Is Renting Smarter Than Buying a Home?

  • Share
  • Read Later

For as long as I can remember, the assumption has always been: It is better to own than to rent a home. But for quite some time now, what that meant to a lot of people was that it was better to speculate than to play it safe.

After the real estate crash, people are reevaluating those old assumptions. Perhaps the mess of foreclosures will change how people approach the home buying process. And perhaps the federal government will also push people along and shift the focus in terms of renting versus buying. After all, decades ago, the government shifted the focus and helped created a country in which two-thirds of people own homes—which isn’t necessarily a good thing.

The WSJ printed a fascinating story written by a University of Pennsylvania professor writing a history of real estate in modern America. How did homeownership come to symbolize the American dream? He explains:

… the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It’s not the story of the inexorable march of the free market. It’s a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

Great line. Since the Great Depression, legislation has encouraged homeownership and home building. The situation evolved until people began feeling dumb if they didn’t get in on the action; rent cost as much as a mortgage, and you were basically losing money by paying a landlord each month. This was not always the case:

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words “keep out of debt” or “pay as you go” appeared in countless advice books. As the YMCA told its young charges, “If you can’t pay, don’t buy. Go without. Keep on going without.” Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn’t lose its sweetness because someone else held the title.

Those are some words to live by right there: “If you can pay, don’t buy. Go without. Keep on going without.”

As the writer explains, the U.S. is unique among other countries because of our high homeownership rate—and because of how we buy our homes, typically with huge loans you just don’t see in many other places:

Some countries—such as Spain and Italy—have higher rates of home ownership than the U.S., but there, homes are often purchased with the support of extended families and are places to settle for the long term, not to flip to eager buyers or trade up for a McMansion. In France, Germany, and Switzerland, renting is more common than purchasing. There, most people invest their earnings in the stock market or squirrel it away in savings accounts. In those countries, whether you are a renter or an owner, houses have use value, not exchange value.

President Obama, who on many occasions has been accused of trying to make the U.S. more like Europe, seems to be pushing a subtle shift toward renting over buying. He plans on using $4.25 billion of stimulus money to pay for foreclosed homes, which will be rented, in addition to creating thousands of other federally subsidized rental units.

This, I think, is the big point: That it’s OK—smart even—to buy a home. But only if you do so in a sensible way, by purchasing only for the long-term (don’t even think of flipping, especially not today or anytime soon), and by buying only what you need and what you can safely afford, no more.

And if you’re not in a financial situation in which you feel comfortable about buying? Well then, don’t buy. Rent until you’re ready, and don’t assume you need to ever be ready. You may very well be happier as a renter.

A recent study turned a huge assumption on its head. The study showed that homeowners are no happier than those who rent—basically because any happiness and satisfaction derived from owning a home is typically offset by the aggravation and stress of owning a home. The stress is obviously worse if you’re never quite sure if you can pay the bills.

0 comments
Sort: Newest | Oldest