Imagine if everyone rented their home instead of owning it? That would be really, really great…..for landlords! Society would be all about a majority of ‘serfs’ and a few landlords building equity in their property and collecting rent from you to pay for it. A recent Freddie Mac survey revealed that 78% of Americans believe renting is more affordable than owning a home, up 11% from 6 months ago. 58% of renters now say they don't currently have plans to buy a home. Landlords have done an exceptional job messaging to the consumer just how ‘cheap’ renting is in a society increasingly oblivious of longterm investing and commitment. Rising mortgage rates and home prices are certainly a big problem making the moment of entry to home ownership has become increasingly difficult, yet in a world of ‘agenda-driven-facts’ and inaccurate perceptions, here are some of my observations on the subject:
1. “RENTING IS SO MUCH CHEAPER!” Landlords would love every American to be a renter. DUH! If the average age of an American is 78 years old — and they start renting from age 21 — that’s $684,000 per rental in the hands of every landlord for a $1,000 per month rental over their lifetime…..assuming zero inflation or rent increases. For a $2,000 per month rental that figure doubles to almost $1.4 million. Personally, I would much rather have something to show for decades of ‘rent’ payments, wouldn’t you?
2. “RENTS BARELY GO UP!” Let’s assume annual inflation averages around 2% over a lifetime. 2% inflation would take a $2,000 per month rent to over $2,400 in a decade, $3,000 after 20 years and over $3,600 in 30 years.
Today's real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. Wage gains have mostly flowed to the highest-paid tier of workers and have not kept up with the costs of ‘stuff’, especially housing.
3. “WHEN YOU OWN YOU HAVE TO SPEND SO MUCH ON MAINTENANCE.” This is true and a GOOD landlord will pay for all maintenance. A GOOD landlord. Homes do cost lots to maintain although many basic tasks can be learned DIY thereby saving thousands. Spread out over 30 years, maintenance costs are manageable.
4. “I CAN RENOVATE AND DECORATE MY RENTED HOME TO MY TASTES!” Yes, you can, but you will never see that money ever again. And you probably have to restore most of your decor and renovations to their original condition upon ending your lease. A conservatively renovated, well-decorated owned home can add value and equity to the home. Landlords do this (capital improvements) all the time…..to raise rents.
5. “WHEN YOU OWN YOU ARE STUCK.” This can be true, yet a home can be rented out at a time when you’re unable to sell it easily or if markets have dipped. Breaking a lease is not always quick or simple. Most leases are very restrictive. As rents rise, you too may feel compelled to stay where you are with your lower rent that may not rise as quickly as alternative properties.
5. “WHEN I RENT I DON’T HAVE TO PAY REAL ESTATE TAXES.” Yes, you do. Its priced into the rent. And when taxes rise, so too do rents.
6. “RENTERS WILL BE FAR BETTER OFF SAVING AND INVESTING THEIR MONEY IN THE EQUITY MARKETS.” Landlords argue that people are so much better off renting and investing their savings instead: if the average American is incapable of saving for a downpayment to buy a house, what makes everyone so sure they will be such astute investors? Wouldn’t an owned home allow them to pay their ‘rent’ to a bank towards ownership — a forced savings account — rather than to a landlord? …..And at the end of 30 years own a tangible asset. No, it may not be a windfall, but it could be that secured nest egg for retirement. A mortgage payment with the incentive of ownership can encourage less wasteful spending on other things.
7. “HOMEOWNER TAX BREAKS NO LONGER MATTER”: While the tax breaks for homeowners have been reduced by the current administration, they still have solid value to most homeowners. They have not disappeared.
8. “I DON’T HAVE TO PAY FOR INSURANCE!” No, you don’t pay for homeowner insurance, but you do have to pay for renters insurance for your furniture, art, and clothing.
9. “THERE ARE BETTER INVESTMENTS.” Yes and no. Housing is an essential need so investing in a home combines investment with something that is essential to your existence….shelter.
10. “RENTAL PROPERTIES OFFER THE SAME QUALITY OF LIFE AS AN OWNED PROPERTY.” There are exceptions, but a good chunk of rental properties offer a lower quality of life, lesser quality build-out, and a more generic existence.
So when you evaluate whether you wish to buy or rent and which is more affordable, its almost certain that buying — short-term — is indeed more expensive. Over the long term though most people benefit from homeownership, aside from the emotional plusses. Long-term commitment is tough in an instant gratification world where many fear the future and seek unlimited freedoms. Maybe it would be best to see in real estate the value of compounding interest in YOURSELF — paying down a mortgage to build equity for you instead of paying your hard-earned money to help create equity for your landlord.
I expect new mechanisms will emerge to make buying a home easier for responsible tenants.