Submitted by ARL contributor Harry Tuttle
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?
Throughout human history, obtaining shelter has, generally, been a fairly simple affair; a not so expensive or difficult objective, really. In much of the world, (even hidden corners of America), expedient shelter can still be cobbled together in fairly short order.
Of course, most of us have transformed what might be a fairly simple endeavor into 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 simply a matter economic survival.
But, it hasn’t always been that way.
A Brief Look Back
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”.
What they realized, of course, was that the USA had embarked on an intentional inflationary path. But, why does that matter here?
Well, this historical “turning point” began what has since become an accelerating decline in the “intrinsic value” of the US dollar; in effect, the steady erosion of it’s purchasing power. 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.
Americans were quickly forced to make a number of serious adjustments. First, we came to realize that it was going to become increasingly necessary two have two wage-earners in the household just to “keep up”. Second, we learned that the best (and, perhaps, only way) for most of us to protect ourselves from the ravages of inflation was to “fix” our largest household expense – for housing.
For most of this past 40 years or so, anyone who hasn’t owned a home has been severely punished – economically speaking. The reason? Hard assets, especially those purchased with OPM (other peoples’s money), have tended to keep pace with and, for brief periods of time, even outpace the rate of inflation.
Over the long term, rents also rise with inflation, thus, the owner avoids that risk – by “fixing” his housing expense, and also benefits from the “nominal” (or inflation adjusted) increase in the value of their home.
You Can’t Save Your Way To Prosperity, Or Can You?
At the core, an inflationary economy will punish savers. Savers are, really, just “lenders” in the economy and, typically, the rate of interest they receive is well below the rate of inflation. In the end, most of the time, you won’t be able to save as fast as prices rise.
Today, at least temporarily, that general rule has changed. Inflation will always lead to the formation of what we now recognize as “bubbles”, the rapid flow of too much money in the system into specific asset classes, like housing during the past decade. When these bubbles burst, as they must, savers can then – and only then – make up for lost time.
At the moment, buyers sitting on a pile of saved cash can find great opportunities. Even those willing (and able) to borrow money are, for the moment, being supplied with unprecedented low interest rates. For many Americans, this combination of declining prices and cheap mortgage money may well represent the “last best” buying opportunity in our lifetimes.
How About Renting?
In the present depressed economic environment, many “experts” believe that both housing values and rents will continue to decline, largely on the basis of declining household income. Obviously, renters would, in theory, benefit by being able to renegotiate their leases as the market continues to slide and, furthermore, avoid the capital loss of buying a depreciating home. If the underlying assumptions are true, this strategy would have merit.
That path, however, requires you to accurately predict the future of the market and, in the end, possibly 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”.
Test your own assumptions using the rent vs. buy calculator at Bankrate.com.
See additional commentary on this site: Should You Buy A House Now?