For a long time, the very mention of renting as a wise financial manuever would get you snickers at best and passionate opposition at worst. Homeownership is the American dream of course, so any mention to the contrary borders on unpatriotic. Recently it has become clear that the homeownership issue is not as cut and dry as it once seemed. You know mentality has changed when a newspaper actually publishes an article criticizing homeownership as I found recently in the Boston globe. A large part of a newspaper’s revenue comes from real estate listings, so publishing such an article is akin to biting the hand that feeds you. Nonetheless it’s good to see some validation in print of what I have believed for a while. From the article:
Owning a home is not right for everyone, they say: In some ways it’s overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be. Widespread homeownership may also have a negative impact on the economy, because, among other reasons, displaced workers can’t easily relocate to new jobs. And some of the alleged rewards of homeownership, such as greater self-esteem, health, and civic engagement, have been called into question by research.
I’ve made the personal decision to rent my home until prices fall sufficiently to make purchasing a logical financial decision. Even my own mother questions what I am doing. “Homeownership is the American dream”, she tells me. “That doesn’t make it right”, I respond. I can understand where she is coming from. In metro Pittsburgh, I estimate that it costs $1500 a month to rent $150,000 of house. The same $1500 a month rents $300,000 of house here in metro Boston. In the end, when I explain how messed up the math is here, she understands my logic. Even with recent price reductions, it’s still not a good time to be buying property in metro Boston.
Some analysts propose abolishing or limiting the mortgage interest tax deduction, which provides substantial tax breaks for homeowners. Others favor greater security for renters - such as laws making eviction more difficult - or tax deductions for renters, which a few states, such as Massachusetts, already offer.
The government has worked hard to push homeownership to these currently unreasonable levels. Between the mortgage interest deduction and the capital gains exemption, the government is giving up billions in revenue. Most of the revenue the government is giving up is going straight to the wealthy. Yes both the mortgage interest deduction and capital gains exemption primarily benefit the wealthy, both are regressive taxes. The wealthy can afford more house and therefore will stand to have larger gains when they sell. The wealthy are also much more likely to itemize deductions to actually benefit from the mortgage interest deduction, while the mortgage interest on a modest home might not even be enough for a middle income person to exceed the standard deduction.
I really like the part of this article where the author disputes the psychological and societal benefits of homeownership:
A recent study, which aimed to avoid the problems of previous research, suggests that homeownership confers no real benefits. The study examined self-respect, perceived notions of control, time spent with friends and family, volunteer activities, and enjoyment of the neighborhood, among other things. On all of these measures, after controlling for income, health status, and home value, the study found no significant advantage for homeowners. In fact, homeowners were on average 12 pounds heavier, and they spent less time with friends.
The evidence is mixed on whether homeowners are more civically engaged than renters. But to the extent that they are, their influence in some cases has undesirable societal repercussions. Since houses are the major asset for so many families, homeowners naturally want to protect their property values. This often leads to zoning laws that make it difficult to construct commercial or additional residential buildings. Such laws erect barriers to entrepreneurs and reduce overall housing affordability.
A homeowners self interest may actually cause them to support laws that go against free market economics. Here in Massachusetts, we don’t need to look very far to find examples of this extreme anti-development. A prime example is Carlisle, MA (within 25 miles of Boston) which has a population density of 317 per sq. mile. Such a low density would classify Carlisle as an “exurb” but being 25 miles from the center of Boston it is geographically a suburb.
So what would happen if we leveled the playing field between renting and owning? My guess is that home prices would drop to levels where it makes economic sense to own. So areas like most of the midwest, where renting is more expensive would see little change, while both coasts would see sales prices drop and rents rise. It would be more expensive to rent, for good reason. Renting is a convenience that you are paying your landlord to provide. If we keep the playing field level, people will gravitate to the decision that makes most sense for them.