This is the kind of real estate dork I am.
When I opened up my mailbox last fall and saw the latest issue of Tierra Grande magazine, which is a magazine that basically shares research from Texas A&M University’s Real Estate Center, I did a fist-pump and said “Yessss!” when I saw they had studied one of the most talked-about real estate topics: buy vs. rent.
The university’s researchers decided to tackle the question of whether you are better off renting or owning in terms of the rate of return on that investment. Especially after the Great Recession, when a lot of people lost their homes to foreclosure, there was renewed attention over whether home ownership was really a smart investment.
Even though it’s my job to help people buy and sell houses for a living, and I generally believe it’s a good path to wealth-building, I was curious what the study would conclude.
I’ll go into the details more a bit later, but wanted to say up front that the answer is complicated and not very satisfying. In short, it all depends on which year you bought a house OR chose to invest your money and rent instead. If you purchased a home early on this 16-year period they studied, from 2000 to 2016, generally buying a home was better. If you purchased later on, investing in the stock market was better.
I know! Super unsatisfying for those of us who were hoping for a clear-cut answer. I’m going to dive into the details a bit before offering my own take on this issue.
The study’s authors assumed that someone has saved up $10,000 for a down payment. That $10,000 is then either put toward the purchase of a house or put into a stock portfolio. The stock investment is treated as a buy-and-hold strategy and they just used the S&P 500 index as a benchmark. The study also does not take into account “any equity increase from mortgage balance reduction.” They assumed that the home purchase was for a $100,000 home. And they based the estimated value of the home off the “FHFA home price appreciation data for Texas.“
Here is the chart that explains their conclusions. The “p” means homeownership was the better option and the “i” means that investing in the stock market was the better choice.
It’s fascinating to see all those rows of “i,” especially from 2013 on. One reason this chart leans heavily in favor of the stock market is because of the affects of the Great Recession, which caused home values in most major Texas cities to plateau or drop between 2007 and 2010. And the stock market has been on a tear since about 2011. I would be interested to know what the study’s authors would conclude if they looked at a longer period of time. Most people who buy a house end up being homeowners over a long period of time, even if they don’t stay in the same house.
And one big caveat about all of this: this study looked at home values across Texas, not just in Austin. Market activity and sales can greatly differ from city to city and even neighborhood to neighborhood. For the period of time this study covered, I very much suspect Austin’s home values rose at a higher rate than the rest of the state. I can’t make a direct comparison to their study, but I can tell you that the median home price in the Greater Austin area in December 2004 was $155,000. In December 2018, it was $309,000, which is basically a 100 percent increase. According to the Real Estate Center’s data, in that same period in Texas their hypothetical $100,000 home went up in value from 2005 to 2017 by 57 percent.
So here’s what I think about all of this. I’m not terribly surprised by the results. And I also think it won’t make much of a difference in terms of influencing people to buy versus rent, especially in a city like Austin where housing prices never took much of a dive during the recession and have been on a steep upward trajectory ever since.
First, it’s challenging for a lot of first-time homebuyers to save up $10,000 to buy a home. (And in our market you really need more like $10,000 to $15,000.) A lot of homes in Austin rent for about the same as you would pay in a mortgage. The study’s authors did acknowledge this problem:
“Renting can cost more than homeownership, in which case a renter household might not have the funds to invest in a stock portfolio.”
But unlike with stock market investing, there are a lot of ways to get other people or entities to help you come up with the money needed to buy your first house. But you can’t usually get someone to give you money to invest.
There are several programs, either state programs or lender programs, that help first-time homebuyers come up with their down payment or closing cost money to buy a house, and often sellers are willing to chip in toward the expense. (I helped a home buyer last year get a $5,000 credit toward his first house that went toward closing costs.)
And the study’s authors don’t acknowledge is that if you’re going to pay $2,000 a month in a rent versus a mortgage for the same type of home, it’s a no-brainer to go for the mortgage because you will be at last paying down the principal every month and gaining equity, versus nothing if you rent.
The study didn’t factor in this equity because they only wanted to look at profit. But I think that’s a mistake because most people find homeownership beneficial specifically because of this reason: it forces you to essentially save money every month and you can’t touch that money (in the form of home equity) until you sell.
For people who aren’t good savers, this is hugely important.
Lastly, buying a home for most people is not purely about the investment, or at least it shouldn’t be. People are motivated by the idea of “settling down” and not moving every few years. They like the idea of essentially paying themselves every month rather than helping pay a landlord’s mortgage. And owning a home can be really fun. For a lot of people, looking at paint samples is more fulfilling than checking your stock portfolio every month and sending a rent check to a landlord.
That said, homeownership is not for everyone. If you are only motivated by a return on your investment and have little interest in the day-to-day upkeep and maintenance a home requires, maybe renting is for you. That’s definitely the case if you want a more transient lifestyle or don’t expect to stay in one city longer than a few years and don’t want to be a landlord.
But if you need a roof over your head anyways, think making Pinterest boards of various types of ceramic tile for your new master bathroom sounds like a thrilling way to spend a Saturday afternoon, want to get whatever kind of dog you damn well please and like the idea of getting a check when you’re ready to move on, it’s time to stop renting.
Lilly Rockwell is a licensed real estate agent in Austin, TX and a former journalist. Questions? You can reach her at firstname.lastname@example.org.