Why A Shift In Mindset On Renting Is
What’s Needed To Help Ease The Housing Crisis.
By Robert Rixer
Geoffery Feil has never rented anything in his life. Not a home, not a car, not equipment for his manufacturing business – he’s only ever owned. But now at the ripe old age of 72, Geoff and his wife Clara are about to rent a $2,000,000, two-bedroom condominium in St. Petersburg, Florida for $8,750/month. Why the sudden change of heart? The economics of renting versus buying have become too great to ignore.
Realtor.com recently released a report saying that renting is cheaper than buying in all of the 50 largest metro markets in the US. The monthly cost of buying in Austin, Texas alone is over 140% versus buying.
There’s an old saying that your rent is the maximum you’ll pay each month, your mortgage payment is the minimum you will pay each month. Property taxes, insurance and HOA dues may be included in the monthly payment calculation – but often overlooked are maintenance, repairs and water/sewer expenses.
But at least your monthly mortgage payment is going toward paying off your house, instead of being flushed down the drain like with renting, right? This is the most common justification for buying over renting. The reality, however, is quite different. At the start of the loan, most of the payment is interest with only a small portion going to pay down the principal. A 30-year fixed loan at today’s 7% interest rates equates to a principal paydown portion of just 12% of the monthly mortgage payment in the first month, and barely climbing to 13% a year later in month 13. Throw the expenses into the mix and this ratio of principal paydown sinks to the single digits. This is not an argument to dissuade homeownership. This is an argument that homeownership should not be the default option.
It shouldn’t be a question of “Can I?”, but “Should I?”.
The 1% have already worked this out. In 2023, there were over 7,000 homes that rented for above $20,000/month. To those entering the homeownership category, it may be baffling as to why someone who could afford to allocate $20,000 per month to housing, would choose to rent. The answer is simple – they’ve done the math, weighed the risks and rewards and have ultimately decided that renting is the better option.
Geoffrey Feil figured this out. After comparing renting versus buying, he estimated he would be up around $4,000 per month by renting his St. Petersburg condo and wouldn’t be susceptible to the potential pitfalls of ownership such as market crashes, special assessments and skyrocketing insurance premiums in Florida.
There is merit to the idea that real estate generally appreciates over time and that it is, after all, a long-term investment. This is a generally sound argument, however not an argument to enter the market at any time and at any cost. In an over-inflated market, a bad move can financially hamstring someone for years to come, while their savvier counterparts are eating their lunch.
Just as sentiment has shifted in the value of a 4-year college degree versus its skyrocketing tuition costs and subsequent 6-figure debt, the same needs to happen with the stronghold perception that homeownership is the ultimate sign of personal achievement. Low interest rates and down payments as little as 3.5% in the past 15 years have made becoming a homeowner so attainable that it’s little wonder why you wouldn’t take advantage of it. But just because you can, doesn’t mean you should.
Of course, there are non-monetary considerations associated with the inclination toward homeownership. Owning your own home is the American Dream for many people. Just like going to college and getting a good job, many baby boomers have implored their children to save up and buy a home. Home ownership is the ultimate mark of “I’ve made it as an adult”. A more dangerous trend is the ever-increasing infection of the “Keeping up with the Jones’s” where people are buying larger and more luxurious houses than perhaps is necessary. Again, the low threshold for housing attainability means that people can push the bounds of what they can afford. Again, just because they can, doesn’t mean they should.
Would-be-homeowners who choose to rent would remove themselves from the buyer’s pool and bring some relief to the housing supply crisis. Simultaneously they could save up more money and be in a much stronger position to purchase once the market simmers out. For the housing market to operate as a healthy ecosystem, a segment of the population needs to question the validity of purchasing over renting.
Reference: https://www.newser.com/story/348349/its-cheaper-to-rent-than-buy-in-every-big-us-metro-area.html
