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Renters are Fiscally Responsible Too

Three reasons renting should be a part of the American Dream

Anthony Randazzo
June 14, 2011

Like it or not, the American Dream is being redefined before our very eyes. Homeownership has long been held up as a preeminent virtue for every U.S. worker, but in the wake of the housing bubble, more and more households are shifting towards renting—and with good reasons.

There is nothing inherently wrong with homeownership. But there is also nothing inherently wrong with renting. Unfortunately, this later idea flies in the face of traditional thinking, where children are taught that they must try to own a home when they grow up. Becoming a homeowner is a driving force behind many American worker efforts to succeed. And we confer societal respect for those that own, while often slightly judging those who rent.

But over the past five years Census Bureau data indicates that the number of households being rented increased by 700,000 a year. At the same time, the number of families that choose to own declined by 200,000 a year since 2006.

The bursting of the housing bubble, rising unemployment, and stagnant incomes have certainly contributed to this trend. But there is a strong case to be made for the value of renting, even when buying is possible and the economic climate is positive.

First, homeownership is not a good long-term investment.

The common wisdom handed down the past few generations has been that you should buy a home because it is a good investment everyone should have. But the data indicates that homes largely just grow in value at the rate of inflation, if that. Nationally, they are not a sure fire investment that every household should have.

Although some local markets have seen prices jump in real terms because of new schools being built or other developments that have driven up property values, the national average for housing price growth over the past 65 years has been roughly 3 percent. And you could earn that much with a decent CD or low-yielding mutual fund with much more liquidity and flexibility.

In fact, many households would likely be better off putting their money from a downpayment into Treasury bonds or stock index funds and then renting. Jordan Rappaport at the Kansas City Fed recently wrote that between 1970 and 1999, there were roughly 15 years where households didn't seen any increase in net wealth at all.

To be fair though there were some years in that period where homeownership did yield more wealth growth than stocks and bonds. But what is important is the long-term trend unless a family is looking to flip homes as an investment instead of living in them for an extended period of time. Looking at housing returns from 1975 to 2009, a Philadelphia Fed paper found that homeowners likely lost money, after factoring in depreciation and property taxes. The find that housing returns on investment were roughly 1.3 percent during this time frame, while stocks had a 3.4 percent ROI.

Second, mobility in the 21st Century favors renting.

During the post-war years, a majority of Americans worked manufacturing jobs or in technical professions that allowed them to stay in one place their entire lives. Communications technology was not much more advanced than the long-distance telephone and so families tended to stay close to one another. And many Americans viewed the costs of travel as prohibitive enough that moving from place to place with some regularity was uncommon.

But that has changed in the past years. Citizens of 21st century America are more mobile than their ancestors.  Getting tied down on a 30-year mortgage with a buyers market for housing makes owning a home undesirable for many who are not sure they will stay in one location for an extended period of time.

Most rental contracts are for a year with a month-to-month lease following. Contracts have clauses requiring 45 to 60 days notice from either the landlord or tenant of eviction or departure. Flexibility exists to move if a better job comes along or better employment opportunities arise.

And Census data shows that renters do just that. Between 2008 and 2009, only 5.2 percent of homeowners moved, whereas 30 percent of renters changed residential location. Those who moved cited cheaper or better housing, better employment opportunities, or proximity to family members.

Further, those who buy a house tend to stay in the same place for a significantly longer period of time, for better or worse. Census data shows that those living in rental units have a far shorter median duration of stay (2.0 years), than those who are living in residences they own (8.7 years). And three Harvard University professors argue that this length of tenure for homeowners may be higher than otherwise if households moved when they wanted to. They find there are "greater obstacles to mobility among homeowners rather than a desire to stay put."

Third, the costs of homeownership are frequently undesirable.

Anyone who has rented knows the frustration of general maintenance and utility in their home or apartment. But if they have a good landlord, they also know the benefit of not having to pay upkeep costs. Sure some rental contracts require tenants to cover the costs of some maintenance, or certain damage they cause, but the landlord generally covers the large costs of maintaining a home. And that is only one of the cost benefits. Consider closing costs, property taxes, title insurance, realtor costs, etc. that homeowners have to deal with. While some academic studies may point to the social benefits of owners, there is much to be said for the more predictable cost structure of renting over owning. 

The point here is not to say that renting is better than homeownership for everyone, but only continue building the case that it is not a second rate lifestyle choice. Renters are not inherently throwing their money away, and there may be very good reasons for a household to rent instead of own. At the same time, certain families will definitely want to own, but we shouldn't design public policy to favor and support those households over renters. The American Dream shouldn't be just about homeowners either.

Sean McElwee, a research intern at Reason Foundation and junior at The King's College-New York City, contributed to this commentary.


Anthony Randazzo is Director of Economic Research


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