Before I move into my analysis, let me credit another thinkpiece for this idea who made a fairly good analysis of the current situation. As we consider the bailout concept fronted by Congress, consider if you will how many people who own homes should be renting and how easily they could lower the accounts payable if they’d simply RENT.
When I sold my home in 2005, I sold it for exactly twice what it originally cost me, at the height of the housing market. I sold the home because I could no longer afford it, having finished the term of my graduate school fellowship, and my wife and I moved into a rental arrangement until I could find other work, and then we eventually divorced. Shortly after the sale, the market started to fall, but we didn’t look for anything because we couldn’t afford to pay the high prices even assuming I still had my graduate money coming in. Fortunately for me, my home covered all of our combined debt after living in it for only two years, which is uncommon. Normally, I could have expected maximum of $30K profit from the home, which would have only covered 60% of my other debt.
By contrast, a relatively close acquaintance of mine tried in that same time frame to flip three homes and upgrade his young family to their dream home. When last we spoke, he was still working overtime as a radiologist to cover two mortgages occasioned by his speculation.
In his article, Jack Hough points out that, barring extraordinary circumstances, houses return nothing on the investment. Even if they appreciate 10%/year, after 7% inflation/year and incidental costs, houses are more like some place you stick your money for later, assuming someone will buy it later. Depending on the neighborhood and jobs 40 years from now when you come to sell your home, you may not be able to get rid of it, especially if the market is flooded with homes. The California migration to Nevada in 2004-2005 dove demand up, and as a result I made a killing on my home, but aside from unpredictable events like this, you won’t actually make a killing on a home, especially since you pay closing costs when you buy and agent fees when you sell, that take huge chunks out of your profits (I know I paid $3000 in commissions when I bought the home to the title company and my mortgage broker and $18000 to the real estate agency in commissions to sell that home).
House returns will not in the future match those of the past. The home I sold for $310,000 has already dropped in price back to $250,000 (last I checked- it’s still for sale and has been unoccupied since I sold it- another speculator bought it [sigh]), and with banks tightening lending standards and people losing their homes the pool of potential buyers shrinks even as the pool of available homes continues rising. Even if the prices stabilize, they will progress at a much retarded pace over the next few years/decades, giving much less potential for profits compared to stocks which have lost 25%+ of their value in the last year. They’re all on sale too.
Renting absolves you of payment for many things. You indirectly pay property tax, but you don’t have to worry about the bill. Your landlord bears responsibility for repairs and maintenance. Renter’s insurance deals with your belongings, and if you don’t own the house you save on costs. Renting costs you nothing in terms of your credit rating (although it also doesn’t help), and while some may tout the mortgage deduction from taxes, does it really make sense to pay an extra $6000/year to save $600 in taxes (based on a rent payment of $500 versus a mortgage of $1000 and a reduction in income tax bracket from 25% to 15%)? The money spent obtaining and maintaining (down payment and incidental repairs) a home might best be spent acquiring other things that bring wealth.
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