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

[DVG]

Let me ask you people who are renting: Why didn't you buy pre-bubble? When I bought my house I didn't think it was cheap. Prices had been running up for a couple of years and most houses were out of my price range. I put offers on quite a few houses and was outbid at what I thought were ridiculous prices. Eventually, I bit the bullet and paid more for a house than I really wanted to. I stretched my budget with two used cars and every penny went to my mortgage. 7 years later, I've had a few raises and I bought a new Lexus. The payments are easier to make than they had been. In another 7 years they will be easier still as they won't rise at all while my income (I hope!) does. Everyone has to stretch to purchase their first house. In the long run it's a wise decision to make. Prices might be lower later, but interest rates will likely be higher than the 5.6% fixed I am paying now. I really thought I was buying at the top of the market, but I could afford it, I found a house I liked, and I did it. The fact that it turned out to not be the top of the market is beside the point. I was facing the same anxieties all new homebuyers face. If you want to know how I feel now I am actively looking to purchase a second home for investment to rent out to someone who will pay it off for me. The only regret I have is that I didn't buy sooner. Like many renters, I was too scared to take the plunge and didn't really want to "lower" myself to an area I could actually afford versus the wonderful area I was renting in. Turns out that my neighbor is a doctor with his own practice and many of the people in this "sketchy" neighborhood do quite well. I had the first BMW in the neighborhood and now they line the block. The new neighbors across the street are an attorney and an executive at Anschutz. You can sit on the sideline and pat yourself on the back or you can reach your goals. For me, I wanted a nice suburban house with a yard and space to raise a family but also close to the city. I had to sacrifice my ideals in order to buy somewhere I could afford, but I would never, ever go back to renting. Ever. If you can afford it then buy. If you can't then wait and maybe you'll find a bargain, but nothing is guaranteed.

[E]

"Let me ask you people who are renting: Why didn't you buy pre-bubble?"

Bought in 2001 sold in 2005. Wasn't living in SoCal at the time however so I didn't bring gobs of "bubble" equity with me.

Started reading HousingPANIC in 2006 (why weren't you?)

Did you buy gold? Did you short the builders and lenders like all the bubble bloggers were?

No? Why not? Wasn't it pretty obvious? Perhaps having a degree in Economics helped me.

Perhaps people should have listened to the bubble bloggers when we were talking about the "ponzi" loans and the necessity to "refi" into a "Rob Peter to pay Paul" loan.

If more people raised a stink about the loans that were being made perhaps things would have been different.

Didn't you raise an eyebrow at all the WAMU window paintings with the "no income, no SSN verification" loans?

on to your next statement...

"You can sit on the sideline and pat yourself on the back or you can reach your goals."

It's not about sitting on the sideline patting ourselves on the back....it's about waiting out the coming Option-ARM resets. Subprime was in the "subprime" neighborhoods. Alt-A and other funky loans were in the better neighborhoods. Those have yet to reset.

It wasn't just "poor" people living beyond their means.

When the tide goes out, we will see who was swimming naked as Buffet says.

[Rational Renter]

DVG - as an honest answer to your question - "why didn't all the renters buy pre-bubble" - I think it's probably one of three reasons for most.

1) not here back then
2) not old enough back then
3) didn't make enough money back then

Perhaps many of the renters reached a point in their careers where they could afford to buy a home under normal circumstances, but they reached that point during the bubble. So now they are waiting for the bubble to pop. Seems smart to me.

[The original RZ]

Nick,
I certainly see your point (and fyi, I am a very good saver). But I have at least 35 years to go until I retire, and I doubt that social security will be around when I get there. With so many years to go, it's hard to tell whether all those savings (retirement funds and otherwise) will be enough. Having a house all paid for by the time I get to retirement will give me the peace of mind that I will have a place to live (and to a certain extent, isn't that worth some money?).

Of course this doesn't mean that I'm about to jump into a crazy housing market. Just saying that based on some circumstances and points of view, there are good reasons to buy (when prices are reasonable) in addition to all the good reasons to rent.

[anony]

It sure is nice to own a house all paid for by the time a person retires.

However, there are things to be considered.

If your income after retirement is somewhat high (investment, social, 401, pension etc.), you won't have much tax shelter beyond a Prop 13 annual property tax.

Some of my coworkers actually refi their primary residence when they decide to retire to reduce income tax with mortgage interest. The way they calculate is that the mortage payment shall be less than the income tax taken away without mortgage interest.

If you are sure that you won't have a high fixed income after retirement, having a free-and-clear primary residence is not a bad idea; assuming your property tax and yearly maintenance won't break the bank.

At the end of the day, being a renter or a homeowner makes no difference when you can't take care of yourself anymore.

In my apartment building, I saw my upstairs neighbor, a 91-year-old lady, being carried out on a stretcher because she was too weak to get out of bed for 3 days! (after she's out of the hospital, her church friends placed her in a nursing home.)

Fortunately, my apartment manager was looking out for her by checking her mailbox daily to see if she picked up her mail. He got worried after 3 days of non pick-up and called 911.

For those of you out there having solo elderly homeowner neighbors living in your street, please be nice to check their mail box from time to time before tragedy happens.

[The original RZ]

DVG,
To answer to your question "why didn't all the renters buy pre-bubble?" ... By the time I finished my schooling, had a stable job with a decent salary, and saved up a decent bundle for a downpayment, the bubble was in full force. If I had been born 5 years earlier, I might have beat it, but now I have to wait it out.

[DF]

To add to the response to DVG, I too didn't buy pre-bubble b/c I wasn't back in LA then and was still in school. This is actually the core of the problem: tons of people finally got stable, well-paying jobs during the late bubble period and found that the insane inflation precluded them from a purchase that would have been perfectly reasonable if the 1950-2000 trendline had stayed in place. The trick now is sorting out this gap--those of us (including, to be clear, me) who have capital and stable income can no longer make the same assessments about renting v. buying that were plausible even as recent as 2001. Certainly then, buying likely made more sense. Now, with values where they are and dropping, that's not as clear. Thus today's renters aren't really doing anything differently than 2001's buyers; they're each running some numbers and making a rational decision. It's just that the cost-benefit of renting given the present market looks a lot more attractive than it did before.

[Crash and Burn]

How do I compare renting vs. buying? Owning vs. renting seems to be a very difficult to calculate. When some people are referencing this it seems like they are comparing the cost of making payments and then walking away which may be what happened the last few years, but will be much more complex than that when prices eventually stagnate.

You then have:

Annual Cost of House for Buying = (Annual Housing Payment– Amount less paid in taxes than if rented) + (Annual Property Tax) + (Annual Home Owners Insurance) + (Annual Housing Association Fees) + (Annual Maintenance Costs) – ((Home sale value) – (Home purchase value) – (Home purchase costs) – (Home sales costs) – (Moving Costs)) / (Years owned))

Vs.

Annual Renting Costs = (Annual Rent) – (Landlord Paid Utilities) + ((Security Deposit not recovered from Landlord) + (Moving Costs)) / (Years Rented))

It appears the huge variable would be your sales price. Obviously this is like stocks, you can’t calculate this, so you have to make your best judgment, or use multiple scenarios where you can see what your costs might be in different situations. It seems like while there is the potential to have lower costs in buying and even the potential to have 0 or better costs, there is a whole lot more potential to have much higher costs than renting as well (more risk/reward). Also while it is advantageous in both situations to stay in one place longer, the cost of moving are amplified for buying. But, what do you base the average annual maintenance costs on? This seems to be the biggest deal breaker when comparing renting vs. owning. Are there any studies or rules of thumb to use here assuming you move in to a place in good working order?

Now to give a practical example, if I ended up paying only about $500 dollars in federal income tax last year with all of the kooky stimulus checks and what not, how would I compare renting a $1700 two bedroom 900 sq foot apartment on the West side vs. buying something with equivalent living area?

It seems insane to me to make all of these emotional qualifications or generalizations about why one or the other is better. We should just look at the costs of each and decide whether for the calculated price, which one you would rather have. For example, if I were to claim I absolutely have to buy a house to have a tax shelter, I’de be a total kook. It would be nice to have a simpler way to calculate costs for people to use. Maybe then market prices would actually start making sense instead of based upon how much credit a bank will let you have.

[818vitola]

What's funny about this discussion is the notion that renters are all fastidious savers...clearly, national statistics on personal savings rebut that notion, and soundly. In the aggregate we're a nation of overspenders. And that applies to everyone, generally, whether you're a renter living extravagantly (they all seem to brag about restaurants and vacations) or a homeowner bleeding whetever equity they have left to buy more toys.

[John]

Unfortunately, one factor which is beginning to have a significant impact in the rent vs. buy analysis in California is the effect of Prop. 13.

Renting will often allow one to mitigate the economic impact of inflated property taxes, whereas if you are moving up in the market it is a significant (unfair) cost.

In addition, because of the way AMT works, the property tax deduction should be carefully considered.

Hopefully the political forces will soon support an amendment to Prop 13, and the generation that has spent well beyond their means can start paying their way! The current system is skewed significantly in favor of those over 50. This doesn't seem fair to me.

[arizona auto insurance]

Seems to me that owning should be the goal of everyone. Now I know some people will never buy and that's ok. But the best financial decision is to buy and pay it off. If more American's could head into retirement with no mortgage payment they would be better off