Renting vs. Owning

At the heart of your “reasonable life”, the home you choose to live in plays a singularly important role.  It’s more than a just a place to live.  Under the right circumstances, owning your own home presents an opportunity to make a long-term committment to the life you want to build. 

And, while ownership also helps to control some major cost variables in your budget. it comes with other, less certain costs (and risks)….an important lesson that many have been surprised to learn in the past couple of years.  In light of these recent events, then, it is worth re-examining this basic housing question – rent or own?

From “the beginning of time”, obtaining shelter was, generally, a fairly simple affair; a not so expensive or difficult objective, really.  In much the world, expedient shelter can still be cobbled together in fairly short order. 

Of course, like almost all human endeavors, we’ve learned to make the filling of this basic need a lifelong burden.  And, though we might eschew the classic “mud hut” in favor of something more permanent and, dare we say, “comfortable”, the real problem for most of us is really fairly simple:  it’s become a matter of money.  You see, it hasn’t always been as big a burden as it’s become.  

Ever since 1971, or thereabouts, any and all pretense of our maintaining a stable dollar was left exposed.  The initial shockwaves were felt in the price of oil – due to the response from the relatively new OPEC, which felt, rightly enough, that they were being cheated by being forced to exchange a tangible asset for monopoly money. 

OPEC’s 1973 oil embargo, served as a rather loud wake-up call for a country that was becoming increasingly dependent on foreign oil imports – a paltry 30% or so at the time.  Our support of Israel in the Yom Kippur War is the oft-cited reason for the embargo, however, most would agree that Nixon’s unilateral exit from the Bretton Woods agreement and the closing of the “gold window” was a root cause.

Why does all this economics “crap” matter here?  Well, this historical “turning point” began what has since become an accelerating decline in the intrinsic value of the US dollar.  More importantly, it was the beginning of an era in which merely maintaining our standard of living, let alone advancing it, became a serious challenge, only to be “overcome”, however temporarily, through the rapid expansion of credit and debt. 

Aside from the evidence of rising oil & gas prices, “inflation” – as we know it – became a pervasive part of our national economy and, more importantly, our survival mindset.  If you didn’t own a house in 1970, chances were very good that you’d find it increasingly difficult to change that condition over the course of the decade. 

Significantly, it was during this period that it became increasingly necessary for a two-wage income stream to make ownership reasonably “affordable”, influence of the women’s movement notwithstanding.  And, yes, like those who buy a nicer car to make their commuter hell more bearable, we’ve tended to inflate our expectations.  Afterall, if you’re going to be a “slave” to the bank, you might as well be comfortable, right? 

Well, for most of this last 40 years or so, you’d have been severely punished – economically speaking – if you opted out, renting instead of owning your home.  The reason?  Hard assets, especially those heavily leveraged through nominally cheaper debt instruments, have tended to keep pace with – even outpace – inflation.  Rents, it may be noted, have also tended to rise with inflation, thus not much has generally been saved on that path. 

I’ve noted that “savers” get wacked in this sort of environment, and by that I mean the savers of “cash”.  Among it’s many “blessings”, after all, inflation is – first and foremost – all about the decimation of a currency’s value.  It allows borrowers – principally the government, but we consumers too – to pay off their future obligations with newly minted monopoly money.  The only way that lenders survive is that banks can generally borrow much more cheaply than the rest of us.

Looking forward, it is fair to say that the “rules of the game” may be changing.  The debate is currently raging over whether we’re presently looking down the barrel of a deflation or inflation “gun”.  As some analysts, Peter Schiff among them, contend, it may be possible to have both…..they make double barrel shotguns too, you know?

This scenario is, at it’s root, a return to the economic paradox known as “stagflation“, which combines high unemployment and slow economic growth with rising prices.  This is considered to be a “paradox” by those that believe the declining demand should constrain pricing growth.  And it does, to some extent, as we’ve seen, thus far, with oil prices.

Proponents of the stagflation scenario – myself included – contend that this condition may arise whenever your economy has become heavily dependent on foreign imports, especially for critical resources or staple goods.  In effect, the declining value of the currency in the exchange markets can be counted on to, eventually, trump the influences of demand destruction that is produced both by economic contraction and rising prices.  For our trading partners, there are hardships on either path, as China is now discovering.

Peter Schiff, who was one of the very few who foresaw the subprime mortgage crisis, goes one step further and suggests that you can have a wide range of pricing shifts in different sectors, depending upon the source of the product and the degree to which leverage has influenced past pricing.  He predicts, for instance, that housing prices will continue to decline with household income and, not incidentally, as interest rates rise.  I’m inclined to agree.

What, then, is the most reasonable solution to your own housing “crisis” in this uncertain environment?  Well, one time-honored solution is to keep both your needs and your debts modest

There is good reason to believe that both housing values and rents could decline, assuming that household income growth continues to shrink.  Obviously, renters would, in theory, benefit by being able to renegotiate their leases as the market continues to slide.  It’s a strategy that has merit.

That path, however, requires you to accurately predict the future of the market and, in the end, give up – indefinitely – what ever hope or desire you might have to own your home.  A better solution, in my mind, is to limit your monthly owner costs to a level as nearly equivalent to the rental costs you would incur for the same property.  As it happens, this sort of “utility” valuation model has the added benefit of exposing where property prices have, in all likelihood, become speculative over the past several decades. 

In the end, it is impossible to be sure how home prices will behave in the future.  It is more certain that interest rates will, at some point, be forced to rise, perhaps dramatically.  As anyone who tried to buy a home in the “stagflation” of the early 1980’s can tell you, it is really hard to afford anything with 18% mortgage rates.  So, to those that insist on ownership, there may be “no time like the present”.

Harry Tuttle

See also a rent vs. buy calculator at Bankrate.com.

For seniors (and others?) another calculator at AARP, an organization of dubious political merit at the moment.

Another interesting calculator at CPER that takes local market conditions into account.

More interesting thoughts:  Rent Vs. Buy Myths That Ruined the Housing Market

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