Home Ownership: American Dream or Nightmare?

The Wall Street Journal makes a case for a renter society:

For most Americans, until the recent past, home ownership was a dream and the pile of rent receipts was the reality. From 1900, when the census first started gathering data on home ownership, through 1940, fewer than half of all Americans owned their own homes. Home ownership rates actually fell in three of the first four decades of the 20th century. But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes. Among whites, more than 75% are homeowners today.

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

It wasn't until government stepped into the housing market, during that extraordinary moment of the Great Depression, that tenancy began its long downward spiral. Before the Crash, government played a minuscule role in housing Americans, other than building barracks and constructing temporary housing during wartime and, in a little noticed provision in the 1913 federal tax code, allowing for the deduction of home mortgage interest payments.

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words "keep out of debt" or "pay as you go" appeared in countless advice books. As the YMCA told its young charges, "If you can't pay, don't buy. Go without. Keep on going without." Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn't lose its sweetness because someone else held the title

Mrs. Hommes and I have a mortgage on a house. Emotionally, we both like the house, the neighborhood, the history, and share an optimism about the home's possibilities. Where we disagree is that I, in retrospect, look at our decision to purchase the house, or any house for that matter, as a hasty, if not mistaken, financial decision.

Don't get me wrong. We are (thankfully) able to handle the finances, and prices in our area seem to be holding up remarkably well in the current environment. I even think in the long run we may benefit. Still, I confess that I was drawn in by the lure of "ownership" without properly weighing the benefits, consequences, and timing of such an important decision. We basically bought a house because we assumed that's what newlyweds were supposed to do.

Helping me to realize my foolishness was Mr. Financial Doom himself, Peter Schiff. Specifically, it was a speech he gave last year for the Austrian Scholars Conference in which he made a very important and foundational point about real estate that is all too often not understood - real estate is a function of rents! The transcript from the speech can be a little difficult to follow because of Schiff's erratic style, but he makes the point well through heavy use of example and sarcasm:

During the real-estate bubble, I remember, I was renting houses — and I'm still renting my house now in Connecticut — and I would go and I would go to houses for rent.

And I remember one time I went and there was a house for rent. I looked at it and the realtor was there. And, apparently, the person who was renting it out was an investor who just bought the place.

And I asked them what was the rent. I forget what it was. Maybe it was $4,000 a month, whatever it was for this place. And I knew. I said, "Well, what'd the guy pay for this? What'd he pay?" I said, "Well, how could he make any money renting it out to me? Isn't this going to lose money? Doesn't he have negative cash flow?"

He said, "Well, yeah, he loses a couple thousand dollars a month." And I said to him, "But you recommended this as an investment?" He said, "Yeah."

"But why would you recommend, as an investment property, a property that has a negative cash flow? Why would you have him buy it?"

And he said, "Well, you don't understand, this property's going to appreciate. This property could double in the next couple years."

And I said, "Why? Why would it double? You can't even cash flow it positive at the price it's at now. How's it going to go up in value?"

And I said, "Real estate is a function of rents." And then the guy said to me — same thing — he said, "You don't understand real estate." He was telling me that rents don't matter to real estate.

...

I did the same thing, when I rented my apartment. After I got divorced, I was renting an apartment in Stamford, and — beautiful apartment, right on the water. I had my boat there. Beautiful views of the Sound. Right on the corner.

Great unit, beautiful building. I had a concierge. It had a pool; it had covered parking; it was a security building; it had racquetball courts, had a gym with a trainer on staff; a lot of amenities.

Right next door, there were maybe 20-year-old townhomes for sale. And I went to one of the open houses just for kicks.

And there was a unit on sale, whatever they wanted, five or six hundred thousand dollars for this unit, that was about the same square footage as what I was renting, but it had no view of the water; it was dark, it was old, there was no security; it had none of the amenities. Yet the property taxes and maintenance fees alone were like a thousand dollars a month.

And by the time I would have paid the mortgage, if that's how I financed it, I would have been spending more money per month to live in one of these little places than this really nice apartment that I was renting, right next door.

And I asked the realtor, I said, "Why would anybody buy this place? You can just rent right next door. There's more units available; I know, I just rented." And the lady said to me, "Well, but when you rent, when you move out, you're not going to have any equity."

I said, "Well, what do you mean?" She says, "Well, when you buy this property, then it appreciates, and then you can sell it when you move out and you make money."

And I said, "Well, why the hell should it appreciate? Didn't you understand? It's already overpriced; you can rent right next door. Why should it go up?" And she said, "Well, that's how real estate works."

I said, "So, you mean the way real estate works is I have to sacrifice; I have to turn down the opportunity to live in a really nice place; I live in this dump for a while and because I did that, I make money. And somebody else is going to come to me a year or two from now and overpay by even more and say, 'I don't want to live in that nice place next door, I'd rather pay more to live here because this is going to appreciate'."

And they totally forgot what real estate meant. Real estate's a place to live. But everybody thought it was going to go up, so they were all crazed.

After thinking about this a while, I took a look at the Hommes budget and calculated how much we paid in interest, property taxes, home insurance, maintenance, and oh yeah, let's not forget that minuscule amount that actually goes to principle, and it started to sink in. Either (a) We will be making these payments for the next 20 or so years (give or take), at which point we will be the proud owners of an 80 year old house, or (b) we will move at some point and be fortunate to recapture a small percentage (especially after all fees and commission) of all the payments made.

Please forgive my pessimism. I do love my house. BUT in a society that has the average family moving every 5-6 years, what are the chances we will stay in the same place for the length it takes to pay the mortgage and then longer? And how much major work and updating will it require along the way?

Doing the math is hard, especially because of the complication of taxes and incentives, but it seems to work out in most cases that by renting modestly, and then squirreling away all the money that would have gone to the taxes, maintenance, commissions/fees, etc., a disciplined couple can save enough money to retire earlier that they otherwise would have, and pay cash for a house wherever they want to grow old and die.

Sure this takes away the possibility of winning the real estate lottery and owning a property that appreciates exponentially, BUT by renting provides a lot of flexibility, requires a lot less responsibility, and someone else pays for the new water heater when the old one gos kaput.

Renting may indeed be a sensible and more low-risk path to the American dream.