I recently heard homeownership described by an academic professor as "the ultimate rent control". It's an interesting perspective, and one that's generally true, especially in high-cost cities where rents are rising with seemingly no end in sight. When it comes to affordable housing, buying a home, at the very least, means locking in a monthly payment that will be roughly the same for the next 30 years, regardless of how the price of anything else in the economy changes.

(from allaboutgeorge on Flickr)

The reason I say this perspective is unique is because people often talk about homeownership in less practical, more idealized ways. Take this blurb from an NPR story on the subject, for example.
The economic hammer has fallen especially hard on 20somethings — part of the so-called Millennial Generation or Gen Y born roughly between 1975 and 1995. Plagued by high unemployment, many have had to delay careers, marriage and having children. And the idea of owning a home is more often being put off or written off entirely. In a nation where homeownership is part of the American dream, a generation of renters could alter communities where they live and redefine the idea of middle-class success.
Let me say that as one of these "20somethings", the desire to own a home has little to do with settling down, or growing up, "achieving the dream", or any other abstract measure of success. It's a simple financial cost/benefit consideration: What's my rent today? What's my rent likely to be in 10 years? And if I continue renting, do I have the ability to acquire assets with my income after paying for rent?

The problem in the years leading up to the bubble was that in a lot of cities home prices were appreciating at a rate far exceeding the rate at which rent was increasing. That should have been a huge red flag that there was trouble brewing in the market, and in hindsight, it seems obvious.

But now the tides have turned. In a lot of cities, rents are spiraling out of control. If I live in a city where rents are growing more rapidly than home prices, it might seem like a bad deal to buy, because there's not going to be much appreciation. And this is exactly the wrong way to think about it. In this case, buying isn't about using debt to leverage an asset, it's about hedging against rent inflation. It's locking in a monthly price and essentially paying "rent" into a pseudo-account that I'll be able to withdraw at some point in the future, rather than paying it to a landlord.

By far, in my opinion, the biggest problem is this... again from the NPR story, emphasis mine.
"The capacity to own a home will be powerfully affected by the slowdown in [their] earnings," she says, "especially for entry-level workers and the crushing consequences of student loan debt."
The one thing that the current generation has that the Baby Boom generation did not is insane amounts of student debt, which we were told was a good idea when we were 18 years old and now that we're 20somethings, starting to question.

When you rent a place, you usually have to put up a security deposit equal to one month's rent or less. When you buy a place, you need to put up a downpayment, which in a high-cost area, can be a very non-negligible sum. Plus, a smart homebuyer wouldn't even think of taking the plunge unless they had another several thousand tucked away for emergencies. When you're already handling 5-figure student debt, it's challenging to handle saving for a downpayment at the same time.

Still, there's something to be said for the flexibility argument. Because of what's happened in a lot of markets, there's a real fear that owning a home means being stuck with an asset that you can't sell when you want or need to sell.  If you need to move, whether for a job or for some other reason, renting gives you that almost immediate flexibility. Most people sign leases one-year at a time. Few renters, or landlords, would be comfortable entering into a 30 year lease, which essentially, is what buying a home with a mortgage is.

But again, it's all about the cost calculation. Owning a home means a generally fixed monthly housing payment and forced saving for the future. The benefit to a new job in a new city would have to be pretty significant for it to be worth it. Unfortunately, for someone unemployed, the option of any job in another city is probably worthwhile, and these are unfortunate situations where they can truly be "stuck".

Unless of course you like moving because you bore easily and like moving. In that case, then of course renting is the superior option when it comes to flexibility.

1 comments:

    On July 26, 2012 Anonymous said...

    Today's lack of inflation means the old chestnut that the mortgage payment will get easier and easier is no longer a given. What have they said recently? Average household income, accounting for inflation, has been stagnant for 20 years? My household income has to improve vs. my fixed mortgage for it to get easier. If income never improves, it never gets easier.

    Labor, in its heyday, discouraged home ownership. It was seen as a way to anchor down and tame labor. Renting allowed flexibility and the freedom to strike. Workers are willing to strike, and temporarily lose income and potentially miss a rent payment, because they can make it up to the landlord later without losing their residence. And if they do, no big deal, just rent another place. Workers don't have that flexibility with a mortgage, miss a payment or two and you get foreclosed and your appreciated asset goes bye-bye. Also, labor that rents can pick up and chase that better job more easily than the worker who has to sell and buy a house and pay the fees and commissions that go with that.

    I've always thought a high tax state like NJ was more favorable to first time home buyers than a low tax state like VA. Prices are based on monthly debt service to principal and taxes. If the market is full of people with $1000 a month to spend on a house payment, and taxes are $400, then house prices will gravitate towards $600 of loan costs/house price. But if taxes are $100, then house prices will gravitate towards $900 per month.

    The monthly payment might be the same, but the house prices are lower in the high tax state, so down payment prices are lower and easier to save for.