(Mint) “Stop throwing your money away on rent.” You see the phrase in Realtor junk mail and hear it from new homebuyers who are immersed in the nightmare of paperwork, points, and plastering.
The logic is simple: renting is just flushing money down the toilet; buying a house gives you a piece of something to call your own. You earn home equity and end up with something tangible to pass down to your heirs–or to sell or refinance when you retire.
There is a kernel of truth to all of this. But it’s mostly crap. I’ve been a renter all my adult life, and I have plenty of home equity. My home equity is called “cash,” and it’s the accumulated difference between what I pay in rent and what a comparable homeowner pays for their mortgage, maintenance, property taxes, and utilities. (Sure, I pay for all of those things indirectly, but that’s the point: they’re rolled into my rent, and they’re not rolled into your mortgage.)
Unlike a homeowner, I can choose to invest my equity in something other than real estate. I can spend my equity without taking out a line of credit. I might squander my equity, but I’ll never be “underwater” due to the vagaries of the market. And I accumulate home equity more quickly than the average homeowner.
Yes, thirty years from now, when your mortgage is paid off, you will own a home, free and clear. You know what I’ll own? Enough money to pay cash for your home.
Sure, I’m making a big assumption: I’m assuming the value of your house won’t rise much faster than inflation (or, at least, not much faster than the performance of my investments). Harvard professor Ed Glaeser, writing on the New York Times’s Economix blog, thinks this is an excellent assumption:
Houses are assets, too, but it’s a mistake to expect them to offer a regular rise in price. Houses pay hefty dividends to their owners in the form of living space–that’s the real return on housing investment–and the basic economics of housing doesn’t point to perpetual price growth.
Indeed, the Case-Shiller index, the most respected measure of housing prices, shows that they’ve barely outpaced inflation since 1890.
I’m also assuming that I have the discipline to keep saving the money. So far so good. Homebuying is often lauded as a “compulsory saving scheme.” I guess that’s true: it’s a scheme that compels you to invest a large proportion of your money in real estate. How is this better than simply increasing your 401(k) contribution?
Two kinds of renters
We’re not so different, Joe Homeowner and me. I rent property from a landlord. He rents money from a bank.
Every month, I write my landlord a check. The money gets spent on orthodontia for the landlord’s kids, and I will never see it again.
Every month, Joe writes his banker a check. The interest portion of the payment–for Joe, that’s well over half the payment, more than I spend on rent for a similar home–gets spent on polishing the banker’s yacht, and Joe will never see it again.
For this analogy, I’m indebted to David Crook of the Wall Street Journal, who wrote a landmark 2007 column on the topic:
Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house…most of your monthly payment neither builds equity nor is deductible. It just goes down the same black hole that sucks up any other renter’s money. And it takes 20 years before a typical borrower pays more principal each month than interest.
Oh, but what about the mortgage interest deduction? It’s not for Joe. It’s for my landlord and Joe’s banker. Only half of homeowners take it–the rest are better off with the standard deduction–and the average tax savings for those who do is $2000, according to Roger Lowenstein of the New York Times. (The big winners in the mortgage interest deduction game are homeowners who make over $250,000 a year but not so much that they can afford to buy a home with cash.)
Trapped in the closet
Home ownership, it has long been said, leads to financial and community stability. The last three years should have taught everyone that “owning” (that is, financing) a home is no protection against financial upheaval.
As for community stability, be careful what you wish for. If you lose your job, the worst place to find yourself is trapped in an underwater house. I could move with two weeks notice and get my security deposit back.
This isn’t just anecdote. As Tim Harford reported in Slate:
English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment…. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.
As for high levels of homeownership creating community, I’m not sure how you would measure that. All I know is that my family lives in one of the safest and most desirable census tracts in Seattle; as of the 2000 census, it consisted of 85% renters.
Why buy?
Am I saying nobody should buy a house? Of course not. There are plenty of situations where you would want to do so:
- You live in a place where the total monthly cost of renting is similar to borrowing. This is true in a lot of non-housing-bubbly places, outside of big cities and off the coasts. In that case, sure, why not?
- You really want to be able to renovate. Yes, this requires ownership. But be careful: renovation costs are almost never recouped when a house is sold. Also, people talk about the ability to customize as if this should be important to everyone. I just don’t care to get my hands dirty.
- The kind of house you want in the neighborhood you want isn’t available for rent. (This is unlikely to be the case in the present market, however).
- There’s a specific house you want, and you can afford to buy it with a big down payment and a boring 15- or 30-year fixed-rate mortgage.
Just because a house isn’t a good investment, in most cases, doesn’t mean you shouldn’t buy one. A steak isn’t a good investment, either. The problem is, houses cost more than steaks, and a lot of people are convinced that everyone should own one, whether they can afford it or not. If you can’t afford to buy real estate, or just don’t want to, don’t. It’s okay. You’re still a grownup.
Me? There isn’t anything I want out of my financial, social, or family life that requires me to own real estate. So I rent.
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Hungry Monkey out now: http://hungrymonkeybook.com/
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11 Responses
[...] This post was mentioned on Twitter by The Liberty Guardian. The Liberty Guardian said: The Renters Manifesto http://su.pr/1ANsPM [...]
Posted on April 14th, 2010 at 12:47 pm
While the link I gave for “Website” isn’t my own site, it’s one that anyone considering buying a house should look at, because it’s full of info about what can go wrong with a house purchase, particularly a newly built house. Mortgage fraud, shoddy construction, loss of legal rights due to arbitration clauses, illusory home warranties, etc. I have been a renter and an owner. There are times that homeownership is nice, and worth the extra cost, but in hindsight there are more times when it’s NOT worth it. And it does generally cost more than renting something comparable, directly or indirectly. It’s a myth that renters are deadbeats and owners are not. Plenty of owners let their houses go into disrepair, and generally if a renter does it’s not the renter who’s being irresponsible it’s the landlord, because it’s a landlord’s responsibility to repair roofs, etc, not a tenant’s. Renting gave me the mobility and freedom to move, take another job, etc. I still feel prices are too high for home buying to be a good idea, at least for me. And no small consideration is the amount of mortgage fraud in the industry that is keeping me from considering another mortgage any time soon. I am a happy renter, doing better financially than many of my homeowning friends and relatives now, because I saw this bubble forming and stayed out of it. I’ve gotten over the “dream of homeownership” which was never anything but an industry slogan even while prices were falling and real estate shills said prices only go up. Many in this industry should go to prison for what they did to the economy, and their cell mates should be the so-called regulators and elected politicians who blessed the industry hype instead of playing it straight with Americans.
Posted on April 19th, 2010 at 9:02 am
[...] leje? The Renters Manifesto | The Liberty Guardian [...]
Posted on April 19th, 2010 at 2:15 pm
Unfortunately, the VAST majority renters do NOT save and invest the difference between their rent and a putative mortgage payment; they spend it. The end-game thus played out is that most long term renters remain that way, paying rent to a landlord into their old age, long after the landlord has paid out his mortgage. At least mortgages have an end-date; renting is never ending. So keep paying rent until you die and eat dog-food in your dotage, or own your own home and/or become a landlord and have the renter pay your mortgage and eat well. I bought my first home when I was 19 and paid it off in my early 30s. Now, 20 years later, I own my residence outright and have a few rental properties with small mortgages that my tenants are kindly paying off for me. I should mention I live in a country and city that has seen very little if any decline in house prices and is unlikely to any time soon.
Posted on April 19th, 2010 at 9:19 pm
II have a close friend who is a realtor. For the past 7 years anytime I would talk about buying a house she would always say “Great time to buy” or “you have to get in the game, now” Interesting how clearly untrue that has been. My family and my homeowner friends have said the same thing. Its just remarkable how brainwashed our society is on home ownership. i will conservatively invest my 2000 dollars a month i am saving on a mortgage, and stay in the apt I love, in the hood i love and lets see who has more equity in 30 years….
Posted on April 20th, 2010 at 6:47 pm
I live in Australia where there is no security of tenure for renters. This is seen as a real disadvantage of renting because you can be ousted from your community/ school/child care/friendship network at a very short notice. People in USA seem to value “mobility” morte highly than we do. Australians generally hate having to move. A cultural difference perhaps, but we regard stability as worth paying a bit extra for.
Posted on April 21st, 2010 at 5:24 am
Funny, I am a landlord. I own 6 houses. Each house has a positive cash flow of $175 t0 $325 per mkonth before the FICT. This increases to $100 each per month after depreciation is figured in and I break even on the income/loss carried over to the 1040. The rents are $900 t0 $1,000 per month payments, taxes and insurance, and maintenance are $675 to $725 per month. Trying to figure out where Harris gets the ideal that including maintenance renting is cheaper than renting. I have been doing this for 8 years and I have a total out of pocket investment of $20,000 in the 6 houses. for this out of pocket investment I receive $1,500 permonth return. Hey Harris how has your stock been doing? But owning real estate is not for everyone, just the smart ones.
Posted on May 5th, 2010 at 5:53 pm
This is a great article. I have read many along the same theme and this one is head and shoulders above the rest.
Superb Job!
Posted on September 19th, 2010 at 1:03 pm
Quick reply to Jim B:
Mr. Harris did address your point at the end of the article. I am making assumptions about your geographic location based on an entire house renting for $900-1000 per month. Where I live in coastal California, a small (2bd/1ba, <1000 sq ft) house rents for a minimum of $2300-2500, and that would be for a less desirable neighborhood. My current annual rent is ~2.8% of what it would cost me to buy the same structure. For me it would seem a prudent financial decision to rent rather than to buy. I am able to put away a lot of extra income each month.
From article:
"You live in a place where the total monthly cost of renting is similar to borrowing. This is true in a lot of non-housing-bubbly places, outside of big cities and off the coasts. In that case, sure, why not?"
Posted on September 19th, 2010 at 1:09 pm
How about making money on real estate? I purchased a three story waterfront house for $620,000 in 2003 and sold it for $1,025,000.00 in 2008! I made $605,000 in 5 Years!!! You cannot make that kind of money renting or investing (unless you win the lottery or bought a high risk stock that magically quadrupled!!
The richest people in the world own real estate (Donald Trump said that he would rather see his money in buildings than paper!). Get out of your bubble dude! You have never been a home owner so you cannot even make an educated statement about both sides!
Josie
Howmowner!
Posted on March 6th, 2012 at 4:54 pm
Retped with corrections:
How about the tremendous money you can make on real estate? I purchased a three-storey waterfront house for $520,000 in 2003 and sold it for $1,025,000.00 in 2008! I made $505,000 in 5 Years!!! You cannot make that kind of money renting or investing (unless you win the lottery or bought a few hundred high risk stocks that magically quadrupled ten times!!
The richest people in the world own real estate (Donald Trump said that he would rather see his money in buildings than paper!).
The average house price 30 years ago was about $50,000 (http://www.jparsons.net/housingbubble/) and now (even after the crash), the average price is $150,000! You cannot predict, in 30 years, that you will purchase the same house with cash you saved after renting for 30 years!
Get out of your bubble dude! You have never been a home owner so you cannot even make an educated statement about both sides!
Josie
Howmowner!
Posted on March 10th, 2012 at 5:00 am
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