The Housing Conundrum: Do I Rent or Own?

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It seems there is always a big debate over the virtues of home ownership versus renting.

For generations, American consumers have valued home ownership as the “American Dream”.  After all, the virtues of home ownership and debt management were extolled throughout the beloved film “It’s A Wonderful Life”.  Quaint Bedford Falls and the Bailey Building and Loan afforded middle class families their very own homes.  In the alternative reality where George Bailey (Jimmy Stewart) had never been born, showed by contrast is a tawdry existence in a town filled with sleazy bars and pawnshops where the townspeople rented their homes and were beholden to the evil miser Henry Potter.

House FancyIs Home Ownership Overrated?

The recent housing crisis has many wondering if home ownership is overrated.  Decades of policies designed to foster home ownership are being questioned in the wake of the real estate bubble and collapse.  Should there really be taxpayer support for giant mortgage agencies; and should individual home ownership be promoted by offering tax incentives?

Many now dismiss the concept that areas with a disproportionately high rate of rental properties leads to cultural or social decline.  In fact, as the demand for rental properties has grown (much in part to the fact that many people cannot afford or qualify to purchase a home), rentals have come to be much nicer in general, with urban or suburban communities seemingly uncompromised by their presence.

In the past decade or two, the workforce has become much more mobile.  To successfully own a home, one has to be “stable” and live in one place for at least five to ten years.  This simply isn’t the norm for a large segment of society due to the nature of their employment and/or the market.

Home ownership has historically yielded financial benefits, with the primary advantage being that it enabled middle and lower class Americans in particular, an opportunity to accumulate wealth, put their children through college and retire comfortably.  Returns were enhanced by leverage provided by the mortgage, as long as housing prices rose.

But, leverage can also magnify losses.  The problem was not that people were buying houses as much as it was that people were routinely buying houses by borrowing 80% of the cost.  That is never a good investment strategy.

House CartoonShould you buy a home today?  Only if you can truly afford it.

The American Dream was never about everyone owning a home.  If it were, it would have been called the American Norm.  Home ownership is not for everyone.  Those who move frequently for work probably would be better off renting; sometimes it just makes more sense financially to rent than own.  This is true if it costs more to purchase a home in an area than it would be to rent one or if housing prices are in decline.

But, most agree that the government should still support home ownership, primarily as a way to promote individual savings.  Warren Buffet, a man who runs one of the most successful investment firms in the U.S., knows a thing or two about investing.  Warren believes in home ownership, but with a clear caveat.  As he has stated to his shareholders, “Our country’s social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford.”  This is the advice from a man who has lived for more than 50 years in a home that originally cost him $31,500.

Affordable home ownership is for those who are in it as a long term investment, as it allows for people to accumulate savings to provide for their families.  The government should support that, as it is advantageous to the country as an economic whole.  That is what the American Dream is about; not the conspicuous consumption of housing experienced in the housing bubble and ensuing market collapse.

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