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A Change of Heart on Homeownership

Emily Badger has a though-provoking article over at The Atlantic Cities about the desire, even in today's market, to buy a home, rather than to rent. If there's one topic that I've had a major change of opinion since I started writing this blog, this would be it.

(from Images_of_Money on Flickr)

Nearly three years ago I sat down and wrote a four-post series about why I thought owning a home was a rotten deal. Today, I feel nearly the opposite. What's changed in the meantime is the place where I live. I believe that place, even at a subconscious level, is a major driver in opinion on this topic, all else equal.

To understand further, it's important to recognize the difference between the place I was living then (Cleveland) and the place that I'm living now (Washington DC). These are two wildly different housing markets, both on the rental and the sales side. Buying in one has benefits that don't exist in the other. Renting in one has benefits that don't exist in the other.

First and foremost, renting in DC is a hedge against inflation. This isn't so much the case in other cities, because inflation isn't much a problem in other cities. Between 2000 and 2010, I calculated that real-dollar rents in DC increased 52%, compared to only 8% nationally. For a home-buyer, that means that whatever your monthly payment is on the day you close is going to be (roughly) the same for the next 30 years. In an inflationary environment (and I would not hesitate to classify DC's rental market this way), buying locks you into a predictable payment for the long-term.

The biggest wildcard, of course, is maintenance and repairs. This is especially true if you're drawn to DC's beautiful Victorian housing stock, much of which is old and fragile. You never know when you're going to need a new roof, when you might have a problem with the foundation, or a pipe in the basement might burst.

The thing is, when you pay as much as, say, $2,000 a month for your mortgage, repairs suddenly feel a lot less outrageous. Need a new stove or dishwasher? The price is basically the same no matter where you live, but in DC, it might cost less than one monthly payment. In other city, it might be equivalent to several payments. When you think about it on that metric, it doesn't really seem so bad. That's not to say it's a cost that doesn't exist, but psychologically, it doesn't feel as painful, compared to someone who has to spent the equivalent of a year's worth of mortgage payments on home renovations.

If I were living in Cleveland today, I believe I would still have very little interest in buying. In Cleveland, there's a pretty significant risk that your house might decline in value. There's a risk that if/when you want to sell it will sit on the market with no interested buyers. There's a risk that you'll have a hard time finding a good tenant to rent it out to. These are all much much smaller risks in DC.

In Cleveland, you can get a luxury apartment or even rent a whole house for under $1,000. For that little, I'd happily invest my remaining discretionary income in stocks and bonds. This is much less feasible when rent makes up a large portion of your income. Like it or not, homeownership is a form of "forced savings", and when you're putting as much as $2,000 a month toward the mortgage, that adds up fast. Even if the home turns out to be a dud as an "investment" and you sell it down the road for what you paid, you're still walking away with a lot of cash in the bank that otherwise would have simply been "consumed" on rent.

I'll end this by saying that for some people, homeownership will never be a good deal. The responsibilities you take on when you buy is something that will cause them more anxiety than it's worth. And there are others who will want to buy, no matter where, or what the cost and the risks. It's the people in the middle, like myself, that I think are most heavily influenced by place.


Angie said…
Couple things.

Owning a house in Cleveland might not be a good long-term investment in itself. But you gotta live somewhere. And in Cleveland you can afford to live in a house you own, with the financial benefits that come with that, tax savings, some equity accrual hopefully. It's actually sort of a nice thing to remove the speculation aspect from it in some ways. You're just paying for house. Though I definitely see the other perspective. I couldn't afford to own in DC but I can in Cleveland. Do I come out ahead over renting in DC, yeah probably, all things being equal salary-wise, which is a whole other discussion.

Also, it would be a huge mistake to spend $1,000 per month in rent in Cleveland, I think, unless you had a fairly high salary. Better to own for less, put aside more money for stocks and bonds, and take a small hit on the house when you sell.
B. P. Beckley said…
See, you've done the reverse of what I did, because you moved from Cleveland to DC. When I was in my 20s in the DC area, owning a home seemed like a financial impossibility to my friends roughly my age, and we felt like we were losing out because of it, and in fact, we were. But Cleveland was different then, and it's different now, and homeowning is routine here even for young people.

Also, you should keep in mind that the DC area is doing much better economically than most of the rest of the country. That includes Cleveland, of course, but it is not by any means limited to Cleveland.

I think homeowning in Cleveland still wouldn't be a bad deal if the values were stable instead of declining, and if the market was fairly liquid, but I'm not sure we're there at the moment. Maybe that will happen again in the imaginable future.

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