The rent-versus-buy debate just got goofier.

I'll let others dive in over their heads into the murky waters of the rent-versus-buy debate.  The question of whether to rent or buy your home is amply addressed in plenty of Internet articles of varying objectivity and credibility.  Most are as entertaining as your car's owner's manual, and I don't think I can do better.  I'll just advise you to avoid rent-versus-buy articles written by people whose only claim to fame is that they've written a rent-versus-buy article, because ten times out of ten they'll tell you "homebuying doesn't pencil out".

In other words, they have an agenda.  Do agents have an agenda too?  Well, if people don't buy homes, agents can't make a living so, yes, I guess we do.  But over the years I've come to realize that a) I can't convince anyone to buy a house, and b) I don't need to convince anyone to buy a house, which is probably why I've never tried.  A salesperson might talk you into buying a shirt you don't like, but no agent (or Internet article) is going to talk you into (or out of) buying your own home.  No argument, carefully reasoned or otherwise, buttressed with selective statistical evidence or not, is going to either turn you into a homebuyer or turn you against homebuying. 

Besides, I've already addressed the rent-versus-buy debate from what I think is the most relevant viewpoint:  the emotional component of homebuying.  Why not delve into the dollars and cents?  Because in eleven years of selling homes, not one client has ever asked me to prove that buying would make them better off financially.  That's remarkable, even extraordinary, and it casts doubt on just how relevant the rent-versus-buy debate is.  Is it really a debate or, like so much real estate discussion these days, merely a roving playground fight?

Not to mention that real estate won that battle.  According to a study commissioned by Bankrate.com, "92 percent [of respondents] say that a home is a good investment for the future".  So the rent-versus-buy debate is one of those "how many angels can dance on the head of a pin" debates that thrills the true believers on either side and no one else. 

So instead, let's examine what the future of real estate journalism might be, now that once-mighty newspapers like the San Francisco Chronicle which, for all their warts and ill-concealed limitations, had at least a semblance of old-line professionalism, thrash about in their death throes, while large Internet purveyors of pop pseudo-wisdom like Yahoo! take their place.  (The media outlet that juxtaposes "Justice Souter retiring from Supreme Court" with "Watch kitty's impressive high-flying leaps".  The media outlet that apparently can't decide if it's a news reporting organization or an online competitor to America's Funniest Videos.)

Let's look at an article I ran across the other day in Yahoo! Real Estate, "5 Reasons Renting Still Beats Buying", by one Jack Hough.

Renter Hough advances five reasons why he won't be buying a home anytime soon.  The first two actually might make sense, if you're predisposed to thinking they might make sense; as Hough informs us, "they form the core" of his anti-homebuying argument.  But I think it's his last three points that tell us all we need to know about the Jack Houghs of this world—they may set a new low in rationalizing your fears in public. 

"1.  Houses produce lousy returns, while stocks produce good ones."

I'll dwell on this for a moment and do what I just said I wouldn't do, get into the nuts and bolts of rent-versus-buy, because the idea that a home should be viewed strictly as an investment, not as your shelter for the next forty years, is an oldie but a goodie among confirmed renters.  I don't know if this idea appeals so strongly because it's seen as hard-nosed economic thinking—man as reasoning animal, everything has a price, that price the only determinant of value—or because it's a convenient smokescreen.  No doubt it's sometimes the latter, but I also don't doubt that in many cases it's a genuinely held belief.  In either case, is it a fallacy to value a home strictly as an investment?  That's a matter of opinion.  My opinion is that homebuyers and confirmed renters are wired differently—there's the homebuyer diagram and the confirmed renter diagram—and that these two wiring diagrams drive the cold-hard-investment-versus-warm-fuzzy-shelter debate, an essentially pointless debate no one will win because it's inherently subjective.  You might as well debate whether blue eyes are better than brown.  But what often follows from this debate is most certainly a fallacy:  the failure of confirmed renters, or at least those most prone to posting on the Internet, to recognize that homebuyers are wired differently and not just idiots.

Because the confirmed renter sees shelter solely as an investment, he feels the need to compare the historical rate of return of homeownership versus stock ownership.  Renter Hough reports that "reliable data on stocks and houses goes back well further than 10, 20 or even 50 years."  (Hough never tells us how he'd know reliable from unreliable data because, this being the Internet, Hough never tells us his credentials.  Which is why so many of the Internet's messages are nothing more than preaching to the converted.)  For example, "stocks returned 7% a year for 200 years ended 2004, according to Wharton professor Jeremy Siegel...after subtracting 3% a year for inflation".  Then Hough throws the other half of his one-two anti-homebuying punch, pop economist Robert Shiller, who claims that "houses returned .4% a year of 114 years ended 2004".

Hough admits that the idea that houses have offered their owners a return barely above zero since 1890 "might sound odd" (especially to long-time homeowners, but then, long-time homeowners wouldn't be reading his article) but adds that "if you think about it [a phrase that should always be a red flag] zero is the only logical answer...Houses don't spend their time thinking about ways to make themselves more valuable.  They just sit there".  Unlike stocks, which are well-known for working out at the gym, going to night school and in general constantly seeking ways to increase their value.  Or is it good management and market fashion that increase shareholder value?  Except when bad management and market panic decrease shareholder value?  If shareholder value ever existed; recall Enron and the dot-bombs and management all-too-often more interested in manipulating the stock price than building long-term shareholder value.  And while I'm on the subject of the little guy's friend, the stock market, let's not forget the endless creativity of corporate accountants rigorously monitored by auditors more interested in selling consulting services than auditing.  Or the leading economists feeding credulous investors their pet peeves and biases.  Or the financial network talking heads bombarding investors as if every trading day was a cross between the last quarter of the Super Bowl and the Second Coming of Christ.  And churning out a torrent of numbers for the benefit of those who think "It's simple, it's just numbers". 

Yes, that stock market:  now there's  a transparent market.  I wonder why they even try to regulate it?

And while this blinking neon mash-up of Wagner and the Marx Brothers plays out on media old and new, fusty old houses "just sit" on land that just happens to go up in value.  And speaking of value, has anyone noticed that the stock market, the confirmed renter's best friend, is lower now than it was ten years ago?

Then there's the study reported in the September 2004 issue of Money which suggests that the past return on stocks is more like 2.4 percent annually "after factoring in the effects of inflation, brokerage charges, investors' tendency to buy high and sell low, and taxes".  So depending on whose numbers you'd like to believe, the difference in the rate of return offered by homes and stocks might be only 2 percent, not nearly 7 percent, and we're not done yet.  According to another study quoted in the same issue, "NASDAQ investors, as a whole, darted in and out so much that they would have done just as well keeping all their money in T-Bills".  Which points out a powerful potential benefit of homeownership:  real estate is far less liquid than stocks, which keeps the homeowner from darting in and out of the real estate market.

And then there's housing economist Thomas Lawler, recently quoted in the Wall Street Journal, as criticizing as inconsistent and unreliable the data Shiller used to build his chart of home price trends since 1890 that Hough says you can take to the bank. 

Why does Hough ask us to believe Shiller?  Because he's "co-creator of the most widely used index for home prices".  Which reveals yet another fallacy:  that someone well-known is inherently credible.  Because Shiller's "widely used index" has been widely criticized, at least among the cognoscenti, for following only the most volatile segments of the housing market.  And some would say that the only reasons the Case-Shiller Indices are "widely used" (by reporters and other dilettantes who've never read their methodology) is that a) their volatility makes for scarier and therefore grabbier headlines than the other two leading home price indices can offer that branch of show business called "the news", and b) Shiller's status as best-selling economist gives his indices a better brand identity than the NAR and some obscure government agency called OFHEO could ever have, and neither readers nor journalists are immune to celebrity worship—"hey, he's famous, he must be right!".  However, it's news to me that someone is a credible man of science just because he's been on the New York Times best-seller list.

Which points out yet another fallacy in the relevance of the rent-versus-buy debate:  economics is a smorgasbord, and the consumer of economics gets to pick and choose only the studies and beliefs that look most appetizing to him.  Which is fine, but it's not science.  It's ideology in search of a "scientific" justification.  And in many cases it's economist-as-celebrity fan-worship.  Which, I suspect, may be more an example of narcissism—"here's a smart guy who thinks just like me!"—than truth seeking.

As for the idea that anyone, especially the grad students who most likely did the grunt work for the Shiller and Siegel studies, could reach way back into the dusty archives as much as 200 years and get meaningful, relevant statistical information on either houses or stocks, and then compare those collector's items to the modern iterations of either asset, well, that's probably giving both grad students and old-time record keeping a lot more credit than they deserve—not to mention that it fails to recognize changes in both the assets studied and in their context over the course of a hundred or two hundred years.  Not that anything much has changed over that time.

Hough dismisses the common idea that leverage offers the homebuyer a unique benefit:  the ability to acquire a major asset for the cost of a down payment.  "Apply heaps of leverage to the numbers if you like, but the outcome only worsens."  Hough doesn't tell us why the outcome "only worsens", unless he's making an oblique reference to the fact that leverage is a powerful but two-edged sword, as more than a few homeowners who bought with 100 percent financing and ended up a few years later owing more on their mortgage than their home was worth could tell you.  But I'm not sure that oblique references do the general reader a favor.  Although oblique references can do the sloppy writer a big favor.

Hough admits that home-buying money is temptingly cheap these days, with mortgage rates at or near historical lows, but says that "you'll still pay 5.2% to capture long-term price increases that merely match inflation.  And today, you'll tie up a bundle of cash with a down payment."  Here it might be useful to see an example of leverage in action, using home prices based on average-sales-price-per-square-foot data for one local city, and see if "the outcome only worsens":

Sure, this scenario includes the steep "irrational" appreciation of 1999 to 2008, although it also includes two serious downturns, the tech bust and the build-up to the war in Iraq.  So let's see what happens if we limit the time period to the "safe and sane" market of 1992-1998:

This rate of return doesn't take into account the property tax and mortgage interest deductions that benefit the homeowner, nor does it include the cost of shelter, something we pay anyway unless we're living under a bridge.  But as the confirmed renter would point out, it also doesn't take into account the homeowner's non-deductible costs of homeownership—property insurance, maintenance costs and homeowners association fees if any—and the potential short-term negative returns.  Not that stock ownership has its own fees or potential short-term negative returns.

Okay, I ran a little long here, but anyone who wants to pencil out the financial benefits and drawbacks of homeownership can find a rent-versus-buy calculator on the Internet.  But I'd be surprised if an Internet calculator either persuades anyone to buy a home or talks them out of it.  I'd also be surprised if anyone reading this doesn't wish they'd bought a home in Palo Alto in 1992.  For a variety of reasons.

"2.  House prices have further to fall."

And stock prices have been stable lately?  Stock market, thy name is Volatility.

Here I'd like to offer Hough's contribution to informed discourse on government housing policy:  "If a citizen is being made poor by the debt they carry on the house they bought, and if a government policy keeps them tied to that house instead of separated from it into more affordable housing, are we really helping them?"  First of all, no one, not even the confirmed renter, would ever suggest that renting, by itself, makes renters rich; the confirmed renter merely asserts that renting frees the renter to invest more funds in the stock market.  Why a renter should be more disciplined about saving and investing than the average American spending his way into heavy consumer debt is never explained.  Maybe that's just part of the confirmed renter self-built mystique.  On the other hand, successful homeownership, bolstered by adequate loan underwriting, can help accumulate wealth over the long term, even if other sources of income have been severely diminished (see stock market) or curtailed (retirement or unemployment).  And millions of long-time homeowners could tell you that's reality, not theory. 

Second and just for the heck of it, let's make a few key changes in Hough's pronouncement:  "If a citizen is being made poor by the rent they pay, and if a government policy keeps them tied to renting instead of being separated from it into more financially rewarding homeownership, are we really helping them?"  Because if a contrarian like Hough had been writing in 1930 instead of 2009, that's what he would have said.  Funny how the failure to know anything that happened more than five years ago can turn today's cause célèbre on its head and change one generation's social scourge into a subsequent generation's smart choice. 

And third, shouldn't it be up to said "citizen" as to whether he wants homeownership to make him "poor" in the short run, assuming that he's merely stretched, as so many homeowners have been over the years without injuring themselves financially, and not in over his head?  Who gets to define "poor"?  People like Jack Hough?  And why does this sound a lot like "just stay in your place and don't try to get ahead—I know what's best for you better than you do".

"3.  Many houses for sale today seem designed to waste money."

I guess Hough missed the memo that said today's homes are far more energy-efficient than they were back in the good old days he seems to pine for.  Yes, homes have been getting larger (since about 1953, Jack) or, as Hough moralizes, buyers are "buying far larger houses than single families need".  That's a value judgment, of course, and while the moralist in me agrees with Hough, people just happen to be more affluent these days and therefore have more stuff and therefore "need" more space to put it.  So are the Jack Houghs of this world going to decide what homebuyers really need and make them go back to living in 900 sq.ft. bungalows with one bath like their grandparents did?  Or maybe we should all live in government-built boxes stacked on top of each other.

And, of course, if Hough isn't into "mansion-ownership", I have a novel solution for him, one that doesn't involve renting:  buy a small house, preferably a nice drafty 900 sq.ft. bungalow or, better yet, a new energy-efficient condo.  I know a few condos in south Florida that might be for sale, cheap.

"4.  Big houses are targets for future taxes."

"I'm worried that property taxes will rise sharply in coming years."  Well, Jack, I'd hate for this to get out, and I'll deny it if you tell anyone, but I'm worried that a raptor will show up at my front door unannounced and drag me away.  But I'll admit that this might be a long shot.

"5.  Neighborhoods are changing in unpredictable ways."

This penetrating insight comes from an article Hough saw in the March 2008 The Atlantic, which advances "a frightening vision of what might happen to America's suburbs.  Low-density suburbs, it theorized, may become what inner cities became in the 1960s and '70s—slums characterized by poverty, crime and decay".  Meet the latest throw-it-against-the-wall speculation on the impending collapse of western civilization, guaranteed to get a rise out of the Jack Houghs of this world.  Jack, have I ever mentioned my fear of raptors? 

Hough admits he isn't entirely sure suburbia will go to hell in a hand basket, but warns that "anyone considering a move to the suburbs should do some careful forecasting before sinking a large portion of their wealth into a house."  Thanks for the hot tip, Jack.  And just how would we go about doing that careful forecasting?  Read savvy writers like you?  And who do you think buys homes in the suburbs?  In my experience it's either 1) people who already rent in the suburbs and know them like the back of their hand, or 2) people fleeing the "poverty, crime and decay" of the big city.

Now, as I said, way back at the beginning, the real question here isn't "rent or buy".  The real questions may be summarized thusly:

• Who the heck is Jack Hough?
• Did Yahoo! really pay him to write this stuff?
• If it did, how do I get me some of that stimulus money?
• Is a work product that reads like it belongs on a blog getting 400 hits a month the future of mainstream real estate journalism?

Of course, the first question is the only easily answerable one, and I'm not interested enough to pursue it.  As for the last question, only time will tell.  But I can tell you I'm not optimistic.

Welcome to journalism's dawning Era of Vague Fears.

copyright © John Fyten 2009         Site Map         Home