To buy or to rent: The great homeownership debate

Have you heard? Owning a house is an investment, except that it’s really not. Home ownership is a vital wealth-building tool, aside from the fact that it’s financial suicide. Historically, the returns for owning a home outpace stocks, although actually they don’t.

Homeownership used to be an accessible, affordable option. But after a financial crisis that sent home values tumbling, and with home prices now reaching astronomical levels due to a housing shortage, things have changed a lot just in the past decade. Finding an affordable home can mean moving away from jobs and increasing commute times, which explains the rise of “supercommuters” across the U.S.

Is owning a home is still worth it? The answer depends on whom you ask, what inputs are included in their model, and their general disposition toward investing—and the answer will almost always be “it depends.”

There are plenty of online tools available to help you assess whether your current financial circumstances would render a monthly mortgage payment lower than your monthly rent. But there are many more factors to consider before you make what will likely be the largest purchase in your lifetime. We’ve tried to simplify the arguments for and against. If you’re a renter who is struggling to wrap your head around this question, here are two dueling perspectives on the great debate of homeownership.

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Why you should buy: The struggle to save for a home today may provide safety and security later

By Jeff Andrews

You can find plenty of academics and financial advisers, armed with spreadsheets and economic models, who will be happy to demonstrate how their fiscal wizardry arrived at this conclusive finding: When it comes down to dollars and cents, owning a house just doesn’t add up.

If they were analyzing stocks, bonds, or the latest Wall Street product designed to maximize returns, their wisdom would need be needed. But in assessing whether to buy a house, one needs to take qualitative factors into account in addition to those quantitative factors. Because at the end of the day, you need somewhere to live.

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1. Shelter is a basic human need

The debate over the benefits of homeownership is often discussed in terms of return on investment. That’s not the right way to think about it. Shelter is a basic human need. It won’t make financial sense for everyone or in every city to buy a home, but for many, it will. And if it does, you should do it because you need shelter.

Anyone who has followed current events over the last two years likely has heightened awareness of the fragility of the institutions and organizing principles that afford us a level of societal stability to debate homeownership in terms of investment instead of need. Should a tectonic shift occur in our government or alliances, I’d, personally, rather own where I live than be subject to a landlord. This might sound like paranoid thinking, but do you really want to find out if it is paranoid thinking when you have the choice now to buy a home?

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2. It’s not an investment, but it’s not financial suicide

Fact: You should not buy a house thinking you’ll get rich off its price appreciation, or that it’ll ultimately pay for itself. In some markets that may be true. But it’s better to not think of homeownership as an investment asset like stocks and bonds, but as the four or more walls in which you live.

At the same time, if you do your homework to make sure it’s the right time for you to buy a house personally, professionally, and financially, it’s not going to be a bad investment, no matter what city you’re in. That’s because the underlying conditions of supply and demand will, over the long run, keep pushing the value of your house up at least at a level that will keep up with inflation.

Even though the supply of homes is currently being restricted by a number of economic factors and public policy positions, the number of humans who need shelter is going to keep going up (barring, of course, some catastrophe that would render the question of homeownership the least of your worries).

Yes, it is overly simplistic to say home prices will always go up, as anyone who was alive 10 years ago can attest. But the underlying conditions that have led to a relatively swift housing recovery should continue.

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3. Retiring is easier as a homeowner

If you haven’t noticed, being an old is pretty expensive, thanks to the skyrocketing cost of health care. Add in an increasingly imperiled social safety net, rising housing prices, and the likelihood that you’ll be on a fixed income with lower earnings potential, and you can see how not having to worry about paying rent every month would be beneficial. Yes, you’ll still pay property taxes, insurance, and other expenses related to upkeep, but it’s highly probable it’ll be less than what you’d pay in rent.

Detractors often cite the opportunity cost of investing in a home. Assuming you think stocks outperform home appreciation, which is a totally reasonable position, you might think it’s better to put your money in equities and then buy a home with the proceeds when retirement age comes along, or use that money to just pay rent.

Sure, you could take that route, but that’s a pretty roundabout way to go about securing a home when you could just use the money to directly buy a home. And the higher returns from the stock market come with added risk. What do you do if the market happens to be down when you reach that age and what you have isn’t enough? Or worse, what happens if your investments go bad and you’re wiped out?

Play it safe, and just buy a home, and do it before our generation hits retirement and overwhelms the housing market. If you’re able to pay off the home entirely or something close to it, you can always trade down to a cheaper home and pocket the difference, giving you a place to live out your golden years—with a little extra cash, as well.

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Why you should rent: The struggle to save for a home today may not be the best use of your money

By Patrick Sisson

It’s an article of financial faith that renting is akin to setting your money on fire the first of every month. Owning property builds wealth and equity. Renters just waste their potential without seeing any return. One simple statistic says it all: the average homeowner has a net worth of $195,400, 36 times that of the average renter’s net worth of $5,400.

But, like many such beliefs in the U.S., these opinions are often warped by an assumption that the past is a perfect analogy to the present. And in the present, buying a home anywhere close to where jobs and economic opportunities are clustered is a huge investment in time, resources, and opportunity.

1. Owning a home is very expensive

Consider what homeownership is for most Americans: a traditional, affordable, suburban home. It really was once so much easier: generous government support for mortgages and loans, abundant open land allowing developers to build cheap dwellings near cities, and median incomes relatively in line with median home prices.

Today’s home market is a different beast. Due to low inventory, a dearth of affordable starter homes, and incredible demand, this spring is set to be the “most competitive housing market we’ve seen in recorded history,” with buyers plotting to pay above asking and make huge down payments to get a grip on anything that’s left.

And that’s just looking at the situation on a national level. It’s much more skewed in coastal cities such as San Francisco: last November, the median down payment for a home in San Jose was equivalent to the median home price across the country, $192,000.

As the nation continues to sort itself out along economic lines, with richer migrants to big cities replacing lower income Americans moving to more affordable areas, it’s set to get worse. The median home value in Manhattan is $1.3 million.

2. Saving for a downpayment takes a long time

Homes today in big cities are arguably great assets, but making that down payment, and gaining entry to the property-owning class, has become much more of a financial burden. Studies have found millennials need at least a decade to save for a home in many markets, due to a much more challenging economic reality. Since, 1980 the median home value has jumped by 60 percent, and the average cost of college tuition has shot up 160 percent, all while wages have only grown 25 percent.

Things may not get easier once you have a mortgage. According to CoreLogic data, more than 20 percent of borrowers are spending more than 45 percent of their income on mortgage payments each month.

Arch Mortgage Insurance Company found that the size of a monthly mortgage payment needed to afford a home rose 5 percent in just the last three months, and forecasts an additional 10 to 15 percent by year’s end, especially with interest rates on the rise.

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3. There are likely better investments

Is it worth it to struggle so hard to make a down payment, especially when housing isn’t necessarily the best investment? Just because it’s hard doesn’t mean it’s a bad idea. But it’s not the only option.

If renters applied the discipline it takes to save for a downpayment, and instead channeled that money into a smart savings plan and other investments, they’d still see good returns, without the burden of home repairs, or the gamble they may take anchoring themselves in one place despite an increasingly agile job market.

Studies have shown that this strategy can often outperform investing in a home: Canadian financial analyst Alex Avery discovered that housing prices underperformed the country’s broadest investment index, and George Mason University economist Alex Taborrak says it’s a bad idea to concentrate your investment in one asset, or expect housing to outperform the market. A study by the London Business School and Credit Suisse found that between 1900 and 2011, housing posted an annualized return of 1.3 percent, while the average return for the S&P Index was 9.8 percent.

There’s no arguing that homes, especially in pricy urban markets, are worth a lot of money, and those who bought cheap decades ago made great investments. But it’s hard to find a quick, easy entry into home ownership these days.

Investments in equity, wealth, and your future are great ideas—but don’t assume homes are the only game in town.