Is Home Ownership Better than Renting? Yes and No
The on-going debate about the relative merits of buying a home as opposed to renting will not be settled by short-term comparisons but there are some additional considerations to add to the mix:
Speaking in favor of home ownership;
- Equity from Appreciation and Amortization – Owner’s equity can increase by both market appreciation and amortization (reduction) of loan amount.
- Tax Incentives – Three primary types of favorable tax treatment accrue to homeowners: Mortgage Interest Deduction, Property Tax Deduction, and Capital Gain Exclusion on Sale.
- Borrowing Power – As an asset, real estate can be used to borrow against, or as collateral for, this and other loans. Think – medical costs (augmentation and contouring are expensive and not likely to be covered by Obamacare), education expense (“she wants to live in a sorority, too?!”), weddings (other than shotgun), vacation to Monte Carlo (less if you do a staycation in Ballard). The list is endless really.
- Permanence / Roots – Owners have historically been more rooted to their communities than renters who are more transient. That permanence has intangible benefits that are difficult to measure but result in greater stability, stronger family ties and an increased willingness to engage in lively debate with your local officials, especially about property tax increases.
- Predictability – Market prices for both purchase and renting are subject to similar supply-and-demand forces that can raise or lower values unexpectedly, but ownership offers more foreseeable costs due to the fixed nature of most loans. Even adjustable rate (ARM) mortgages are now moving to longer fixed-rate initial periods as lenders attempt to compete in a tighter home finance market.
- Status / Community / Pride – Once upon a time, only white, male land owners could vote and participate in community affairs (Oh the good/bad old days…). Land ownership carried a certain privilege and status that was denied to others. This barrier to entry has evolved today to mean a clustering of similar economic levels and displaces the racial and gender discrimination of yore. It has taken over 200 years, and more than a few court judgments, to include all citizens equally in the opportunity to join the community fabric. Rather than diluting the benefits to the culture at large, universal opportunity for home ownership makes for better and stronger societal bonds. Home owners contribute to the financial health of local schools through property taxes, as well as support other essential services. There is no mistaking the pride and elevated status that is conferred on those that make the commitment to buy (literally and figuratively) into the community.
- Customization – If you ever wanted to build a miniature roller coaster, treehouse, or baseball diamond in your back yard (HOA Design Guidelines and local zoning code not withstanding), you can appreciate the right to customize your home and property as you see fit. Try convincing a landlord to allow that self-indulgence.
- Choice / Privacy – The freedom to walk naked in your garden on a Sunday morning or enjoy a good night’s sleep without the neighbors living upstairs treading not-so-lightly on your ceiling, is prized by most homeowners, even if they choose not to exercise their right to the naked part.
- Location – The location issue cuts both ways. Most rental properties are located near areas zoned for commercial and higher density activities and tend to be high energy (read that noisy). Most for-sale, single-family homes are in suburban, less kinetic locations but those on the market may not be in your favorite neighborhood or near your choice of coffee house. Visit Newhomelink.com where there are over 100 new construction neighborhoods in the Puget Sound market from which to choose, many near Starbucks.
And for the renter’s rebuttal;
- Possible Negative Appreciation – Those unfortunate buyers, who saw their homes in the Seattle area and across the country fall dramatically in 2008, know the perils of a cyclical market. The long view however tells a better story of positive appreciation of home values over the last 3 decades, if a bit inconsistent. There is a school of thought that holds the future of homeownership is less bright than prior decades owing to the retirement and downsizing of the Boomers and the indifference of the transient Millennials to home ownership, but don’t be surprised if single women and new immigrants ride to the rescue of the new home market, especially in tech-centered areas like Western Washington.
- Maintenance – Typically costing 3-4% of home value annually, home maintenance can be both a bother and an unwanted expense. Renters can rely on their landlords to fix a broken hot water heater, while owners need to be handy with the toolbox. One way to avoid this unpleasantness is to “Buy New”. Brand-new builder homes come with new everything – appliances, carpet, systems, plumbing fixtures – and you can take comfort in knowing you are (probably) the first to use your toilet. One and sometimes two-year blanket warranties are the norm in new construction. Most appliances and some fixtures carry longer warranties of three or more years and, in Washington, state law provides for additional coverage by the builder for certain home components up to six years.
- Opportunity Cost – Measured simply by the base yield of the broad stock market over the last 30 years, securities have beaten out the average home appreciation nationally by a factor of 3-to-1 (compare annualized 3.6% average national appreciation of a Single Family home over last 30 years against 11% annualized increase of the Standard & Poor’s 500). But as they say, all real estate is local – markets vary, and besides, who do you know that bought an S&P Index Fund and held it, undisturbed, for over 3 decades?
- Upfront Cash Requirement – Possibly the single-most difficult hurdle for prospective homeowners is the accumulation of the down payment and the cash to facilitate the purchase of a home, a problem renters do not have. A first home purchase can be especially challenging due to the lack of carry-over equity from an existing home. The cash required to buy a typical $500,000 house can easily run $60,000 to $120,000. Renter proponents win on this one. Bonus tip: Use Newhomelink’s Commission Share to enjoy a reduction of cost to purchase a new home from Seattle area builders.
- Limited Flexibility / Mobility – The flip side to the advantages of permanence and roots in the community cited above, home ownership limits one’s mobility and wanderlust. It’s hard to pull up stakes and follow your favorite band around the country in your RV when there is gardening to be done at home. There is the added advantage to renters of an easier division of assets in a divorce. Fighting over custody of the pet iguana is easier than deciding who gets to keep the house.
- Complacency / Lifestyle – An often overlooked aspect of home ownership is the tendency to grow too comfortable in your surroundings and fail to seek new and better designs and lifestyle improvements associated with updated floor plans and amenities. My 25-year-old home has low, 8-foot ceilings and smallish secondary bedrooms compared to the new homes I see today but I love my wood-burning fireplace and 3-car garage.
- Responsibility / Fixed target – Homeowners have to appreciate the overall mantle of responsibility that comes from owning a fixed asset like real estate. The buck stops with the owner while a renter can defer expense and liability to a landlord. For those concerned with legal and financial exposure from property tax increases, assessments or judgments, a home is a fixed target and not easily screened from sharks and creditors. The IRS knows where you live.
Many of the metrics used to compare and contrast the benefits of renting versus buying in the Seattle area point to a Seller’s / Renter’s Market currently. “Price-to-Rent” ratios hover near 20 (conventional wisdom says 21+ is the range to strongly favor renting ), “Rent Yield” percentages have dropped to well below 7% in some areas (still a higher number than returns on a Money Market account), also favoring renting, at least on paper. Home ownership is more about the long view and less about simply economics. Just as it can be said that “All Real Estate is Local”, it is equally true that “All Real Estate is Personal”. Homes are ever an emotional purchase and factoring the dozens of elements outlined above, will continue to be more subjective and less objective. Besides, the real determinant of the home decision, the one factor that has veto power above all others, is the opinion of the woman in the household. Builders and landlords take note.
Questions or Comments about this article contact Steven Jewett at Newhomelink.com