Is it really time to rethink homeownership?

The numbers do tell the story.
Supposed start of the bubble late 1997 - 65.4% ownership
Peak of the bubble mid 2006 - 69% ownership
Latest numbers - 67.5% ownership.

Throughout the 90's, we were averaging around 64.0%. Looks like we have some more adjusting to do. But one concerning number is the percentage of younger people (under age 35) owning houses, it has dropped from 43.6% down to 40.3%. Without youger people buying, the real estate cycle is broken.

I hate that the main reason for against renting is that you are "throwing your money away". That is the biggest misconception, and I think the article did a good job of pointing that out. People still fail to realize that owning a house has many hidden costs, including annual repairs, larger utility bills, farther commutes, etc. In addition, if you are only planning to own a house for 5-10 years, if you factor in all the fees associated with buying and selling, the amortization of bank loans (meaning you pay mostly interest, not equity, in your loan at first), and the hidden costs, you are MUCH better to be renting! Just whip up a simple spreadsheet, and the numbers are obvious ... I think the bubble just skewed these facts since people always assumed the prices would go up.

I'm under 30, and I feel bad for all my friends that might be stuck in houses that aren't ideal (far from the city, not large enough for a family, etc.). If they were to sell and move, they'd be taking a big financial hit. So, maybe it's not time to re-think home ownership, but the concept of "STARTER" homes. People would in much better situations if they were to rent, save a lot of money, and put it toward a house that they will be in for 20+ years.

Now, don't get me wrong, I would love to own a house vs. renting. And I think owning is the better long-term solution. But it's just a matter of finances and short-term patience. Currently, my wife and I are renting close to the city and saving good money. It's just a matter of time before we'll buy a house (in an area that we want) that we'll want to be in for the next 20+ years.

It's nice the question is being asked. The Globe piece was great. I always get flustered when politicians get up and tell me that home ownership should me my goal in life.

It really is time to rethink home ownership. The NAR and the banking industry were relentless in marketing housing as the path to riches over the last 10 years.
A house will go back to being just shelter, not a cash register, or an extension of one's ego, just shelter (as it always should be). This housing crash is a GOOD thing.

Yes it is time to rethink home ownership. Not everyone is cut out to be a homeowner just as some people are not cut out to be landlords. People in general don't like to live within their limits be it financial or social limits but I digress. Homeownership was put on a pedestal often and it is a big goal to attain but that doesn't mean it is for everyone, and not owning a home doesn't make you less of a person. There is a lot of financial responsibility that comes with owning a home, and few saw that and appreciated it. They felt it was an injustice to provide loans to those that did not have the wherewithal to own and pay back a loan while maintaining the home. But what they failed to see was sure it was great in the short time the long term it was more of an injustice to provide those loans and now we are all paying for it.

There are some people that just are not all that handy and not into hiring the appropriate contractors to do good quality work. There are some that think that they can do it all without training, just give them a tv show and a good book and they can do it all no matter how small or big the project is.

For me it is a quality of life thing, I have never liked the way that the landlord maintained his properties, sure it had running water, heat etc but the appliances were dated. The flooring should have been replaced, the windows should have been upgraded but there were no serious health hazards. That was one of my motivating factors to buy my own place rather than continuing renting. That also meant a lot of additional saving prior to me buying the place.

In the end home ownership is like a lot of things, just because you can do it doesn't mean you should. When buying a house, TV, car or anything the first thing the person or persons should think about is does it make sense for them in terms of does it fit their lifestyle, skills etc. And if yes then go on to decide if it is something they can afford, and if they cannot afford it they should make a plan so that they can afford it even if it means waiting for a while.

Fundamentally, you need to decide whether you are willing to trade off some of the flexibility that renting allows you (can move with minimal costs compared with owning - great advantage especially when kids are not of school age yet) for the lower overall cost and the freedom to live as you please that home ownership brings (no landlord to restrict what you can and cannot do with your home).

Like lots of other people, we rented for about a decade then bought a home when we decided to settle in around Boston, and we're very happy with both those decisions.

You're way better off renting right now. Renting is hardly throwing money away in this economy, where you not only pay your mortgage, but the value of your house goes down every day to boot. Don't get me wrong, I'd rather own my own house, so I could do whatever I wanted to the property, but like almost everyone else in the 25-35 year old bracket, my spouse and I were priced out of the market by greedy real estate agents, sellers, and speculators/flipper jerks over the last decade. I'm sure glad we didn't listen to the "buy now or be priced out forever" doom and gloom realtors of 2004. They were just slightly off in their greedy predictions..

Young families are the ones caught in a bind. There is a shortage of decent, de-leaded rental properties in nice, safe neighborhoods. Buying is a much more attractive option given the very poor selection of rental stock for this demographic. And anything that is decent and de-leaded with enough space, is expensive. At least that's been the experience I've had working with some of my clients. And if they have a dog, it's almost impossible to get a rental.

So, *someone* needs to be a landlord and needs to buy if we're going to increase the good quality rental housing stock for this new wave of renters.

Re Brian C/#1:

As one such Young Person, I think that homeownership among us youngsters has gone down because housing has gotten so unaffordable. The only way you can afford today's bubble pricing is if you already own a home which benefited from that bubble.

I'd love to own a place. I hate throwing money at sketchy landlords, I'd like to have a pet without asking extra permission, and I'd love to repaint and remodel whenever I want. But I'm willing to wait and save towards my down payment until prices have stopped dropping 10-20% year-over-year and are no longer 3x what they were only 10 years ago. I'm sure there are plenty of other people in the same situation.

This discussion leads me to wonder what those on this blog think of the old adage which advises would be homebuyers to buy the most house that they can afford. Prior to our most recent home purchase, my husband and I kept going back and forth as to what our budget for our home purchase should be. The online calculators told us that we could afford up to nearly $900K, however we felt more comfortable sticking below $750K for a home. In the end, we found a home that met all our needs for less than $400K, and we are both quite happy. We anticipate being in this home for at least the next ten years; the schools are good, and our commuting time is reasonable. I am just curious if others believe that we should we have spent more to buy in an area like Wellesley where the only advantage would have been the potential appreciation? In real estate, the key is “location, location, location”. How does that factor into the current real estate market? How much more should someone pay to live in a “premier” town?

I always thought that all these comparisons buy vs rent is non-sense in many cases, because real estate for rent is very different than real estate for sale.
I would give an example. We are a family of 3 (1 small kid) with a solid income. We wish to live in Newton- good schools and nice commute. I really value life in a single-family house. I wish to have some land for gardening and to put a swing. I hate 2-3 family houses, because I want to control a noise level neither in my apartment, nor in apartments above/below. I also want a house in reasonably good condition ( kitchen and bathrooms less than 15 years old, etc.)
I would love to rent, but I was not able to find anything satisfying my conditions on the rent market at the reasonable price. I think the market for rent is not for people like us, it is more for “renters”. And the median renter is OK with 2-3 family or even apartment complex, as long as it’s cheap. I can easily find 3 bedroom (in condo, 2-3 family) in Newton for about 2K, but finding a relatively nice single-family is tricky, and costs at very least 3K. Believe me or not, but my current mortgage for a smallish but very cute SF we bought several months ago (+ property tax+ insurance) is below 3K.
Do I wish to rent my current house for 3K/mo? Yes, absolutely! But I cannot find such a deal. Do I wish to own a regular rental for below 2K/mo.? No, thank you!
All these buy vs rent calculations are comparing apples and oranges.
Funny thing is that if at any point I would decide to find tenants for my house for 3K, I likely will have problems… Because, majority of renters would prefer condo of the same size but for 2K.

bbguitar (#2): Great post. You are right on the mark. The concept of a “starter home” is a marketing gimmick dreamed up by brokers to generate more business. They know if they sell you a starter home, you will quickly outgrow it and move on. The obvious motive for them is they get to pocket two (or more) commissions instead of one. But this means you end up PAYING two or more commissions. And that's in addition to other transaction costs-- appraisals, loan origination fees, inspections, legal fees, transfer fees, etc.-- which are substantial. When you add all this up it gets expensive, especially when compared to the transaction costs for renters-- which last I checked was around $39 for a U-Haul plus $20 or so in beer for the buddies who help you move your stuff.

Buying a house for the short term is a recipe for financial disaster, especially in this market. Prices need to fall another 30-50% before they reach historic levels relative to household income and rent. Save your money and let somebody else take the financial beating these next few years will bring. There will be plenty of homes for sale at much better prices when you're ready to buy. In the meantime, enjoy your carefree life as a renter. You're making a very smart move.

I completely agree with the sentiment that it's time to re-examine the cult of home ownership in this country. Ultimately, it should be a matter of individual circumstances: the decision that makes sense for one person may not make sense for another. What I really believe needs to be rethought is the issue of home ownership vs. renting with respect to public policy (I"m thinking primarily of the tax code). But unfortunately I see virtually no chance of any major reforms in this area being enacted -- even when the current financial crisis is over. The political interests involved are simply too powerful, and the majority -- homeowners -- will always be able to protect their subsidy by outvoting the minority (renters). I see the only hope for more tax code neutrality with respect to housing being long term inflation. Eventually, if the $1 million cap on the mortgage interest deduction is not raised, its value will be eroded away with inflation. Bu this will obviously take a very long time.

If you have kids and you want a decent place for them to live in with 3 bedrooms, a nice yard, no lead paint, a garage, etc, that means you are renting a house. The rent for a decent house in a town with good schools is a lot more than the little 2 bedroom apartment you are renting in Brighton. And when your kids have become friends with all the other kids on the block, it really sucks when the landlord decides to sell the house on you and you have to move.

There's another 40% drop left to go. Don't be a knifecatcher, be patient, and save your money.

Lance: I guess I agree, except that much of the current mess is from people who bought more house than they could afford. If people had purchased starter homes they could afford, we might not be here now.

As for prices falling 30-50 %, that is probably wishful thinking until rates skyrocket. When they do, all bets are off. Anyway, any bets on when the rates start skyrocketing to 10 %?

What I find interesting is the lack of dialogue that is taking place around the combination of the following three things:

1) The bubble bursting
2) The preceding surge in new construction
3) The soon-to-follow drop in ownership when the boomers move out

The next generation of home buyers is substantially smaller to begin with, but no one seems to consider this point when discussing the issues in the market right now. How will values ever come back up if the baby boomer generation starts to retire and the market gets loaded with inventory. I'm not saying it's a forgone conclusion, but I haven't heard mention of it yet.

Hung, you've really latched on to that "knifecatcher" phrase, huh?

Thank Barney Frank, and remembe this when he runs for re-election. He did not do ANYONE a favor by pushing for more mortgages for those who could not afford it through fair lending laws. Getting people mortgages they couldn't afford didn't help anyone, including low income buyers. Also, having these people in the market raises prices for all of us buyers, as they were bidding against us, and should not have been in the market to purchase a home in the first place.

Related to the cult of homeownership and state subsidies to build that up, take a look at the Mass Soft Second loan program. I bought a condo in 2007 in South Boston and every month, the kind and generous taxpayers of Massachusetts kick in $128 towards my mortgage payment in addition to insuring my loan so I don't have to pay PMI. Thus, my current mortgage, condo fees, and taxes (thanks to the Boston residential exemption) are less than I was paying in rent for a smaller place that came with a landlord complaining about whether or not I do the dishes every night. That's before the $10,000 income tax deduction I get on the interest I do pay. And, if I end up selling the place for a loss, all the money that you, the taxpayers, have paid towards my mortgage is forgiven, which gives me a nice cushion to protect me on the downside. Now I just need to decide what color I want to paint the bathroom when I use Boston's home improvement program to help pay for a re-do of that. I just hope the nice raise I just got doesn't put me over the income limit. And people say we're in a recession.

To all you people who would rather rent than own a house- where are you going to go when your landlord gets foreclosed on? My parents and I lived in a "starter home" until they died and I married and moved out. It was our home and we were happy to have a roof over our heads. Renting IS just throwing money down a hole the same as leasing a car is unless you need it for business purposes or a "status symbol" in which case go throw your cash away.

I love the cult of real estate. Don't take offense that I don't own a home, just smile and nod. I enjoy renting and the cost premium is negligible over owning given the current prices of homes in the area that fit my needs. I don't consider renting "throwing away" money, I get a place to live at a cheaper monthly cost (compared to owning) that allows me mobility, little worry for the months I'm away from home for work, and the freedom to live in a neighborhood I like. Someday I'll own, when it meets my needs. For now, renting takes the cake over owning - so much so, owning would be throwing money away. I just wish homeowners would stop taking offense at the notion that not everyone wants to be a homeowner/homedebtor: it is almost as bad as the "so, when are you going to get married?", "When are you going to have kids?", etc. questions those of us in our 30s hear so often.

What does get me is the NAR's campaign that "owning a home is a sure path to wealth" when in reality, it should be "being wealthy is a sure path to owning a home."

Liz,
I think you are being a bit judgemental. Are you now in a home that is worth less than you paid for it? Is that where all this resentment is coming from? It is not your place to determine whether someone who is renting is throwing money away. I rent and am not interested in throwing REAL money away by buying a house when the market is still crashing. I also don't think that buying a house, spending weekends caring for the yard and doing repairs, spending more money on heat and electricity, pooring out money on all those things that go wrong and need to be fixed (which depending on the issue can be thousands!) all while worrying about whether my home value is dropping like an anchor as I cross my fingers in the hopes that this round of layoffs doesn't have my name of it.

So please, just because that is something you don't think is throwing your money away, doesn't mean I do. It sounds more like someone throwing mud because they are pissed they aren't renting right now.

And there is no shame or glory in house renting or car leasing...it is all personal preference.

bv (#16): Agree in principle, disagree on the definition of “starter home”. In my mind, the term implies the buyer is planning to trade up in the near future. If the buyer's intent is not to move-- i.e. the intent is to purchase a moderately priced home, live within their means, and stay put for a long time-- then then the term doesn't apply.

Liz Pakula (#21): If everybody was as financially responsible as your parents, then we wouldn't be in this mess. They deserve credit. However, renting is not "throwing money down a hole". In many (if not most) cases it makes more financial sense to rent than to buy. Particularly in this market.

I had been adamantly suggesting renting and saving to our eldest daughter, pointing out the flexibility she would continue to have - be in the drivers seat, so to speak. Now though, with renters being evicted because more and more landlords are cashing in rent checks, not paying the banks the money due them and being foreclosed on; and with the renters having no recourse and very little time to regroup before they have to move on, I'm not so sure that renting is necessarily the best answer. Suddenly, those starter homes aren't looking like quite the bad idea I thought they might be...

do the people who think "renting is throwing money away" actually own a calculator? I'm just simply amazed anyone still says that. The ignorance involved is vast.

Renting can make sense. Or not. Buying can make sense. Or not. Anyone who just says one is always right is guaranteed to be wrong. Only doing the math will let you figure out the truth. Its easy math too, no HP 12C etc necessary.

What happens if my landlord gets foreclosed on? I write a check to a different landlord. Simple. If I lived in a non commercial building, I'd move. Also simple. I'll probably do that in any case for various reasons. I've moved around 30 times in my life, its really not that hard.

Chuck, be nice! :)

Charles, we moved plenty of times before kids. We've actually moved 2 times after kids. It is very much more difficult. When the kids were little, we could only pack when they were asleep or after 8 PM. We lived in a semi-packed state for weeks both before and after moving. Hard to put a dollar value on that, but it is certainly unpleasant. Now that kids are in school, we have even less flexibility, unless we want to move to a different school district and have the kids lose all their friends.

Sometimes renting is throwing money away. Sometimes it is not. We found that even during the height of the housing boom when we bought (2005) it was about break even to buy versus rent given our constraints. When renting and buying break even, I would argue that buying is the better option, because a significant portion of the money we pay toward the house is going to actually buying the house (i.e. principle). With renting, none goes towards principle. But still, our example may be the exception and not the rule.

bv - seems perfectly reasonable, as I said above - you did the calculation though, most don't.

chuck- projecting much? I seem to have touched a nerve. I've never had any problems though, LOL, thanks! That said, my parents moved with us as kids around 8 times. My brother has moved with his kids 3 or 4 times. (Bro and I suffered by getting multiple Ivy degrees each as a result... moving sure is tough) Doesn't strike me as very hard, either by memory, or observation. But I guess you can make anything challenging if that's your approach. Those 30 moves? Some have been intercontinental, and I've done them all myself. Granted I'm several orders of magnitude larger than normal, but still, its just not that hard.

"I suffered by getting multiple Ivy degrees" -- "Those 30 moves? Some have been intercontinental, and I've done them all myself."

Ivy league degree or not (I lean towards the latter) - posting to a blog as frequently as you do would point to an apparant lack of a social life. Ivy league degrees don't neccesarily make you a happy, well adjusted adult. So, yes I would say the number of times you move as a child can have an adverse effect.

..The only difference is, the guy who rented in 2005 instead of buying isn't $65,000 underwater in equity...

Steve, no need to worry about me really, but you're welcome to your opinion. If you're curious, you can page back through this blog and figure out why I have so much time on my hands.

As to what I say, as I've said all along it is quite fair to judge it on its accuracy and predictive value. Its in the archives of this blog as well - I've no ability to go back and change what I wrote years ago, feel free to judge it for accuracy.

Happy renter:

Well, not really. Depends on a million factors. In our case, we pay nearly 1000 in principle / month. So in the four years we've owned our house, we've paid off 48 k of principle. (Actually more because sometimes we pay more, but that shouldn't count in this example because the corresponding renter would have had that money free to invest). So if your numbers are correct (although you don't know our house, price, etc), we'd be down only 17 k in 4 years. Still, nothing to be proud of, but I think we need to compare apples to apples when discussing these sorts of things. Finally, I am not so out of touch to think my house has not fallen in price, the houses in my town have fallen less than other towns according to Warren group data.

I posted something similar a while back, but a refresher seems to be in order . . .

Assume you put 20% down and paid $1000 in equity per month since you purchased the home 4 years ago; let's evaluate the following scenarios *:

A 5% home price depreciation over 4 years i.e. 5/4 = 1.255% per year
+ $200M house: 88M equity, 10M loss on home ~ 11% loss
+ $300M: 108M equity, 15M loss ~ 13% loss
+ $400M: 128M equity, 20M loss ~ 15% loss
+ $500M: 148M equity, 25M loss ~ 16% loss

A 10% home price depreciation over 4 years i.e. 10/4 = 2.5% per year
+ $200M house: 88M equity, 20M loss on home ~ 22% loss
+ $300M: 108M equity, 30M loss on home ~ 27% loss
+ $400M: 128M equity, 40M loss ~31% loss
+ $500M: 148M equity, 50M loss ~33% loss

A 20% home price depreciation over 4 years i.e. 20/4 = 5% per year
+ $200M house: 88M equity, 40M loss on home ~ 45% loss
+ $300M: 108M equity, 60M loss on home ~ 55% loss
+ $400M: 128M equity, 80M loss ~62% loss
+ $500M: 148M equity, 50M loss ~67% loss

For comparison investing same amounts April 1,2005 – April 1, 2009 in:
+ SPY, 31% loss excluding dividends;
+ DIA, 24% loss excluding dividends;
+ VTI, 28% loss excluding dividends.

If you spent less than 400M on a home and home prices depreciated less than 10% over 4 years, then you have performed about as well as the market. All other cases, you lost.

* I evaluate equity only and not the true cost of home ownership or the impact on federal income taxes.

Taxes, insurance, and maintenance & repairs conservatively cost 1 - 2% of the home price per year which would add 8M to 16M loss on a 200M home; 12M to 24M of loss on a 300m home; 16m - 32m for a 400m home; and, 20M - 40M for a 500M home.

The Mortgage Income Tax Incentive effect is really very personal. However, keep in mind that the benefit only kicks in when you pay interest in excess of your personal deductions (11.4M for a couple filing jointly; 5.7M for a single person) and that it is not dollar for dollar.

To calculate it:
(interest paid + property taxes – itemized deductions) = incremental write-off
+ 300M loan at 6% ~ 19M interest + 3M property taxes – 5M itemized deductions = 5.6M in incremental write offs. 5.6M * personal tax rate is your effective tax break for owning a home.

WAJevons...

House prices are down about 2 % from 2005 in my town according to Warren (2005 - 2008), Dead even if you look at Jan/Feb 2005 to 2009. So maybe we did better than the S&P by your count.

Interesting how you chose to look at loss. Fair, reasonable, but not how I would look at the situation.

Cliched as it may be, all relestate is local.

BV,
Do you believe you are in the majority or minority of home owners?
How do you choose to look at financial loss?
Where should people buy homes now to avoid loses (like you have)?
What attributes of your town do you think preserve value?

I put the S&P in there to draw comparisons. My ax on this blog has always been about financial literacy. People need to be aware of the great deal of leverage buying a house gives them.

bv, no town fits your data. Neighborhoods of Boston? Yes, but because they had an inordinate number of high end, first time condo sales come on market. But, you don't live in a condo according to some of your older posts.

WSJevons...you are missing my point. I was addressing the fallacy of renting is throwing money away. It is sometimes true and sometimes not. If the cost to rent = the cost to own after taxes, etc, then you are better owning. One the one hand , if you rent you have to pay rent and I would not consider calling that a loss. Lets use that as the basis of your living expenses...the cost of doing business shall we say.

Now if you own, and you pay the same in the end, some going to principle, then you are ahead. Every dollar you put toward principle is a dollar you wouldn't have seen otherwise. If you lose that money due to declining house values, that it is a shame, but still, it is money you would not have had otherwise.

Your assessment makes tons of sense if you look at buying a second home as an investment. It is not like you _have_ to either buy or rent a second home. There is the choice to do neither. However, for a primary residence those are your only two options, unless you want a tent. :)

I have no brilliance as far as where people should buy...where housing prices will hold up best, etc? Perhaps we've been lucky? Purchased a lower priced home in a higher-end suburb. My personal opinion is that it is all about the schools, but that may not be data supported. At the end of the day, you need to live, send your kids to school, etc. You simply need to assess the choices you have at the time.

One thing important factor that has been left out of the conversation is bad neighbors. When you own, you're stuck unless you move, or the neighbor(s) you don't like move.