Canada's Housing Bubble

Nov 29, 2010 Eli Baracha reflector.com

Homeownership is the “American Dream.” It is often considered the most viable path to wealth creation for the majority of Americans and has shown to enhance civic pride and improve voter turnout.

Homeownership also contributes to better societal outcomes — less crime, a superior familial environment and a better sense of community.

The concept of homeownership seems entrenched in our national psyche as an imperative and is supported at the highest levels of government with a preferable tax treatment. In fact, the strong inclination toward homeownership is so pervasive that in our daily lexicon home ownership has become homeownership.

The significant public policy efforts to enhance the percentage of homeownership combined with constant societal coercion toward homeownership (“why throw your money away on rent”) serve as casual proof of the fact that ownership has financial and wealth benefits over renting. Might there be some fallacy in this paradigm?

In a recent research study that spans the period between 1978-2009, I found that renting, not owning, has proved to be the better decision from a monetary point of view for the average U.S. consumer. In fact, the only time period in which homeownership was preferred to renting revolves around the period of the recent housing bubble until its abrupt burst. The study considers factors such as the rent to price ratio, the average time Americans hold their homes before moving, the tax benefits associated with homeownership, average home price appreciation, and home-related expenses such as property tax, maintenance, insurance, mortgage initiation and selling commissions. However, these results are strongly dependent upon fiscally disciplined individuals who, without fail, reinvest any residual savings from renting in a portfolio that has similar risk to an average home.

Does this mean that we should all just rent our primary residences? No. Many non-monetary factors such as being able to call a place “your home,” homeownership pride, and the ability to make changes and improvements without having to deal with a possibly over-demanding landlord are not considered in the analysis. Moreover, while in some locations it is easy to find a rental property that meets our needs and wants, in many towns and cities across the United States the pool of rental properties is mostly comprised of small apartments and ill-maintained houses. Finally, many of us are not disciplined enough to give up the self-imposed savings vehicle that is built into the monthly amortization of our mortgage. Said another way, while renting may have been wise, any extra savings from renting might be spent on non-wealth enhancing goods resulting in any benefits from renting versus owning disappearing in a cloud of consumption spending rather than savings and investing.

So while renting a home often can prove to be the better financial decision, the study also finds that the current housing market situation increases the odds that owning will be the preferred choice over renting in the near future. The likelihood of higher than usual benefits to homeowners is rooted in a current higher than average rent to price ratio, historically low mortgage rates and abundant supply of housing to choose from. In other words, if you are looking for a place to call your home rather than a way to make a quick buck and plan to stay in the same residence for an extended period of time, today's housing market is giving you a rare opportunity — owning a home you want to live in that also makes financial sense.

Eli Baracha is in the Finance Department at East Carolina University.