The nation is undergoing a radical transformation where renting is currently outpacing homeownership. The reasons are complex including the multi-year investor orgy into single family homes. Since the crisis hit 7,000,000+ homes have been lost due to the long and drawn out process of foreclosure. No need to worry since investors picked up a solid portion of the slack here. Americans are notoriously bad savers and addicted to debt. For most, housing is a forced savings account. This is why when net worth data is pushed out we find that homeowners clearly outperform renters. It is important however to keep in mind most of the net worth is tied up in equity. That is, you will need to tap your home somehow to get the money flowing out. This is how we end up with dumpster diving baby boomers scrounging the local Whole Foods for goodies while living in a million dollar crap shack. The hipster kids don’t seem to mind since they are now living with mom and dad, unable to afford the high rents in places like California. Yet housing overall does end up being a big forced savings account and that is why the net worth figures between homeowners and renters are not even close. If anything, it adds more evidence to the feudal landlord nation we are witnessing.
Net worth – homeowners and renters
One of the more in depth surveys done on net worth comes from the Federal Reserve. The data is comprehensive and shows a clear win for homeowners on the net worth front. In fact, as a nation, renters are one paycheck away from eating Kibbles ‘n Bits. Yet this doesn’t paint a very clear picture for say a place like San Francisco where the majority of households rent but you have tons of high paid tech workers.
First, let us examine the data:
Source: Federal Reserve, NAR
I found this chart while browsing the NAR website. It looks like a clear cut case of buying over renting. For most of the nation, I would argue that this is true. People are simply poor savers especially in our hyper consumer driven economy. A home forces many into a hedge against inflation. I think it is important to look at the data closely as well:
“(NAR) Data shows that median homeowners had nearly $200,000 in net worth or 36 times that of the median renter who had just over $5,000. The median value of owners’ homes was $170,000.â€
You get that? In essence, the bulk of net worth of homeowners is tied up with their home. This doesn’t really help in retirement when you need a stream of income from somewhere. If you own a rental, then yes, you have an investment throwing off cash. But if you live in a crap shack you are actually spending money without cash coming in. You still need to pay for maintenance, taxes, and insurance.
What this chart shows more than anything is that housing has been a useful forced savings account for many Americans. With investors crowding out regular buyers, you lose the one vehicle where Americans have consistently been able to build wealth. In other words, welcome to renter nation and the USA of Feudal Landlords.
With this data out there, does that mean you should spend $700,000 for a tiny drywall paradise? No. Keep in mind that the median home price in the US is $222,900. Most of the country is affordable with low interest rates. But in many areas, buying a home is not a clear decision especially given current price tags. You have opportunity costs to factor into your decision and people in places like San Francisco, L.A., or Orange County have other motivating factors: investing difference of owning and renting, affordability, and availability of properties.
I think when people see charts like the above, it almost seems like a resounding case of buying over renting. While this logic is clear cut for the nation as a whole, this doesn’t apply to manic markets. You have to run the numbers much more carefully. This also assumes you are unable to find alternative investments that can outperform real estate which overall tends to track the inflation rate. For the public however, the stock market is viewed as an exhilarating casino while real estate is really easy to understand and perceived as riskless (ask those 7,000,000 foreclosed households how riskless it really is). That is why you can have the “Dad used to be a truck driver but now flipped his way to millions†type shows. It doesn’t take a genius to understand. You don’t hear about people flipping their way into a job at Google or rehabbing a space shuttle. But everyone can “get†that if you put granite in your kitchen you can sell for more! Add a bathroom? More money! Recessed lighting? Cash in your pocket!
Homeownership makes sense in many regards. But to make it seem like a no brainer purchase is absurd in many markets. Think about the tech worker at a startup in San Francisco looking at a $1 million starter junk home. Will that company be around in 10 years? 20 years? 30 years? That household will be carrying an insanely high nut for a long-time even with a giant down payment. Many people simply shack up with others and split the rent. Are you willing to co-sign and split a home purchase? With a spouse, yes. Then people forget that homes have an aphrodisiac quality that seems to beget kids. Kids are incredibly expensive. People seem to forget that there will be additional hidden costs to buying a home beyond the PITI. The net worth data simply reiterates how leveraged we are when it comes to real estate. There is so much lobbying in terms of buying that people fail to save adequately in other investment vehicles.
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