Renters Are Deluding Themselves – Here’s Why

It’s en vogue now to be “anti-homeownership” given the recent crash in home prices and all the shenanigans the mortgage companies, banks and Wall street firms pulled over the past several years.  People tend to use the recency effect and confirmation bias to formulate their opinions which dictate important lifestyle and financial decisions. Before you jump all over me for this thesis, let me clarify a few things:

a) Many people CAN’T own – that’s a fact of life.  If owning a home isn’t an option for you for numerous reasons ranging from finances to career, then making a choice between renting and owning isn’t something that mandates weighing the options.
b) Many people SHOULDN’T own – perhaps during the days of easy credit or even today, you have the funds to buy a home, but there might be some factors that would make this a poor choice.  Perhaps you need to relocate every couple years due to your line of work, perhaps you’re in the middle of a divorce or child custody battle or perhaps your income is quite variable.  It might make sense for you to rent until there’s more stability in your financial situation.
c) Many people COULD own, but don’t.  That’s the target audience.

Long-time renters often cite all the negatives of home ownership, and there are some to be sure.  But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

Continue Reading Renters Are Deluding Themselves – Here’s Why

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Opinionated Blovaitor
Opinionated Blovaitor

Renters are simply running an alternative economic strategy, that the end of the ponzi will cause a collapse in housing prices to the point where the real estate market in the United States resembles that of Argentina in 2001.

Those who buy real estate in this point in time will have their net value nuked assuming they still hold onto a job when the implosion hits within the next 2 years.

This time it’s different, yes like the 1930’s…

buchjoe
buchjoe

I’d like to see a analysis of home prices over a very long span, one which identifies the ratio of home price / personal income prior to when the concept of a mortgage became popular and accepted as the norm.

Going back ages, the term “real estate” derived from the fact that only the land was “real” and everything else (including structures, fixtures & appurtenances) constituted merely your personal estate which depreciated and was replaced from time to time.

I suppose before mtg’s became the norm, people saved until they could build the log cabin or the barn. Somewhere, likely in conjunction with the industrial revolution and the establishment of modern finance, the idea of borrowing for 15-30 years to build the house now became acceptable and I’m certain must have driven up prices dramatically relative to personal income. Now, (save the very wealthy) the very idea of saving for a house before buying it is ridiculous.

So, what happens when the credit markets freeze, the dollar goes down the toilet, savings are wiped out and there’s no money to borrow for a new mortgage even available? How low could house prices fall. I’m betting pretty far. Anyone seen a good analysis to this point?

Administrator

Misunderstanding the Rent vs. Buy Dynamic

By Barry Ritholtz – August 17th, 2011, 7:25AM

There seems to be an underlying misunderstanding about the US Real Estate market — how it functions, the psychology of buyers, and its current problems. Today, I want to take a long term look at these fundamental issues, and put them into some context.

The cause of these thoughts are a pair of studies: The first from Zillow that looks at home values by community, and finds that “Home prices in some of the nation’s hardest-hit metro areas have fallen far below pre-bubble levels, stirring concerns that properties in those markets are undervalued.” The second is a similar study from Trulia looking at the rent vs buy question.

The original WSJ web article had a rather surprising headline: Something like “Are Homes Undervalued?” — thats gone now, replaced with the circumspect Linkage in Income, Home Prices Shifts. But the editor who penned the descriptor may be misguided: “Home prices have fallen below “fair value” in one-third of nearly 130 housing markets examined in a study by real-estate firm Zillow, raising concerns that some housing markets have over-corrected.”

There are several reasons to be concerned about housing at present: First, any economic deterioration, especially a recession accompanied by further job losses, will start another leg down in Housing and an accompanying set of bank balance sheet problems. Second, many asset classes recovering from a Boom & Bust cycle do not simple revert to fair value but often careen wildly past it towards a deeply undervalued state. Third, following a debt crisis, consumers spend a decade or more deleveraging, and tend to downgrade purchases that involve taking on more credit — like a mortgage. Last, any former investor favorite that suffers a collapse can take a long time to recover investor confidence. Its been more than a decade since the dotcom bubble popped, and the Nasdaq at ~2,500 is still off its bubble highs by 50%.

Recall our three favorite metrics for valuing homes:

1) Median Income versus Median Home Price

2) Valuation of Housing Equity as Percentage of GDP

3) Cost of Owning versus Cost of Renting

The first two show that nationally, home prices remain elevated — Zillow pegs Prices at 3.3X Income — about 14% above trend. It varies dramatically by region, with broad differences in median income, economy, and home values. Only the Rent vs Buy metric shows homes cheap, and there are specific reasons not to trust that measure:

• Appropriately Tightened Lending Standards have removed millions of potential buyers from the market.

• Desire for Mobility (or a fear of the lack thereof) may be keeping buyers as renters; Flexibility of tenting allows employees who may need to relocate to obtain better jobs. The fear is getting stuck with an underwater home that is potentially worth less than its mortgage and prevents a job seeker from relocating.

• Deflating Asset: There remains a fear of owning an asset that is falling in price.

• Down Payment Requirements — having the cash to put down on a home purchase is beyond many families abilities. Consider that a mere 20% of $200k homes is $40,000 in cash –far beyond what most families have sitting in their bank accounts.This is beyond the tightening credit qualifications.

Consider the WSJ’s take:

“For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.

Of course, prices have fallen much faster in certain markets. In Las Vegas, home prices are now 25% below their historic price-to-income trend of 2.7. During the housing bubble, that ratio more than doubled to 5.6. Home prices have been falling for the past five years, and by March, prices were just 2.1 times household incomes.

Home prices are undervalued by 35% in Detroit; by 18% in Modesto, Calif.; and 13% in Fort Myers, Fla.”

Detroit is a perfect example of why valuation cannot be considered without understanding the broader context: The Motor city has become The-No-Mojo city, with an exodus of jobs and people leaving the state. The valuation metric based on historical data provides little insight as to the prospects for a real estate recovery anytime soon.

Its the Macro economy, stupid.

The bottom line: The time to be generally optimistic about housing is not yet here . . .

buchjoe
buchjoe

That’s sort of to my point, but it still only considers the “modern” era where available mortgages are the norm allowing the home price average to be 2.9x

If a simple 20% down payment is “–far beyond what most families have sitting in their bank accounts” and that 20% of the total 3.3x is only .6x income, wouldn’t that suggest that w/o available mortgages, home prices could actually fall to below 1x income given the overwhelming supply and what would be a complete dearth of buyers. Who you gonna sell to if the ability to borrow is eliminated, and at what price?

I’d like to know what the __x income / real estate valuation number was pre-Fed when borrowing had a stigma and credit was not easily available. That’s our bottom.

Administrator
tbone
tbone

okay it’s the best time to buy a house again ! yippee!
became a renter two years ago , living in a house that at the time that was valued at $400K, maintenance, taxes, insurance paid by LL. ($1700) had i put 20% down and bought it, would have 320K mortgage ($2100) total cost per month $3800, then we add closing costs, repairs, legal fees etc. so in the two years the house cost about 100K, now the house is worth less than $360, so your total cost of housing over the period is about +/- 140K or $5800 a month, versus rent of $2850 month or $68400.
no one is saying there is anything driving home prices up, soon to have huge jump in inventory due to mortgage doc backlog, goverment talking about disallowing mortgage deduction, which will be great for market.
I can become an owner in 15 minutes, how long does it take a owner to become a renter and at what price?
I can’t believe that someone would say something that stupid…is this a spoof?

Bruce
Bruce

Buying vs. Renting is very simple issue to address. If you are realistic you can plainly figure out the pros and cons and what suits you best. There is never a good time or bad time to buy a house or to rent, only the right time biased on your own values, circumstances and considerations. Folks want to be told what to do about everything. Look at all the advise segments and shows on the MSM that dole out the obvious. Why do people want Susie Orman or someone to tell them blue is blue and green is green?

marissa
marissa

I was browsing zillow on Sunday looking at houses for sale in my zip code, just for the entertainment value of local insanity.

Every house I saw had listed an estimated mortgage payment HIGHER than the estimate of what the house could be expected to rent for.

And of course none of that is taking into consideration the coming insanity of local government extortion taxes in the future.

If they were giving away houses for free around here I’d run the other way.

howard in nyc

heh.

if i had a dollar for every time i was called delusional or some such thing during the 90s and 00s for not buying a co-op apartment in new york or more property in cali, i could afford some more gold.

sure, in some select areas it is cheaper to buy than rent. and in other select areas, the obverse remains true. like manhattan, ny.

llpoh
llpoh

Historically, buying was beneficial as it did one thing very well – it forced the buyer to save. Each and every month, the buyer saved money – savingit by investing it on his/her home instead of blowing it on a new car.

I understand that is still largely the case – in many instances renters can rent the same home for less than they can buy the home. But what they do next is the kicker – they blow the differential rather than save it.

So a good argument can still be made that buying is better than renting if the buyer is in the game for the long run. Because at the end they will have accumulated something, while renters tend to accumulate nothing.

Terry
Terry

The past three days have blessed me with an air conditioner failure in 100+ degree Texas heat and a major plumbing failure. All fixed, but now I qualify for a SNAP card.

Renting sounds pretty good right about now…

ron
ron

Id rather buy land, build a shack than make payments for thirty years.Hey howabout that stock market!

tbone
tbone

lloph
Historically, buying was beneficial as it did one thing very well – it forced the buyer to save. Each and every month, the buyer saved money – savingit by investing it on his/her home instead of blowing it on a new car……

okay, so you buy a house and pay say 360K, pay $3200 a month in mortgage and taxes, at the end of seven years you paid $268K and you still owe the bank $305K how much have you saved.
Your theory only works in a rapidly esclating market, other than that the oposite is true.

rent the same bank the difference…you’ll be way ahead
just do the math

Thunderbird
Thunderbird

There are places where one can purchase land and slowly build a house without complying to permitting. I would never buy a house in a sub-division. This is not true home ownership. This is home slavery where you pay high taxes and are subject to the whims of the home owner association. The days of most sub-division homes are gone. These houses are going to rot on their foundations in what I call the speading ghost divisions. It is an idea that has outlived itself.

Renting is difinately the way to go right now mainly because of the economy. People have to remain open to move to another State or district for economic reasons; especially if one is supporting a family.

I also would like to make the observation that most apartment complexes and many homes are owned by investors and management corporations. This is not good for potential renters of these properties because of the cost to maintain these properties. Many of these corporations are turning into slumlords. But there still are many independent people who own and rent properties. My advice is to look for independent owners to rent from rather than management corporations if you are going to rent.

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