Today’s news that national housing prices have double-dipped to a new recession-era low is grim for homeowners, home sellers, banks, builders, and the president. Prices are down in 19 of the 20 biggest metro regions—Washington, D.C., is the exception. And given the 1.9-million-house backlog in the foreclosure pipeline, nobody expects prices to rebound any time soon.
But these data can be interpreted another way. The American economy is making a significant shift from buying to renting, and that may ultimately be good news. According to a USA Today analysis of Census data released this weekend, since 2006, the number of households that rent has grown by about 700,000 a year, while the number of households that own has fallen by about 200,000 a year. One reason is macroeconomic. The unemployment rate remains high and wages are down, meaning many people simply cannot afford to buy a house. Plus, nobody wants to take the risk of selling into a down-market. But there are also indications that Americans are electing to rent—and that is a very good sign.
Contrary to the housing-bubble dogma that a mortgaged apartment or house provides a pathway straight to the American Dream—and contrary to the tax code, which encourages buyers and discourages renters with a huge break for mortgage interest—renting is better than owning for many Americans. Indeed, dozens of recent studies have shown that, excepting the go-go bubble years, houses tend not to make very good investments at all: A prospective homebuyer would have made more money taking her down payment, parking it in inflation-adjusted Treasury bonds, and renting.
Jordan Rappaport of the Federal Reserve Bank of Kansas City, for instance, recently looked at housing as an investment (PDF). In a few time periods, like the late 1970s and the late 1990s, buying a home “unambiguously” helped households build more wealth than investing in stocks or bonds. But overall, homeownership built more wealth in just about half of the years between 1970 and 1999.
In a paper titled “American Dream or American Obsession?” Wenli Li and Fang Yang of the Philadelphia Federal Reserve Bank draw a stronger conclusion. They examined returns on housing between 1975 and 2009. Factoring in costs like depreciation and property taxes, “the adjusted real rate of return on housing actually falls below zero … -0.575 percent!” they note. (This is the first time I can remember two Fed economists using an exclamation point.) Nationally, between 1975 and 2009, the national rate of return for homeownership was 1.3 percent, they write. For stocks, it was 3.375 percent.
A number of factors conspire to erode the possible benefits of buying a house, rather than renting it. First and foremost, buying a house means cutting a fat check for a down payment, generally 20 percent of the purchase price. That means you cannot use that money for other investments, whether an education or stocks or gold. You’re stuck with your eggs in one house-sized basket.
You are also literally stuck in your home. If you receive a fantastic job offer from a firm in another state, you cannot readily sell your property and move—not without taking the time to deal with brokers, contracts, and banks. That might depress your lifetime earnings, and thus your lifetime wealth. Even worse, if housing prices decline and you want or need to sell—that is, if you are underwater on your mortgage, as about one in four homeowners currently is—you might be truly trapped. That is part of the reason that some economists theorize that high homeownership rates tend to boost unemployment rates.
On top of that, buying and owning a home comes with considerable other costs, many of which are hidden both to purchasers and to analyses that look solely at purchase prices. Closing costs tack on 2 or 3 percent of the sale price. Homeowners need to pay for title insurance, regular insurance, fees, and periodic maintenance and upkeep as well. Plus, there are property taxes. True, in many cases, those costs are factored into rental rates. But in some cases they aren’t. And if your roof caves in, you would certainly rather be a renter who can skip out than a homeowner with no choice but to fix it.
Despite all of those risks and costs, of course, for many Americans—particularly those looking to put down roots and stay for a while—owning a home makes sense. (For the record, my fiance and I own our apartment, given that our mortgage is a few hundred bucks cheaper than rent would be in our neighborhood.)
But it is conclusive: Not everyone should own a home. The recession has helped erode the stigma against renting, with about 70 percent of Americans now admitting that it has advantages over buying a house. If people are making unsentimental decisions about whether homeownership is really worth it for them, that is at least one small benefit of the housing bubble bursting.