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Owning Vs. Renting: Exploring Why and How

Sorohan, Mike
Owning versus renting: two reports this week explore the thought process behind consumers making that decision--and when and where it makes most sense.

Fannie Mae, Washington, D.C., released a study saying Americans are affected by a mix of demographic and attitudinal drivers in making the own-rent decision. The report suggested that many of these drivers, especially attitudinal drivers, act as automatic or unconscious biases that lead consumers to their respective housing choices.

“Americans’ aspirations to own a home are strong even facing the dramatic challenges in the housing market over the past few years,” the Research Brief said. 

Fannie Mae conducted predictive modeling to investigate which attitudes, in addition to demographic conditions, best accounted for individuals’ current status as homeowners or renters, as well as their intentions to own or rent if they were to move. The analysis said that consumers consider a mix of demographic and attitudinal drivers in their future “next move” own-rent preferences. Demographics such as income, age, marital status and employment status are the primary drivers of current homeownership status and the own-rent intention for outright homeowners (those who don’t have a mortgage).

However, the paper noted attitudes are the key drivers of the own-rent intention for renters and homeowners with a mortgage--two groups that account for about 80 percent of housing units in the U.S. Exposure to default, perceived home value appreciation/depreciation and self-reported underwater status make minimal incremental contributions to predicting the own-rent intention in the models.

“It is possible that many of these drivers, especially the attitudinal ones, act as automatic or unconscious biases that lead consumers to less fulfilling and less successful housing choices--e.g., needs that drive a consumer to over-consume in their home purchase and ultimately default, fears that prevent a well-qualified renter from purchasing a home that will better suit their needs or expectations that drive a happy renter to become a less happy homeowner,” the paper said.

Meanwhile, a report from Zillow.com, Seattle, said the decision to buy or rent depends on how long the consumer wants to stay and where they want to live. Zillow created a “breakeven horizon” to determine an economic tipping point between owning and renting.

Zillow Chief Economist Stan Humphries said the breakeven horizon evolved from what he described as the “simplicity” of standard rent versus buy indexes.

“Plenty of experts are quick to trot out a simple rent vs. buy index and tell you that if you live in, say, San Francisco, you should be renting, while if you live in Detroit, buying makes more sense,” Humphries said. “Indices that look only at monthly rents and compare them to mortgage payments for similar units or homes are only looking at a tiny part of the overall picture.”

Humphries said a number of other factors go into a decision to own versus rent, including time horizon (how long one plans to stay in the home), future price and rents, tax deductibility, maintenance costs and transaction costs.

“The conventional price-rent ratio doesn’t consider any of these pieces of information,” Humphries said. “Moreover, most analysts compute the simple price-rent ratio by comparing the prices of current for-sale listings or recent sales to the prices of current rental listings. This approach usually leads to comparing very different sets of homes, because homes for sale can differ quite a bit from homes for rent--rental homes are typically of lower quality. As a result, this leaves you really comparing apples and oranges.”

The “breakout horizon” measures how many years of homeownership it would take before owning a home becomes more financially advantageous than renting the same home. It calculates costs and benefits associated with buying and owning a home, such as the down payment, purchase costs, mortgage payments, property taxes, utilities, maintenance costs and tax benefits, as well as all the costs associated with renting the same home. It also includes expected home value and rental price appreciation.

“If a consumer knows that they want to buy, it allows them to target cities and metros that are appropriate given the length of time that they intend to live in the home,” Humphries said. “Alternatively, if they are unsure whether they want to buy or rent but they do know where they would like to live and how long they intend to live in their next home, the breakeven horizon offers them guidance on whether to buy or rent.”
 
For example, Zillow compared Concord, N.H., and Saint Marys, Ga. Both cities have similar simple price-rent ratios, but the breakeven horizon for Saint Marys is two years versus six years for Concord.

“Two big factors behind these differences are the dissimilarity of the rental and for-sale inventory being used to compute the simple price-rent ratio and the big differences in property taxes between these two cities,” Humphries said.