The Case For Millennials To Rent And Not Buy Their Home

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Includes: IYR
by: Steven Hansen
Summary

The cost of owning a home is much larger than the mortgage payment itself.

There are maintenance, insurance, taxes, and utilities to pay.

The biggest issue for Millennials is that this asset is hard to sell if they must move.

Home ownership was a struggle for me as I worked in an industry which required moving from state-to-state and continent-to-continent every few years.

In many respects, this gives me some insight into the home ownership issues Millennials face.

When one pulls out the calculator, and projects home price appreciation - home purchase makes sense. Home buying is a forced savings plan as part of the mortgage payments increase home equity. This works IF you have the coins to plop down the down payment - closing costs - and the home price appreciation occurs as expected. And going into retirement, social security goes much farther if you do not rent and own your home outright - especially if you have owned that home for a period of time and have relatively low tax rate.

Home ownership is a noose around your neck if one is required to move. Homes are close the hardest asset to sell. For Millenials, many are faced with a changing job market. How many times in their lifetime will Millenials change jobs because of robotics? And according to LinkedIn "Millennials are job-hopping more than previous generations" - 4 companies in 10 years after graduation. Is it smart to make a long term commitment (say home ownership) if your job changes requires moving to a new location?

Additionally, what goes UNSAID is the hidden costs of home ownership. From gobankingrates.com:

Buying a home is expensive - in fact, the average American home costs more than $360,000, according to the U.S. Census Bureau. The cost of owning a home doesn’t end with your mortgage loan, however; you must add maintenance into your budget, which might cost you an additional $1,204 a month, or $14,448 annually. See how the following seven monthly costs can add up quickly - it might help you decide if buying a home is the right financial move.

According to Zillow, the median rental price in March 2017 was $1,430 - not much different than the monthly maintenance costs shown in the graphic above. But if one looks are US Census data (which is only through 2015) - even Zillow's median rental numbers are high [my guess is that Zillow uses rental prices of units as they are re-rented and US Census uses a survey across the population no matter how many years they have been renting].

The rent-to-income ratio in the above graphic uses median family income divided by median gross rents. The US Census definition of median gross rents which was used in the above graphic:

Gross rent is the monthly amount of rent plus the estimated average monthly cost of utilities (electricity, gas, water and sewer) and fuels (oil, coal, kerosene, wood, etc.). Monthly rents were computed for specified renter-occupied units paying cash rent, which exclude one-family houses on ten or more acres.

Note that when comparing median home sales prices and median rental prices - it is not an apples-to-apples comparison. Owned homes are generally larger, and have more amenities. The median rental homes are geared towards:

  • the lower income sector which cannot afford to buy
  • transient work force
  • the first residence after beginning work or whilst in university.

And in case you missed last week's post, Even With Low Mortgage Rates, Homes Are Not Affordable.

In any event, the downward trend of home ownership rates likely will continue - as it is being driven by changing workforce conditions which requires more job changes (and inability to make long term commitments). Combine this with renting being an overall cheaper option.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.