So What?

Via Glen Reynolds, from Keith Jurow at Business Insider

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

When an author uses the word "threatens" to describe a trend, you know he doesn't like it.  While a home may be  a good place to put excess cash for some people, as a leveraged investment it is insane.  It is a dead asset, producing no cash flow or future value.  While the land under it may be a scarce asset, particularly in some areas with strict growth limits and zoning laws, the house itself is a depreciating asset as much as your car is (trust me, I just replaced an air conditioner and spent weeks repairing dry wall cracks).

Renting pays a lot of benefits, not the least of which is the mobility it adds to the labor market.  Individuals with leases are less tied to a certain spot, so have more flexibility to leave a given area to seek better opportunities elsewhere  (this actually triggers a thought I had not had before -- I wonder if government promotion of home ownership, particularly at the state and local level -- can be seen as a modern form of serfdom, with politicians attempting to tie people to the land so they cannot move and take their tax money elsewhere).

So home ownership is a fine option for many (I own a home and prefer that status in my present circumstances) but there is no law that says it has to be the norm or the default.  Many people have switched from whole life to term, from buying individual stocks to mutual funds, from defined benefit pensions to 401k's.  The way we achieve goals evolve over time, and there should be nothing surprising about a change in how people wish to access housing.  And certainly nothing in this trend which should occasion government intervention to prevent.


  1. delurking:

    Indeed. What, really, is the difference between renting, where you pay a flat fee to someone who is responsible for maintenance; and owning, where you have to arrange for the maintenance yourself? Comparing costs, I think it is only the tax advantages that make owning attractive. If you compare the costs of owning vs. renting identical abodes (in my area, at least), renting comes out ahead except for the mortgage interest deduction. Of course, the mortgage interest deduction so skews the market that it is nearly impossible to find single-family houses to rent.

  2. JDog:

    Well, one advantage of owning vs. leasing no matter the item (house, car, etc) is that you don't have a monthly payment after your own it. Rent will escalate over 30 years, but if you lock in a mortgage payment and don't move for 30 years, your payment will stay the same and eventually you won't have a payment at all.

  3. delurking:

    My calculation included the opportunity costs in each approach and used both historical rent increases and historical age-appropriate portfolio ROI. Remember, you get to invest your down-payment if you rent. After 30 years or returns, it is quite a lot of money. I calculated everything when deciding whether or not to buy in the middle of what was obviously a housing bubble, and the result was that the mortgage interest deduction was the deciding factor. Buying a more expensive place came out ahead after 5 years, even assuming no housing price appreciation. Without the mortgage interest deduction it wasn't close.

  4. James H:

    JDog, you're not quite correct, there are still property taxes that tend to increase.

    Why would any trend like this be "threatening"? For one person to rent a home it must be owned by someone else, correct?

  5. Uno Hu:

    The notion of "tying the serf to the land" is an interesting notion. I'm not saying it's correct, just interesting.

    My wise ole [sic] daddy told me a long time ago that "If a fella has his house and his car paid for, he's mighty hard to hem up in a corner and 'talk to'". He was right. Today we buy everything "on time" - house, car, boat, cycles and other toys, vacation cabin, etc. What this means is that it is MANY years of time payments before a person truly "owns" anything. The implication of this is that you have become a serf. It makes no difference what working conditions are or how onerous income taxes become, YOU MUST KEEP WORKING. If you don't keep turning that grindstone, YOU LOSE EVERYTHING YOU HAVE, because none of it is paid for till. . . .

    I do not believe this set of circumstances exists by serendipidy. I got my house and car paid for a long time ago!

    I can see November from my house!!

  6. JDog:

    Yeah, I realize there are other costs to owning a home besides the mortgage (maintenance, taxes, etc). I do think renting could be a good option, but its a nice thought to think your house might be paid off by retirement age.

    Perhaps they think its threatening because its a sign there is a shrinking percentage of the population who can truly afford all the costs of owning and maintaining property. Maybe its a sign of changing times and efficiency, like small farms being consolidated by larger ones. Maybe in the future, housing will only be cost effective for landlords, and not individual property owners. Maybe that's not a horrible thing, but it is quite different.

  7. T M Colon:

    Does any one ever really own their real estate? I mean, every year you have to pay property tax. And if you don't pony up the government takes your property from you. In effect you are renting from the government. Makes you wonder about the validity of the underlying principle behind property tax. Though it's been around so long, nobody does.

    Property tax is basically a fee to maintain possession of what is essentially a fixed asset you've paid for. Most people don't find this strange. But what if you applied the same principle to other classes of property? Say, furniture for instance. How would people feel about paying an annual furniture tax so they can keep their living room suite? One imagines they'd think that pretty wierd if not outrageous. Yet with land, they don't see a problem.

    Let's take it a step further, what if you applied the same principle to money. That's a type of property. How would folks react if the government taxed their savings at 2% a year? One might imagine mass protests. Yet with land, which is not necessarily generating any income or changing in value, nary a peep when the taxman takes his cut.

    Which makes you wonder, is property tax an outdated idea? Is it fair and valid? Why should we pay in perpetuity for the right to keep our own property?

  8. Dr. T:

    "It is a dead asset, producing no cash flow or future value."

    This is untrue, even when one considers property taxes. Every year I live in my home is a year in which I pay no rent. Property taxes and property maintenance costs are less than half the amount I would spend to rent a home or a large apartment, and none of the rentals would be as nice as my home on four acres of land. The difference between my total home costs and rental costs is money that I can spend now or invest, which gives home ownership a future value. (Note: The value obviously is less if one is paying a large mortgage, but in most markets it's still positive.)

  9. magilson:

    "Let’s take it a step further, what if you applied the same principle to money. That’s a type of property. How would folks react if the government taxed their savings at 2% a year? One might imagine mass protests. Yet with land, which is not necessarily generating any income or changing in value, nary a peep when the taxman takes his cut."

    Let's not joke about that. Certain economists have proposed this very thing to encourage spending. Not to mention a targeted inflation rate is, as I understand it, exactly the same thing.

  10. tomw:

    Locally, some are proposing ending property tax in favor of an increased sales tax. The county school tax is 3/4 of the property tax bill. Seems to me, they run a 'gold plated' school system locally. Their plans currently call for one new school a year for the foreseeable future. My take is they are planning based upon the past few 'fat' years instead of the lean years caused by the Obama Depression.
    As I just got old enough this year, next year I won't pay school property tax. Hah, they'll change the law and make sure to include everyone.

  11. caseyboy:

    Someone owns the rental home. Property tax is not avoided. The cost of maintenance is not avoided. These things are embedded in the rental rate, which is not deductible by the tenant, but is deductible by the landlord. Some people have a transient nature, while others seek stability. Owning or renting is a matter of personal choice. I think the only thing that has changed is whether you should consider your home to be a savings account. Recent history suggests not, but then owning stocks or mutual funds hasn't been a winner either the last 10 years. Assume that your home will not be a savings account and then make your decision.

  12. molloaggie:

    I think renting can be very beneficial in many cases. My parents are 10 years from retiring and are still paying off the mortgage of the very large family home they bought even though they're now empty-nesters. The house needs massive repairs probably equal to what they owe on the mortgage. If you calculate the future repairs with currents needs, then it's easy to just start renting a smaller place.

  13. richabbs:

    I don't claim to be an expert on the issue, but before we go pilloring the property tax here, I would suggest that a land value tax (assessed on the value of the land, rather than the improvements to the land, such as a home or business) may be the best/least harmful tax available. I believe Milton Friedman felt the same way. I would recommend Googling "Henry George" on this issue, rather than me make the case here, but the land value tax actually acts as an incentive to use the land in the most productive way, whereas all other tax mechanisms (i.e., sales and income taxes) act as a disincentive to production.

  14. Rick:

    Why would anyone own the rental units?
    Is it being suggested that govt own properties and we all rent from ourselves?

  15. J.S.Bridges:

    So much semi-information, so little clear reasoning...

    Look, folks, before you can assess intelligently which alternative you prefer - rent or own - you need to a) fully understand your own future intent and motivations and b) get a solid grasp on housing costs of various kinds.

    For instance: Property taxes, both local (city/county) and State - these taxes are generally voted upon, and are supposedly to cover costs of infrastructure (streets/local roads, public building maintenance, fire and police protection, schools, etc.) and administration (public salaries, record-keeping, etc.), plus a share of Federally imposed charges to the States. All part of keeping everyone's real estate from deteriorating in value (value of an asset either increases or decreases, regardless of rate of either - there is no "steady-state" in asset economics, as in so many other things in real life). Such taxes GENERALLY tend to rise over time - BUT, such increase is not, by any means, inevitable, and the level of taxation SHOULD always have some (at least) nominal relationship to value received by taxed-asset owners - if it does not, that's a problem for the asset owners to address jointly.

    Whether you rent or own, however, property taxes are a wash, a non-factor - everyone pays them on residential property, renters simply pay them as a "hidden" tax, in their rent payments, and (inadvertently and mostly unknowingly) allow the property owner to receive the deduction from State/Federal income taxes.

    Whether for renters or for owners, residential property must NEVER be primarily regarded as an "investment" or an income-PRODUCING asset - it's a place to live, people; it will ALWAYS cost more, in the end, than it should ever be expected to "return" in monetary terms. The decision to rent from some other owner or to own it yourself should intelligently be made based upon your preferred lifestyle and the economic means you are able to muster.

    Deciding to rent or to buy involves emotion, yes - we may THINK about finances, but we must FEEL comfortable with the set of alternative circumstances we choose. There are advantages - and DISadvantages - to each choice.

    And this is not something Gubmint should be directly influencing - but, it's also another area where politicos and bureaucraps (no, that's NOT a misspelling) just can't stop "messing with it"...

  16. perlhaqr:

    this actually triggers a thought I had not had before — I wonder if government promotion of home ownership, particularly at the state and local level — can be seen as a modern form of serfdom, with politicians attempting to tie people to the land so they cannot move and take their tax money elsewhere

    Creepy, and yet believable! Only it implies a level of forethought I just can't credit most government flunkies with.

    But you're certainly describing a real effect. My wife and I would like to move to a different city, but own a house we can't rent out for the cost of our mortgage, and can't sell for what we owe on it. Which pretty well means we're stuck.

  17. GB:

    Not counting financial benefits/negatives homeownership is still an overrated notion these days. Serfdom is a good way to put it. Stuck with the local job market and beholden to the selectboard and worse the local school district. Want school choice? rent a house. Besides if you need a permit to install a pool or garden shed do you really own anything?
    A bit too nomadic for me right now, I hear that the number of full time RVers are growing, not just retired folks but full time employed work from home/self employed folks.