Stated differently, if you (a) rented and (b) had the discipline to save the difference and put the savings in financial assets, you would have been much better off renting. I've always had the intuitive sense this was the case, due to the sky-high interest, transaction, insurance and maintenance costs associated with home ownership, together with the stunning bubble pricing from ~2002 through 2006, the resultant crash, and a general sense a house is a depreciating asset that fails to provide a monthly or quarterly return on capital (instead the house gets older, materials rot and rust, appliances and plumbing wear out, etc.). Mortgage interest is the real killer.
From the article:
The sense that homeownership was an essential building block to household wealth was a key psychological driver of the mortgage boom. . . . A new academic article in Real Estate Economics turns this conventional wisdom on its head. Using data from 1979 to 2009, the authors demonstrate that renting was the superior investment strategy for most of the past 30 years. Counterintuitive as the finding may be to some, it is actually quite logical. Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property. The amount of capital to be rented is a function of house prices, while the bulk of a mortgage payment is interest, which is the rental payment on this capital. After 2 years, the typical 30-year amortizing mortgage balance has been reduced by less than 3%. This means that a household that took out a $300,000 mortgage with a 5% interest rate to buy a home has only reduced its mortgage balance by $8,600 after two years despite spending nearly $39,000 in total over this period.
They key to understanding why renting is so often superior are “price-to-rent ratios,” which reflect the difference between the monthly cost of renting or buying equivalent residences. While it is often less expensive to rent than it is to buy, the relationship can change over time causing one of the two options to be an especially (or comparatively) good deal in some circumstances. . . . From 1999 to the second quarter of 2006, the cost of buying a home doubled relative to what it would cost to rent the same property (on an average, community-wide basis). To put this change in concrete terms, imagine a two-bedroom, 1,800 square foot condo. In 1999, it required a $1,200 per month mortgage to buy, compared to a $1,000 monthly payment to rent (a price-to-rent ratio of 1.2). For the price-to-rent ratio to increase by 2.2-times over this period it might have cost $3,000 a month (in mortgage payments) to buy the property in 2006, compared to a $1,100 monthly rent payment. In retrospect, it is remarkable that it was the household spending $1,900 per month less to live in the same property that was considered to be "throwing money away." . . . .
Importantly, the authors make clear that in general, renting is only the superior financial choice if the renting household has the discipline to invest its marginal savings into financial assets. Renting generates residual savings because the cash outlays tied to housing consumption (or purchase) are lower. But if renting households, or the individuals themselves lack the discipline to save this money, and instead increase non-housing consumption, any wealth gains will clearly disappear. The basic intuition is that the principal portion of mortgages is what usually leads to more wealth. But as this article shows, that's because it represents incremental savings not because of anything intrinsic to the mortgage itself. Viewed in this light, the economic gains come not from “owning” a home but rather the forced savings generated by the principal portion of the monthly mortgage payment.
It is instructive that at the end of the analysis, the much-touted economic gains from homeownership really come from the forced savings of an amortizing mortgage. And this benefit only accrues to myopic households that would not otherwise save. Thus, the government could replicate the same economic benefit generated by federal housing policy through a simple deduction from checking accounts that could then be deposited into a tax-free savings vehicle. This is an important point to consider the next time someone argues that removing or lowering a housing subsidy will necessarily inflict an acute economic hardship on the nation.
