Buying a Home Isn't Bad for You
The always provocative Josh Barro took to the pages of the Upshot a few days ago to ponder the irrationality of buying a house versus renting:
Imagine if we bought food the way we buy housing.
Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That's basically what buying a home is: securing the use of a residence, indefinitely.
Buying that stream of future food would be expensive, so you'd get a loan from a bank to cover most of the cost, secured by your interest in those future chicken breasts. And if for some reason you didn't need your chicken contract anymore (you became a vegetarian or you moved out of the delivery range of your chicken supplier), you could sell the contract at the current market price.
With this system, perverse things would begin to happen. Normally, consumers prefer that food prices be low. But this practice would create a large constituency of foodowners, who would benefit from rising food prices: If you bought your chicken contract for $20,000, and rising chicken prices pushed its value to $40,000, you'd have a nice windfall.
It's an interesting analogy. Of course, it also applies to cars, washer dryers, boats and so forth. Does it always make more sense to rent?
Later in the piece, Josh himself points out that there are good reasons to buy:
Owning offers people a sense of security, as well as the freedom to customize their residences as they see fit. Those are perfectly good reasons to buy a home as a consumption good; it is not a justification for homes (or chicken breasts) as investments.
But are these the only reasons? Not in the market for cars, appliances and so forth; renting is the most expensive way to access these goods.
The problem with comparing different classes of goods, such as food, housing and consumer durables, is that they have very different characteristics. Consider depreciation: A house takes decades to depreciate to a value of zero (and the land under it may actually appreciate instead); a car takes years; food generally takes weeks -- less if you actually eat it. Or resale: The resale value of used food is generally zero, and in fact, we have to pay to dispose of it. The resale value of a car is a lot less than you paid. But the resale value of a house can be lower or higher than your original price.
For all that, we do have futures markets in food, as well as entities interested in driving up the price of those futures. If you have restaurant gift cards in your possession, you too are engaged in this sort of speculation, in a small way.
But that doesn't make buying rather than renting a house rational. As a former advocate of the permanent-renter lifestyle, it seems worth comparing the costs and benefits.
First the costs, financially:
1. Maintenance. Most new home buyers forget that stuff is going to happen to their house. At the moment, for example, we have a gutter that likes to overflow and pour water through our kitchen window despite my assiduous attempts to keep it clear, a bathtub with a malfunctioning overflow valve, and a bathroom window that remains broken after an unfortunate dinner party fire and a window guy who decided to decamp for North Africa rather than to show up, as promised, to fix it.
All of this stuff costs money, and I haven't even touched on rotting fences, elderly roofs and what you have to do when the pipes freeze. (Answer: Just hand over your wallet and beg them to be kind.) You can no longer just phone up the landlord and angrily inform him that he'd better do something, because oops! You're the landlord.
2. Employment. A recent paper suggested that homeownership raises unemployment. Certainly, several papers during the Great Recession indicated that people who were underwater on their homes had a harder time finding jobs, because if you're underwater on your house, you can't move to get a new job.
3. Transaction costs. Buying or selling a house is super-expensive, something that new homeowners often forget. This is one reason that people find it hard to sell to move to a new job.
4. Commuting time. Similarly, even if you do get a new job, you are more likely to lengthen your commute rather than move closer to work if you own a home. This not only impinges on your quality of life, but also adds to depreciation of your car and costs more in gas -- or, if you take mass transit, may increase your fare.
5. Downside risk. If your rental home loses value, you can ask for a rent reduction. If the home you own loses value, well, you just lost a bunch of money.
Buying looks pretty terrible, doesn't it? Well, let's look at the risks of renting:
1. Renting also has transaction costs. When you're 24 and you have to move, you spend a weekend packing your stuff up in boxes and rent a U-Haul. You "pay" your "movers" in beer and pizza. Over time, however, you accumulate stuff, and your friends accumulate busy lives, along with injuries that make them reluctant to carry your couch up four flights of stairs. Now you have to pay movers and take days off of work to unpack all your stuff. And you have all the old transaction costs: getting the Internet hooked up, putting the electricity in your name and so forth. As your responsibilities pile up in your 30s, this starts to seem less and less worth it.
Moving also requires buying new stuff, such as a replacement for the couch that no longer fits in your new space. The more stuff you acquire, the higher these costs go.
2. Housing price volatility. It's true that we accepted a big downside risk when we bought a house in 2010 (I wrote as much at the time). But we didn't care, because we locked in our housing cost, something that was very valuable to two journalists in an unstable industry. We wouldn't have to realize the loss for decades. On the other hand, your landlord gets to raise the rent once a year -- and there's a ratchet effect: He's more likely to send notice of an increase than you are to hassle for a decrease.
As any economist will tell you, risk is itself a financial cost: You don't want to know just the expected value of an asset, but also how much its cash flows vary from year to year. Home prices have their own tendency to swing, of course -- but it's a lot easier to avoid losses by timing a sale.
3. As you grow older, the financial value of mobility radically declines. Not necessarily -- if you're still single at 50, maybe mobility is just as valuable. But if you're married, you've already lost a lot of mobility power, because wherever you go, your spouse also has to find a job. The children, if there are any, will have to switch schools. The pets, if there are any, will have to be transported. You are much less likely to pick up and switch cities -- and so renting means paying for option value that you are less and less likely to lose.
4. Eviction is expensive and annoying. This is really a special case of housing price volatility. There you are, planning on staying in your grotty, subterranean 435-square-foot studio, and suddenly your landlord decides that it's going condo, or his brother-in-law needs it more, and you have to move. Too bad if this is not a convenient time.
5. Housing is pretty effective forced savings. We pay extra on our house each month, much to the dismay of many financial types of my acquaintance. Now, in theory, I could put that money right into mutual funds. In practice, I'm probably more likely to put it into a nice table for the backyard. As Dave Ramsey says all the time, the biggest mistake people make in talking about personal finance is treating it as a math issue. It's not. The math behind personal finance is so risibly simple that journalists can do it. The discipline, however, is very hard. So the correct comparison for homeownership is not what the buyer could have achieved by putting all that extra money into a mutual fund; it's what they would actually have done with the extra money if they hadn't bought a house.
So while I'm not saying that you should definitely invest in a house, I won't say you definitely shouldn't, either; all I would say is that you shouldn't count on your home value too much.
But what about the political economy argument that Josh hints at? That homeowners come together to force up the price of housing with building restrictions?
This is a pretty common thesis among urbanists, and it's obviously intuitively plausible, but I haven't actually been able to find much research to back up the idea that homeownership causes excessive NIMBYism. I mean, I believe NIMBYism exists -- it's obviously causing huge problems in areas like New York, Boston, Washington and much of the coastal West.
But is it really driven by homeownership? 1
Some of the worst NIMBY cities seem to be disproportionately filled with renters, not owners. Also, Californians. But that's another blog post.
Why might that be? Well, one way to think about it is that people really like the security of homeownership. They like it so much that when there's a huge proportion of renters in the city, they band together to vote themselves a sort of property rights in their rental housing. Call it "quasi-homeownership." In California, New York, Washington, etc., it is very hard to evict renters, and in a lot of these cities, a substantial portion of the housing stock is rent-controlled or publicly run.
Once people have acquired these quasi-property rights in their housing, they may start agitating for the same sorts of things that homeowners are thought to want, such as restrictions on the ability to build nearby. After all, renters like light and space and easy parking, too.
Homeownership is not the one-step solution to financial riches that people used to imagine. But neither is it necessarily a bad idea financially. And it may not even turn you into a NIMBY. So if you want to invest in a split-level and some custom drapes, go right ahead, as long as you can afford a sizable down payment and a sensible mortgage.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
Washington's relatively low rent-to-income numbers in this chart probably reflect historically high crime, plus rent control, public housing and very tenant-friendly eviction laws; the price of rental housing is not quite at New York levels, but it's rising at an amazing clip. A few decades ago, the rent-to-income ratio was a mouthwatering 16 percent.
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