The Unownership Society
Seven years ago, when people I knew were buying houses they couldn’t afford with the philosophy that real estate prices always go up, and the go up fast, I was sitting on the sidelines. I had no money, no desire to settle down, and no belief that real estate in the form of home ownership was such a sure thing. Years later, I had a chance to see the real numbers behind the true cost of owning a house for 30 years, and I was not impressed. For all that people say about real estate appreciation, there is a lot you don’t hear about often.
To truly determine how much you earn on a house from the moment of purchase to the moment of sale, you can’t ignore all the maintenance costs and other fees you are required to pay in order to live in that home. Buying a house for $500,000 and selling for $600,000 two years later is not a real 20% return when you consider you spent $30,000 in taxes, $15,000 for a new patio, $10,000 for a remodeled kitchen, your closing costs when you purchased the house, and the Realtor’s commission when you sell. The home you live in barely beats inflation over the long term when you factor in all costs, unlike long-term investing in a broad selection of stocks like an S&P 500 index fund.
MP Dunleavey mentioned that more people are beginning to think the same way I have been thinking, and taking this approach much farther than I have. These “transumers” eschew ownership wherever possible in favor of a more transient existence, supported when necessary by renting and leasing. “Rather than spending your money on individual things, which you then have to keep (suddenly an old-fashioned idea), you purchase access to an array of objects and experiences. It can save time as well as cash: The more you own, the more you have to worry about, maintain and upgrade.”
Renting is often cheaper than owning, even over the long term.
When you count gas, maintenance, insurance, repairs, loan payments and depreciation, the average cost of car ownership is $8,095 a year, according to AAA. Yet the majority of cars in North America are driven only 66 minutes a day, according to a 2008 study by Susan Shaheen of the University of California, Berkeley. That works out to about $20 an hour, two to three times the hourly cost of car sharing.
I don’t think a service like Zipcar would work for me because most of my driving is my daily commute, but the transient lifestyle lends itself to leasing a car. Leasing usually includes a contract that is not favorable to the consumer, and most related financial advice warns to avoid leasing a car. But in cases where leasing is more expensive in the long run than buying, or you have no asset at the end of the contract, you could consider the increased cost the price you pay for not needing to deal with the pains, headaches, and expenses of owning the car.
Every time you add to your possessions, you add to your responsibility and in many cases your expenses. Rather than being tied down to material objects, you can spend your money on experiences or save for the future.
Why Own When You Can Rent?, MP Dunleavey, MSN Money, May 6, 2009
Article comments
It’s true that real estate values barely exceed inflation over the long term – but that doesn’t mean your return is close to that unless you are buying your home(s) in cash. LEVERAGE is the primary reason real estate is such a good investment. In your example of a $500,000 home, the buyer probably put down $50,000 and got a $450,000 mortgage. If that person sells the home for $600,000 two years later, their return isn’t 20% ($100K / $500K) – it’s actually more like 200% ($100K / $50K).
Of course you have to account for taxes and maintenance, etc, as you rightly point out – so that actual return is much lower (though I’d argue you can’t include adding a patio and remodeling a kitchen as required maintenance costs). But it certainly still beats inflation. Especially when you consider that not only is the house increasing in value (over time), but that you are ALSO paying down the loan principal (typically). Toss in the tax advantages of being able to deduct interest and taxes and you would be hard pressed to argue that the cost to own exceeds renting over any significant length of time.
There are lots of things that are cheaper to rent (or borrow if you can), and you also get out of storing them. For instance: a rug shampooer; sports equipment for a sport you’re just trying out or that you don’t do often (e.g. skiiing once every couple of years); or specialized tools.
Leasing a car isn’t really renting. It’s like the worst of both worlds – you pay a premium, and you have restrictions on the use and abuse of the item; yet you still have to maintain the item yourself, and pay all the carrying costs.
I’m leaning more toward this philosophy everyday. The things you own end up owning you. My pressure washer broke, and my first instinct would be to buy another one. But I’m trying to change, so I think I’ll rent one for the one weekend out of the year that I need it.
Maybe I’m just overstating the obvious, but I think that personal preference (and family history) usually has more to do with this than monetary factors. Going under the assumption that there are more rentable apartments apartments/townhouses out there than rentable houses with surrounding property, I think that if a person prefers the outdoors, doing yard work, etc., fixing things, they’re going to gravitate towards home ownership. However, if someone would rather spend their time doing other things, then they’re going to lean towards renting a smaller property (ie apartment or townhouse) where the above items are usually taken care of for them.
I think this is where family history comes in too…those who grew up in an apartment may feel overwhelmed by the tasks of owning a home and are quite content living in a smaller space with more people around them. Likewise, home owners may not prefer to move into a more cramped environment.
I think it depends a lot on the local housing market and your individual situation. Many places renting is a better option than buying for most. But in other cities buying will be cheaper than rent. If you move a lot then renting is likely to be better overall. But if you plan to stay in one home for several years then that can be better.
Another downside to home ownership is that it encourages you to spend more on housing that you would otherwise elect to spend. When someone goes from renting to owning, they almost always end up opting for more square footage. When you’re paying by the month, you tend to want to keep costs down. When you’re buying, the thought is “I better make sure that I own enough square footage that I will never feel that I don’t have enough.” You end up paying for far more room than you really need.
Rob
I’m afraid I don’t find this type of pablum very useful. Rob makes statements describing what’s in peoples’ minds when they rent or buy. How in the world does he know this beyond what was in HIS mind? Is there a data base you’re relying on, Rob? Or are you just making it up?
I guess I just don’t see the value of this type of pseudo-psychobabble.
There’s a line in a song by Mae Moore which I frequently quote… “All the things I don’t have set me free.” It’s very true. That being said, ownership is an experience in itself because you can do whatever you want to do to the thing which you own, whether it’s a car or a house. When I rent, it never completely feels like home. I can’t remodel or always decorate the way I want to.
As for home ownership, you’re forgetting the tax benefits which can be great for people who are single and make somewhat high incomes. I have a house in another city that I’m renting out and I rent an apartment where I live. My house has gone down in value since I bought it, but I do get the depreciation, property tax, and other tax benefits. I do have to worry about it and check on it occasionally. This whole mortgage and economic crisis has tied people down. If I eventually can’t find a renter, I may have to quit my current job and move back to where my house is to find a job there.
As for cars, I like driving them too much to participate in ZipCar. Driving my cars are experiences I enjoy, almost like a hobby worth spending money on. Financially speaking, for a couple, I think it’s good to have one new car that is in warranty and reliable for long trips and another old car that you can run into the ground. Putting miles on the old car also keeps the new car in warranty longer. Somebody commented above about maintenance expenses, but some car brands provide free maintenance for 3 years or more. Leasing is hardly an option today as not many companies are offering reasonable lease rates.
I’ve been running these calculations for the past year or so, ever since it started to seem like a good time to buy. I can never make the numbers work in favor of buying. I frequently talk and advise people about this. It really comes down to a lifestyle decision. If you are buying/building a home because you want to control materials, environment, paint colors, neighborhood, a million other things then it can make sense. If you are buying because you think it is a good INVESTMENT, the numbers don’t support this in many cases. A lot depends on where you live. Here in Florida, the cost of insurance is astronomical and property taxes are relatively high because there is no state income tax. It will be interesting to see if home prices EVER dip low enough here to justify a purchase from a purely monetary perspective.
Very good article. Not only are those things problematic, but in our current system, over time people see a nominal increase in home values but because banks do anything they can to lend, with the help of artificially low interest rates, banks can say we are lending, people are spending, and it doesn’t matter how much debt is out there your increase in home value is justified. Ultimately though, along with a general increase in prices for things you need to keep your home in the shape you want, coupled with the purchasing power of your money at the time of your purchase and how much can be bought with that same amount x amount of years down the line will be less. Does anyone think a person can buy a home, have it go up in value, along with the purchasing power of my money at the same time? I just want to save my money and have it be worth more down the line, not worth-less.
While I’ve been a renter since I left college, we’ve decided to buy a home this year. While your calculations are indeed correct, one thing I always look at is in 15 years (8 years if things stay good) I will own the home outright and will have no monthly payments for the home. At which point I can roll all that money into my retirement accounts. Sure if we have to sell we will have to face the fact that the return isn’t as good as a market investment, but if we live for the “what if” then you have to ask yourself if you are really living.
The fact that you can eventually stop sending mortgage payments when you own a house is definitely a plus for your cash flow. A lot of families never reach that point, unfortunately, moving from house to house as if they were renting anyway, upsizing with every move to make more room for a bigger family or to just enjoy the increase in income over time.
I generally agree with the advice on this blog, but making the argument for leasing a car is not something I can remotely understand. Zipcar, yes, but leasing a car?! No! The costs of owning a car mentioned (maintenance, gas, insurance, … ) are also borne by the leasee, so that’s a wash, but the leasee also has cumbersome payments and a contract for your ability to drive certain miles and resale value (buyback provisions), etc. I’d be interested in a follow-up post detailing the price/cost differences in buying vs. leasing a car. I totally agree that if you live in a city and it makes sense with your lifestyle, that Zipcar is a great idea, but I just can’t get next to leasing.
Leasing is almost always a bad deal for the consumer and I would never recommend it except in excelptional cases… for example, if your career required you to project a certain kind of image or if you knew you would only need the car for a short time. Sometimes a self-employed business owner would benefit from a lease due to his or her tax situation. So I can’t completely rule out the option, but for most people leasing doesn’t make any sense.
The reason I’m still comfortable with being a homebuyer (I won’t say “homeowner” unless it’s paid for) is because I’ve had plenty of Landlords who don’t live up to their end of the deal and refuse to repair things. If I’m going to pay to fix something, or upgrade something, I don’t want to feel like it’s a complete waste.
I am slowly subscribing to this mentality; however, in the US we tend to have this mentality of “He who dies with the most toys wins” and our never ending desire to have the biggest and best stuff. This was pre-economic crash, but is still prevalent. Somehow we think (or thought) that homeowners are “better” than renters, that they are more financially stable, etc. In addition, it was always drummed into our heads that owning a house was the best investment that you could ever make. Hopefully, people are now seeing that this isn’t the case anymore!
I would rather have an empty apartment and a full stack of memories related to experiences! If that makes any sense 🙂