Let's Stop Thinking of Renters as Losers

On Monday, I wrote about my impending move from my L.A. apartment to a duplex with a yard.  I talked about how I wasn’t crazy about the process of moving (who is?), but  I really didn’t mind renting, and, in fact, there were things I liked about it, like the flexibility, simplicity and economy.

for-rent-photo.jpgTo my surprise, I received two negative comments on my post.  One was from the publisher of a real estate investors’ magazine, who accused me of being “negative on real estate.” The other expressed her disdain of renting — the exact quote was “Renting sucks” — and doubted that I was sincere when I said I didn’t mind renting.

I’m not negative on real estate per se; as I’ve posted before, I’ve owned six homes. But I’ll tell you what I am negative on:  the message that’s been pounded into us since birth that we all should own homes. 

I have to give the real estate industry credit.  Its relentless marketing campaign is has definitely worked on the American public.  Much like the DeBeers diamond people told us for decades that men were losers if they didn’t spend two months’ salary on an engagement ring, and likened the size of a diamond to the depth of a man’s love, the real estate industry has made us believe that everyone should aspire to homeownership, and that renting is throwing money away. 

Fellow Redfin blogger Tim Hebb also commented on my post, referencing this New York Times opinion piece that appeared Sunday. Entitled “Home Not-So-Sweet Home.” the column echoed points that I made in my post, such as the unemployment-homeownership connection.

The impetus for the column was President Bush’s 2002 “Homeownership Challenge,” a set of initiatives aimed at increasing homeownership in America. 

Oops. While homeownership rose as the housing bubble inflated, temporarily giving Mr. Bush something to boast about, it plunged — especially for African-Americans — when the bubble popped. Today, the percentage of American families owning their own homes is no higher than it was six years ago, and it’s a good bet that by the time Mr. Bush leaves the White House homeownership will be lower than it was when he moved in.

The writer, Paul Krugman, goes on to question why everyone — politicians, policymakers, and citizens – has bought into the notion that homeownership should be everyone’s goal.

The belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own.

In effect, U.S. policy is based on the premise that everyone should be a homeowner. But here’s the thing: There are some real disadvantages to homeownership.

Some of those disadvantages should be obvious, given what’s happened over the last several years.

Americans, aided by their government, have completely bought into the idea that homeowning is superior to renting. People take on mountains of debt and pay far more in mortgage payments then they’d pay for rent, just to be able to say they’re owners (when, in fact, the only thing they really own is a giant obligation to the bank).

It’s time for Americans to stop worrying about what others think and do what makes sense for their financial and job circumstances. Sometimes homeownership makes sense; other times, renting is the better avenue.  Homeowning is not one-size-fits-all. 

Recent Redfin posts:
Rent vs. Buy Near the Glendale Galleria 
Here’s One of Jeff Lewis’ New Flips
‘Don’t Need Air Conditioning’? Don’t Believe It!

  • Alex

    The advantages of owning a home are based on basic econ 101. A young person, or couple, buys a home in their 20′s when they are at their highest wage earning potential. They continue to earn high incomes as they progress through their careers, paying down their mortage. The original mortage was for 30 years, to coincide with the age most people retired. Their income then dropped but they no longer had to pay for what most people assume is 33% of their monthly income. They were able to enjoy their later years without having the burden of a house payment, as well as very low taxes. Now take a renter. A renter pays an amount each month, month, after month, after month, never doing anything but helping the landlord pay for the real estate. Each month the rent goes up; and each year that goes by the risk of being unemployed increases. Either through illness, life circumstances such as divorce, being laid off and having to find a new job, children being born and wanting to stay home, etc. The rent payments just keep going up, and up, and up. Eventually, the income will stop and the rent will continue to go up, and up. The renter has no choice but to “move” which usually is because they can’t afford to stay and look for a cheaper, place in a run down, or dangerous place. Thank of the old people you know. There are many old renters living in studio/one bedroom dumps or have been forced to move in with their adult children. The exception are those who in their 60s or 70s who SELL THEIR HOUSE and use the proceeds to live in an assisted living facility or rent in a retirement community. I agree that renting is for short sighted people or writers who work sporactically and can’t accumulate a down payment and qualify for a loan.

  • King Bob

    Wow, Alex, you’re a hateful little person aren’t you?

    Right now in Los Angeles there are very few situations where it makes sense to buy. And only 30% of the people who live here can afford any house to buy at all. Those who have bought in the last few years are falling like flies, losing everything or at least their homes.

    You sound like an out of work real estate or loan officer pro to me.

  • Dillon

    Alex, I agree with everything you said. Building equity long term is definitely the “no brainer” way to achieve financial stability long-term into retirement.

    However, the problem is that the way we work is different now. It used to be that one would settle into an employer/career by the late 20′s or mid 30′s, and then work at that job ’til retirement. Once you buy a home, you don’t expect to move. That’s a main assumption of the 30-year fixed-rate mortgage.

    Nowdays, few people work in the same career their whole lives, let alone for the same employer. People have to move to where they can find new jobs. Unfortunately, for the home owner, the time they have to sell their home and move for a new job also tends to coincide with when real estate prices are low, because both events are caused by the same problem, an economic downturn. A good example is Detroit, and the rustbelt in general. The same thing happened in Texas when the oil jobs disappeared, and in L.A. when the defense industry closed down. In these cases, many those who own lost not only any equity they may have gained, but their down payment as well.

    However, renting vs. owning is really irrelevant in terms of the Big Picture, which is whether or not people have the financial knowledge and foresight to build long-term wealth for retirement. For owners, they have to refrain from using their equity as an ATM, and pay down the mortgage as quickly as possible, hopefully before 30 years. For renters, they have to put away the money saved through renting and invest it wisely for long-term growth. For both, they all have to build a substantial emergency fund to weather any storms.

    In the end, both owners and renters can come out ahead in 30 years. It has little to do with owning vs. renting. What’s needed is financial discipline.

  • Marcy

    Who lives in a place where the rent goes up every month? I rented a 3-bedroom house for 12 years, at $895 per month. That was through the bubble, as well. Allowed us to sock away a fantastic down-payment by taking what we saved NOT having a mortgage and putting it away to earn interest. We also were able to start IRAs and 401k, and keep putting money into those. A mortgage on a house we could afford (about $175k, which would have put us in the worst, most crime-ridden section of town), would have taken away all of that. Except, we wouldn’t have been able to get a loan, because we had no down. If we’d have taken a sub-prime, no money down or ARM, we’d be in the same straits as everyone else who bought into the BS.

    The risks associated with a monthly payment – renting or ownership – are exactly the same. Losing one’s job, having to take a lower-paying job, health issues, etc. Buying doesn’t eliminate those things, and you have far more to lose if you can’t make the mortgage payment. If you can’t afford to buy, (and buying is MUCH more expensive than renting) then renting makes perfect sense. The average mortgage payment is about twice the average rent, and that’s not counting home owner’s insurance, mortgage insurance, property tax, etc.

    That attitude of “I must own a home even though I can’t afford one” is exactly what got many folks into their current situations. Of course, realtors and agents will try and convince people who make 50k a year, that they can afford a 650k house. Means nothing to them when the monthlies fall behind and the home gets foreclosed upon. They already got their 3%.

    There is nothing shameful about renting. There IS something shameful about lying on loan papers in order to get oneself into a place you can’t afford, relying upon some sort of magical influence to pay the bills.

    People in their TWENTIES are the highest wage earning potential? Is this a Twilight Zone episode? That is just about the funniest thing I have heard today. I wonder if it was ever true, even in 1940. Life and experience shows us that people in their thirties and up, earn far more. The average person runs through various jobs in their teens and twenties, and eventually settles into something in their thirties. IF they are lucky and don’t get downsized, they accumulate raises year by year and increase their earnings as they go and head toward retirement.

    I don’t know a single person in their twenties who is doing much more than barely scraping by month to month. Even if they managed to lie their way into a loan, they definitely have nothing to use as a down payment, and couldn’t afford the loan payments anyhow even if they got Mom and Dad to front them 20% of purchase price.

    Alex, your comment just seems bizarre. Did I miss something? Were you quoting someone else?

  • http://www.personalrealestateinvestormag.com Andrew Waite

    Cindy: No insult meant but some people are doomed to rent. As Reverend Ike used to say, “Help the poor, don’t be one!”

    Getting on the property ladder is the surest way to asset stability known to man. If read any of the philosophers who talk about social stability, the first step is a commitment to owning a home. People take on a different attitude and the community at large becomes important, not just the chattels in their apartment.

    The NYT article was clearly on the editorial agenda to bash the Bush administration. It was written in the negative. Now invert it and read it from the positive. The homeownership market expanded from 65% at the launch of the Bush Administration’s homeownership to 69.1%. This was the high point year or so ago. Homeownership has contracted just short of 1.75% meaning there are more people renting than a year ago. But here is what is ignored: The net gain of 2.75% and many millions of new homeowners that bought wisely and are on their way to growing personal assets.

    Cindy you probably read OFHEO, NAR, and Case/Shiller data and find justification in your position. Could this data be quite possible presented to justify a traded versus non-traded asset positiuon. Do you think that Standard & Poor/Case Shiller Index serves the stock market market argument in proving real estate is a “bad investment” so give us your retirement funds?

    Did you ever notice that the stock market mavens ALWAYS IGNORE cash-on-cash returns from any real estate holding versus paid up capital value and appreciation. Do the numbers and there is zero argument for renting, other than enriching a landlord.

    Quite frankly (and sadly) thank goodness for people like you that argue that renters are better off. It is no accident landlords are thrilled with the market and rents are up.

    Cindy I am m so sorry to burst your bubble.

    Read our July-August issue of Personal Real Estate Investor where we point out how the real estate industry has been hijacked by misguided economists with a need to reflect non-traded housing data like its speculative day traded information. Nothing could be further from the truth. These are America’s homes not Wall Streets trading assets, though Angelo and friends nearly pulled it off.

    Best: Andrew Waite

  • Alex

    I actually love Renters. I own my own home, and rent out 2 duplexes and 2 single family homes. By the way, I did buy one of them in 2005 and I am not underwater in any way. All of them are rented all the time. The renters are paying each month for an asset I will own forever. I spend my time traveling while the rent checks show up in my mail box each month. Since the real estate market has created even more renters I can raise my rental rates – basic supply and demand.

  • http://www.los-angeles-real-estate-blog.com PhyllisHarb

    Just out of curiousity, what city are you moving to?

  • mgmtmom

    Cindy: First of all, you’re NOT a loser. Owning a home is not for everyone. Just like having kids is not for everyone. I appreciate your energetic blogs and your dedication to researching this crazy market and keeping us informed.

    We’ve been holding off on purchasing a second home for our college students because of market volatility. I find it interesting that California is one of the few places having this problem in the extreme. Texas does not have high prices or unrealistic costs related to THEIR housing industry. Cost for construction are now 3 times what they were before the Iraq war, but ONLY in California. Do you see a pattern here? I’m just wondering when it will come back to reality.

  • Hongyu

    I am sorry to say, but Andrew you seemed to be very biased. When you use words like “do the numbers”, and then ‘zero argument for renting”, it makes your post like irrational burst of anger than a rational analysis that many people appreciated. I think I don’t need a Ph.D. degree in science to point this out, even though I do have one.

  • xtine

    My dear – his name is Paul KRugman.
    Not Klugman.

    Listen to all these guys rant!

    They are speaking in their own self interest.

    Each individual knows their affordability threshhold. If people have to be TOLD what they can afford, I guarantee you they cannot afford it.

  • Kristen

    Alex,

    When you can afford it, buying is a great way to build your assets, I agree.

    But there are times when renting is smarter than buying. The bubble especially, has been one of those times.

    It makes sense to rent when house prices are spiraling downwards, as they are now. It also makes sense to rent when house prices are very high and out of proportion with the actual value of the house – for example, if you were to buy a house, but the market wouldn’t support you renting it out at a price near what the monthly mortgage is – obviously, you wouldn’t buy that house.

    At other times – probably after this bubble finishes correcting – buying a house will be a great investment, so long as you’re only buying the amount of house you can afford (and waiting to upgrade out of a starter home until you can afford higher payments).

    The problem with buying a home is that in troubled scenarios, where the value of the house drops rapidly from what you paid for it, you actually end up losing more money than if you were renting – because you’ll have not only lost the little bit more than rent that you paid per month, but you also lose the value of your down payment.

    A smart buyer knows to rent when its not a good time to buy – this doesn’t make them a loser.

  • Janet

    Hey Alex–Haven’t you ever heard the expression “Don’t sh@# where you eat”. According to you those “short sighted people” are paying your bills. Why the sour grapes real estate mogal?

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    WOW, you guys! I am sitting in my new rental duplex, freshly hooked up to my new ATT/Yahoo DSL, and when I checked my email the first thing I saw is all the commentary from my post this morning. Very cool! Great comments and lots of well-thought-out points of view — well, except the one from Andrew Waite, the publisher of Real Estate Investor Magazine, whose comment on my Monday post about moving prompted today’s post.

    Andrew, do you sound like an elitist, or what? “Doomed to rent?” Did you read ANYTHING I wrote? The condescending, agenda-laden tone of your posts is just a little wacky. However, please keep posting. I am very entertained!

    I agree with everyone who said that ownership works best if you live in the house for a long time, build (not spend) equity, and pay it off. That’s what my sister is doing. She will live in her house forever. However, she is unusual. Most people want and need to be able to move around. This benefits people in the RE industry, who get paid every time someone moves, but it can get expensive for the individuals.

    There are also intangible benefits to owning — you have more control, you can do what you want to the place, and you won’t get thrown out by a landlord who suddenly decides to sell.

    All this is sort of irrelevant to me right now, because I cannot afford to buy anything in the area I live in (just south of Wilshire and east of La Brea). However, for a fraction of what it would cost to buy, I can enjoy all the benefits of this lovely neighborhood while we sit on our money and wait for the market to stabilize.

  • mark

    I pay less in rent $720/month than most homeowners in my area (Los Angeles, 90028) pay in poperty tax alone. Plus I don’t pay water, trash, or for repairs to my unit.

    Don’t get me wrong I’d like to have a house, a yard, a dog, and my own washer/dryer. It’s just that buying a house now or in the last few years was just throwing money away. The prices are coming down and I’m waiting for them to be a little more realistic. In the mean time, I have zero debt and have managed to save up quite a bit for a down payment.
    = mark =

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Thanks for your comment, Mark. I will add that in my new rental, I have a nice yard for my two Labradors. I found that landlords don’t mind your pets so long as you have good credit.

  • http://www.los-angeles-real-estate-blog.com Phyllis Harb

    Mark, you are well on your way to future home ownership, no debt AND savings – great! check you credit report and make sure your credit history is accurate – lower interest rates go to those with the best/highest FICO scores. The best time to work on your credit is before you need to – no last minute panic. AND good luck in future endeavors.

  • Rick

    Cindy, I agree with you completely. It’s amazing to hear people keep up the blather about what a great deal owning a home is. So much of this is from people who don’t want you to see that the Emperor has no clothes. I have a Masters degree in Real Estate from Johns Hopkins, I’ve owned three homes and quite gladly rent right now while the interest on my equity is almost covering my rent every month. I wouldn’t buy a home in LA even if prices dropped another 10%, it’s just not a good investment at this time. Even if you don’t look at the expense and headache of the constant maintenance, realtor’s fees, or the cost to furnish, look at how it limits your career opportunities. If you own a home now, you’ve really limited your career options to roughly 45 miles from your house. I’m free to pursue options anywhere in the country, including cities with better economies than LA. The homeowner is stuck, selling in this market would be painful. They could rent it out and watch it’s value continue to decline and deal with the headaches of being a landlord but that sounds like a bad lifestyle and financial choice to me. There are lots of valid reasons to rent and right now there are lots of really smart well-off renters who are getting the last laugh at homeowners who are stuck with declining assets and limited options besides waiting it out. Don’t get me wrong, I do think homeownership has benefits, studies show that homeowners are happier than renters, and if the time is right in your life and your job, it may bring you happiness. But realize that the new homeowner should expect to hold for at least five years to break even and be willing to forgo any better career opportunities that may come along. My advice: enjoy the carefree life of renting and don’t believe the people who tell you it doesn’t make financial sense, I wouldn’t trade places with an LA homeowner right now for anything. PS: I study real estate trends for a living.

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Mark, thanks for your comment. I can see why, all things being equal, homeowners are happier: You control your own destiny. Unfortunately, as you point out, all things AREN’T equal at the moment. Housing and gas prices are out of control. It make sense to live close to work and rent a place you could never afford to buy for a fraction of what owners pay until things get more reasonable out there.

  • Paul B. Cutler

    Don’t have time to read the thread, but I must say I am locked in a struggle with my wife about renting vs owning. I have never believed in “the American Dream”, a house, a car, the 3 kids. It seems like a version of wage slavery to me, but what do I know, I’m a crazy ex-punk rocker with a penchant for writing peculiar posts on boards I don’t frequent.

    Stay free.

    pbc

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Hey, Paul, since you don’t frequent this blog, you probably won’t read this, but I laughed out loud at your cool post. Owning a home is a bit like wage slavery, and I speak from experience. When you’ve got that monthly obligation to meet, it tends to lock you into a certain work and income level. It’s not for everyone. I hope you and your wife reach an agreement!

  • Ron

    Renting has been berry berry good to me over the last 2+ years. We sold our home for $432,000 in Jan of 06 to a family who was unfortunately foreclosed upon less than a year later. Now, the same model home down the street is listed for $180,000.

    We currently rent a larger home in a nicer area that was purchased in 06 for $600,000. We pay $2500 per month and could probably pay less if we didn’t have to worry about finding a place that would accept our German Shepherd.

    Renting has drawbacks (like the dog situation) but all I had to do to make/save several hundreds of thousands of dollars was to live in a nicer house closer to work for a little while. If that makes me a loser than so be it.

    I do think that in the majority of situations buying a home is the wiser financial decision but 2004-2008 was an obvious exception.

  • http://www.geniusmonkeys.com Patrick

    And Cindy, Paul is a bonafide rock star (antirock star?) as one of the founders of a band called .45 Grave and a couple of really cool albums by Dream Syndicate.

    Sorry, I’m a music geek.