This is an article by Sam Lustgarten, a doctoral student a midwestern university.The real estate market is changing.
After years of record-low rates for mortgages, the interest market is beginning to heat up.
Homebuyers are suddenly second-guessing their decision to buy.
NPR recently reported that many prospective buyers were quoted “3.5 percent” only weeks ago. Now, they’re facing 5.2 percent.
Homebuyers seeking low mortgage rates have long benefited from extended quantitative easing (QE) from the Federal Reserve. By keeping interest rates low, the Fed hoped to spur bank lending, and consequently, greater borrowing (more capital to markets).
In general, it’s worked. Unfortunately, the market, investors, and homebuyers are questioning what the eventual increase in Fed window rates will mean for their bottom-line.
The American Dream is Changing
Buying a home was quintessentially American. Dreams of a white-picket fence have long been the accepted norm. Ownership was encouraged in popular media, government officials, and even our tax code.
From Leave it to Beaver to Growing Pains to MTV’s Cribs, home ownership is relished as an important measure of success and maturity. The family starts at home, with a mortgage. It’s one of the single largest investments most people make, and sometimes the only place where families have savings. The clear mortgage payments are likened to a bank account.
Lifelong Debt to Resistance
Common wisdom and advice has always suggested buying a home. The author at Living Rich Cheaply just asked himself if he had wasted $80,000 by renting for years. The questioning is encouraged by frequent phrases like, you’re “flushing money down the toilet” or “wasting your money” by renting. They are a constant reminder of what’s expected of you as you age.
This ideal is fading. As younger generations, shackled with ever-burdensome student loans, credit card debt, and record high unemployment, try to enter the workforce and find carve their dream, a question is rising: Do I want to be in debt for 20 more years?
You don’t just have to be a Millennial to believe or question it, either. More and more people are resisting home buying, in favor of renting. And, it might just be financially savvy.
A World Where More People Rent Than Own
You might think that most of the world purchases homes, but did you know that 62.1 percent of residents in Montreal rent? The New York Times just featured the French-speaking province in a comical account of the July 1st shuffle. Every year, about 115,000 people relocate. The moving stresses the city and industry for that day. But then it’s done. Neighborhoods help and people find anything they can to move (e.g., bikes, pickups, and trailers).
College towns and metropolises are famous for high turnover rates and demand for rental properties. At transient times in life, renting has made sense. Meanwhile, buying was that solid commitment to stay and root into one particular place.
Financial Benefits: Renting vs Buying a Home
The aforementioned tax write-offs and property investment have long been the stalwart argument for buying. But might it be possible to save more each month and retire earlier by consistently renting? The answer: Possibly.
Homes are often the only real savings a family has because mortgages are forced discipline to save more. But what if the extra amount saved by renting each month (versus a mortgage) was invested?
Even before the most recent housing market crash, Forbes questioned the logic of buying a home versus investing. Here’s what they found:
“[I]n the short term…U.S. real estate sale prices increased more than 56% from the beginning of 1999 to the end of 2004, as tracked by the Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development. The S&P 500 index dipped nearly 6% during that same period.
But if you take a longer view–say 25 years–you’ll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.”
As the mortgage rate swap market bubble burst and housing prices tanked, questions about performance of stock market versus housing market continued. Even though the broader market crashed, it paled in comparison to housing. Potentially, by investing your extra cash and saving for retirement, the difference can gain serious traction over a home purchase.
Question Your Assumptions
I’m not saying you should never buy a home. I’m not saying that buying may someday be a better investment. I’m not even saying that all Millennials will change this old buying habit.
All I’m stressing is that we must question our assumptions. The antiquated phrases of buy and hold must be replaced with a skepticism to increased debt, delayed retirement, and jumbo mortgages.
Buying a home has numerous ancillary costs and liabilities. You are responsible for the maintenance, liable for mechanical failure, market risk, buying and selling commissions, and the increased monthly cost on a mortgage.
Renting offers the flexibility to come and go. You are not responsible for most maintenance, liable for most mechanical failures, market risk, buying and selling commissions, or increased monthly costs. Renting offers a liquidity that buying can’t.
Over the long-term, the stock market has crushed the housing market. With disciplined saving and investing of the extra money each month from renting, tremendous returns may follow.
What about you? Did you buy into some of the mythical benefits of buying a home? Should you have rented? Share your story in the comments below.
Image by CarbonNYC