Owning a home is “cheaper” than renting one, so long as you can afford it

The Wall Street Journal reported that, on the average, it is 35% cheaper to own a home than to rent one.  Obviously, landlords price their homes at the cost to them (i.e. that of homeownership) plus a profit, so it’s “cheaper” to own than to pay someone to own and earn a profit.  

Let’s dig into the problems with this “average”.  First, the cost of home ownership can be expressed as an average, but rarely occurs as one.  While property taxes and insurance payments are fairly stable, many costs of home ownership occur sporadically (e.g. replacing the roof or the furnace) or entirely by chance (e.g. having your house partially destroyed by a hurricane or a flood).  While insurance will cover most of the costs of repair, most policies have a very high deductible (often around ten thousand dollars). 

While the average cost of owning a home might be less expensive than renting, the distribution of costs is anything but even. Hypothetically, if one in twenty people have more than $10,000 in damage every year, they are not each paying a $500 deductible for repairs: one is paying ten thousand dollars, and the other nineteen people pay nothing.  Likewise, if one in thirty people lose $150,000 on their homes when they sell, and the others all break even, the person who sells at a loss sells at a six-figure loss, not the average loss of $5,000. The same analysis can be applied to a house with extensive termite damage, a basement that floods during every rain storm, or any other high-value cost that occurs infrequently.

That is why many people with little liquidity should rent: they simply cannot afford the risk of owning a home.  As a renter, I view the “extra” rental costs as risk-shifting: I pay fixed costs every month, and pay my landlord to assume the risk of expensive repairs.

Some renters live in houses with underwater mortgages, but the equity:value ratio is irrelevant: the landlord is able to afford the mortgage payments. However, an owner whose home is underwater is forced to either stay in that home (and forgo opportunities elsewhere) or sell at a loss.  Renters are mobile and have liquid net worth – a benefit that is not easily calculated, let alone for the “average” person.

Ultimately, if you cannot afford a six-figure loss of home equity, a high deductible for repair, or to own one home while you live elsewhere for a better job, it is not “cheaper” for you to own, because nothing is “cheap” that you cannot afford.

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