We’re four days into the New Year, and by now almost a quarter of individuals who made New Year’s resolutions have abandoned them. The odds on New Year’s resolutions are in nobody’s favor; just 8% will see them through the year. For most resolutions, I can’t offer any more advice than you might find on a motivational poster: “Hang in there, kitty,” and such. But for finance-related resolutions, I’m your go-to source for structuring, pursuing, and achieving your goals.
2013 was a gratifying year for both my radio show and mortgage company. After crunching the numbers, we found that we had helped over 175 households—most of them listeners of the show—achieve their financial goals by saving them over $450 each month through a lower mortgage interest rate and paying off high-interest debt. And we’re determined to help even more people this year.
Of course, the historically low interest rates of 2013 are going away, and I believe rates will climb throughout 2014 to settle above 5% by 2015. So the benefits of refinancing or paying off debt through a cash-out refinance are steadily diminishing. But there is one class of people who can benefit regardless of where interest rates are: Renters. If Ambrose Bierce’s The Devil’s Dictionary had an entry for “renter” it might read: “An individual who works diligently for many years to achieve his landlord’s financial goals.”
A common misconception about renting is that it’s less expensive than owning a home. Poppycock, I say, and balderdash to boot! Renting, on average, is seldom less expensive than owning, and the Bureau of Labor and Statistics has evidence to support this claim. In 2010, the average cost of home ownership was $8,000 a year; for renting, it was $12,800. Worse is the rate at which renting costs are inflating versus ownership costs: in 1986, the average cost of renting was $6,800 in 2010 dollars versus $7,800 for owning. And the same factors contributing to this inflationary trend—absurd zoning laws, a shrinking middle class, stricter lending standards—will only accelerate over the coming decades.
Further, people tend to confuse costs with opportunity costs. An opportunity cost is what you forfeit when you make a choice. The cost of coffee is $1; the opportunity cost is a newspaper or candy bar or any other item you could have gotten with that dollar. Similarly, the cost of renting is, say, $800 a month. The opportunity cost is equity. By renting instead of owning, you are forfeiting the opportunity to build equity. (Owning, too, has opportunity costs: you forfeit the leisure of having someone else mow your lawn, make any repairs, etc. Everything has both a cost and an opportunity cost.)
The confusion between cost and opportunity cost was on display in an article I read from girlsjustwannahavefunds.com. In it, the author listed six reasons why renting is better than owning. They are:
You never truly own your home. Even after your mortgage is paid off, you still have HOA dues and taxes
If you lose your job, you can lose your home
Buying a home locks you in for as long as you’re in the home
You need 20% down to buy a home (This, by the way, is not true.)
Home ownership is no longer an investment
Homeowners are responsible for the cost of repairs and upgrades, while renters aren’t.
You can check out the archived show for my full reaction to this list. Suffice it to say, most of these items ignore the opportunity cost of renting versus owning. Yes, even after you own your home you will still be liable for HOA dues and property taxes. But renters pay HOA dues and property taxes, too; it’s rolled into the rent. As are the costs of repairs and upgrades. But the biggest divergence in opportunity costs is equity. After thirty years of paying either a mortgage or rent, the owner will have possession of a large asset—their home—while the renter won’t. At its worst, homeownership is merely forced savings with an interest penalty. At its best, the equity builds faster than interest compounds and the homeowner is left with an asset worth much more than he paid for it.
So even if you missed the recent period of historically low interest rates because you were renting, you can still benefit from the far-lower-than-average rates we’ll see this year by buying a home. And if you own your home but aren’t achieving your financial goals because of high-interest debt, it’s still not too late to benefit from a lower rate. And, finally, if your resolution is health, weight, or alcohol related…well, hang in there, kitty.
1-4-14 Beyond the Numbers: Owning versus Renting