America is so over homeownership: Why the shift to a renting economy might actually be a good thing

SALON ^ | 08/30/2014 | HENRY GRABAR

[Georgia Girl 2]

Yes, if we can get everyone back renting again it will keep them from building wealth and security for their old age.

[SamAdams76]

Well that’s assuming that purchasing your home is your only investment. Many people who own their homes also own stocks, mutual funds, 401(k)s and even other real estate from which they derive rental income from.

[Mad Dawgg]

First of all no one owns a home in the USA and I mean no one.

We are all renters...

[thirst4truth]

When you don't pay your mortgage, then the lien holder can force you to pay or take it back! What do you think a landlord does when you don't pay the rent?

There are many, many people buying homes now, the interest rates are below 4%, the property taxes have stabilized and most end up paying less for a mortgage than renting the same type of home.

Bought our first house when interest rates were 16% in 1983, after 18 years, we sold and had over $200,000 equity which we used to buy two multifamily units and an 80 acre parcel of land. 13 years later one of our units is paid off, the 80 acre parcel is paid off and the two units combined gross $100,000 a year. We are self employed so it was necessary for us to invest in real estate to help us retire, it has been an amazing blessing.

Owning a home is good for America, good for families and good for a community, I see no downside of home ownership, until you start buying toys with your equity. The above story is what I tell all young first time home owners, if you decide to take a second mortgage, only do it for remodeling or to buy another home/rental. That is where people get into trouble, they buy toys and loose everything.

[Alberta's Child]

Right. But if you have $500,000 of equity in a home, think of how large your other asset classes would have to be in order to be adequately diversified.

My rule of thumb is that no investment should comprise more than 5% of my net worth ... or 10% for a "closely held" investment (like an ownership stake in a self-managed company). I'd consider a home a "closely held" investment for the sake of this discussion, which means I would not be comfortable with $500,000 of equity in a home unless my net worth exceeded $5 million. In that kind of scenario I'd think that an "own vs. rent" discussion is largely academic.

[Mr Rogers]

The investments sunk into X would need to average more than my interest on the loan. That may or may not happen.

120K over 15 years vs 30 costs 51K vs 120K in interest. After 2 years, the 15 year loan has you paying off $500/month in principle, while the 30 year loan has you paying off $159/month on your principle.

During your third year of ownership, that works out to paying off 6,000 and paying off $1900.

You can decide if you think your stock investments will outperform that. Over a 30 year period, the answer is probably. Over 5-10 years, maybe not. The additional value in your home is something tangible being purchased, vs stocks that are here today and may be gone tomorrow.

Of course, if you are stupid enough to buy at the top of a bubble, your house will lose value - but it is much easier to see a housing bubble than a stock market one.

[Alberta's Child]

I know there are a lot of other considerations involved, but here's some food for thought:

If you had invested $100,000 in an S&P 500 index fund on January 1st of 1983, it would have grown to more than $2.9 million by the end of 2013 ... and that's assuming that you didn't add a single penny to your original investment.

[SamAdams76]

So if you have $500,000 equity in a home, you'd be better off investing most of that money. So as an alternative to selling the home and paying rent to somebody else, what if you take out a 30-year mortgage and consider that your "rent". In that scenario, you will have the house equity freed up to invest and you'd be paying yourself back with the mortgage (minus interest). If you were even in a situation where you needed to pay the mortgage off, you'd have other capital from which you could do that.

Actually not a bad idea but I'm sure I'd get killed on capital gains in the beginning.

[Alberta's Child]

The investments sunk into X would need to average more than my interest on the loan. That may or may not happen.

That's true, but over a nine-year period that is not a bad "gamble" to make when: (1) you are dealing with historically low interest rates at the start of the nine-year period, and (2) the interest is tax deductible anyway (which means the investment would only need to average more than the effective interest rate, not the actual one.).

And buying at the top of a bubble is a terrible investment for two reasons:

1. The obvious problem with buying high.

2. The fact that the bubble is driven almost entirely by low interest rates, which means that you are not likely to ever face a scenario where you can refinance your mortgage at a lower rate, and at a time when declining interest rates have inflated the value of your asset.

The second point is an important one. Notice how some folks even here on this thread point out how well they did since the early 1980s. They point out that their first mortgages carried very high interest rates, but they may not understand that the declining interest rates are what drove up the value of their investments in the first place. This reinforces my prior statement that most people who buy homes buy a mortgage, not a home.

The additional value in your home is something tangible being purchased, vs stocks that are here today and may be gone tomorrow.

That's the beauty of an index fund. The whole aim of the fund management is that it accounts for the turnover of the companies. As long as there are at least 500 publicly held companies in the U.S., there will always be an S&P 500 index. More than 80 companies in the S&P 500 index have turned over since 2007, due to a combination of factors that include the demise of the company and the loss of market capitalization (they're no longer one of the 500 largest companies). But one of the most common reasons why a company is dropped from a major index like the S&P 500 is a merger or acquisition (ExxonMobil replacing Exxon and Mobil, Motorola Mobility acquired by Google, etc.).

[nascarnation]

That’s exactly what I did.
When we moved to our retirement home (a 1500 sf ranch on 2.5 acres) I pulled out all my equity and financed for 30 yrs fixed at 3.75%
I really believe inflation will eat my payments up.
Property taxes....well that’s another potential landmine.

[Alberta's Child]

That's actually not a bad idea, but I wouldn't even consider advising for anyone who is not an astute investor. There is a huge risk in borrowing money to finance an investment, which is why I'm not keen on holding a big mortgage in the first place. LOL.

If I had $500,000 of equity in a home I'd give some serious thought to selling the home and paying $250,000 cash for a smaller home, then investing the other $250,000 in $50,000 blocks.

[Mr Rogers]

I’ve got a lot of money in index funds. They can be a great investment. But if my house drops in value, I still have a place to live.

And in the example I gave above, during year 3 of a 15 year mortgage, $500 of my ‘rent’ goes to me, not the bank. $6000 a year, going from my ‘rent’ payment into my pocket - and that was year 3! By year 8, only about $300/month of my ‘rent’ is going to someone else. Try finding a house you can rent for $300/month - even in southern Arizona.

[jughandle]

Hello,Salon....colored people and other minorities desire home ownership also. Racist much?