Earlier today, I ran across an article at eFinanceDirectory entitled Rent vs. Buy Myths That Ruined the Housing Market. Amazingly, this article was being linked to by a number of reputable blogs – apparently ones who haven’t actually done the research and investigated the real scoop behind the issues in the housing market.
First of all, the problems in the housing market are not due to home ownership. They’re due to lenders lending out ridiculous amounts of money to borrowers who couldn’t afford it, and borrowers agreeing to loans far beyond their realistic level to pay. That has nothing to do with the value of home ownership – it has to do with greed, both on the part of the lenders and the borrowers.
I’m going to deconstruct this article carefully for you guys, so that there’s a clear point-counterpoint to the major issues raised in this article. I’m not stating that the original article is strictly wrong, but that it presents an extremely one-sided viewpoint that deserves some counterbalance.
Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes or maintenance fees. They pay rent.
First of all, buyers are not “throwing their money away” for the first five years of home ownership. Their monthly payments do consist of primarily interest on their mortgage, but a portion of that payment goes towards the value of the home itself, and that portion grows larger with each payment.
Second, buyers have the option of making additional mortgage payments. These payments go wholly against the principal and make a dramatic difference in the interest paid over the life of a mortgage. Even $100 extra a month not only shaves years off of the repayment period, it also goes straight towards the value of your home.
Third, the “first five years” period is the only period where there is a perceived advantage in renting over homeownership. After that, the dual forces of progress on the payments plus the progress of rental inflation swing the advantage around towards the homeowners – but we’ll talk about that later.
Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.
That’s nice, in theory, but people in rental situations rarely do this and if they do, it’s so they can make a down payment on a home.
Let’s look at reality: the savings rate in America is negative, yet this article is using the argument that people might save and invest as a reason why rentals are more cost-effective? They might be more cost-effective for someone with their financial head on straight, but those people are homeowners who see the long-term losing strategy that is renting.
Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents. Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone–including renters–is allowed to take.
For most people, income tax deductions aren’t a consideration when buying. They’re merely a perk if you qualify for them. In my area of the country, very few homeowners would even qualify for any deduction when it comes to their homes, and even in expensive areas, the deduction amount is seen as a perk because the tax rules (including the standard deduction amount) is subject to change.
When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the ‘tax benefits’ of owning into a buying decision.
You do in fact pay property taxes when you rent – property taxes are a part of the calculation that comes up with the amount of rent you’re charged. Just because you don’t see the bill doesn’t mean that it does not exist.
When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent ‘investment’ ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.
These costs mentioned above, in most modern homeowner transactions (particularly in a buyer’s market), are paid for by the seller, not the buyer. We did not pay a dime of any of these when we bought our house and the price we paid was roughly equal to the assessed value.
Even in a seller’s market, the real estate agent commission is covered by the seller and, while some of that is figured into the price of the home, the market in an area will end up being the factor that determines the value of the home, not the commission.
Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.
Unless you’re living in an extremely run-down area and enjoy living in slovenliness, there are maintenance costs for renting, too. Also, any rational renter will purchase renter’s insurance in order to protect the value of their property – the same logic by which a homeowner would purchase homeowner’s insurance. Plus, renters also have to actually pay the rent, which is akin to the mortgage interest discussed above.
At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.
Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the ‘investment’ they made through mortgage payments is gone–dried up virtually overnight through no fault of their own.
This would be true if we were going through the Great Depression, but it’s not. Depreciation in even the worst markets in the country is scarcely up to 20% and in many markets, it’s nonexistent. In fact, based on home sales in my area, prices have held steady (or perhaps gone up slightly) in the last year.
In other words, if you pay attention only to a handful of overheated housing markets, the quoted statement might have some semblance of truth, but once you open your eyes a bit and look at the nation outside of these markets, it’s not as bad as doomsayers want you to think.
Renters may not co-own a home with a lender, but this doesn’t mean that they don’t have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven’t been paying a lender to ‘rent’ money so that they could pretend like they own an asset.
I’m actually scratching my head here as to what the point is, honestly.
First of all, there seems to be some sort of implication that a renter is better off because they may have assets of some sort, which apparently include Star Wars collectibles. This is true of homeowners as well – anyone with stuff can liquidate that stuff if need be.
Second of all, homeowners are quite free to sell their home if they so choose and use the proceeds from that sale to eliminate their mortgage. It is the homeowners’ decision as to whether or not to sell, not the mortgage lender’s decision. Once you’ve signed the papers, it’s basically your asset to do with what you see fit – the only catch is that it’s collateral on a loan. But under that logic, you should always lease a car instead of buying it so that you don’t have to pay a lender to “rent” money so that they could pretend to own that car, even though it’s theirs free and clear in a few years.
During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.
The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.
Let’s completely ignore the fact that you get a valuable asset at the end of a mortgage and look at the money you pay into the mortgage as rent. I live in an area where you can easily get a decent apartment for $600 right now. Otherwise, you could get a house with a $150,000 mortgage at 5.5% for about $850 a month.
Right now, the advantage goes to the renter because they’re paying in $250 less a month. But let’s move down the road ten years.
In ten years, with inflation at 4%, that $600 monthly rent has gone up to $888 a month. At the same time, the mortgage hasn’t changed a bit – you’re still paying $850 a month for your home mortgage. At this point, the renter might argue that they’re saving in other areas, like on property taxes and such, so we’ll still say that the renter is ahead here. Let’s roll ahead ten more years.
At the twenty year mark, with that inflation still at a steady 4%, that $600 monthly rent is now $1,315 a month, while that homeowner is still only paying $850 a month. It’s pretty tough for the ol’ renter to argue that the deal is better, but the delusion might still happen.
Let’s jump ahead to the thirty year mark. The homeowner sends in his last mortgage payment and now has to pay $0 a month. The renter, on the other hand, has seen his rent go from $600 a month to $1,950 a month. Not only that, the renter will have to continue paying that rent in perpetuity – and it’ll keep going up with inflation. The homeowner is done with that game.
This doesn’t even include the asset value of the home. Even strictly ignoring the asset value of the home, the homeowner is in a better situation at the end than the renter is.
Normally, I don’t get frustrated by articles like this, but when I see things like this posted on sites that are presumed to be respectable, I feel a deep need to respond and offer up a balance to the perspective.