A Case for Renting Instead of Buying (in Today's Economy)
Before my real estate agent or mortgage friends scream at me, relax. I’ve always said that owning your primary residence isn’t inherently “bad,” it’s just not what I would do in relativity. That being said-- I’m single, only have a dog, and have a one bedroom with an office in it. I’ve got what I need and if a lightbulb is out, I ask them to come fix it.
This always tends to be a hot button issue when I put it out into the world that I think renting can be better than buying in a lot of cases. If you’re between the ages of 25 and 40, you’ve been indoctrinated with the concept that owning a home will be the greatest asset you’ll ever acquire. Yet, the housing market continues to climb—which is one of the main arguments I get from those who say I’m “throwing money away” when renting.
“ARE YOU STUPID? I’VE OWNED MY HOUSE FOR FIVE YEARS AND I COULD SELL IT NOW FOR A MASSIVE PROFIT!”
Is that right? Are we talking gross profit or net profit? Or did you do the numbers at all...?
The funny thing about that argument is people who use it are either real estate agents, mortgage companies, or people who identify as homeowners. Humans have this instinctual way of attaching themselves to the industry or identity that they are in and have a hard time having a completely non-biased approach. I think utilizing whole life insurance as a storage unit for potentially riskier investment opportunities, hedging inflation, a tax-shield, and literal generational wealth is “the right way” to do things, but then again, you’ll have people who think 401k’s are the gateway to wealth.
Perspective is everything in any type of argument or riff. You come from where you are and your own personal experiences and the other person or people come from their own personal experiences. With the evolution of social media and the ability for people to be keyboard warriors behind a username, you have some “brave” people willing to think out an entire answer before they click “post.” Whereas if you were face-to-face, they may not have much of an argument at all. Nonetheless, I say all this because I’m giving you MY personal experiences and perspectives as to why I believe renting can relatively be a better move than buying, specifically in today’s economy.
Mobility and Leverage
If we can thank COVID-19 for anything, it’s that we got to find out firsthand just how mobile and dynamic the business economy can really be. Gone are the days of having to go into an office—unless you’re in specific, hands-on fields—and working 9-5 while hearing about Jake from accounting’s “wild weekend in Chicago with the boys.” No, people for the most part go smart during the pandemic and saw that their physical presence in an office wasn’t nearly as important as how efficient and quality their work can be from the comfort of their own home.
We’re almost two years into the COVID-19 world and most companies are seeing the benefits of a “mostly-remote” workforce because their workers by-in-large are happy and more efficient and their bottom line has exponentially increased because their operating expenses of the business are far less than before.
What’s more, workers are realizing they don’t have to be in Omaha, NE to do a job in Omaha, NE—they can be back home in Philadelphia, PA closer to their family and fly back to Omaha on a quarterly basis, as an example. Let’s say the example I just used is real life, there’s absolutely no reason to buy a house right now back in Philly when the housing market there grew almost 20% in the past year and a half.
Now, let’s be clear here, rent prices also increased in Philadelphia by 5%. I like to refer to Philadelphia as a “soft market”—meaning they don’t have outrageous home prices, but they aren’t necessarily cheap, relative to Elkhorn, NE—where I live-- and the average home price is $420,000. The average home price in Philly is $225,000. If you lived in L.A., you’re looking at more like $900,000, so it’s potato tomato, as my grandpa would’ve said.
Let’s go back to Philly for a second—does it make sense to pay 20% over the real market value, in addition to the closing costs, taxes, maintenance, repairs, and insurance when you’re not 100% sure you won’t have to go back to the office? In my opinion, no, but this is just a random example. On a $225,000 house in Philly, which is what the actual market value is, you’re looking at a $270,000 home that is overvalued and likely to decrease in value over the course of the next 12-36 months when the FED decides they can’t keep putting band-aids on interest rates and the stock market implodes.
You’re likely putting 10-20% down on this home, meaning you’re shelling out $27,000-54,000 in a down payment, paying the taxes, getting the insurance, etc. I mean… I’m just saying. You’re likely in the hole on this one. It could just be Philly’s market though, so again, it’s relative.
Mobility was one of the key words here as it pertains to renting because mobility has become king. I mentioned earlier that you don’t need to be in the office, so why go? Now, you can make a case for culture building in the office or a social factor being a main drive to wanting an office presence. But in reality, that’s not your call anyway if you’re an employee—it’s the business owner’s. If you can quite literally work from anywhere, why would you stay in one place when the world is so mobile now?
Leverage was also a key word in this section of the blog because what many people forget to calculate into their pros/cons list of buying is a house is the leverage you lose when you aren’t “mobile.” Think of it this way: if you go into a salary negotiation with your boss, is it better to be tied down to an area because you’re in a housing market that seemingly has ceiling nobody is a willing to talk about—or are you better off being mobile in your approach because you aren’t tied down and can move at a moment’s notice? I’d say the latter, but I’m sure the real estate agents will jump at that and say they would be happy to sell your house and the mortgage officers will quickly jump at the opportunity of finding you a new “forever home.”
I’m not hating on those people by the way. I have close business relations with them and many are close friends of mine. This is how economies operate, simple as that. But the beauty of capitalism is that anything is for sale and there is almost always an angle to “do the numbers” and it make sense. Do your numbers and you’ll have your answers.
Flexibility in a Recession
Make no mistake—there is some funky stuff going in in the economy right now. If I personally had a home, I’d be selling it—if the numbers made sense at least. We’re heading for a crash that will certainly be different than the crash of 2008, but nonetheless a crash. 401k’s, Mutual Funds, and other qualified plans will take hefty hits and there’s really no way around it. The economy was inflated in the election year by Trump and then a slew of poor decision-making by Biden has brought the economy to a tipping point in which we’ll see the likes of a crash that will devalue nearly everything in the U.S. economy. Gas prices will go up, cost of living will stagnate -- for investors, specifically-- and housing prices will adjust back to what they were pre-COVID and thus, you’ll have a lot of homeowners “stuck.”
That doesn’t happen for renters during recessions. You can move to a cheaper place in a bad economy because you aren’t beholden to your mortgage. You’re more-or-less stuck in your decision because the market carries an uncertainty that effects the price of your home. What’s better—having a to put 20% down and 30% over asking price on an asset that’s likely to decrease in the next 12-36 months or put your money elsewhere, stockpile, and jump at the opportunities that are inevitable within the next 12-36 months in what’s certain to be a down economy.
The choice is yours.
This was a low-level overview of my opinion on buying and living in a primary residence. I don’t expect anyone to “be on my side” of this “argument,” but I think these few examples are simply factors that most people ignore. By design, humans are impulsive in their purchasing of literally anything. It’s no surprise that when we see a home we are interested in and the cost falls inside our “range” that we jump at the opportunity without carefully considering the ramifications of throwing your money into a home that, as I mentioned before, will likely decrease in the coming years.
As always, do you numbers, balance the risk-reward, and then be decisive one way or the other.
For more information, visit www.lyvfin.com and set an appointment with a certified professional!