Housing has always been a poor investment, and I have been saying so for as long as I’ve been writing about personal finance. That’s the retail, owner-occupied housing market, not the real estate field in general. The latter is a business, the former is where you live — and they need to be assessed differently when it comes to their quality as an investment.
For many people, investment returns over time, opportunity costs, compound interest, taxes, and ancillary costs all get swallowed up by one simple fact: you have to live somewhere. That stone cold hard line brings the question of where to live into sharp relief and, for the majority, breaks down to either buying or renting.
Even though, for the majority of people, renting will be the optimum financial solution, it’s not always a satisfying lifestyle. Some landlords make renting a constant headache, by being intrusive and over-protective. Want to mount your TV on the wall? You have to ask. Want to change the interior colors, you have to ask. Just about any change requires permission, and that process of asking justifiably bothers some people. You’re constantly aware that the place you’re living in is not yours.
That brings us to renting versus buying in 2014 — here are the facts:
Rental Vacancy Rates Will Finally Tick Up
The recession in 2008 created millions of new renters, people with a bankruptcy on their record who had been royally burned by the retail housing market. Their swelling ranks quickly siphoned up the available rentals, and pushed rents higher. But 2014 could see the bottom of that trend, largely thanks to Wall Street greed.
Wall Street banks have started buying up foreclosed single-family homes and turning them into rentals. This comes at a time when anyone with a steady job is once again able to get a mortgage. Tired of constant rent increases, and really wanting to hang their TV on the wall, many frustrated renters have moved back into the retail housing market. The year 2014 will see vacancies start drifting back in favor of renters.
Home Ownership Rates Will Bounce Back
One could argue that home ownership rates have nowhere to go but up in 2014, and there’s some truth to that assertion. Even though home buyers in 2014 are going to pay more for less house, and will be paying a higher mortgage interest rate on top of higher home prices, the percentage of people who own a home will continue increase. Almost certainly mortgage interest rates will continue to creep higher in 2014, but keep in mind that even the higher rates are incredibly cheap by historic standards.
The single biggest mistake homebuyers make is one shared by people buying cars: looking at the monthly payment instead of the cost of the item. Examining the payment looks past a myriad of fees and costs that can, in some cases, be eliminated or negotiated down. Focusing on the payment is a virtual guarantee that your agent is trying to get you to buy more house than you need.
Despite the fact that it’s bad business, millions of Americans will look at that mortgage payment number, mentally compare it to the rent check they’re writing, and conclude that they’ll be “saving” $300-$400 dollars a month buying a home. They’ll forget about all the times they called the landlord to fix something, the tax bill, and insurance. They’ll finally get to hang their TV on the wall, and that will give them the smug satisfaction of putting one over on their old landlord. These newly-minted homeowners will lose money — and feel good about it.