A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.
I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.
I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.
Questions and objections
In what follows I've tried to anticipate and address questions and objections:
"You can't live in your stocks" or "Renters throw money down the drain."
Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price-rent ratio of 19. House incidentals often cost around 2%.
If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)
Note that houses and shares have transaction costs, too. Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.
"Homebuyers get tax breaks."
So do share buyers, but both are a bad deal. The interest on loans for houses (mortgages) and shares (margin balances) is tax-deductible. But the rates are almost always too high. A big house loan presently costs 6.1% interest, while a big stock loan costs about 9%. For the returns, we can forget about inflation because it helps debtors while hurting investors, making it a wash for those who borrow to invest. Still, nominal returns of 3% for houses and 10% for stocks aren't high enough to justify those rates. The tax breaks aren't really breaks at all. Moreover, a majority of homeowners don't claim them. Their incomes are low enough to make the standard deduction a better deal.
"What about the pride of homeownership?"
It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. Homeowners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden and poor returns and maintenance to someone else.
"You seem to knock government housing subsidies, but they've helped many Americans afford homes."
My inner socialist agrees. My other inner socialist worries that the government has effectively raised prices to the point where the middle class can't afford houses or buries itself in debt to own them. My inner capitalist is too busy watching shares to care about house prices. My inner conspiracy theorist notes that while politicians tout the social benefits of homeownership, none mentions its tax benefits to the government. I pay no taxes on the overall value of my stock portfolio, just on my cashed-in gains and collected dividends. But Americans pay taxes on the full $11 trillion worth of housing they own plus the $10 trillion worth of it they're still paying off.
"Houses are bigger than apartments."
True, and both can be rented. A third of renters live in single-family houses. I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen. I'm not especially frugal; I spend a teacher's salary each year on restaurants and travel. But I guess I'm too busy or lazy right now to bother with a big house and its innards.
"Are you saying I should sell my big house and rent an apartment instead?"
No, unless you have more space than you need and moving wouldn't be disruptive to your family, and you want to cash in on recent housing gains, make more money over the next couple of decades, use less energy while simplifying your life, and you don't mind seeming odd to friends. In which case, yes. But really, I'm not trying to win anyone over. Strong demand for houses keeps my rent cheap.
"Renting is for poor people."
True. But it's for rich people, too. The average renter makes about $34,000 a year, but while the percentage of renters declines after incomes exceed $20,000 and rents exceed $600 a month, it jumps again once incomes top $150,000 and rents top $1,200 a month. In other words, poor people rent modest apartments for lack of choice. Middle-income people buy houses. High-income people, presumably with a dose of financial savvy, often rent nice apartments instead of buying.
"You say houses return zero. But I've made a fortune on my house in recent years."
I'm referring to inflation-adjusted returns over long periods, absent external boosts to demand. You're referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates. Over the next 20 years I believe houses will return zero or slightly less after inflation, and that stocks will return 7%.
"So you're never going to buy a house? What about raising a family?"
I might buy one eventually, but the longer I can put it off the more I'll get out of the shares I'll have to sell to afford it. I'm 34 now with a fiancÃ©e and a fish. I'm going to try to rent for at least 10 more years. If I have kids I'll probably move into a big apartment or a house once they reach running-around age. I'll rent, most likely.
This article was reported and written by Jack Hough for SmartMoney.
Dayton Ohio:Â Real Estate and Property Management
Jason Byram at CONNECT REALTY.COM is with one of the most dynamic and innovative Real Estate companies in Ohio.Â He specializes in helping buyers and sellers invest or lease single family homes in Tipp City, Troy, Vandalia, Huber Heights, Union, Englewood, Clayton, West Milton, Bradford, Dayton, Piqua, Brookville and other surrounding areas.