Renting vs. Purchasing a Home
The decision to rent a home, rather than buy one, is complex but comes down in favor of renting. In addition to a credit shortage, buyers are skittish about investing their money in what seems to be a losing proposition. After all these factors are considered, the thriving rental market is no surprise.
The decision to rent a home, rather than buy one, is complex but comes down in favor of renting. After the housing bust, homes are much less expensive than they used to be, but credit for purchasing a home is harder to find. In addition to a credit shortage, buyers are skittish about investing their money in what seems to be a losing proposition. Baby Boomers, who do have more assets than their grandchildren in Gen Y, are no longer interested in the upkeep associated with large homes. Gen Y, entering the job market, is more interested in the location flexibility allowed by rentals. After all these factors are considered, the thriving rental market is no surprise.
In Europe, where rates of home ownership are much lower than in the U.S., "houses have use value, not exchange value" (Sugrue, 2009), and are not viewed as investment vehicles. In the U.S., "between 1995 & #8230; and 2005, the homeownership percentage in the United States moved from 64% & #8230; to 69%; in addition, home prices doubled & #8230;" (Wallison, 2008). However, "since the peak in 2006, home values nationally are down 29.5%," says Zillow in Home Prices Fall Again In Biggest Drop Since 2008 (Alden, 2011). As a result, "28.4% of all single-family homes with mortgages are now "underwater," or worth less than the mortgage owed (Alden, 2011). Though future homeowners still see homes as investments, 1 in 3 current homeowners have come out badly on their investment.
In the housing boom days, applicants could get mortgages with little to no documentation beyond the assessed value of the house and a credit report. However, since the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), was passed, credit scores, down payments, employment history and repayment records have all become required for mortgage loan applications, because "creditor(s) & #8230; [require] verified and documented information concerning the consumer's financial situation & #8230; before extending the loan" (Sabel, 2010). It was widely concluded that the foreclosure rates in the U.S. are the result of "mortgages that far exceed home values and bargain-basement rents" (Whitehouse, 2009). For those existing homeowners who do default, "10 states & #8230; largely prevent mortgage lenders from going after the other assets ..." (Whitehouse, 2009), which provides some incentives for default, even though a default stays on credit reports for seven years. As a result, banks have taken the Dodd-Frank Act to heart, and now it's "easier for an apartment builder to get a construction loan than it is for the average American to get a mortgage" (Lewis, 2011). All of this makes buying a home less of viable proposition.
There are many reasons to rent. Even in the same neighborhood, renters pay less, and do not have to worry about paying property taxes, homeowners' insurance, or maintenance and repairs (Whitehouse, 2009). It is tough to justify the several thousands of dollars it takes to purchase a home, plus the down payment, knowing that "the value of the house may actually fall" (La Monica, 2010). Another reason to avoid buying a house is worrying about short sales. Those who cannot sell their existing home (Wallison, 2008), cannot buy a new home, and so end up renting anyway. The unemployed (a steady 10% of the workforce over the last 3 years (Bureau of Census, 2011)) end up with bad credit from homeownership -- either from foreclosure, or from being sued for walking out on a mortgage, and end up seeking rentals as well. These are all good reasons to rent rather than buy.
Baby boomers will eventually end up as renters, too. Eventually, "retiring Baby Boomers & #8230; downgrade from bigger houses to apartments" (La Monica, 2010). It makes financial sense, because according to the AARP, for the bottom half of the income brackets, "owners [age 50+] with mortgages face higher levels of housing cost burdens than renters," (AARP Public Policy Institute, 2011) though that does not mean that they are free and clear. Nearly one-third of older renters use at least 50% of their income for housing (AARP Public Policy Institute, 2011). Though the percentage of older renters has stayed steady over the last decade, an additional 4% owe a mortgage, usually on a fixed income (AARP Public Policy Institute, 2011). Renters tend to be disabled more often than mortgage-holders (AARP Public Policy Institute, 2011). Given these issues, it makes sense that even though the housing market is poor, baby boomers are still looking to sell their homes, often for money for retirement...
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