Own? or Rent?
I have owned a house or two in my time: a heavy financial burden. Now I rent, and on the whole I like it better. There are tradeoffs to consider, but the idea that it’s always better to own than to rent is untenable. Dean Baker addresses it in this article:
There has long been a strong ideological bias in the United States that has pushed families toward becoming homeowners. Instead of resisting this bias, many people in the policy and advocacy community unthinkingly echoed this ideological refrain, joining the push toward homeownership.
This would have been problematic at any time, but pushing homeownership at the peak of a housing bubble was a recipe for disaster. In the wake of the collapse of the bubble, it would be great if we could promote some clearer thinking on the relative merits of ownership and renting.
At the most basic level, it is important to recognize that ownership will not always be desirable for every family at all times. First and foremost, homeownership will typically only make economic sense when families can expect to stay in a home for a substantial period of time. If there are family or employment reasons that make long-term tenure unlikely, then homeownership is probably a losing proposition.
The arithmetic on this is fairly straightforward. As a long-run average, house sale prices equal roughly 15 times annual rent. This means that a unit that rents for $1,000 a month can be expected to sell for roughly $180,000 (15 times the $12,000 annual rent). The combined buying side and selling side transaction costs average roughly ten percent of the sale price. In other words, the roundtrip transaction costs will typically be equal to one and a half years of rent. In this example, the transaction costs associated with buying and selling the home would be equal to $18,000, which is one and a half times the annual rent of $12,000.
The high transactions costs associated with buying and selling a home mean that …
