Buy or Rent: The Big Dilemma

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When exactly did the downfall of the housing market start? Many play around with dates from the 1980s to September 11, but one woman takes it back even further than that.  Alyssa Katz  wrote the book Our Lot: How Real Estate Came to Own Us and brings up housing market problems that started as early as the 1970s. It is hard to think about our problems that are well over 30 years later being so closely connected with the politics of the 70s, but Katz explains how everything is connected. During the Great Depression the need  widespread home ownership began with the 30 year mortgage that had government insurance.  This primarily covered the suburbs, and stayed faraway from urban centers.  In the 60s; however, there were lots of riots occurring in major cities.  Some believed that people would burn and destroy buildings if they felt some sense of ownership.  This led to mortgages being offered across the US with few constraints and eventually some corrupt officials.  Then the 1980s came about and mortgage back securities came with them.

The housing industry basically became this huge pressure to buy situation.  People were afraid that if they didn’t get in the market now then they would never be let in,even when things began to appear overpriced.  There was more of a fear of not being a part of the home ownership club than how to finance it all.  Americans have been taught that home ownership is a good investment, and the government has provided financial incentives and resources to those who purchase a home.  Renters however, are not protected.  They can be kicked out after living in a place for years just because their rent is up.  So should the government be focusing more on protecting renters, as well?  Or, should housing prices be driven down so that more can afford them?  In New York City many of the rental neighborhoods have managed to thrive still, while neighborhoods with home owners have not.  I think that depending on the location, rentals can be a good option.  If rentals were better protected agreements, would they be so looked down upon?  I know that buy purchasing a home you can refinance it and borrow money against it, thus making purchasing homes a good idea.  However, what are the disadvantages?

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7 Responses

  1. from: http://media.slate.com/media/slate/Podcasts/bigmoney/TBMB09071801_book_katz.mp3

  2. There are several things that need to be weighed when deciding whether to rent or buy. Its a similar dilemma people face when decided to buy, finance, or lease a car. If the cost of capital is low, an individual has the equity for a down payment, and the market conditions are such that it is a buyers market, purchasing a home may be the correct decision from a wealth standpoint. However, renting could be attractive to those who don’t wish to tie their capital up in a physical asset and have identified home ownership as a serious opportunity cost. They believe that they can make more money by utilizing that capital elsewhere. It’s my understanding that the prevailing view throughout the real estate boom was that buying a home was a great investment because the value of the property was growing at a rate higher than an average investor could expect to receive on another investment. Another factor, which you mention, is the desire to own something and to begin to build equity that can be borrowed against later. Besides the few people that choose not to buy because of an opportunity cost, people generally choose to rent out of convenience (landlord takes care of maint. etc.) and because they can’t afford to actually purchase anything in the neighborhood the desire to live in. I’m not sure if we need stricter renters rights….look at rent stabilized apartments in New York:
    http://www.housingnyc.com/

    This may be the renter protections you are proposing. They use a specific set of metrics to determine what rent increases for a given year will be. The object is to protect renters from sudden spikes in prices and being forced out of their apartments. I’m not a fan because I feel like it perverts a functioning market mechanism. Hope my rant helped answer your question/ further the discussion.

  3. First, check spelling. Secondly, I was really provoked to think about what you said regarding renters. Coming from a family whose livelihood it is accepting rent checks every month, I rarely thought (think) about what it is like to be on the other side of the transaction — most specifically some of the hardships they face. It is true that a landlord does have the ultimate say in who can live in their properties and for how long. However, after having a conversation with my grandfather, I learned that the laws already are largely in favor of protecting the tenant. It is so extreme that it is almost never worth it to go after a past tenant for damages over and above a security deposit because the law protects their rights through the court system. Moreover, tenant law is very clear on notice that must be given to vacate, written notices, etc. If these laws are perfectly, the landlord opens them selves up to suit. Interesting.

  4. […] Buy or Rent: The Big Dilemma […]

  5. Kurt, I am glad that you looked into renter protection. One of my concerns; however, is that many renters rent because they can’t afford to own a home. Can we expect these same low income people to be able to afford a lawyer to sue their landlord? Many rentals drive down the value of homes in neighborhoods because they are not taken care of as well as homes that are owned. This is where most post questions policies. Not just in the protection of renters, but also in encouraging people to rent. This is not so much my idea as Katz’s idea at the end of her book. She proposes that there is too much stress in policies to own homes and that renting in some ways might be just as beneficial for certain areas. Therefore, maybe policies should have benefits for renters who meet certain guidelines.

  6. I think pushing people to rent rather that buy is perfectly fine, but problems arise when rent is controlled. As long as you let the market determine the prices and supply, you won’t run into problems. But when you have policies protecting renters, the market cannot perform and you are left with lower quality apartments. I guess that is fine if your goal is to have everyone be able to afford one, but that is not how a capitalist market should be run.

  7. You bring up a new question for me though, is a purely capitalist market optimal? One of the biggest issues in the housing market was that no one was there to say things were getting out of hand. There was limited regulation and people began to push the limits of what constituted a good loan. So, if the huge housing market collapse is the result of a lack of policies, should we put renters in a similar position? If rent control was taken out of the picture what happens to people when a bubble occurs?

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