Send this Article to Anyone Who Says Renting is a Waste
We know that houses bought in the 1980s amassed a tremendous amount of wealth for the owners. But does that mean housing is a good investment or that a family rich enough to buy a house in the 80s and never sell is already rich? Also, can we really look at decisions made in the 1980s as good advice for 2021? If we look at data about housing now, then renting is better than owning. Send this article to anyone who says renting is a waste because the numbers do not support that.
What Counts as a “Good” Investment?
For an investment to pay off, it has to be timed and priced correctly. There are no investments where timing and price do not matter. You can buy Amazon stock and sell at a loss. You could buy into a Ponzi scheme and make money.
Your results don’t mean that investing in Amazon is bad or investing in a Ponzi scheme is good. It just means that a broken clock is right twice a day and sometimes you can do everything right and still get bad results. Timing and pricing are crucial. This is not controversial.
Yet people often say “good debt” like housing and college are investments that ALWAYS make good sense. I mean it has to have some marketing when the numbers make no sense whatsoever. Whether these are good investments depends on what you’re buying, what you pay for it, when you buy and sell, and also, the opportunities you miss out on by choosing your particular investments.
The Losers – Who Regrets Buying a House?
Owning a home is like marriage: the unhappiest people are those who chose wrong.
A single person might meet the love of her life the next day and get married, but an unhappily married person lives in fear of love because she can’t act. A renter can find her dream home and buy it tomorrow. An unhappy owner has to figure out how to stay in her house to recoup her costs.
Of course there are people who are happily married and happily single, renting happily or owning happily. We’d like to think that we won’t be the unhappy married or the unhappy homeowner. But there are a lot more of them than people are ready to admit. The question is which one are you going to be?
Short Sales, Evictions and Foreclosures are a Reason to Rent
It’s not guaranteed or even likely that prices will continue to go up at the same rate in the future for anything. It’s also not guaranteed that you will be able to afford your mortgage while you’re paying it.
Yes, you face some risks by renting and not owning – namely that you could have missed your dream house or missed a hot market. The worst that can happen is disappointment and lost profit.
The risk for buying and not renting, though, is financial ruin. If you miss a few mortgage payments because you fall on hard times you could get evicted, lose your down payment, your house, and ruin your credit. If your house value decreased, you could lose even more to your lender.
1% of buyers are foreclosed upon by their lenders. 5% of sellers sell their homes because they cannot afford the mortgage and/or the other expenses of owning a home. These aren’t high percentages, but remember that this is the worst case scenario and the consequences are dire. There are 83 million owner-occupied households in the country. That means potentially 5 million households belong to this group of people who suffer the worst case owning scenario. How do you know you won’t be in this group?
Sellers who Don’t Recoup Their Cost
When home sellers brag about their profits, it sounds impressive, but it’s never the whole story. It’s like comparing the retail price against the cost of the materials. With home prices, there are so many additional costs in buying and maintaining a home.
On average, it takes 4 years for sellers to recoup their costs from buying a house. So someone should aim to live in their house between 5-7 years before selling.
Most of the data on making money when selling a home is skewed upwards because of people in their 60s and 70s selling homes they bought in the 80s. But home sales for younger people is a much more relevant demographic. Young people bought their homes recently, bought at close to the high prices we have now, and have a lot of flux in their lives whether it be starting new jobs and families or pursuing job opportunities. They are thus, more likely to be swayed by the rent/buy decision.
The data show that 88% of 22-29 year old sell their homes in 5 years or less; 51% of 30-39 year olds sell by the five year anniversary. Those are solid majorities who likely won’t recoup their costs. I could hang my hat here, but there’s more!
Homeowners Who Want to Sell But Can’t Find a Purchaser
7% of sellers wanted to sell earlier but didn’t because their homes were worth less than their mortgage. Note that this information comes from a survey of home sales – it doesn’t include owners who never found purchasers for their homes. The number who want to sell a house but couldn’t makes this statistic much greater than 7%.
Who knows what waiting for a purchaser meant for the sellers’ lives? Maybe they missed out on family time or job opportunities. Maybe they incurred incredible costs maintaining two households. While 1% of these sellers rented their homes, it’s not clear that their renters were good renters, or paid enough to maintain the mortgage and/or the cost of maintaining two residences.
People who own seem to think that rents are tied to house prices, but of course they aren’t. The rents are going down in this area, even as housing prices increase. As more people leave rentals to buy houses, and people leave the area for cheaper ones, renting companies have to reduce prices to entice renters. So if you want to rent out your house, you can’t necessarily charge your mortgage price because renters can find much better deals on apartments. You have to lower your rent in order to entice good renters to pick your house. Further, it’s just a lot of stress to do these things on short notice.
Also when selling a home, you’re not in charge. You’re at the mercy of supply and demand in the housing market too. 40% of home purchases reduced their asking price at least once. That number jumps to more than 60% for those younger than 54, which suggests that the numbers are skewed by those living in homes for 30 years. 34% of all sellers offered incentives to attract buyers. Your life savings – and now you have to throw in some extra bonuses to get some schmuck to want to purchase it.
Homeowners Who Delay Their Lives Because of Their Mortgages
When people sell their homes, 16% want to move closer to friends or family, 13% want a bigger place, and 11% move for a job relocation. Sellers typically lived in their homes for 10 years before selling.
But how likely was it that it took 10 years for people to want to move closer to their families or want a bigger place? People sold at 10 years because that’s when the economic benefit would be best. It skews the investment because people are changing their lives in order to get the best financial gain. When people have children, for instance, the time to move near to your parents is in those early years when you need childcare – not 10 years down the line. I’m not even factoring in childcare costs lost by not selling because that would too easily put the win in the renters’ column.
More than half, 54%, of sellers’ houses were on the market for more than 3 weeks. 15% of home sellers needed to sell their homes urgently and 41% had a set time frame for their sale. That means these sellers are unlikely to get a great price and just imagine the stress of seeing if your life’s investment would pan out for weeks or months.
Homeowners Who Regret Their Purchases (Apart from Costs)
In buying a home, you have to make a lot of concessions. 71% of homebuyers reported some concession when buying a home – with the most common concessions being price, condition, size, style, and distance.
Buying a more expensive home than you wanted could mean forfeiting other desires, like vacations or more children. Buying an older place may mean more costly repairs. Compromising on style might mean waking up every day annoyed at the appearance of your environment. Conceding on distance takes time out of your life commuting, missing time for yourself or losing time with friends and family.
Conceding on neighborhood could also have other negative externalities. You get more bang for your buck living in a gentrifying area but the new people change the neighborhood culture and push poorer people out.
Even if you buy in a desirable neighborhood, there’s no guarantee that it’ll stay desirable. 14% of home sellers sell their homes because the neighborhood and schools became less desirable. You can’t control who’s moving in and who’s moving out. And when you buy, you don’t have as much freedom to leave.
A Case Study: My Costs Didn’t Add Up
81% of buyers consider a home purchase a good investment. But I don’t think most comparisons give the purchase a fair shake. These calculations compare mortgage payments with rent payments, as if down payments and other costs of ownership don’t exist. You save a lot of money upfront if you don’t purchase a house, and if you invested that money, as I did, over 10 years, that would yield an incredible savings.
I just saw a condo listed that is very similar to the apartment where I live. Comparable location, similar square footage and amenities. Yes, I could have picked a cheaper condo, but then I could have also picked a cheaper apartment to live in. I think this is a fair estimate comparing apples to apples with actual numbers.
|Condo purchased at $322,400 compared to Renting Similar||Rent||Own|
|Mortgage ($2,298/mo – 30-year fixed, includes taxes, HOA fees of $700/month, and 3.83% interest – 4.83% was average in 2011, but maybe you refinanced later for an average of 3.83%)
Rent ($1800/mo – my average rent) for 10 Years
|Utilization of difference between mortgage and rent ($588/month saved in renting v. owning, considering returns of 13%, the average rate of return from 2011-2021)||$68,390||$0|
|Down Payment (20%, one time)||0||-$65,000|
|Down Payment Utilization (the growth the $65k down payment experiences if invested in the stock market for 10 years)||+$155,646||$0|
|Closing Costs for Buying (2% of purchase price)||$0||$-6,448|
|Closing Cost Utilization||$15,440|
|Insurance (10 years)||-$1,000||-$14,830|
|Maintenance (1% of purchase price each year for 10 years)||$0||-$32,400|
|Tax Deductions (10 years)||$0||$44,811|
|Tax Deduction Utilization (Tax deductions invested in stock market)||$0||$33,747|
|Home Equity = $55,783
Interest Paid: $88,670
Left on Mortgage = $201,617
Sale price ($455,000 listing price) -$201,617- sale costs (approximately 4% value, $18,200)
|Total Cost (10 Years)||$22,476||– $80,697|
Costs Most People Forget
Most rent/own calculators assume that the owner puts her money in an investment (a house) while the renter just doesn’t have any money. I can see that the owner doesn’t have any leftover money to invest; they just put it into a house. But the renter has options. I’ve never seen a calculator include any investment earnings for the renter in their rent/own comparison. But given that most buyers have closing costs including a considerable down payment, that’s money the renter could invest.
In my calculation, the renter invests money that would have gone into the home into the stock market instead. Some people estimate that it could take 14 years to save for a down payment in major metro areas. I think that’s probably a little high. But let’s say you save for 7 years, all the while believing you’ll buy a house soon. Instead of putting it in the stock market, you’re probably putting it in a savings account. For my calculations, I’m not even including the lost compound interest while you save for a house, but I’m including putting your down payment in an index fund. That growth is a huge contributor to the growth of your net worth. I am including the savings from closing costs and mortgage/rent differential.
The Best Case Scenario for Owning is Still Worse than The Worst Case for Renting
I should add that this is the best case scenario for owning and the worst case scenario for renting. Prices have appreciated in this area. I assumed a 10-year stay and I’m assuming that the condo sells for the price listed (it hasn’t sold yet). I’m also assuming average maintenance costs even though both condo and apartment are about the same age (~50 years old). The condo certainly could have steep maintenance or renovation costs over those 10 years.
I just rented a new apartment. I didn’t do a lot of research but worse to worse, I only live there for a year. The housing market is so hot right now that people are waiving inspections. That could easily mean you sink your life savings into something that has gone through less vetting than my apartment and you just promised the next 10 years of your life there.
If you’re buying a house, you don’t even know what you don’t know. And there are things you can’t know. Like what if the neighbors are really terrible and now you’ve bought the place. Maybe the neighborhood dissolves into gang violence. Most likely you end up thinking, I shouldn’t have waived that inspection…
When I was looking for new jobs, I was really pleased to be able to have complete optionality in terms of location. I can take a new job anywhere. When I took a career break, so many people told me that they wish they could, but they were tied to their mortgage.
I know a lot of people who could afford to take time off from their jobs because they rent. They packed up their stuff in storage and went where the wind took them.
If you want to pick up and move somewhere, renting allows you to do that with minimal hassle. Housing is an investment that impacts your whole life.
A friend bought a house, got married, had a kid. They never wanted to live in this house, but it was underwater. Still, they lived there for years hoping the market would change. But that’s years of their married life, and years of his kid’s life that were spent hostage to his housing investment. Eventually they just sold the house and moved to their dream city. They wanted to live their lives. And good for them because lots of people can sacrifice their lives for a bad house trying to make this “good investment” work.
In contrast, I sold a losing stock yesterday. The transaction was quick and easy and it didn’t affect my life at all.
16% of 2020 homebuyers are single females.
A few years ago, a creepy guy I went on one date with emailed me periodically, noting when he saw me around our neighborhood. And you know what? I moved (not because of him, but I did move). And I can continue to move if someone follows me or figures out my address. That peace of mind is priceless.
If I purchased a place 10 years ago, I would have picked a very different place than where I live now. It would have been in a different neighborhood and I would have picked the cheapest place I could find. Perhaps that would have worked, but I’m not sure I would have lasted 10 years in the place.
70% of home sellers move to another place in the same state, on average 20 miles away, so it’s likely that they just wanted a different house, not required to move.
10% of home sellers sell because of a change in family situation. Buying a house is difficult because most of us are not great at predicting what a 10-year older version of us would want, let alone a 30-year older version. Renting allows for us to change our minds. Housing does not.
If you Still Decide to Buy
Buy for some reason other than costs, such as stability for your children or finding the perfect house. Buy in a place that you would live in for forever no matter what happens to the neighborhood or the area. Factor in all costs when deciding which house to buy and figure out if that’s feasible and likely given your career and life.
Then think, if the house was not a good financial investment, would you still get enough value out of living here that it would be worth it?
Send This Article to Anyone that Says Renting is a Waste
I think there’s a lot of vitriol thrown at renters. But really, why does where I live or how I pay for it matter to you? It makes sense for my life and my finances. I literally ran the numbers on my particular circumstances and it didn’t work out.
Whether renting or housing makes better financial sense depends on so many individual factors that no one can know but you. So let’s all cool it on which one is better – neither renting nor housing is better. What matters is what’s best for you.