“The House may change, but the Home does not.”
-Todd Strobel, Guide to Financial Peace Radio
The Own vs. Rent Debate: Shifting Assumptions
Should you own or rent your home? The debate is a long-standing one, and for many years, it has been assumed that the only reason you would NOT own your own home is that you can’t afford to. Yet that perspective may be changing. Owning a home may no longer be an essential part of the American dream. And according to a few thoughtful observers, that might not be a bad thing.
Here’s how Daniel Gross put it in a May 4, 2012, Wall Street Journal article titled “Renting Prosperity:
As we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they’re OK with renting it. Home ownership is on the decline, and home rentership is on the rise.
Really? How did this happen?
At least since the end of World War II, home ownership has held a prominent position in the American Dream. The American population migrated to suburbs in pursuit of it. Government agencies subsidized it, and lenders found ever-more creative ways to finance it.
New housing construction was a mainstay in the national economy, and owners had the expectation that not only were their homes their castles, but they were also good investments. For sixty years, residential real estate was a booming industry, and no one blinked as bigger and better developments sprawled across the country.
But beyond the temporary euphoria of factory workers becoming real estate tycoons by flipping unfinished homes in Arizona and condos on the Florida coast, changes were brewing.
Eager to maintain growth, lenders and builders expanded their markets by requiring less from prospective homeowners in the way of qualifications. The three formerly essential criteria – good credit, a down payment, and verifiable income, were reduced to two and even only one criteria for many loans. This resulted in homes that were built for, and sold to, individuals who couldn’t really afford them.
Around 2007, when fast-inflated home values (fueled by easy mortgages) and a sluggish economy down-sized many household budgets, struggling homeowners found no buyers to relieve their mortgage burdens. Foreclosure, once a last resort, became prevalent, and the flood of repossessed properties punished home values.
To stop the bleeding, lenders tightened their standards once again. The result: the pool of eligible homeowners in the U.S. shrunk dramatically, and housing values continued to fall.
Besides the financial issues, cultural changes have crept up as well. In a fluid economy where job opportunities move quickly across the country, the financial obligation connected to owning a home can be a hindrance to maximizing one’s income potential. For many households, a single-family residence just isn’t a good fit anymore.
Furthermore, aging baby boomers have discovered that while suburbs might be great places to raise children, they aren’t as well-suited to growing old. When you can no longer easily climb stairs, a two-story home becomes problematic. And when you can no longer drive, even a ranch house in a subdivision can be a lonely place.
Does Home Ownership Make Sense for You?
These changes don’t mean owning a home has become a bad idea. After all, people still need housing. But there may be some new considerations for home ownership. Even today, owning a residence may still make sense if any of the following factors apply:
1. You are confident you will be living in the same place 10 or more years. If you have employment stability, buying and remaining in the home for 10 to 20 years improves the chances for appreciation and building equity (generally enhanced through the leverage of a mortgage.)
2. The home has potential as a rental property. For instance, you might want to know if the home could be rented for at least your hard costs each month (mortgage, taxes, repairs, etc.) If you need to or wish to move, renting your current home can turn it into an income-producing asset and reduce any pressure to sell. As the pool of eligible homebuyers shrinks, the number of renters increases.
3. The home is a vacation property. Owning a vacation home combines the advantages of the two previous options. No matter where you live, a vacation home will probably be a property you’ll want to keep long-term. And there will likely be opportunities to rent, often on a short-term basis (which usually means higher rents). Imagine this new home ownership paradigm: renting a residence, owning a vacation home!
A shift away from home ownership could dramatically change other aspects of your financial life. There might be more funds available for investment, yet fewer deductions on your tax return. There may also be some great opportunities for investment. You might become a landlord, viewing residential real estate as a profitable piece of your investment portfolio rather than a social status symbol.
Have your views of home ownership changed along with the economy? We’d love to hear in the comments below!
Are you about to move? Thinking of buying or selling a home? Partners for Prosperity, Inc. (or your own “Prosperity Economics” advisor) can help you examine the numbers to see which option makes the most sense for your situation. Give us a call at (877) 889-3981 ext. 120.
Disclosure: Our content is meant for educational purposes only. While it’s our goal to help you learn about building a life of prosperity, we do not intend to provide financial advice. Please consult your financial, tax or legal advisor before making any investment or financial decisions.