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The Money Pit

Friday, June 17, 2005

I don't own my own home. I'm a renter. Every time I see family members, they tell me I'm crazy. The Washington Post seems to think they're right, since in its recent story it compares 2 women with equal incomes. One owns a home and is doing quite nicely as a byproduct of rising housing prices. The other rents and has a large pool of savings, but has a much more modest lifestyle. Buying a home seems like a pretty good idea.

On the surface, homeowners have it pretty sweet in America. They can deduct their mortgage payments from their taxes, build wealth because of rising housing prices, and live in a nice place. At the same cost, renters pay more in taxes and are gaining nothing in the long term. According to the Washington Post and others, anyone who doesn't buy a home is a just a fool, aren't they?

Maybe. Maybe not.

It is certainly the case that people who rent are getting screwed. The mortgage deduction in effect subsidizes homeowners at the expense of renters. And the rising housing prices that so benefit homeowners just jack up the cost of renting. Public policy tries to increase housing prices; but for a renter, flat housing costs are the ideal. Combined with the decline of government-subsidized affordable housing, and renters are getting a pretty raw deal.

So if renting is such a bad deal, why don't these people buy?

Not everyone can buy a home. If you are just scraping by financially, or live in an urban area with very high housing prices, you will never, ever be able to own your own home. It's simply impossible. People who rent tend to be at the lower end of the income ladder and live in cities, so all those pro-housing policies amount to a massive redistribution of wealth to affluent suburban zones.

But are renters really so dumb? Not necessarily. First, homeowners have a lot of costs that renters don't, like maintenance. More importantly, the housing advocates just assume that housing prices will rise indefinitely. But how are 10-15% annual gains sustainable with flat median incomes and only a slow population increase? And what happens to the value of these homes when all the boomers retire at the same time? I think we know.

Homeowners refuse to accept the existence of a housing bubble, because bubbles burst. Investing in a home is, in fact, an investment. In other words, it is a gamble. There is no guarantee of future gains. And investments that everyone is engaged in are frequently bad ones - that's why we call them bubbles.

So if the housing market collapses, will the woman with a valueless home and large debts be better off than the renter with savings and no debt? In that situation, renting doesn't seem like such a bad idea after all. At least you know what you're getting.
Posted by Arbitrista @ 6:36 AM
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