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.
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?