Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
from Ben ChristopherCalMatters
!["A]("https://i0.wp.com/calmatters.org/wp-content/uploads/2020/09/09042020_Housing_TK_01.jpg?fit=1200%2C800&ssl=1")
This story was originally published by CalMatters. Sign up for their newsletters.
It’s a benchmark for success, a cornerstone of responsible adulthood, a time-tested way to build wealth for you and your progeny. Home ownership, we’re told time and time again, is a status that every right-thinking person should aspire to—the epitome of the white-picket fence American dream.
But what if it’s also a bit overpriced?
For generations across the country it has been taken for granted that property is both financial and financial socially superior way of inhabiting a home and that public policy makers should always encourage it. California lawmakers and housing advocates have spent the past year embracing sweeping policies aimed at facilitating the construction of housing of all kinds. In the coming year, many of them indicate that they plan to focus specifically on providing more abundant pathways to homeownership.
They will have their work cut out for them.
The rate of state ownership of housing from approximately 55% is the second lowest in the nation, above New York, and a full 10 percentage points below average for the country. Most of this gap, both common sense and researchers at UC Berkeley tell us, is it not the result of an atypical attachment to the freedoms of tenancy, but comes down to price. The average price of a detached single-family home in the United States is $426,800. In California it is $852,680. In San Francisco, it’s over $1 million.
With loan rates still fluctuating over 6%these prices translate into estimated monthly mortgage costs of between $4,000 to $6,000 or more. Even in all but the thinnest neighborhoods of coastal California, that’s far above the cost of renting a typical apartment.
In Orange County, estimated total monthly housing costs (including taxes, insurance, maintenance and any association fees) are four times the median rent, according to recent analysis from the commercial real estate firm CBRE. In Los Angeles and San Francisco, the “premium to buy” is three times higher than renting. Nationally, it is twice as much.
!["A bar]("https://datawrapper.dwcdn.net/IK7FH/full.png")
Is it worth the extra cost?
Economists and housing finance experts are careful to point out that it depends on a person's financial situation, the specifics of their preferences and the market they want to live in, how long they plan to occupy a home and, most challenging of all, what the future holds.
But nationwide, the gap between renting and owning is "well outside the bounds" of the historical norm, said Laurie Goodman, an economist at the Urban Institute, a liberal-leaning think tank in Washington.
In 2018, Goodman is a co-author of a report on home ownership in the United States, which came to the fairly unequivocal conclusion that most people most of the time would be better off buying a home (provided they can afford the monthly payments) than renting.
"Homeownership is not a panacea, but the financial returns from homeownership have been more profitable than renting for most homeowners and are likely to remain so if current patterns continue," Goodman wrote in a corresponding blog post at that time.
Current models did no continued: Today we see skyrocketing prices, interest rates and flat rents in most places. Home ownership is far from the financial hit it once was, she said.
Take a market like San Francisco. The median price of a rare single-family home in the city is $1.38 million, according to Zillow. Depending on the amount of the buyer's down payment, this would equate to a monthly loan payment of about $6,500. The average rent for one is $4,350.
For all those extra monthly payments to eventually pay off, the value of the house would have to skyrocket into the indefinite future. Or the rents that determine how much a person can save no purchase, you will have to shoot as well. Either the stock market or other possible places where a wealthy renter could park any extra money he doesn't spend on a mortgage will have to catch up.
Or a combination of all of the above.
A person who buys into this market is accepting a very specific and by no means certain version of the financial future, Goodman said.
Either that or they're just "desperate to own in San Francisco because they're just desperate to own in San Francisco," she said. "For whatever reason."
The case for renting forever
For many Californians, this isn't really a solution. The number of renters who can buy locally and get away with spending anything less than 40% of their income on monthly home ownership costs is in the single digits in Los Angeles, San Diego, Riverside, Sacramento, San Jose and Ventura, according to CBRE report. Being a renter in California is hard enough. More than half of California renters spend more than 30% from their rental income as it is.
But for those lucky enough to rent by choice, it's not necessarily a bad choice.
Remember that yawning "purchase premium" between the monthly cost of owning and renting? A wealthy tenant is able to save and invest the difference. Although home ownership is often touted as the best way to build wealth, it's not the only way. It might not even be the best way: On average, and over long periods of time, the stock market regularly outperforms average home prices — though not by as much tax benefits and other boosts that federal and state governments are bailing out homeowners.
Instead of pouring every dollar of disposable income (and then some) into a depreciating asset that threatens to leak when it rains, parking that money elsewhere also allows the renter the option of diversification.
"I think more people are becoming interested in renting and saving at the same time because they've been removed from owning a home, but they still want to meet their financial goals and they're looking at those alternatives and becoming more savvy about that," said Redfin economist Darryl Fairweather.
Calculating whether renting and saving is actually the better financial decision gets very "murky," she said. Much of this depends on the future of home prices, local rents, stock prices, interest rates and how long one plans to stay put. This is an extremely complex and individual choice and is not without risk. Fairweather advertises an online rent vs buy calculator produced by the New York Times.
But the specific conditions of California - high prices relative to rents, high maintenance and insurance coststhe relatively large number of tenants protected by the rent control policies of one kind or another — the financial case for renting may be about as good as it's ever been.
The benefits of owning property
Even if renting is a better deal on paper, there are many reasons someone might want to buy that have nothing to do with money.
Space is one: For multiplicity regulatory and financial For reasons, the majority of rental units are apartments, while detached single-family homes are mostly reserved for owner-occupiers. Especially for growing families, the option is often to either cram your spouse and kids into a city apartment or leave town (and possibly out of state) until you can afford to buy.
!["74%]("https://datawrapper.dwcdn.net/ATRbG/full.png")
Education is another. The rents are also more likely than for owner-occupied housing to be in neighborhoods with poorly performing public schools and elevated crime rates.
For some, home ownership also comes with an entirely non-monetary warm and fuzzy factor, whether it's independence — deciding when and what color to paint your walls, for example — or a sense of security.
Finally, simply because someone can save and invest the extra hundreds or thousands of dollars a month that would go toward a mortgage payment, that doesn't mean they will. No one likes paying a mortgage, but by turning a portion of your paycheck each month into equity, it acts as a sort of forced savings plan. It is an eternal temptation not to save.
"It takes more discipline to buck the social trend," Fairweather said.
This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.