Homeownership has always been held up as a gauzy, government-supported American Dream. But it took a major hit during the Great Recession, slamming home values. As a result, despite a rebound in much of the country, even some affluent homeowners are weighing whether it makes sense to become permanent renters - and are asking planners for guidance.
Many former owners have already joined the ranks of renters. According to a March report from the Federal Reserve, 16 million Americans became homeowners between 2000 and 2006, while 700,000 became renters. However, in the five following years, 1.2 million left the ranks of homeowners, while 4.2 million new renters emerged.
The report also found that an apartment building boom followed, with annual starts jumping to a seasonally adjusted rate of 338,000 in December 2012 from 58,000 in October 2009. Reflecting the higher demand, rents rose too, climbing to an average of $1,310 in September 2012, up almost 10% from December 2009. Remarkably, the report added, this happened "even with housing affordability near historic highs."
The fact that people flooded the rental market during a period when one might have expected a rise in ownership, due to a combination of depressed home prices and historically low interest rates, indicates that other factors are at play.
CHANGING THE MATH
Homeownership still makes sense for most of Bowie, Md., planner Art Widmann's affluent clients. Yet given the economic and political climate, "the prospect for increased taxes, decreased deductions and slow growth in housing is driving many people to consider the rental alternative," he says.
While buying has many advantages - including guaranteed fixed housing loan costs over the long term (assuming the owner has a fixed-rate mortgage), the potential for appreciation, tax deductions for mortgage interest and favorable treatment of capital gains - drawbacks exist. Homeownership requires a substantial down payment, typically 10% to 20% of a home's purchase price, and will generate an annual property tax bill as well as hefty annual maintenance costs - anywhere from 1% to 4% of a home's total value, according to HSH.com, a real estate publisher.
That changes the math for some clients, says Jennifer Myers, president of SageVest Wealth Management in McLean, Va. Because the cost of buying and selling a home can be close to 10% of its value, ownership makes sense only if a client plans to live there five to 10 years, she says. "You need enough time to ride out a market cycle if necessary to cover these costs," she says.
Of course, it's not always possible to coordinate market cycles with the need to move - so there's no guarantee that homeowners who stay put will recoup their costs or do better financially than if they had rented.
"It's certainly possible that, for some people, choosing to rent and invest the difference will work out better than buying a home," says New York CFP planner Lauren Lyons Cole. "This largely depends on where they live and their lifestyle, as well as their investment savvy and risk tolerance."
Renting is, of course, more common among younger adults - 43% of people younger than 30 rent, compared with 22% of those 45 to 64, and 16% of those older than 65, according to the National Multi Housing Council, a Washington trade group. But while young adults in the past might have stretched to become homeowners as soon as they were able, they are now more cautious.
Some consider renting to be a long-term lifestyle choice that gives them more mobility and freedom from maintenance chores. Having reached adulthood during the Great Recession, they saw home prices plunge and carry no illusions that appreciation is guaranteed.
Widmann says that, in the past, his younger affluent clients tended to concentrate on the relative difference in net after-tax payment between buying and renting. Now, he notes, many are more pessimistic, and are "factoring in either zero or negative short-term growth."
For clients 45 and older, the primary concerns may be different. At midlife and beyond, people often make the decision to buy or rent based on lifestyle preferences or health issues rather than financial concerns, particularly if they already have substantial assets.
For older clients in particular, renting may also offer estate-planning benefits, Myers says. "Trustees and estate executors are alleviated from having to sell a property, which can require improvements in preparation for sale, selecting an agent, negotiations and differences in opinion among estate beneficiaries," she says. "Renting also alleviates a potential liquidity drain if the house doesn't quickly sell."
Yet making the decision to rent, even when it makes sense from a lifestyle perspective, can be difficult for seniors, says San Ramon, Calif., financial planner Kirk Dobson. He recalls one man who worried that he would be evicted if his rented home was sold. "Loss of control is a big fear," he says.
Dennis Loxton, a CFP and reverse mortgage specialist in Orlando, Fla., says that when his older clients are trying to decide whether to stay in their home or perhaps buy another, he asks them whether the place is suitable to grow old in: Does it have stairs that would be hard to climb? Does it need significant repairs or upgrades? If the house is not suitable, and if it's not likely to appreciate enough during the client's planned tenure to offset the cost of fixing it up, then "renting is a no-brainer," he says.
Beyond financial considerations, renting can make life easier for older clients' families, Cole says. "It eliminates the emotional aspect of not wanting to sell the family home, or the tough decision of when to make the transition to a retirement home or assisted-living facility," she says. "If an elderly person is already in a rental situation, then those moves will be a lot easier on everyone."
Of course, renting carries financial risks of its own - the biggest of which is inflation. Though inflation is low now, Dobson worries that clients who commit to renting for the long term will suffer should it rise. "If that happens, renters will bear the burden of increasing rents as dollars buy less," he notes.
Clients who chose to buy instead and locked in fixed mortgages will be in better shape, since their loan payments will be unchanged, he says.
Other planners point out that clients are paying a high premium to avoid housing market risk. Soren T. Christensen, a CFP in Naples, Fla., notes that because of the tremendous margins available to people renting out high-priced homes, most affluent renters are paying anywhere from 50% to 100% more than the all-in cost of the home's owner. That takes a bite out of the client's monthly cash flow, he points out. While tying up a down payment means that opportunities for making alternative investments are lost, he advises most of his clients to buy.
"Obviously, stomaching a 20% down payment is never exciting for anyone," Christensen says. "But again, being still at or near historic lows on prices and rates, not stomaching the down payment could mean they miss out on larger margins and more leverage."
June Fletcher, a writer in Naples, Fla., is the author of House Poor and writes the weekly online House Talk column for The Wall Street Journal.