The American dream transforms
Homeownership, the American dream, right? Well, not so much.
It may have been up until about a decade ago when millions of U.S. homeowners lost their homes to foreclosure in the 2008 housing bubble collapse and subsequent recession. The trauma so many Americans experienced still haunts most people who were impacted, crushing the generations-old mindset that buying a home made good financial sense.
Even though the recession is rear view mirror stuff in 2018 and foreclosures and underwater mortgages have recovered in most markets, home seekers across generations are opting for rental housing in numbers that, for the first time in modern memory, has the rental market outpacing single-family home purchases according to the Urban Institute. At the top of the rental housing demand list are town homes and single-family rentals, which account for 35 percent of the country’s 44 million rental units—up 4 percent since 2006.
Crunching the numbers
The housing crisis is not solely to blame for the decline in demand for home buying.
While most Americans once considered home ownership the most economically sensible long-term investment choice, today purchasing a home is considered by many to be financially imprudent.
The idea of spending years paying thousands in interest on a mortgage simply doesn’t make sense financially . The myth of home ownership as an investment is just that—a myth. Most homeowners never gain the full tax benefits nor see enough appreciation to rank their home in the category of beneficial investment, although a home’s location can make a difference in the buy or rent judgment call.
The rising preference for rentals is led by Millennials, followed by Baby Boomers who are retiring at a rate of 10,000 per day. After leaving the workplace and learning to pare down to manage on a fixed income, boomers are happy to shed the family homes they purchased back in the 1970s and 80s and downsize not only their living spaces but the expense and responsibilities that go with owning and maintaining a house.
Building wealth and financial security outside of homeownership
For a growing number of people looking to make the best financial decision when it comes down to deciding between buying or renting a home, logic dictates that it's simply a matter of doing the math. Between 1946 and 2008, a majority of Americans presumed that home ownership was the number one investment goal to which everyone should aspire.
It was taken for granted that buying a home was an investment in the buyer's future, the crown jewel in a nest egg that made retirement the life achievement reward for 40-50 years spent in the workforce. During the years and decades spent maintaining the home, raising a family, and holding down jobs to keep it all running, homeowners enjoyed peace of mind in the knowledge that their real estate investment was building equity that would one day provide them with an income stream in retirement.
But it would take years for the homeowner's mortgage payments to begin chipping away at the principal owed.; mortgage payments paid down the interest balance first. Renting, on the other hand, made no sense from a financial security perspective since the landlord was the one building a nest egg on monthly rental payments. Most Americans bought into the presumption that home ownership was vital to establishing long-term financial security, motivating millions acting on blind faith to do whatever it took--scrimping saving, working 2-3 jobs--to buy a home. Today, instead of a home purchase many people see better long-term investment opportunities in sponsored retirement and health savings programs, 529 college savings programs, IRAs, and other lower-risk investment vehicles for building wealth and financial security.
While renters miss out on the benefits of the tax write-offs on mortgage interest, they’re often still ahead. Median income homeowners in 75 percent of major U.S. cities receive no federal tax benefits, nor will they see any meaningful appreciation in their home’s value, even decades after its purchase. Roughly 40 million households—more than half of current homeowners—purchased homes during time periods in which they would have been better off renting and investing their money elsewhere.
To decide whether renting or
buying a home is more beneficial for your family, a buy-or-rent calculator available free online can help clarify any uncertainty. The buy-or-rent formula is calculated as the ratio of home prices to annual rental rates in a specific market. For example, in a real estate market where average home values are $200,000, and rentals are available for $1,000 per month, using the formula $200,000 ÷ (12 x $1,000) determines the price-rent ratio to be 16.67.
Bottom line, If the rent-to-price ratio is 5 percent or less, you may be better off renting and investing the money you would have spent on a house in other investment vehicles that carry better long-term returns and are less susceptible to market volatility.
Another consideration that would-be home buyers should take into account are the added expenses that go with ownership. You’re looking at maintenance (roofs and furnaces wear out and need replacing, interior and exterior spaces need repairs and upkeep). Property taxes should be a major consideration as well. Communities that attract young families do so by investing in and building upon top-notch schools, fire stations, public spaces such as libraries, and other desirable perks paid for by property taxes that are likely going to rise steadily over the years.
Weighing the financial implications of buying versus renting
When weighing the financial implications of buying a home versus renting, keep in mind that there is a seemingly unlimited selection of housing options in the rental market; today’s rental homes often come fitted with smart technology, interiors sized and designed to fit every need, round-the-clock security if safety is a concern, and no financial anchor limiting your options. Renters can up and move as often as they wish (provided they abide by the terms of their lease) to find more suitable digs for a growing family, relocate if their job dictates, or just because the mood for a change strikes.
RentVest Property Management offers customer-centric property management services to property owners in Atlanta, Las Vegas, Dallas, Phoenix, Tucson, Reno, and Hawaii. To learn more about our full-service management benefits, visit the RentVest Property Management website.