Renting is often the smarter choice
If renting is cheaper, don't be afraid to rent
In the spring of 2008, shortly before the financial world completely imploded, I traveled around Florida reporting on the real-estate crash. I ended up in a brand new "super luxury" high-rise in Miami's Brickell area that was just about to open. It had a waterfall in the lobby, a pool on the roof, valet parking and all sorts of other conveniences. Every exercise machine in the gym had a slot to connect your iPod directly to a personalized sound system. The tower's units had mostly been bought off-plan. The owners, unable to flip the units for a profit, had been forced to rent them out instead and wait.
As I stood on a spectacular wraparound balcony on about the 20th floor, looking out on the azure waters of Biscayne Bay beneath me, I did some rough calculations. The people who owned the units were paying at least $3,500 a month for the privilege. They had to pay the mortgage, condo fees (valet parking!), property taxes, and so on. Meanwhile, I learned that so many of them were desperately trying to ease the pain by renting their units out that you could rent the units for $2,000 a month, or even less.
The title of the article I wrote for The Wall Street Journal, "Why The Smart Money Rents In Miami," pretty much tells the story.
I wonder if I will ever see anything quite so egregious again. But the idea that it is always better to own your home than rent it is a total myth. The decision to rent versus buy is mainly just a financial decision.
And this may be a timely message as so many millennials and Generation Z find themselves unable to afford to buy a home. Prices, especially since the COVID-19 lockdowns of 2020-2021, have rocketed to record highs. Meanwhile, mortgage rates, which bottomed out around 2.5% back then, are above 6.5%. The combination is devastating. For many, homes seem unaffordable.
But when that is the case, renting isn't always an unfortunate necessity. It's often a positive choice. You can get more and better housing for less money. Your money may be better used, or invested, elsewhere.
Housing industry research shows that lately renting has often become a much better decision than buying.
The myth around home buying
The idea that homeownership is somehow a necessity, an essential step to building wealth, is mostly a myth.
Housing is overrated as an investment asset. For the past 50 years or more, U.S. home prices have risen by an average of about 1.4% a year in "real" terms, meaning on top of inflation. (That's using data from the S&P Cotality Case-Shiller National Home Price Index, the U.S. Census and the U.S. Federal Housing Finance Agency). For most of that time, you've done much better in stocks, bonds and gold. And that's even before deducting the extra costs related specifically to real estate like property taxes, condo fees, maintenance, insurance, sales commissions and so on.
And that "average" return figure masks a lot of variation. The median U.S. home price, adjusted for inflation, was lower in 1982 than it had been 15 years earlier in 1967. In 2011 it was lower than it had been in 1979, over 30 years earlier.
Over many decades, homeowners benefited handsomely from leverage, because they were able to borrow cheaply for 30 years at low fixed interest rates. But leverage only works if the return on the underlying asset exceeds the interest cost. It helped that, from 1982 to 2021, the rate on a 30-year mortgage collapsed from a peak of 18% to less than 3%.
When things go against you, leverage is a curse, not a blessing, as anyone who was on the wrong side of the housing crash nearly two decades ago knows. (Incidentally, using derivatives such as options, you can also invest in the stock market using inexpensive leverage - if you want to.)
If, as the research suggests, it is on average about $1,000 a month cheaper to rent than to buy in today's market, that means renting leaves you an extra $12,000 a year you can invest in stocks, bonds and so on.
If you are convinced that mortgage rates, currently around 6.7%, are going to collapse again, you don't have to buy a home to benefit. You can put your money in zero-coupon long-term Treasury bonds - there's even an ETF, ZROZ - and profit if and when that happens. You could even go further and gamble on high-risk interest-rate derivatives that would skyrocket in those circumstances.
Good luck with that.
Naturally, owning real estate allows you to live in the home without paying rent. This constitutes a tax-free invisible "income" stream, which the government sometimes likes to call "owner's equivalent rent." This is a valuable benefit, especially when it protects you against rent inflation. As housing costs, especially "owner's equivalent rent," make up the largest component of the official inflation calculations, the two often march hand in hand. Since 1970, official data show, average rents have risen 4.2% a year on average, slightly ahead of the CPI's 4.0%.
But, as with everything, the value of this benefit has to be weighed against the costs. Realtor.com reports that average U.S. rents have now declined for 35 consecutive months. (Realtor.com is operated by News Corp subsidiary Move Inc.; MarketWatch publisher Dow Jones is also a subsidiary of News Corp.). Landlords have been struggling with flat or falling rents in many markets. And owning a home doesn't protect you from inflation anyway. Your property taxes, insurance, maintenance and other expenses are apt to rise over time.
Meanwhile, if you really feel a need to have some real-estate exposure in your portfolio, you can always buy stock in residential real-estate investment trusts, or REITs, which own properties. Data from the National Association of Real Estate Investment Trusts show that, since the mid-1990s, the price of residential REITs has risen overall about the same amount as the price of homes.
Prices of REITs have come down in recent years. The two biggest such REITs, Equity Residential $(EQR)$ and AvalonBay $(AVB)$, are merging. Currently they have forecast dividend yields of about 4.4% and 4% respectively. Camden Property Trust $(CPT)$ has a 3.9% yield. (CEO Alexander Jessett, who bought nearly $2 million worth back in February, recently claimed the stock was a "screaming buy," though CEOs often say that) There are some ETFs, but none perfectly track the residential REIT stocks.
And if you don't think the REITs are a buy, you probably shouldn't worry about not being able to afford a home.
-Brett Arends
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