Friday, February 22, 2013

Own or Rent Redux — Controlling the Chaos

The American Dream?
I posted this blog two and one half years ago, during the height of what has been called the Great Recession, and has as much validity today as then. Maybe more so. A housing equilibrium has begun, foreclosures are significantly down, home prices are rising, and apartments are booming (Remember: All things are cyclical). 

We have owned a home for over thirty years; it is both a source of pride and value. None-the-less, from a meager down payment in the late 1970s we have significantly leveraged that payment into a comfortable home and not an unreasonable sum of equity – I said equity not cash – ah, there is the rub.

The Wall Street Journal notes this week (Sept. 2010) that Fannie Mae (now there is a reliable source) says that the percentage of people who consider a house a safe investment has declined from 83% in 2003 to 67% this past July. My guess it corresponds to number of foreclosures, unemployed, and speculated homes – but that is just my guess. 

To own or rent is a debate that will never end. In the mid-1940s, articles were written in Harper’s Magazine and other publications, saying that home ownership would be a disaster to your personal finances and implied that the buyer didn’t know what they were getting into. Other types of housing were offered as the solution: rentals, apartments, mutual associations, and the like. At the time there seemed to be a fear of homeownership – fifteen years of almost no ‘ownership’ construction will do that (see Great Depression). This obviously passed as all irrational fears do. Americans have built and bought millions of homes since then.

The current debate is more economic than challenging the fulfillment of a dream. In America there has been a cultural, economic, and social desire to plant your flag on a chunk of ground and call it your own. It is a visceral desire – in fact many of the current sad stories are a direct result of this yearning. In other times and different economies, this longing would not have caused the chaos of today. Many competing and opposing forces came to bear to create this disaster.

But markets try to and eventually will, balance themselves. When inexperienced or even experienced homeowners are sadly forced out, other opportunities appear. The foreclosed house now becomes a rental, and large suburban tracts are changed to horizontal rental complexes, street after street, meeting the needs of the marketplace. Is this good or bad? I’m not sure, only time will tell. But what is critical is the residential market structure is preserved and adjusts to reflect later market forces, from owner to rental and back to owner.

Rental and ownership are perceived differently across the country. New York City, where almost everyone rents (or more culturally/financially appropriatly, leases) a residential unit; extreme allowances are made and tolerance giving to rent control, obituary diving, and under-the-table rentals. But there is no stigma to the renter – all are in the same boat. This is an entirely different housing market than the suburban foreclosed homeowner who is forced into a rental property. Iowans would not understand New York City housing.

The Census Bureau notes, in an August (2010) release, that renters pay a higher percentage of their income for housing than do owners – go figure. In most cases the age and the structure of the family has something to do with it. As these families mature, incomes and stability increase, homeownership follows – it is the longer term that is often thought of by the homebuyer. The renter tends to be transient, mobile, socially and culturally looser – age and family growth changes these actions. Rents reflect the current marketplace (for good or ill), ownership costs do not – as personal incomes increase, the ratio changes. Today’s foreclosures do tell a different story for some, but the trend will always go back to the mean – consider your own home and situation if you bought prior to 2000.

To rent or own will always have its champions. Rationalizations will be made that prove, without a doubt, their position is correct. As I noted above the desire to own is visceral – the reason for renting may be cerebral. Rationalize away . . . .

Stay tuned . . . . .

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