Owning vs renting

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This page reviews the arguments for owning vs. renting your home.


Many people get a psychological benefit from owning a home. They like feeling that a piece of property is theirs. Of course, that ownership is normally dependent on making monthly payments to the bank. And even after the mortgage is paid off, you still need to pay insurance and taxes.


The biggest advantage of renting is the flexibility to relocate relatively easily. In the last century, many people worked for employer their entire lives. But today, most workers are likely to work for a number of different employers, in multiple different cities. Even when switching jobs within the same metro area, a previously convenient house may now entail a grueling commute.

1 in 6 now owe more on their mortgage then their property is worth.[1] Many more are not willing to sell their homes because they know the price has dropped below what they paid. Many of these stay in a home that is poorly located, or too big or too small for what they can now afford.

Houses vs. Apartments

There is a common misconception that only apartments are available for rent. Although most rentals are apartments, homes in every category from 400 sq ft shacks to 10,000 sq ft mansions are available for rent.

If you are concerned about having to move after a year, most landlords would be thrilled to sign 2 or 3 year leases. But this is normally unnecessary. Most landlords are thrilled to have a renter who reliably pays their rent,

Transaction Costs

Asset Class

Separate from the value of having a place to live, a home is an asset that increases or decreases in value over time. The underlying housing equity is a real asset, but it is a incredibly poorly returning one. According to economist Robert Shiller, "the average annual real (net of inflation) increase in home prices was a mere 0.40%"[2].

Of course, any given house might double or triple in value. But it also might lose value even faster. In any event, housing is always an extremely illiquid asset. Unlike stocks or bonds, it can take months to sell a home, and there is a serious risk that if selling during the wrong time, a homeowner can get significantly less than the long term average price. As an asset class, homes also tend to be highly correlated with economic conditions of their city. So, if you lose a job because of hard economic times (such as in Detroit), you may find your home equity simultaneously diminished.

Finally, a home is by definition undiversified. Although Homeowner's insurance should protect you from fire, flood, and earthquake, it does not provide any guarantee that you will get back the money you paid for your house.

Negative Bonds

Purchasing a house with a mortgage represents both an asset and a liability. However, the two parts of the transaction interact with your portfolio in different and subtle ways.

As a liability, a mortgage is a negative bond. If you have 300 K in bond funds (loaning money), and a $300 K mortgage (borrowing money), you do not have any net allocation to bonds. The effect of the negative bonds (the mortgage) is to put you in a riskier asset allocation than you might otherwise choose.

Now, let's consider the asset side of the ledger. There are two financial aspects of owning a home, and neither of them are at all like a real ("positive") bond. The appreciation or depreciation of the property and housing stock is a very illiquid, undiversified form of equity. Implicit rent "is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market"[3]. The implicit rent is only like a bond in that you can think of it paying a coupon, but that "coupon" is a housing voucher good for a month's implicit rent at a single address.

It's simpler to think of the implicit rent as a reduction in expenses rather than as some sort of strange bond. Similarly, Bogleheads often calculate pensions and social security as reducing one's need for retirement income rather than as a form of asset.

The underlying housing equity is a real asset, but as mentioned above, it is an incredibly poorly returning one. So, in summary, buying a house with a mortgage is economically equivalent to making the following three transactions:

1) Reducing their fixed income ownership by an amount equal to the size of the mortgage. 2) Investing in an illiquid equity product with a long-term real expected return of 0.40% 3) Reducing their monthly expenses with a housing voucher good at one house only.

Forced Savings

One of the strongest justifications for owning a home is the forced savings. For people who can't be trusted to contribute to their 401(k) and taxable accounts every month, a mortgage payment forces them to save. (Specifically, they are saving the principle, while the interest is an expense that disappears forever.) Of course, there's problems with the idea of forced savings in practice, because spendthrifts can borrow from their 401(k) plans and can take out home equity loans. And with mortgage payments, the first 5 years (the length most people live in a home) is nearly all interest payments.

See Also

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