Like marriage and children, owning a home is one of those milestones that defines a good, wholesome, American adult. If you don’t do it, it’s one of those things that you’ll have to explain all the time. Why aren’t you married yet? Why are you a vegetarian? Why don’t you own your home? We fetishize homeownership.
There is no denying that there can be strong advantages to owing a home. A paid off home provides financial security in retirement. There are valuable tax incentives, and in the long term, a home is a reasonably safe place to protect your savings from inflation. For the less disciplined, it can also be a means of enforced savings. Putting aside these practical considerations, there is pride of ownership. It’s just nicer to own your space.
Nonetheless, owning a home is not always a sensible financial choice. In exploring this idea, it’s important to clarify the term “homeowner”. Few people actually “own a home”. Most “homeowners” are really “mortgagers”: parties to a legal contract whereby they can live in a home as long as they make regular payments to a lender. Mortgagers also have other expenses such as maintenance, insurance and property taxes. On the positive side, mortgagers earn some tax breaks. If a mortgager wishes to move, they must find another mortgager for the home. Depending on the market, this transaction will result in a gain or a loss, and in all cases will involve fees paid to real estate professionals to complete the transaction.
Similarly, renters are parties to a legal contract whereby they can live in a home as long as they make regular rent payments. Whatever they don’t pay in rent they can administer any way they want, including by saving and investing. Renters have no tax or maintenance to worry about, nor do they get tax breaks. If a renter wishes to get out of the legal contract, they must simply tell the landlord as stipulated in the rental agreement.
Viewed in this way, mortgaging and renting are just alternate ways of determining cash flows and making investment decisions. Mortgagers pay interest to the lender, renters pay rent to the landlord. Mortgagers put their savings toward principal. Renters, may save nothing at all or may save and invest aggressively. Renters pay no maintenance, insurance or tax for the property, nor do they get tax breaks associated with mortgaging. Renters have more flexibility to move on a moment’s notice. Mortgagers are tied into their property, especially if they have borrowed a large amount and the market is down.
Which option is better depends on many factors: relative property and rental prices, interest rates, expected appreciation in housing prices and yields in alternative investments, need for flexibility, tax breaks, expected maintenance, how much “pride of ownership” is worth, etc. All told, it is true that mortgaging is better in many cases (see here or here).
The problem is that it is not better in all cases, yet there is a subtle, pervasive pressure to buy, buy, buy. As just one example, consider how, even though it’s impolite to ask about others’ finances, it’s still perfectly normal to ask an acquaintance if they own or rent (and to express disinterest if the answer is “rent”). Pressures like these drive people to astronomic levels of silliness. Even in inflated markets in which the benefits of renting are far greater, we still see people tripping over themselves to outbid the other, while leveraging themselves to the hilt to do so. Put simply, people are competing fiercely to overpay for something that few of them can afford.
If this article is unromantic, if it kills the magic and excitement that surrounds buying a new home, then it’s been successful. Remind yourself that there are hundreds of thousands of dollars on the line, that emotion can do a great job clouding judgment, that a fool and his money are soon parted, and that no matter how extravagant your house, if the bank owns it, you’re not wealthy.