The Stuff of dreams

"Dr. Laura," I cried, "forget the kids. I am my clients' Realtor and I have a moral dilemma. For years I have advised clients that home ownership is the American Dream. Well, I just finished Home Ownership: The American Myth. Myth - of all things! My question for you is this: How can I set things straight with my clients?"

There are of course many reasons why one would choose to rent instead of to buy, some personal, some financial. The author, Mitchell A. Levy, focuses on the latter, running the numbers in order to determine the break-even point. He does this very well, although this type of analysis is nothing new. Frankly, it is his use of the word/concept "myth" that intrigued/irked me.

According to the author there are three "myths" associated with home ownership:

#1 It is a myth "that by owning a home you are better off because you will pay less tax."

It is NOT a myth that the home owner will pay less income tax. The author's intended point is that the renter may increase net worth better than a home owner notwithstanding that the latter pays less income tax. Valid point lost in a sentence made awkward by forced use of the word/concept myth.

#2 It is a myth that the money expended on a home purchase is an "investment rather than money squandered away."

It is NOT a myth that putting money into a home is "better" than squandering it. The author's intended point is that renting is not equivalent to "squandering" and that one may accumulate more equity by renting and investing the difference - akin to buying term and investing the difference, than by home ownership. Again, a valid point lost in a sentence made awkward by forced use of the word/concept myth.

#3 It is a myth "that housing prices always appreciate."

It is NOT a myth that housing prices appreciate. The author's intended point is that some areas (eg, Houston and Boston) suffered a decline in prices over a finite period of time, demonstrating that appreciation is not a straight-line phenomenon. Was someone making that claim? It is not fair to add the word "always" to the sentence in order to justify the word/concept myth.

The author presents rent/buy analyses for twenty nine cities, including San Francisco (Bay Area). He uses the median home price, average monthly rent, a 31% marginal tax bracket, and 4% FDIC insured savings account interest rate.

On the buy side he factors in closing costs; down payment; interest rate; real property taxes; insurance; repair/utility expense; and costs of sale.

On the rent side he factors in incremental rent increases and interest earned on savings (the difference between buying and renting).

Comparisons are made over three time frames - three years, five years and ten years - in order to determine how much appreciation would be required in order for the homeowner to break even with the renter, within each time period. I certainly commend Mr. Levy for a very balanced, comprehensive approach.

One would think that such mathematical analyses would be critical to a decision on whether to buy or to rent. Do folks approach their CPA with a request for a rent/buy analysis in order to time their purchase? I doubt it. I suspect that when consumers have saved enough for a down payment their CPAs advise them to consider home ownership to offset their growing income tax liability; and that the consumers are more than happy to act on that advise.

Years ago I met Steven A. Lyons who was just publishing HomeBuyer, a book and software home buying kit. His Chapter 3, "Should I Buy", included a similar although certainly less comprehensive rent/buy analysis. Steve had asked me for some feedback and I remember thinking at the time that no one asks "Should I buy?"; they ask, "How MUCH can I buy?"

Why is this so?

Short answer? Because Home Ownership is indeed the stuff of dreams. I suspect that anthropologists have discovered that "home" ownership is a universal dream, at least among cultures which have adopted the social/political concept of personal ownership.

So, while rent/buy analyses are appropriate for automobiles, office furniture, computers, etc., I question whether such analyses are relevant to home purchasing. Interesting, yes. Relevant, no. Because ultimately, where we live is an emotional decision limited only by our financial capacity.

And this is just as true for renters!

The proof is in the pudding. I call it my rent/rent analysis.

By moving to a neighborhood where rent for the same square footage is $200 per month less, one might accumulate $138,809.88 in a tax-deferred account: that's $200 per month, at 4% compounded monthly, for a 30 year term.

Will there now be a stampede to neighborhoods where rent is less? Nope. It just ain't about running the numbers.


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