There’s no question, owning a home is the emotional preferred choice. It also fits more comfortably with him humanity’s tendency toward normalcy bias – the general assumption that whatever has worked in the past will always work in the future. But as the nature and core structure of America’s economy continues to change rapidly, you may be better off renting your home than owning.
Let’s take a look at the major reasons why.
Renting Offers Greater Geographic Mobility to Follow a Job
In 2017, only 11% of Americans changed residences, which I believe is a record low. Much of this recent lack of mobility is attributed to the high cost of housing. It’s making it more difficult for homeowners to change jobs when a geographic move is required.
There’s even significant evidence homeownership deepened the Financial Meltdown, as homeowners were unable to relocate to follow new jobs.
This is a problem a renter doesn’t have. It’s much easier to get out of a lease arrangement than it is to sell a house.
There’s also the replacement factor. The homeowner will almost always look to replace a current house with a new one, as in buying in the new location. The renter can go from rental to rental, greatly reducing the stress, cost and complication of a relocation. This gives the renter a major advantage in following jobs.
This is an underrated advantage as well. Job stability in the 21st Century no longer matches up with the nature of long-term mortgages.
The average US worker holds a dozen different jobs during his or her working life, with an average of just 4.2 years per job stay. It’s a certainty some of those job changes are lateral moves, while others may be a step down.
The typical mortgage runs 15 to 30 years, and with all the job changes it’s very likely some of them compromise the homeowner’s ability to afford the house. By contrast, a renter can quickly trade down to less expensive quarters to better match up with what might be a reduced income situation.
No Trapped Capital
This is really the liquidity factor. For many middle class workers, the family home is the primary source of wealth. They may have very little in savings apart from their home equity.
But as much as home equity may seem comforting, it represents trapped capital. Unless you plan to sell your house, it’s not a liquid asset.
If you have $50,000 in home equity, you have two choices if you need the money:
- Sell the house, which is never easy and will require relocation, or
- take a home equity loan, which will increase monthly debt.
Neither is a good option.
But then there’s opportunity cost. That’s the question of what could that money be doing for you if it were invested elsewhere?
For example, if you were to invest $50,000 in a blended portfolio of stocks and bonds, paying an average of 7% per year, after 20 years, you’d have $193,485.
You may have that much home equity after 20 years, IF house prices in your area continue to rise steadily. But with an investment portfolio, not only would your money grow, but you’d have access to it if you needed it.
It’s capital, but it isn’t trapped like home equity is.
Owning is Not as Cheap as it Once Was
When it comes to buying and owning, most people (real estate agents in particular) focus almost entirely on two numbers: down payment and monthly payment. Your down payment and mortgage principal and interest payment are fixed costs, but every other expense connected with homeownership is a variable, and subject to move in only one direction – higher.
The reality is owing a house isn’t as cheap as it used to be. Even if you pay off your mortgage (which also results in more trapped capital), you’ll still have major expenses to pay.
Property taxes. This varies by state. The average tax bill on the median priced house in New Jersey is $7,601. That’s an extreme example, but property taxes are going up all over.
Homeowner’s insurance is another major variable. The national average premium is $1,083 year, but it varies widely by state, specific locality, type of home, and previous claim history.
Not surprisingly, Florida is the highest at $2,055 per year. But a previous coworker of mine who used to live in Palm Beach County had to sell her house, due to her homeowner’s insurance. It was over $8,000!
Then there are repairs and maintenance. These costs are routinely ignored in rent-vs.-buy debate, but they can’t be.
HomeAdvisor.com reports the average cost to replace the following systems:
- Roof, $7,496
- Furnace, $4,240
- Central air conditioner, $5,392
- Hot water heater, $1,059
- Driveway, $4,173
- Paint a house, $2,795 exterior, $1,751 interior
A home repair guy in one of my old neighborhoods said homeowners need to budget $300 to $500 per month for repairs and maintenance. I’ve crunched those numbers and they’re accurate. That adds $3,600 to $6,000 per year to the cost of owning.
And that’s probably why it’s commonly ignored.
Tax Reform Removed the Home Owner Tax Benefits for Most Homeowners
Due to historically low mortgage rates and gradually rising standard deductions, the tax deductibility of homeownership has been slowly disappearing. But that situation took an even more dramatic turn with the 2017 tax reforms.
For 2018 and subsequent years the standard deduction has been raised to $12,000 for singles and $24,000 for couples.
You’ll have to have some serious deductible expenses to even qualify for itemization.
For example, if you’re married filing jointly – with a $24,000 standard deduction – you probably won’t be able to write off your homeownership costs.
If you have a $300,000 mortgage with a rate of 4.5%, your interest deduction is $13,500. If you add $6,000 in property taxes, you’re only up to $19,500. That’s still not enough.
Even if you double those deductions to $39,000, only $15,000 of it would represent an itemized deduction. The first $24,000 is being given to you by the IRS.
If you’re in the 12% tax bracket, the tax savings on your house would be just $1,800 per year ($15,000 X 12%).
If you were a renter, you’d still get the $24,000 standard deduction, even though you don’t own a house.
This is another situation that favors the renter.
Greater Control of Your Time
This one doesn’t take too much thought or proof. As a homeowner you’re responsible for everything that happens in your house and on your property. Examples include:
- Keeping the inside of the house clean.
- Property maintenance – mowing the lawn, trimming the hedges, shoveling snow, cleaning the gutters, etc.
- Less frequent outdoor maintenance – pressure washing the house and driveway, treating decks and fences, maintaining plants and shrubs, etc.
- Fixing whatever’s broken, both inside and outside the house.
It all takes time, which means you have less time for everything else happening in your life.
That’s becoming increasingly important. In a world of increasing self-service – where vendors and merchants put more work on the customer to cut operating costs – time has become more limited than ever. Owning just takes up more of it.
By contrast, a renter only has to be concerned with keeping the inside of his or her home clean. That leaves more time for everything else, like…
- Managing a demanding career.
- Taking care of your spouse or children.
- Dealing with a career or financial crisis.
- Doing fun stuff.
- Engaging in serious hobbies or passions.
- Taking care of your health.
Rent and Save the Difference
You’ve undoubtedly heard the life insurance saying, buy term and invest the difference. Term life costs about 10% as much as whole life. If you invest the 90% you’re not spending on life insurance, you can build up a small fortune.
The same can be said of renting vs. owning your house.
You have a chance to buy a $250,000 house. You’ll make a $50,000 down payment, and take a 30 year mortgage at 4.5% for $200,000. The monthly principal and interest will be $1,013. You’ll also pay $5,000 in real estate taxes, and $1,000 in homeowner’s insurance. The total monthly payment will be $1,513.
If you’re married filing jointly, you won’t be able to itemize your housing costs. However, we’ll assume the house isn’t in a homeowner’s association neighborhood, requiring yet another fee.
The alternative is to rent a similar sized house, apartment or condominium at $1,500 per month. The monthly payments between renting and owning are roughly equal, and neither gets a tax benefit.
But there are two major costs you’ll have as an owner that you won’t have as a renter:
- The $50,000 down payment (we’re ignoring the extra investment of closing costs and escrows due at closing), and
- roughly $5,000 per year in repairs and maintenance.
Let’s say you decide to rent and “invest the difference”.
You’ve got $50,000 to invest up front (the down payment that wasn’t made), plus another $5,000 per year you’re not spending on repairs and maintenance.
If you invest in a blended portfolio of stocks and bonds averaging 7% per year, in 30 years you’d have $870,644.
Even if you paid off your mortgage (and never recast it), and the house tripled in value to $750,000 in 30 years, you’d still be better off renting.
You Never REALLY Own Your Home
I wrote an article on this topic a couple of years ago, Do You Ever REALLY Own Your Home? and it’s an increasingly valid issue.
There was a time – only a generation or two ago – when you could pretty much do anything you wanted with your own property. Those days are gone. The reality is that while you are fully responsible for your property, including both the financial and property maintenance sides, you’re largely limited in what you can do with it.
I would even argue that the whole concept of homeownership today would be unrecognizable to homeowners 50 years ago.
Just a few of the common prohibitions owners face include:
- Running certain types of businesses.
- Storing items, like cars or business inventory.
- The number and relationship of occupants (restrictions against taking in boarders).
- Food production (large vegetable gardens or a chicken coop).
- Composting or burning compost.
You may agree with any or all those restrictions. But when I was growing up in the 60s and 70s, in a well-to-do New York City suburb, each of those activities were common for homeowners. Today, those are only the most general prohibitions. Some communities impose limits on even more subtle activities.
There’s also the property tax factor. A county or municipality can raise your taxes substantially, and you’ll have nothing to say about it. It happens in the real world.
And still staying on the legal side of the ledger, if you get involved in any financial disputes, a lien can be attached to your property. That’s always been true, but it’s just much more common today.
One of the main reasons people prefer to own is precisely to have greater use of their home. But today, that freedom isn’t always there.
The HOA Complication
The situation is even more serious if you buy in an HOA neighborhood. I’ve lived in three in my lifetime, and no one can convince me they’re benign.
As well, 15 years in the mortgage business showed me most people think HOAs are wonderful places, but largely because they don’t know any better. But trust me, all you need is one run in with the HOA board – over an issue you think of as your inherent right as a homeowner – and you’ll realize the frightening truth. (Don’t say I didn’t warn you!)
The overriding question that needs to be asked is are the increasingly limited “freedoms” enjoyed by homeowners sufficient to offset the greater mobility and lower level of responsibility enjoyed by renters?
I’d argue it’s increasingly untrue.
Final Thoughts on Why You May be Better Off Renting Your Home
So why am I going through this list? Isn’t it un-American to cast homeownership in anything but a positive light?
I’m far more concerned about helping people survive and thrive in what has become an increasingly unpredictable economy, especially on the employment front.
The mainstream media advocate for homeownership because real estate related businesses are major revenue providing advertisers. The media is pitching for their sponsors.
But life should teach us that when everyone’s lining up on one side of the boat, it’s time to explore the possibilities on the other side.
Despite the happy talk from the government, industry leaders, the media and economists, America’s middle class is gradually being squeezed out of existence.
The only rational response to that reality is to develop strategies to earn more income, create more income sources, find ways to save and invest, cut basic living expenses, and embrace flexibility and mobility as virtues. Increasingly, renting is fitting those strategies better than owning.
Do you agree that we’re gradually moving toward a time when renting makes more sense than owning?