Renting vs. Buying – Myths that created the housing bubble and the foreclosure crisis


I read an interesting article today at efinancedirectory.com – detailing 5 “Rent vs. Buy” myths that we’ve all heard over and over in the past few years, dissecting them, and telling us why they are just that — myths. Myths that created a real estate buying frenzy that seemingly everyone got caught up in, buying houses they could barely afford because they were such a great investment. Certainly, some people were able to sell at the right time, and made a lot of money off of the housing bubble. A lot of other people, though, are currently losing their shirts. This article won’t help them now, but it does make a pretty good argument for renting.

Unless, of course, you’ve gotten into an owner-occupied duplex situation like me — with my tenants’ rent subsidizing my mortgage, tax, insurance and maintenance bills, I pay roughly the same amount per month as what I was previously paying in rent. I do have the hassle of fixing things now, of course, but luckily that hasn’t come up that often. And, unlike what this article says, my taxes did go down considerably after buying the duplex. Not only do I get to deduct half of the mortgage interest on my personal return, the duplex also creates a huge business loss on my taxes, after you figure in the expenses and depreciation…

The whole article, with related reading links, is here

Myth #1: Renting is Like Throwing Your Money Away

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes or maintenance fees. They pay rent.

Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.

Myth #2: There are Tax Benefits to Owning

Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents.

Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone–including renters–is allowed to take.

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the ‘tax benefits’ of owning into a buying decision.

Myth #3: It Doesn’t Cost Any More to Buy Than It Does to Rent

People can usually rent a home by paying first month’s rent, last month’s rent and possibly a security deposit. All the money that is paid initially actually goes towards monthly payment obligations, with the exception of the security deposit, which is nearly always returned to the renter in the end.

When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent ‘investment’ ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.

Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.

Myth #4: Buyers Have Assets, Renters Do Not

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.

Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the ‘investment’ they made through mortgage payments is gone–dried up virtually overnight through no fault of their own.

Renters may not co-own a home with a lender, but this doesn’t mean that they don’t have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven’t been paying a lender to ‘rent’ money so that they could pretend like they own an asset.

Myth #5: Houses are a Good Investment

During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.

The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.

Although home prices can go up (and down), the rate of appreciation on housing does not surpass inflation levels over the long-term. Between 1890 and 2004, the real return on housing was a pathetic 0.4 percent per year over the last 100 years, according to Robert Shiller, a housing expert and Yale economist.

Real estate investments aren’t that much better over the short-term. The gain in new home prices over the last 20 years has been a mere fraction of the Dow’s gain. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.

Another nice thing about the owner-occupied duplex situation — I come out ahead on both sides. If housing prices were to continue to go up, because everyone wanted to buy, I could sell the duplex at a profit. If it becomes universally more attractive to rent, I have a larger pool or renters to choose from, allowing me to be more choosy and raise the rent.


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One thought on “Renting vs. Buying – Myths that created the housing bubble and the foreclosure crisis

  1. I’m glad I read this. This is even more true in Chicago, where tenants can wind up winning damages equal to two-times their full security deposit against their landlords. Often, those landlords just rent out a single house or two-flat or condo unit, which were no doubt bought as “investments” by the landlords. But the renter is the one cleaning up. Good article no matter where you rent.

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