Why Homeownership Still Makes Sense (I think…)

A few months ago I read with great personal interest an article by Emily Badger for the Atlantic Cities in which she contemplates the notion of the end of the era of homeownership and the rise of the “middle class forever renter.” Behind this purported trend are an increasing number of potential homebuyers (at least those who can qualify for a mortgage these days, given tighter underwriting standards) who now see home ownership as a liability, rather than an asset. The housing bust has reminded Americans that as an investment, single-family real estate is by no means a sure bet, and many have professed reluctance to invest in what has increasingly come to be viewed as an unreliable return (at least in the near term). Furthermore, given the general economic uncertainty and lack of job security that many still face, owning a home is a monthly financial commitment that many are uncomfortable burdening themselves with. More to the point, homeownership can be an anchor in a world where mobility is often key. Owning a home may, in some cases, bind job seekers to a place where employment prospects have been exhausted, potentially inhibiting workers from exploring employment opportunities in other cities or regions.

The reason the article struck a chord with me was that at the time, my husband and I were in the midst of mulling over this exact issue. We had been renting for some time, and were in the process of engaging in a little self-reflection. What was our long-term plan for housing? Given all of the benefits of renting that we were enjoying (lower housing costs, flexibility), were we comfortable with the prospect of being “forever renters,” or was there still something undeniably attractive about owning our own home?

While renting certainly has many advantages over owning, in her article, Ms. Badger laments what for her is the primary downside of being a long term renter: The lack of control over one’s own domicile. She talks of the frustration and indignity of not beingable to plant a kitchen garden, of being forbidden from owning a pet, and of not being able to install a pot rack in her kitchen without drawing the attention of the property manager. Here is where I should mention the principal difference between Ms. Badger’s rental situation and my own. While my family enjoys all of the benefits of renting mentioned above, because we rent from a family member, we have not suffered this downside of renting. We have full freedom to customize our apartment, and have the authority to paint the kitchen at will and live with our 115-pound bull mastiff.

“A Great Time to Buy”

The question then is: Why, despite all of these perks, did we ultimately decide to trade all of the benefits of renting for the “dream” of home ownership (and the higher housing cost and exposure to risk that come with it)? While the seemingly endless analysis and soul searching has been partly quantitative and party qualitative, the decision really came down to a few essential elements (mortgage rates and tax deductions aside). The extent to which these factors resonate with and impact other potential homebuyers, or point to any broader social sentiments or trends, I cannot say, but the following considerations ultimately persuaded us to conquer our post-recession anxieties and (timidly) jump back into the housing market:

1. Climbing Rental Rates

Increasing demand for rental housing has been significantly pushing rents in our hometown of Portland, Oregon, and in many instances these rents are approaching the cost of maintaining a mortgage. This increased rental demand is potentially attributable to a number of factors: Some speculate that the sheer number of foreclosures over the past few years has pushed former owners into the rental market, and that more stringent underwriting standards, uncertain employment prospects, and the persistent memory of the housing collapse are keeping would-be homebuyers at bay (this trend is reflected in SERA’s project backlog, which has shifted from condominium projects to apartments). Regardless of the source of the demand, it has resulted in dramatically climbing rents and decreasing rental vacancy. The Metro Multifamily Housing Association recently reported that rents in the Portland Metro area have climbed 3 percent since late 2011 alone (averaging $1.21/square foot in my neighborhood in Inner SE Portland). Furthermore, the National Association of Realtors reported in February that the Portland area has one of the lowest residential vacancy rates in the country, and currently stands as the second-tightest rental market in the country behind New York City. Average vacancy in the Portland area is 2.5%, and in my neighborhood is an unbelievable 1.4%. All of this price pressure means that rents for two and three-bedroom units are often comparable to mortgage payments. A quick search on padmapper.com for three-bedroom rentals in my zip code yields a total of three available units with an average rent of $2,100. As growing families look for more space, they are often confronted with this lack of affordable supply, as the great majority of rentals are studios, one- and two-bedrooms in multi-family buildings. Families looking for three-bedroom rentals are therefore typically limited to (and often prefer) rental houses, and supply is a particular problem in desirable urban areas where buyers bid up the price of homes to the extent that owning them as a rental investment doesn’t pencil next to the prices that owner occupants are willing to pay. Given this lack of supply and rising rents, owning a home may actually become a money-saving proposition for many families.

2. The Desire for Complete Control
Yes, my (soon to be former) rental situation is somewhat unique in that I have the freedom to paint my kitchen and own a pet. But because I don’t own the property, I am reluctant to spend any real money fixing more substantial issues that bother me about our apartment. I cannot with a good conscience come out of pocket to change out the worn carpet, or knock down that unnecessary wall (which believe me, would seriously improve flow), thereby enhancing somebody else’s property at my expense. In a complex, demanding world where many of us feel constantly subject to the whims and demands of forces completely outside of our own control, part of the appeal of owning a home is the notion of complete control over one’s own homestead and the ability to carve out a little corner of the world that perfectly reflects who you are and how you choose to live. It’s a romantic notion for sure, but one that I believe resonates with a lot of folks.

3. The Appeal of Long-Term Wealth Building
It’s fairly clear that the era of banking on short-term appreciation is over; however, the prospect of working toward owning an asset “free and clear” and (eventually) eliminating the “housing payment” line item in one’s personal budget is part of the allure of ownership. While the era of regarding a home as an investment may have passed, having a bought and paid-for place for your family to live is surely an asset (though it may not yield any cash returns). Furthermore, without owning a home, retiring can be a tricky prospect for those burdened with monthly rent payments, and the sooner one starts the 30-year mortgage clock ticking, the sooner retirement becomes realistic.

Betting on the Value of Close-in Neighborhoods
While these factors helped nudge us toward our eventual decision to buy, we of course sought to make the best investment decision we could, and though the home-buying process has been wrought with uncertainty, we felt much more secure knowing that the prospects for walkable, mixed-use, transit-accessible neighborhoods (where we eventually chose to buy) look quite promising.

The Center for Neighborhood Technology has made a convincing case that the definition of “affordable” housing (conventionally defined as a total housing cost not exceeding 30% of a household’s gross income) should factor in the cost of transportation associated with housing location. CNT’s research has shown that when housing and transportation costs are considered in tandem, seemingly “affordable” suburban and outer-ring locations often cost more overall than well-connected, mixed-use areas. (For those who may be curious, they along with the Center for Transit Oriented Development have created a nifty, interactive map that looks at the overall affordability of nearly 900 metropolitan areas and the individual cities and neighborhoods within them… a fun way to compare the combined cost of housing and transportation across different neighborhoods). Given the ever-increasing cost of gas and the generally bleak future for cheap transportation, it would seem that demand for housing located in well-connected, location-efficient neighborhoods will at the very least be persistent, if not on the rise in the future. Chris Leinberger of the Brookings Institute generally argues along these same lines. He notes that there is an oversupply nationally of low-density, car-dependent development at the fringes of metropolitan areas, and that homes in these areas have typically lost more than twice as much value as metro areas as a whole since the real estate crash. Alternatively, walkable, urban real estate has seen less than half the average decline in price from the housing peak. He points to examples in the Washington, DC and Denver metro areas, where walkable city neighborhoods command much higher per-square-foot prices than car-dependent suburbs.

In fact, this dynamic is somewhat supported by recent Portland real estate data. The following table (prepared by Johnson Reid) compares the change in value of single-family homes in close-in Southeast Portland from 2007 to 2011 against homes in more auto-oriented, outer-ring areas of the Portland Metro area:

While median sales price has declined across the board, home values in close-in Southeast Portland have fared significantly better than those in more outlying suburban locations.

The New (Old) Normal
I have to admit that the scariest part of the decision to buy is that we realize that we’re not just buying a piece of real estate, but that we are, in fact, doubling down on Portland itself, and betting (or rather, hoping) that the city’s economy can at least hold its own (a question that I’ve expressed concern about in the past). Perhaps this is the reason that despite all of the “pro/con” list making, despite the endless financial modeling and sensitivity testing, despite all of our self-assurances that our decision does actually make good sense, the fact that we can’t predict what the economy will look like in the coming months and years made for an unbelievably nerve-wracking decision. Complicating this anxiety is that the buffer against economic uncertainty is to have a certain amount of cash on-hand, and tighter mortgage underwriting standards means that homebuying now requires a larger down payment, leaving one more exposed to economic turbulence. But perhaps this is what the homebuying process is supposed to be like. Perhaps part of the problem has been the lack of due seriousness with which people jumped into homeownership during the recent housing bubble. Perhaps it’s supposed to come with some (or a lot of) anxiety. Perhaps the “new normal” of homebuying is in fact the old model: Saving for years for a down payment, committing to settling down in one place for longer than a few years, and holding one’s nose, and taking the leap.