there will never be a time when I am not paying rent.

There are also personal reasons perhaps unique to my situation. For example, my mortgage payment is less than what I was paying in rent for a smaller house. And then of course there's the "I get to do whatever I want aspect of it all."

Ultimately it depends on your situation, but to me buying almost always makes more sense in the long run, unless you are of the sort that is perpetually moving.

Zach said...

This is very helpful for me as I have been wrestling with the decision to buy or not to buy. Renting to me seems to be like setting my money on fire. But there seem to be a lot of risks associated with home-ownership.

Really though, what it comes down to is that my wife doesn't want to have our new baby begin life in an apartment. So in a sense there's really no debate at all, for me anyways :)

DMinor said...

Perhaps it is just me, but I always see these attacks on "the American Dream" as ways of manipulating the population into an urban setting. Urban living is oh so much greener than suburban or rural living. Also we take one more step away from that pesky concept of personal property.

While I understand life without cars and personal houses may be more environmentally friendly, not every situation is suited to it.

And I'm with you on the economics, Darwin. You're paying for mortgage, taxes and upkeep either through rent or otherwise.

Rick Lugari said...

Agreed that economically speaking, renting long term is just a waste. The necessity or desire to relocate often is of course the most reasonable exception.

I want to comment on DMinor's point (one that I agree with), but first, I'd like to offer what I think is another possible motivation of some. First, there's a real risk, especially in the rather wealthy time and place that we find ourselves in, that we become slaves to our possessions. One could theoretically choose renting as a means of avoiding such pitfalls. However, I doubt we see that happening in earnest. I think the motivation of a number of those who would spurn home ownership for "freedom" reasons, are just trying to free themselves up to be beholden to other possessions and consumerist activities (a boat, world travel, dining out every night, etc.). If correct, the disordered appetite is pretty self-evident. Especially considering that while being a slave to your house in some sense is at least somewhat natural in that shelter is a physiological need and in some sense (as observed above), there's no escaping the slavery to shelter. You're going to work for it one way or another.

To DMinor's point, yeah, that mentality drives me mad. I've actually seen Catholics argue such nonsense and bill it as THE Catholic way. Chesterton, who loved the city of London, was a rather big advocate of home ownership for man to be fully alive. He understood the desire for man to have something to call his own and do with as he wants - no matter how big or small.

Anonymous said...

Pity all those people who own houses in Detroit.

And pity all those people who are unemployed in this recession, and can't relocate to find a job because they are upside-down in their mortgages and thus can't move w/out declaring bankruptcy.

And pity all those people who have to turn down promotions because they would have to move, and their houses just won't sell in a down market.


Widespread homeownership makes recessions worse and makes the job market less efficient. Renting isn't just a lifestyle choice for the young and mobile - it's better for everybody. The fact that I live in an apartment and thus can move with little hassle makes *you* more prosperous.

Joel

Darwin said...

Joel,

It makes me more prosperous that you could without much difficulty uproot from wherever you live and come take my job for less money?

At most, I can see that it might make you more prosperous at my expense -- but I'm having a hard time seeing how it makes me more prosperous.

As for whether widespread renting makes society as a whole more prosperous than widespread homeownership -- I'd have to think about it a bit. At first pass it seems to me like an economy in which the vast majority of people rent from professional landlords would be one in which a small moneyed class would be richer, while the wider non-owning class would be poorer. Though I suppose one could argue that the greater economic specialization would result in a higher overall GDP. I don't think I'm buying it. Though I am open to argument.

(And actually, I know some people who were upside down in homes in Detroit and nonetheless moved out of the region to take a better job -- and in the process turned the Detroit house into a rental property. Not fun, but survivable.)

Mark Adams said...

Glad to see this post. I remember for a while reading posts from Matthew Yglesias and other liberals I consider smart claiming there was an economic case to be made for renting and I just could never understand it.

How is spending $x/month to buy something worse then spending $x/month to rent something? I'm glad to see there wasn't some formula that I was missing that made sense of the whole thing.

RL said...

Darwin, can you please delete the previous version? I don't mind giving such personal information to the current audience, but the Internet has one helluva memory and reach. Thanks.

Pity, indeed, Joel. However, as the fortunate (ex)Detroiter that Darwin mentioned who is now a landlord by necessity, I think you're missing something regarding home ownership and real estate in MI. Michigan was once a great place for the working class. That is gone now, but for every one of us who is upside down on their homes, there's many more who have their houses paid off or worth more than what they paid. There's some real security in that when times are tough. Those people could have rented in order to be secure in the thought that they weren't tied down, but they would have actually found themselves with fewer accumulated assets and having to find a means of paying rent. There's definitely some lasting security in owning a home.

I've rented three times. Each time it made sense for me. When I bought my home, it made sense to do that. Even though I'm upside down on it - even if I had to get foreclosed on it - it was still the appropriate thing to do. I could have rented a place for my family of five, that grew to eight, but I would have spent far more money in rent - money that I didn't have. As it turned out, having built some equity in my house, I was able to use that to borrow for enough to ride out the tough times (in this case relocate). If I had rented all those years, we'd have been on the street before the bubble burst.

Perhaps renting makes sense for you given all the factors in your life, that's understandable for many. However, I don't buy for a minute that as a society we'd be better off having a small propertied class and those who toil to fill their coffers.

Barb said...

We paid our house off ten years ago and I can say that having no mortgage and no rent to pay is wonderful. I know someone who is 50 years old and is being laid off from his job. He is very glad to have his house paid off. One less thing to worry about...

Anonymous said...

Darwin wrote: "It makes me more prosperous that you could without much difficulty uproot from wherever you live and come take my job for less money?"

Where did "less money" come into this discussion? Do you really need me to explain why a mobile workforce is better for the economy than an immobile one?

OK, I'll explain. Say a company needs to hire someone with highly specialized skills - frex, a Ph.D chemical engineer who can do research into ceramics. There might be only two dozen such people in the entire US. And in today's real estate market, it's totally likely that nineteen of those people are currently trapped by homeownership and thus unable to relocate to this company. Of the remaining five, there may or may not be anyone who is suited to this company. The company may have to do without these skills, and perhaps give up on that R&D entirely and thus give a market advantage to their competitors, who may be overseas.

This isn't rocket science. Ask any economist.

Joel

Anonymous said...

One more point: Even if the folks in this forum continue to insist, in spite of the obvious economic issues, that widespread homeownership is desirable, I would hope that everyone could at least acknowledge that the federal subsidy of homeownership is a problem. It is a transfer of wealth from the lower class to the upper, and it distorts the housing market.

Agreed?

Joel

DMinor said...

Joel,

"And in today's real estate market, it's totally likely that nineteen of those people are currently trapped by homeownership and thus unable to relocate to this company."

In my circles there are many families who need to relocate for business reasons. In previous good real estate times, they sold their houses and bought at their new location. Now, they rent the house they own at the old location and rent a domicile at the new, just as was described above.

The specialized skill example you cite would probably play out in the same manner: scientist wants great job, so he rents his house until he can get some traction at new, higher paying (presumably) job. When conditions change, he sells the house.

But what happens if the pay (including benefits) is not enough to entice our scientist to move, and there is no one else in the U.S. qualified? The company will probably recruit a non-U.S. citizen. In fact, I believe this has been happening for the last couple of years. I had no idea that home ownership had anything to do with it.

If we want to talk about real immediate large-scale economic impact, we should be talking about the common worker, vice the highly specialized one.

The game is not rocket science, it is social science.

Anonymous said...

"The company will probably recruit a non-U.S. citizen."

Only if the non-citizen doesn't already own a home in his country.

Joel

RL said...

Joel,

I think you may be arguing exceptions that prove the rule. The vast majority of people are going to choose to remain in a particular region due to family and friends. It may be rather abstract and hard to quantify, but it seems there is great economic and societal value in having a reasonably stable, less transient, society. There's an awful lot of expense that would be involved if businesses and people were constantly uprooting to different regions. Frankly, that's why you don't see it happening very often.

Even considering your example (an exception to the rule), if the market was such that a company thought it needed a particular person for a role, and the person was balking because of his mortgage, the company would evaluate just how important the role or the individual was. If the benefits were great enough, they would foot the bill for a relocation. There are relocation companies whose business it is is to buy and sell the old home as well as getting the person into a new one. They bid the job and negotiate with terms of any potential loss with the company. Regardless though, so the role goes unfilled or the project scrapped, so what? It's a drop in the ocean economically speaking.

I can't quite put my finger on it, but what it seems like you're advocating is similar to the broken window fallacy. Like you would rather break windows in order to create work for the glass maker and glazer. So too would be having people transfer a larger portion of their treasury as an expense rather than a lesser portion to aquire an asset. It just doesn't hold water in my mind.

Darwin said...

Well first off, yes, I certainly think it's a bad idea for the government to subsidize mortgages -- both for the obvious reasons of supporting the real estate bubble, and also because the mortgage interest deduction (which is perhaps actually the bigger long term factor) encourages home debt rather than home ownership. It's totally politically unfeasible to get rid of the mortgage interest deduction, but I do think that getting rid of it or changing it would be good.

I do see the economic advantage of a mobile workforce, but I'm unclear that home ownership is really that much of a drag on it. For one thing, many companies already deal with this. For instance, even though home values here have remained steady (my house has never dropped below the price I bought it for in 2003), when a friend here was recently offered a highly placed job in Seattle by a large company, their offer included an offer to take his house off his hands in return for a cash payout, leaving the company to sell the house as best they can. This is actually not all that unusual for specialized jobs. So his quandry is not "can I take the job" but rather "should I sell the house myself and possibly make more, or should I just take the cash payout and not worry about it.".

Also, I'd argue that you'd see a lot less frothiness in the home price market if people primarily took an attitude of buy-to-own rather than buy-to-hold-briefly-and-then-refinance-or-sell. I do think that people who enter the housing market with the idea they can buy, hold for a few years, realize vast gains, and then sell are going to end up taking a bath. (That's why when we lived in California from 2000 to 2003 we rented, while when we came to Texas we bought.)

So basically, if people are looking at home pricing thinking, "I wanted to end up holding this house long term and either owning it outright, or selling it with major equity in order to be able to own my next home outright in the end," they're going to make different decisions about what's a reasonable price than people who are thinking, "Wow, the market is really booming right now. I think I'll get an interest only mortgage and hold this house for a few years, and then refinance to own 20% or sell it."

You will occasionally have regions that economically crash and burn (as Michigan has) but if you're taken a cautious and ownership-based approach to buying a house, you can survive that by renting your house out if you have to leave the region, if you got house you could afford.

Enbrethiliel said...

+JMJ+

Joel, I assure you that there are hundreds of Filipino professionals who own their own homes here and who would sell them at a drop of a hat if they were offered jobs in the United States.

MomE. said...

Joel,

You must have a wonderful landlord. In the last place I rented, I put an exorbitant amount of money into fixing things that my landlord should have taken care of but didn't do it in a timely enough manner (ie.: gaping hole in the living room ceiling caused by water damage and raccoons in the walls- I lived with it for quite some time before hiring someone to fix it). I was never reimbursed. I could have taken landlord to court- another exorbitant fee, moved- lost my deposit for breaking my lease or a number of other things. I am now a landlord of sorts myself and I see the other side of renting property and how much upkeep and a headache it is. Landlords are at the mercy of their tenants, tenants are at the mercy of their landlords. Either way it seems like a game of who can take advantage of the other unless you are in an ideal situation as you seem to be but sadly not everyone is and many just can't afford to be. Many people I know (of course not all) who rent would give anything to own their own home.

Elena said...

The trick to successful home ownership is not to buy more house than you really need. My husband and I bought a house in the inner city. It's lovely with a huge fireplace, wood floors, crystal chandelier. It will be paid off in about 5 more years. Of course it is in a crappy school district ( so we homeschool) and the occasional street shooting ( which also gives us the ability to really help our neighbors) but we could afford the house payments and my kids are getting better social skills than they could have at their cousin's suburban white bread public school.

Pentimento said...

We are just settling into our first home, as I've been writing about on my blog. It is a bizarre feeling after years of renting/urban living. If we had stayed in New York City, we could never have afforded to buy a house within 75 miles of the epicenter. In our new home town in northern Appalachia, on the other hand, the housing market is so shockingly affordable that I still feel as if we're in the land that time forgot. The house we bought (for well under $200,000) would have cost four times that in Yonkers, just a few blocks away over the New York City line from our old home in the Bronx.

On the other hand, landlords here are terrible, as I know from having rented for our first year. In NYC, at least, being a landlord is a profession, and there are scores of arcane laws that compel landlords to be accountable. Not so here. So in New York, you may not like your landlord, but chances are good that he's going to keep your place in good working order, or it's easy enough to haul him into housing court, which generally awards the plaintiffs with all kinds of concessions.

TS said...

Faced with a school district with out-of-control spending and a constituency used to giving the schools what they want, I see no reason my property taxes won't keep rising far above the rate of inflation. Which makes paying off a mortgage somewhat less exciting since after you're done you're stuck with what looks like a small mortgage payment.

Rents won't go up by as large a percentage since the higher density of housing per acre means the burden can be shared.

Anthony said...

TS - In California, we have Prop 13 to protect us from the political class trying to eat us out of house and home by raising property taxes. (Prop 13 passed at a time when the average property tax bill was rising more than 20%/year, and many people's bills doubled from one year to the next.)

Mark Adams - there aren't many places where $1000/month will buy or rent you the same house. In California, $1000/mo rent gets much more house than a $1000/mo mortgage, unless you have a huge (50%ish) down payment. In other parts of the country, if you can come up with a 20% down payment, a $1000/mo mortgage gets you more house (because it's *hard* to find a job where you can save that 20% down payment).