Home Buying vs. Renting

As the paper value of Americans' real estate has evaporated by some $2 trillion dollars in the last 2 years, what have we done about it? Many have overreacted, questioning whether this is the death of the American Dream (owning your own home). There’s also been a flight to renting, encouraged by many in the army of money pundits who must constantly feed the ravenous media beast.

But as the coach used to say, let's shake it off and do a little clear thinking. First of all, real-estate owners didn’t truly lose $2 trillion dollars because they never had it in the first place. It was a contrived paper value, based upon want, hope, lax regulations, some fraud and certainly a lack of realistic assessment and backbone required to act sensibly. Although home buyers, the real-estate industry and government officials all participated in this grand Ponzi scheme, the typical mass absolution you hear from Wall Street on down that "No one saw it coming." That’s hogwash.

Just look at the folks author Michael Lewis profiled in his book, "The Big Short," who saw the emperor was, in fact, naked and got rich from betting on that observation. I also have in my hand a headline from the Wall Street Journal that reads "Fearing a Bubble, Homeowners Cash Out; A Return to Renting." (Though we hear a lot about renting these days, this headline is dated Tuesday, July 23, 2002!) There were headlines documenting the trend even then, most just didn’t want to hear it.

Historically, politicians have shown an almost religious zeal in promoting home ownership as the path to a more solid economy -- a way for low-income folks to step up and "buy-in" to middle-class society. Except now we see that the opposite happened. The middle class has in fact been weakened (temporarily, one hopes) by widespread foreclosures, caused by ill-advised home loans and/or massive job losses as the housing industry, and its enabler, the financial-services industry, collapsed and nearly wrecked our society.

I wrote some time ago of the benefits of home ownership if a home purchase was preceded by a sensible analysis of one's personal financial situation and goals, in accordance with what was going on in the real estate market. The article was reprinted in the real-estate media as a paen to buying homes, glossing over the critical IF part.

Today, people are disillusioned, grieving over losses and financially unable, if not unwilling, to resume their previous behavior. The credit industry is reeling as well, in spite of sitting upon massive amounts of cash, courtesy of various governmental bail-outs. The industry seems loathe to loan even to credit-worthy borrowers. Ironically all of this is in the face of a glut of unsold, fire-sale-priced homes in most parts of the nation.

So former and would-be homeowners are now turning to renting -- those who can’t afford to buy, those who don’t qualify for credit and those who are just plain scared. Despite Franklin Roosevelt's dictum, "We have nothing to fear but fear itself," fear is one of the primary drivers of this current economic environment, rational or not.

Briefly, buying a home makes economic sense if you are planning to remain in it for at least five years, to amortize the hefty entry and exit fees (another area of economic behavior crying out for reform). If you can get a good price for the right house, qualify for a mortgage at current rock-bottom rates, and afford the down payment and monthly payments without financial strain, it makes sense to buy a house. Tax law still favors home ownership, to the tune of a $100 billion annual subsidy to write off mortgage interest payments. And over time there’s a possibility you might yet earn the historical return of about 4 percent on the purchase price.

More to the point, a house may make sense to own as a home, but not as an investment. It will cost you one percent to two percent, per year, of home value to maintain a house, and another one percent to two percent for real-estate taxes, neither being small sums.

Renting, on the other hand, seems more flexible and cheaper. Easy in, easy out. No millstone mortgage. Maintenance and taxes are the landlord's problem. You hold on to your cash, stay out of debt and keep your powder dry. But there are two problems with renting: First, when demand for rentals is high, as is increasingly the case around the country, prices can quickly soar. At this point, people are apt to say, "I am throwing my money away, with nothing to show for all of these high payments, so I might as well buy and start growing equity."

The second factor, given little play in the current debate, is that renting is often not as comfortable and pleasing as living in a house that you own. I am not talking about the emotional security, but rather that renters tend to avoid putting time, money and effort into sprucing up and maintaining someone else's property.

When I sold my old homestead, after the kids had grown and left the nest, my wife and I looked at rentals in San Francisco. Out of curiosity, I went to see the most-expensive places available on Nob Hill. (It doesn't cost anything to look, right?) Well, the neighborhood and views were terrific, but even for five-figures a month, I was surprised to find that the rentals were not places where I would want to live. In contrast, the homes for sale in the area and elsewhere -- and not even at Nob Hill prices, thank you very much -- were simply more habitable. Surprisingly, the decision about where and how to live ended up being only partially a financial one, and turned me away from renting. Who knew quality-of-life could depend so much upon the nature of renting versus the character of ownership? (Has this been your experience, too?)

So the real-estate bubble has popped and we are personally and collectively affected by the experience. But life goes on, and the basic continuing need for housing and, hopefully, rationality will out. Time, cultural change and politics will determine when and if our current system will be modified. But on an individual level, the next time that we look for housing, I hope that we do not reflexively or emotionally make a decision about either renting or buying. But rather engage in the cool, fact-based reasoning that is our daily goal as doctors in making decisions for and with our patients.