Five years ago at the peak of the housing market, my husband received a call out of the blue from a mortgage broker. He had automatically qualified for a home loan up to $290,000. However, living in Southern California, there weren’t any properties selling for this low of a value. He kindly turned down the offer and we continued our lives as renters.
At that time, houses in my area started at $435,000. For that price, we’d be buying a major fixer upper in a questionable neighborhood. Though friends were saying it was a good time to buy because loans were so attainable, I just couldn’t get the math to work out in our favor. I was under the impression that you shouldn’t buy a home for more than 3 times your income. Based on what homes were selling for, I couldn’t believe that the majority of people were making double six figures, or $200K annually. Needless to say, the income to house price ratio was thoroughly out of whack. People were still only making about $55,000 to $130,000 annually, yet purchasing homes averaging around $550,000.
Why were these people duped into home ownership? Given my own personal experience, people really believed their homes would never lose value. If they didn’t buy now, they’d never be able to afford a home based on the exponential increase in prices.
Renters Win, Home Owners Lose: Revealing the Biggest Scam in America by Tom Graneau was written in response to this most recent housing bubble. When I was asked to write a review on this book, the title alone intrigued me. As a renter who wants to own a home someday, I was curious about his research.
Summary
Renters Win, Home Owners Lose is a look at what fed into the most recent housing bubble and its decline: the media, real estate agents, mortgage brokers, greedy financial institutions. Too many people were “forced” into home ownership not really understanding the responsibilities associated with it. The idea of the “American Dream” is still ingrained in most American’s minds, leading them to do whatever is necessary to purchase property. A house or piece of property is looked at as an investment in one’s future. However, Mr. Graneau begs to differ.
Points of interest I agreed with
Mr. Graneau made a few strong points about how renters have more advantages and positive cash flow than most home owners.
- They are not responsible for repairs. This can save renters a large amount of money in the long run. Home owners are responsible for minor and major repairs which can cost thousands of dollars a year.
- They are not responsible for Home Owner Association Fees. Renters are not responsible for these fees. However, I would assume that a home owner who is renting a property has already factored in the HOA fees into the monthly rental amount. The only time this would be in the renters favor would be if the HOA fees increased, yet their rent didn’t increase to reflect the difference.
- They save money on property taxes. Again, as a renter I assume my landlord has already factored in property taxes into my monthly rent. Since I live in a state that hasn’t raised property taxes in 30 years, my landlord comes out ahead. However, landlords living in states with high property taxes probably have trouble adjusting rents to keep up with the tax increase.
One of Graneau’s major points was that home owners tend to stretch themselves thin to make a monthly mortgage payment. If they had remained renters and had invested the difference, they would come out ahead in the long run. The problem usually lies in the fact that renters don’t invest the difference, so the majority don’t come out ahead.
Another advantage I would have added to his list is the ability to relocate. Many home owners are literally stuck; they can’t sell their homes because the market is depressed, and they can’t rent them out to cover their mortgage. All a renter needs to do is give their landlord a 30-day notice. Of course, if they are in a lease, they might have to offer them a settlement amount for the remaining portion.
Overall his message is to be realistic when purchasing a home. It’s not an investment, per se, it’s a place you will live. The idea of flipping it with 5-years is unrealistic given historical data on housing prices.
Points I didn’t necessarily agree with
Since the book was in direct response to the current housing market, a bear market that we haven’t seen in decades, much of his advice is biased. For instance, if a person sticks to the 2.5 times to 3 times their income to house price ratio, it’s not uncommon to obtain a mortgage for less than one would pay for the same property, but in rent. A few advantages (in my opinion) to owning a home, or complete washes to either are as follows:
- Monthly mortgage may be lower than monthly rent. I live in an area where monthly rent averages about $2,000. Currently, “starter” homes are selling for about $300,000. At today’s low interest rate, my mortgage would be less than what I’m currently paying in rent. (Of course I’d have to factor in maintenance costs).
- Insurance is a wash. One of Graneau’s renter’s advantages was that home owners spend more money on insurance. However, as a renter, I’m paying the same amount for renter’s insurance that my landlord pays on home owner’s insurance. Of course, I’m sure it has something to do with living in California.
- Responsible home owners can eventually make some of their money back, or at least break even. As a renter, I will never, ever get any of my rental payments back. Not now, not ever. Yes, home owners pay a large portion in interest. But, if they sit on their homes for 10+ years (maybe more, maybe less depending on the market), they will get some of that money back that they paid in. Renters will never benefit from the potential to break even.
- Home owners end up “homeless” when things go awry. Don’t pay your mortgage, eventually the bank will take your home. However, it takes many, many months for the bank to actually kick a home owner out on their ear. This hopefully gives the home owner (soon to be renter again) time to save up a little money and make a solid financial plan. Their credit is now wrecked. However, if a renter doesn’t pay rent by day 5 or 10, guess what? They only get about 30-45 days to get their finances in order and then hit the street. Their credit is now in the dumpster as well.
Over all, Graneau’s ideas left me thinking that renting isn’t such a bad option; a point he was trying to make. It also made me think about the reasons I want to own a home. If anything, when and if I become a home owner, I will definitely be making the largest financial decision of my life.
Based on my pros and cons, what questions might you have for the author? Would you be interested in reading his book?
11 Comments
As a current renter, I can’t imagine ever purchasing a house. I think that renters have too many advantages in most situations. Once you factor in maintenance, insurance, and property taxes, owners rarely ever pay less than they would in rent.
I haven’t read this book, but you make a very good point about being biased based on the latest developments in the housing market. Of course, from 2004-07 people were extremely biased based on recent events as well. And I actually think that most of them still are.
@ Khaleef – Thanks for sharing your thoughts as a renter. I definitely agree that there are fewer costs associated with renting over all. Although, in my area home prices have dropped significantly, but rent hasn’t. So at this time and moment in my neighborhood, it is less expensive to rent (though a couple of years ago this was not at all the case.)
Don’t mind me saying but these points sound pretty common sensical? Does it have to be put into a book? I mean, sometimes it pays to rent and at other times it pays to own. Depends on where you are and your individual circumstances?
Also depends on macro economic policies (which was responsible for the bubble). So does the book offer any thoughts about macro economic policies going forward?
@Mr. Credit Card – Graneau does lay out some scenarios moving forward for both buying and renting. But the overall tone of the book (which could be due to the timing of when he wrote it) is buying a house isn’t financially the best choice. Many of his struggling home owner examples were based on people who should never have qualified for a house in the first place, but didn’t know they shouldn’t be buying a house because the lenders mislead them. I’m guessing that it was kind of targeted for people who don’t know very much about finances.
I agree with @Mr Credit Card… but I’m a financial blogger, so it looks like common sense to me.
If I were so tight with finances though (say oh perhaps a construction worker that never really tried to learn it), perhaps the the book would have much more value.
Historically, house priced hardly ever fall, so taking this one time when it has and making it the rule, seems naive.
When you own a house, there is a risk that you’ll lose it and the potential equity that you have in it. But when you rent, you never have any equity in it.
Don’t believe me? Google “Net worth of renters vs home owners”… The stats are eye openers! 🙂
In fact, now that the bubble has burst, this may be a once in a lifetime opportunity to buy a house on the cheap. But then again, who knows 🙂
@Money Reasons – So right. The one problem with renting is that there’s NEVER any potential to earn equity. Yes, when you pay a mortgage, technically the bank owns the home. But there is a point when you can become free and clear when it gets paid off! Then you can, hopefully, live your retirement years mortgage free!
@Suba – Me too! Since I’m drooling over homes for sale, maybe my perspective is a little biased. Perhaps one of us will hop on over to the other side soon (if our finances make sense to do so, of course.)
@Everyday Tips – I think the psychology behind owning a home is very strong. The book does mention this, and the author points out that this might be why people jumped into this last housing bubble not really knowing what they were getting into. Basically they were in a euphoric state of mind. However, you made some good points about renting a house; the owner could decide to move into it him/herself or sell it putting the renter in an unpredictable position.
@Ken – You make a very good point about the location. Los Angeles homes are still pricey compared to the median income. However, I’ve noticed that rent hasn’t come down though housing prices have. I’m not sure what’s up with that; perhaps landlords are hoping for a resurgence in the market. Thanks for sharing your thoughts!
Interesting! We live in an area that is hard to buy in as well – Silicon Valley – and we’re renters. I am okay with renting, but I think that there are factors that aren’t included in your list. For one thing, eventually you’ll finish paying a mortgage if you buy, and after that you don’t have to pay rent/mortgage payment every month. Also, your mortgage rate is steady over a long period of time (if you don’t refi or get an ARM) whereas rent will continue to rise. Your years of rental payment won’t be much of anything in 30 years, but 30 years of mortgage payments will be an asset you can sell or pass down.
We rent a home from a family member who bought our very modest 2 bedroom, 950 sq. ft house, (on a street with homes that sell for close to a million dollars), for $26k in the 70’s. She also inherited two homes from other family members who have passed; she lives in one and rents the other out. She now gets rent on two fully paid off homes, which she lives in, and lives rent/mortgage free. Not too shabby, and not something that could have been done had her family not valued ownership.
That said, I doubt very much that we’ll be buying a home any time soon! See the million dollar price tag of 2 and 3 bedroom homes in our neighborhood!
@The Saved Quarter – I agree that ownership is a good thing if a person can pay off their mortgage, then live mortgage free during retirement. Better yet are those people lucky enough to inherit paid-for properties. We also live in a rental that is owned out-right through an inheritance (lucky them!) I think it will also be a while before we can afford to purchase anything as well. We also aren’t sure where we will be living in 2-3 years. I’ve been perusing the CA map and skimming the bay area for less expensive towns with teaching jobs. Do you know of any!?