Home sweet rental: in praise of renting

Is renting just a temporary stop on the road to home ownership, or is it a destination in and of itself?  And does it even matter in the search for a place to call home?

An opinion essay worth reading in today's L.A. Times addresses that question. Headline: "You don't have to own it to make it a home." Kerry Madden writes:

My husband and I have never owned a house -- and may not any time soon, despite the steep drop in home prices. ... We've lived in our current home for 10 years now. We pay $1,400 a month in rent for a five-bedroom in Silver Lake. Our only debt is mounting college loans. Our landlord is a good guy. He's raised the rent only once, and he has a home-warranty plan, which means that if something breaks, the company comes out and fixes it. The neighborhood is full of friends for the kids.

But is it a holding pattern? Shouldn't we look to buy now that prices are finally coming down? But how can we with tuitions going up?

As I say, worth reading. The essay, as I read it, is only partly about the old rent-versus-buy argument, which is pretty much an economic discussion. It's also about the psychic issue of where your home really is, and what makes a place your home.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.
More about author Kerry Madden here.
Photo: Los Angeles Times

Comments

[Brad]

Interesting cultural shift underway perhaps? Thanks for highlighting this, Peter.

Seems to me the biggest problem facing voluntary or involuntary renters these days in SoCal is the threat of forclosure. Even for those who are happy to rent for years have to now live under the fear of eviction by the bank (at a moment's notice) for circumstances completely out of their control

[Ace]

I don't see this as 'in praise of renting'. I don't know what this house would have sold for in 1998 when they first started renting it but I would think that if they would have bought in 1998 they would be in great shape today.

[mike]

the front page of cnn money has a story right now about how 1st time home buyers are holding the reigns so to speak. they are demanding big concessions from the buyers and getting them right now. but in los angeles the median income really doesn't matter. there are lots of very wealthy people here to buy the high end properties. i live in hermosa and the 1m plus houses are all sellin g after about one year.

oh and is e is still on the air i hope hermosa beach passes muster with you as opposed to my DUMP in paso robles...
if you rent you will always have the potential for a landlord to pull the rug out from under you and your family.

[OverIt]

Five months ago my wife received a phone call from our landlord of almost 7 years, informing her that we would need to move within 3 months due to an "unforeseen family situation".

To make a long story short, we found a new place and all is well but the point was well taken. No matter how many years, how many experiences we'd shared there as a family, no matter how much junk of ours the house held, it was not our house. I'm in my early 40's and would love to own a place I call home before I die - it doesn't seem too much to ask for as between my wife and I, we earn in the top 10 percentile. Whether or not that can ever happen here in L.A. remains to be seen. And I'm not even talking West L.A. but EAST L.A. proper.

[E]

Yep...I'm here Mike.

And I'll always be here to counter the smugness of homedebtors.

I've been a homeowner and a renter. Now I'm a renter. Sooner or later I'll be a homeowner again...but not because of the arrogant attacks on renters.

[Laker]

In LA, the up and down cycles are so easy to see, that bot buying in 1998 seems like a big mistake.
On the other hand, if the house that they are renting is great in shape, is exactly what they need, and is substantially under priced as far as low rent, then it might be a good deal.
If they are responsible, and were able to set a aside and save the difference between the mortgage and their rent, they could have by now saved Half million dollars or more...
So, it is not a case of black/white. Even though in general, long term vision, renting for more than 10 years seems not to smart financially.

[Anonymous]

Ownership is a lot more of philosophical construct than many imagine. You can't take it with you.

Certainly renters risk the chance that a landlord will make them leave. How much is eliminating that risk worth to you? I can assure you that to me, it's not worth the "homedebtorship" premium currently priced into the market. If you choose differently, I hope it works out for you.

[Drew]

"Certainly renters risk the chance that a landlord will make them leave."

I know far too many people that this has happened to. Imagine settling into a place that you thought you could rent indefinitely, only to find out you have 30 days or less to move.

There are far too many ways to evict someone, including sale of the property, death of the property owner, a desire for the owner or a "relative" to move in, and now of course foreclosure.

I prefer having a little more control over my life than that. And to me it's worth the extra payment today to secure a better future for tomorrow.

[fezco]

As a renter, I am constantly under threat of the whims of my landlord. Whether it is an increase in rent, or the threat of selling the place to a land developer. I guess similer threats for homeownership exists these days. A mortgage company sells your loan or goes under. The feds raise intrest rates. Your local government uses eminent domain to kick you off of your property.
I think homeownership gives you a more permanent stake in your town/society, however.

[homedebtor]

E, calling the kettle smug...what a way to end the week.

[The original RZ]

Renting obviously makes sense for certain people, and for those of us who can't afford homes, what other options are there (save living with family or not having anywhere to live)? But I have three long-term issues with renting:
1) After months/years/decades of writing rent checks, you don't see that money translate into a permanent place to live.
2) If I had a house and was paying a mortgage, I'd have a tax write-off, which a renter doesn't get (though this doesn't really apply if I can't afford a house since I'm better off with more in my bank account and no tax write-off)
3) I don't want to go into retirement having to pay rent since that would likely be the largest monthly expense I'd have (assuming my health care costs won't be sky-high by the time I get there). It would be much better to have a home all paid for by the time I retire so my 401(k) funds could be used for other living expenses.

[Rational Renter]

Mike - you say that "in L.A. the median income doesn't matter" because there will always be lots of rich people to buy up properties. The economic ignorance of this statement is pretty glaring. Sure, those nice properties are still selling down in Hermosa Beach. They're still selling here in L.A. too. Many of them get multiple bids for over asking price. Of course, you probably don't realize that the sellers had to aggressively price those homes to get those multiple bids. They're not getting nearly what they could have gotten last year for the homes, even at the high-end.

But anyway, the median income DOES matter. Because at the end of the day, while there are a lot of rich people in L.A., they are factored into the median. That is why our median is higher than most cities'. And no matter what you might think, there are not enough of these rich folks to sustain housing prices. Otherwise the median would be something like $100,000 instead of what iit is (around $55k).

Housing prices only went up because of exotic financing. That's gone now, and therefore the drop back to fundamental levels is inevitable. That's 2001 pricing + standard inflation, by the way.

[Dave]

I have several million in savings/investments. I rent. Why? I did a spreadsheet and found that it would be completely irrational to buy.

For me, if houses are appreciating at >6%/year, it would be a win to buy. If less than that, renting and making low-risk investments with my cash is a far better option. Other people's numbers may vary slightly, but the huge purchase premium means that renting is smarter for most people.

Thankfully, most people disagree with me, biasing it even further in my direction.

[Nick]

To RZ:

To avoid all three of your issues with renting, take the savings you have from renting instead of buying, and put it into a savings account. By the time you retire, you'll have enough extra money to rent until you die, probably on the interest alone at today's rent/own ratios.

Most people who put forward the "eventually you'll own the house" argument fail to account for saving the difference between renting and buying cost. The only reason you'll own the house eventually is that you're buying it slowly. If you save the money instead, you can buy something when you retire, or rent with the interest on your savings, or rent and take vacations, or... etc.

[Todd in WeHo]

Buying a home makes sense if you plan to live in one place for many years. If, however, you want or need to remain mobile for any reason, then trying to time the real estate market is the most foolish thing you can do.

[sandiegan]

That's great for them.

But their situation is so atypical that calling this "in praise of renting" is laughable.

"In praise of lucking out" would be a better title.

This has little to nothing to do with typical housing cost decisions.

[Roger Ramjet]

Saw a great bumper sticker last week. GOT THAT UPSIDE DOWN FEELING? BIG SHOT! I talked to the guy in a Wal Mart parking lot. He has been renting a small apartment for ten years in Brentwood. A pilot that is gone most of the time. He told me it works for him.

[Sailor Boy]

I have better that ocean view property. I live on my catamaran on the water. Slip fee is low. Liveaboard fee is low. Have a nice day!

[Cal]

The high carrying cost, transactional costs and maintenance cost of owning really make it imperative that if you do buy you buy as cheap as possible (i.e. buying on the dips in the LA area, at or below equivalent rental costs) to have a chance of coming even close to the amount that renting and saving the difference will make.

While I've always judged rentals as rising at the pace of inflation I have yet to live in a rental that came even close to matching the pace of inflation. And once you are in an enviroment where housing prices are dropping you would have to be paying so high over market rents and rents increasing for buying to make sense over renting.

Many of the arguments I see skewed towards buying now at their fundamental level assume that another bubble will be around the corner to bail people out of their bad decisions.

I personally think that people buying now either better have so much extra money (above retirement, health and college savings) that the money doesn't matter or resign themselves to having much less money than their peers going forward.

[Steve]

Renting is a huge waste, it is like this poor soul above the rent he is paying will at some point be the same or exceed the mortgage if he bought it. It is this simple if you rent you go no where financially, you own you are paying down the best investment you will ever make and the govt helps you. I recently read a statistic the renters end life with a net worth of $98K, owners end life with a net worth of $552K. If you cannot afford LA move to a place where you can afford a house, the job is secondary.

[RM]

Renting vs.buying is a decision with many different answers as each personal situation is unique. Advising people on financial matters, especially regarding their retirement is a delicate matter. Therefore I will only share what I know first hand.

My parents retired some years ago and started to live on a social security benefit of about $2200/mo total between the two. They had some savings and a profit sharing that they went through very quickly as they adjusted to their new level of income and paid off the balance on their home. The only reason they can survive on what they receive is because they have no house payment, no car payments and virtually no credit card debt. Had they not bought their own house a while back they would today be paying some $1800/mo in rent, leaving them with only $400/mo for utilities, food, gas, doctor visits, etc...obviously an impossible feat.

Also, part of the reason they were able to save in their latter years of work was because their house payment of less than $500/mo was a lot cheaper than renting after only some 5 to 7 years from when they bought. As for myself, I hope to also be mortgage free by the time I retire, if social security is still around that is. Otherwise we're on our own, which is why so many investors invest in rental properties for the long term. Personally, I have nothing against renters, as one day I will probably totally depend on them for my income, especially if SS goes bye bye.

[Mary C.]

If everyone could find a cute five-bedroom house in LA in good condition in a decent neighborhood for ten years for $1400 a month -- no one would buy a house! These people are in an exceptional circumstance, and their landlord is generous or nuts or both. He could easily get a minimum of a thousand dollars more per month for a five bedroom house. There is probably a large unmet demand for houses that size for all the people with big families, in-laws, or multiple wage earners who want to share a house. There are one-bedroom apartments renting for more than that. I'm not sure this is a fair example of renting vs. owning.

[DF]

This story is very well-written but atypical. These people are getting an insane deal for renting a house that large in Silver Lake--or anywhere else in LA, for that matter.

This debate over rent v. buy is very amusing. It's not really up for much debate, the way I see it--there are calculators that tell you which is a better approach given current rates of inflation, housing price trends, etc.

One major misconception is that renting means "throwing money away." Wrong for two reasons. First, standard amortized house payments are heavily skewed toward interest--that's not paying down the equity on your house, that's giving the bank lots of hard-earned cash, just like giving it to a landlord. Second, if rent is much lower than mortgage payments for a given place (as it almost always is in LA these days), you can invest the amount you save by renting and that amount will continue to appreciate if you are wise about the investment.

And the tax break point is only part of the equation. If the mortgage tax break takes your monthly payments down to $3000/month, but your rent for the same place would still be $2500, then you're still losing money by owning, even with the subsidy.

Finally, the security point is true of renting--it may be the case that you get told you have to leave on a moment's notice, and that's no good. But it's a little ridiculous to describe owning as comparatively more secure in a world where foreclosure is rampant, and owners are getting thrown out by banks all the time. Plus, if something bad happens and I can't pay rent, I can just leave, maybe owing some premium to the landlord. But if I can't make my mortgage payments, then I can lose the house, get my credit rating slashed, and forfeit the equity I built up in it; that's a form of insecurity that renters don't suffer from.

[DVG]

I bought my house in 2001. My mortgage is $1800/month. With the tax break I get on the interest I pay it's even less out of my pocket. Ignoring any appreciation or that I've now paid down $35K in principle so far, the best thing about owning is that my rent is fixed. 15 years from now my rent will still be $1800/month. What will rents be then? How about 30 years from now when I retire? I can tell you what rent was 30 years ago to get an idea of what it might be in the future. Renting is a losing proposition long term. It should be clear that that will always be the case, because the landlord is making mortgage payments, repairs, and taking a profit, too - all at the expense of the renter. Landlords rarely lose money on their properties and when they do it's not for long. Who is coming out better? The people paying $1400/month or the guy who has been cashing the checks and paying off the debt? In 20 more years (max) these people will have paid his mortgage for him and he can kick them out and sell the place to fund his retirement. Meanwhile, they'll be looking for somewhere else to rent for $4000/month.

[E]

I love how all the "loanowners" like to tell us how low their payments are on their PRE-BUBBLE purchases.

Why don't you tell us what the payment would be at your perceived FANTASY VALUES now?

I have a feeling that this blog has more nervous homeowners who hit up the housing ATM, have an ARM that's due to reset in 2009-2011 and think that by constantly goading the renters here about stability, etc etc that we are going to bail them out of their debt addictions.

Perhaps instead of spending so much time trying to justify your 98 purchase (with your cash out refi in 2005) you should all try debtors anonymous...if not, you will all be so depressed that you'll be hitting the bottle so hard and in such financial dire straights that your spouses will leave you and you'll be in Divorce and Alcoholics Anonymous.