Remember renting vs buying debates?

[NinjaNick]

Oh the good 'ol days of people arguing about renting vs buying. Whatever happened to that? I ran across this on yahoo and it reminded me of those times.

http://realestate.yahoo.com/promo/5-reasons-renting-still-beats-buying.html;_ylt=Ar4y4NniEFwo1y.3sqMEE4kazJV4

5 Reasons Renting Still Beats Buying

By Jack Hough

Mar 6th, 2009

This weekend I’ll throw $1,100 down the drain. That is to say, I’ll pay my rent. Pop-finance pundits have long used the drain cliché to describe how renters like me waste money, while homeowners with mortgages “pay themselves” and “build equity.”

In April 2007 I argued something different: Renting Makes More Financial Sense Than Homeownership. Basically, houses produce poor returns over long time periods while stocks and other investments produce good ones, and the outlook for houses is especially poor now, so I’d rather rent cheaply and funnel my extra cash into something other than a house.

Even though house prices have plunged and I have enough money to buy one, I’m still not nearly tempted. In what follows I’ll give five reasons. (The first two form the core of my original argument.) Before all this starts to sound too self-congratulatory, I’ll also explain the one big thing my essay got wrong.

Reason 1: Houses produce lousy returns, while stocks produce good ones

Houses looked like smart investments in 2007. They had returned 9.3% a year for a decade, while stocks had returned just 5.9%. This year, with investors fleeing both houses and stocks, both probably look like a waste of money. But be careful about succumbing to what psychologists call recency bias — the tendency to form beliefs based largely on the most recent observations in a long series of data. For U.S. investors, reliable data on stocks and houses goes back well further than 10, 20 or even 50 years.

Stocks returned 7% a year for 200 years ended 2004, according to Wharton professor Jeremy Siegel. That’s after subtracting an average of 3% a year for inflation, or the gradual rise in prices of ordinary goods. The plunge in stock prices over the past 16 months makes me all the more sure that shares are poised to deliver good returns over the next decade or two. Houses returned 0.4% a year over 114 years ended 2004, according to Yale professor Robert Shiller, co-creator of the most widely used index for house prices. That number is suspiciously close to zero. Indeed, it might have been zero, reckons Shiller, if not for two periods of aggressive house buying, one spurred by government incentives following World War II and another created by the Federal Reserve’s drastic interest rate cuts in 2002 and 2003.

A zero return for houses might sound odd. An editor who re-published my original essay at another web site stuck the word “virtually” before zero, I suppose to soften the message. I made him take it out. If you think about it, zero is the only logical answer, so long as we’re talking about a single-family house and not, say, a rental building built to maximize income. Inflation, recall, is the gradual price rise of ordinary goods. What’s a house if not an ordinary good? Houses don’t spend their days thinking about ways to make themselves more valuable. They just sit there. Subtract inflation from their long-term price increases and there’s nothing left.

Apply heaps of leverage to the numbers if you like, but the outcome only worsens. Mortgage rates now are about as low as they’ve ever been, thanks to more government efforts to, among other things, spur house buying. But you’ll still pay 5.2% to capture long-term price increases that merely match inflation. And today, you’ll tie up a bundle of cash with a down payment. I’d rather pay cheap rent instead of an expensive mortgage and put the monthly cash I save into stocks and other investments. And rent is still plenty cheap, because . . .

Reason 2: House prices have further to fall

Price matters. Few stock investors would think about buying shares of a company before looking at some measure of how expensive it is relative to the value it creates. They might look at the price/earnings ratio, for example. Houses have a price/earnings ratio of sorts — the ratio of their price to the yearly income they could generate if rented out. In April 2007 I noted that price/earnings ratios for stocks were only slightly above their historic average, while price/rent ratios for houses were double their average.

Stock prices were the thing I got wrong. The price/earnings ratio I gave was correct, but the earnings on which it was based were far from ordinary. The fierce housing boom was ringing cash registers at furniture stores, employing heaps of real estate agents, padding the profit statements of lenders and, thanks to home equity loans, puffing up buying power for just about everything. I should have realized that America’s corporate profit was close to a third above normal levels as a percentage of gross domestic product. Profits have reverted to average levels, and stocks have fallen to around 14 times earnings. I recently cautioned readers that, even though stocks are fairly priced, it’s natural to assume that after a long period of above-average prices we can enter a few years of below-average ones.

Houses still seem expensive, though. One recent survey by Moody’s Economy.com found that the price/rent ratio in major markets had fallen to 20from 24 three years ago, but that for 16 years ended 1999, before the house-buying spree began in earnest, it had stayed below 15.

Numbers like those should inform not only house-buying decisions, but public policy. If a citizen is being made poor by the debt they carry on the house they bought, and if a government policy keeps them tied to that house instead of separated from it into more affordable housing, are we really helping them?

Reason 3: Many houses for sale today seem designed to waste money

“Most men appear never to have considered what a house is, and are actually though needlessly poor all their lives because they think that they must have such a one as their neighbors have.” Henry David Thoreau wrote that about 160 years ago in a long, somewhat preachy but also poignant treatise called "Walden," which argued against materialism and for simplicity. I’d imagine it applies to today’s houses even more than to ones in Thoreau’s day.

Commercial real estate investors seek to maximize the amount of use tenants can get out of a building, while minimizing the operating expenses. Single-family house buyers have lately done almost the opposite, by buying far larger houses than single families need. From the 1950s to 2006, the average American house size doubled, even as the size of families shrank. U.S. tax policy rewards house buyers who borrow, not renters, and not house buyers who pay cash. So naturally, Americans responded by borrowing, which inflated their buying power and ultimately caused dwellings themselves to balloon. The “dream of homeownership” became more of an entitlement to mansion-ownership. But all those mansions on the market do little for me, financially speaking. They’re expensive to heat and cool, and to fill with a respectable amount of stuff.

Reason 4: Big houses are targets for future taxes

This year, U.S. government debt will increase by the largest amount relative to the size of the economy since World War II. Assuming the country will eventually right its financial course, at least some of that money will have to be paid back. That means higher taxes in the future, and taxes come mostly from people with a proven ability to pay — people with high incomes and people with large, expensive, easy-to-find assets. There’s only muted talk of states raising property taxes now, since the federal government is working to support house prices. I’m worried that property taxes will rise sharply in coming years. Of course, renters pay taxes too, if you figure that landlords merely pass along taxes to tenants. But renters live in smaller spaces.

I might have titled this reason, "Few people truly own their house, anyway." To me, owning something is defined in part by not having to pay anymore. Condo owners are really renters, if we consider their endless maintenance fees. But house owners, too, must pay rent to the government in the form of taxes, and must pay for plenty of ongoing maintenance besides.

[NinjaNick]

Reason 5: Neighborhoods are changing in unpredictable ways

In March 2008, The Atlantic published a frightening vision of what might happen to America’s suburbs. Low-density suburbs, it theorized, may become what inner cities became in the 1960s and '70s — "slums characterized by poverty, crime and decay.” I’ve no idea whether anything like that will come to pass. But the popping of America’s giant housing bubble, and a corresponding shift in where people find jobs, seems sure to reshape how and where we live in coming years. For rural folks that might not matter much. (For them, in fact, little of this might apply, since house prices in rural America have stayed pretty sane.) But anyone considering a move to the suburbs should do some careful forecasting before sinking a large portion of their wealth into a house.

I hope all this doesn’t sound alarmist. I’ll surely buy a house one day, when prices are low enough, and I’ll probably even buy one that’s a little bigger than I need. But I’ll do so knowing that I’m spending on luxury, not investing. Also, I hope this doesn’t further the anxiety of readers with mortgage troubles. The trend of the day seems to be to take an angry tone with people who’ve gotten in over their heads -- one fellow columnist referred to them the other day as “deadbeats.” But two other parties deserve a full measure of blame, and I don’t mean lenders. First, lawmakers have for decades trumpeted house affordability initiatives like tax breaks, while leaving supply in choice markets constrained. That inflated demand and ultimately produced the opposite of affordability. Second, too many people who do what I do for a living spent most of the housing boom cheerleading instead of doing math. It’s time to stop lecturing renters — and maybe to ask why public policy treats them as less-worthy citizens than buyers.

[that dude]

popcorn peanuts..im gonna keep my mouth shut on this one

[NinjaNick]

Oh the debates use to get HEATED about this subject man.

It doesn't bother me what others think about it, so I never participated, but it was good entertainment to watch though.

[flounder]

yeah this is a good one. people have been telling me Im wasting money renting but if you consider the difference between my rent and a mortgage and if I put that difference in the bank, I definitely come out ahead

[Todd#43]

yeah this is a good one. people have been telling me Im wasting money renting but if you consider the difference between my rent and a mortgage and if I put that difference in the bank, I definitely come out ahead

Here we go again....big thanks Nick

Renting is NOT a waste of money - you have to live somewhere, right? Considering that fact alone, how can it be a waste??

In some small way, I feel somewhat vindicated

[dustinsn3485]

My house payment is cheaper than rent...

[bigbluebird]

My house payment is cheaper than rent...

mine to and i can write off the interest on my taxes

[dustinsn3485]

mine to and i can write off the interest on my taxes

Me too!

[Todd#43]

My house payment is cheaper than rent...

That's cool. When your furnace takes a shit or you have a major problem that needs fixed NOW, you can use all that money you saved to pay for it.

Plus, if you want or have to move, all that money you pumped into your house stays there...nothing is appreciating these days, if you haven't noticed.

mine to and i can write off the interest on my taxes

Yup, and as long as you're paying more interest than the standard deduction, you might get a couple of dollars for your trouble.

[ReconRat]

There are calculators that help decide whether to rent or buy. You plug in your numbers, and it gives you a break point, mostly income. Past that, you are theoretically better off purchasing a house. It does not take into account variations in the variables. Basically, if you lose your income, or your tax structure changes, or have a house fire, or some other thing goes wrong. Other calculators, show exactly what is said; you make more money by investing it in ANYTHING other than a house. Decide for yourself, but understand that in the current economic environment, it is still possible to "get in over your head".

The only people I consider successful on buying a house, offered a lot less than what was asked. Offered a lot less than what the house was considered worth.

Do you realize that less than a hundred years ago, people built their own houses? Even to the extent that you could buy that house as a kit from the Sears catalog? What happened to that?

There is one basic truth about housing prices that bears repeating;

If houses increased in value at a rate above the rate that the buyer's income increases, then eventually no one would own a house, as no one could afford one. House prices should never grow faster than the GDP growth rate. That's still true, and it is why we are seeing a correction in housing prices now. Don't expect house prices to go back up, and consider that they might still have to go a lot lower, or stay low a lot longer, to average out the long-term house-price vs income-ratio mentioned.

Edited March 11, 2009 by ReconRat
edit typo

[dustinsn3485]

That's cool. When your furnace takes a shit or you have a major problem that needs fixed NOW, you can use all that money you saved to pay for it.

Plus, if you want or have to move, all that money you pumped into your house stays there...nothing is appreciating these days, if you haven't noticed.

Yup, and as long as you're paying more interest than the standard deduction, you might get a couple of dollars for your trouble.

Ah, but I've got a brand new furnace. Brand new water trunk line. Brand new washer/dryer.

I bought my house cheap. I can guarantee a profit no matter when I sell. I don't plan to sell for a bit anyway so I'm not worried too much about appreciation at the time.

[flounder]

To each their own. I am ahead by renting and no one here will tell me otherwise.

Seacrest out.

[Todd#43]

Ah, but I've got a brand new furnace. Brand new water trunk line. Brand new washer/dryer.

I bought my house cheap. I can guarantee a profit no matter when I sell. I don't plan to sell for a bit anyway so I'm not worried too much about appreciation at the time.

Did you put the furnace in? Buy the new washer/dryer? Replace the water line? If so, add those to the cost of your house. I rent, I've got all brand new shit too - in fact, the entire condo is brand new.

Run the numbers...ALL the numbers, and show me on paper that you can turn a profit. Unless you bought the house at a significant amount (40%-50%) below current market conditions, I doubt that you can actually make money on the deal. At any rate, I'm sure you could have purchased something else that would have provided you a greater rate of return.

[dustinsn3485]

Did you put the furnace in? Buy the new washer/dryer? Replace the water line? If so, add those to the cost of your house. I rent, I've got all brand new shit too - in fact, the entire condo is brand new.

Run the numbers...ALL the numbers, and show me on paper that you can turn a profit. Unless you bought the house at a significant amount (40%-50%) below current market conditions, I doubt that you can actually make money on the deal. At any rate, I'm sure you could have purchased something else that would have provided you a greater rate of return.

I've got plenty invested in other things that will give a fine rate of return. That base is covered. The house, I'd prefer not to go into financial details on, I got significantly cheaper than current market. Basically, I bought the house because I could. It, for me and in my situation, was a better option.

I'm not criticizing you because you rent, I was basically stating that I own. Not trying to create an argument.

[yotaman88210]

Seacrest out.

homo

[Zorro]

After a quick google search, there are 73.8 million home owners in america. I always thought owning a home was part of the so-called American Dream. Renters can easily win this debate during these tough economic times. When I say debate, I'm thinking about money. I'm not talking about other non-monetary benefits from renting vs. buying...except for one point. Most renters have apts that really don't compare to a house. So, when renter's are paying 50-75% per month less than what home owners are paying, they're getting less as well. With that being said, I know people who are renting their second house for the price of their mortgage. If the renter lives there for 30 years...and moves, he has nothing to show for it. The home owner will have something to show for it.

Maybe 73.8 million home owners are wrong. Hell if I know.

[that dude]

im still staying outta this one...but its tempting...arhhhhhhhhhhh..

[Todd#43]

Let's quote it again:

Ah, but I've got a brand new furnace. Brand new water trunk line. Brand new washer/dryer.

I bought my house cheap. I can guarantee a profit no matter when I sell. I don't plan to sell for a bit anyway so I'm not worried too much about appreciation at the time.

I've got plenty invested in other things that will give a fine rate of return. That base is covered. The house, I'd prefer not to go into financial details on, I got significantly cheaper than current market. Basically, I bought the house because I could. It, for me and in my situation, was a better option.

I'm not criticizing you because you rent, I was basically stating that I own. Not trying to create an argument.

I didnt take it as criticism. What you said was you could turn a profit. Plenty of people say that, but very very few can actually prove it. Maybe you're the exception?

[dustinsn3485]

Let's quote it again:

I didn't take it as criticism. What you said was you could turn a profit. Plenty of people say that, but very very few can actually prove it. Maybe you're the exception?

I'm not going to put a detailed analysis of my financial/home ownership situation on a forum for a bunch of strangers. I'm confident, however, that I would be able. Without actually trying I won't know though. Numbers on paper and what someone is willing to pay are two separate things. I still stand by my statement, yes I've seen my numbers. That's all that needs to be said.

[NinjaNick]

Here we go again....big thanks Nick

I'ts been quite around here man.

[bigbluebird]

personally i just like the fact i own something.

[ReconRat]

Perhaps I should have made clear that the increase in wages that housing stays equivalent with is simply a cost of living increase. Meaning that a house is worth a house, on average. It is not, or seldom will be, an investment. It can be, and will be, a tax write-off. Don't get me wrong, I would enjoy a house myself, regardless.

[Artmageddon]

I'm not against renting, but I own my house. Why? I like to build shit. I like gutting my bathrooms and redoing them completely. I built a deck, and a bar in my basement that looks like it belongs in a pub. I have a yard for my dog to play in, and a big garage to work on my bike.

I could never do that stuff in a rented apartment or home. Now I can do whatever I want, when I want. It's increased the value of my house even in today's market, and I love to do it. My projects keep me sane.

If I didn't love to make stuff with my hands, I might rent.

When I decided to buy a house, I ran the numbers then bought something well under my price range, so I'm far from overextended, but I could see how people got in trouble. I have friends that were in the mortgage business and from what they have said, unscroupolous business practice was getting out of hand.

We happen to live in a market more stable than most. Columbus never saw the giant gains other markets did, so we're not seeing as much losses. If I lived in Vegas or something, yeah, I would rent with out hesitation.

[Disclaimer]

personally i just like the fact i own something.

+1, that's why I have have a girlfriend.

(I'm kidding, c'mon )