Rent or buy? Your call

The Pak Banker - - OPINION - Noah Smith

SHOULD you buy a house or rent? It's one of the most con­tentious top­ics among econ­o­mists and econ writ­ers, and there's still no gen­eral agree­ment. Re­cently, it was the sub­ject of an on­line de­bate be­tween Alex Tabar­rok of Ge­orge Ma­son Univer­sity and Ti­mothy B. Lee of Vox. Tabar­rok gives rea­sons why rent­ing is the right fi­nan­cial move, and Lee coun­ters with rea­sons why buy­ing is smart. I'll go over some of th­ese ar­gu­ments, and add my own thoughts, but here is a pre­view of my con­clu­sion: If you re­ally want to own a house,buy a house. If it isn't very im­por­tant for you to own a house, don't do it just for the sup­posed fi­nan­cial ben­e­fits. With this rule of thumb, you can avoid all the com­pli­cated back-and-forth and prob­a­bly get the de­ci­sion right. But any­way, on to the pros and cons, which are in­ter­est­ing to think about.

The main rea­son to rent is di­ver­si­fi­ca­tion. When you own a house, a huge chunk of your wealth is tied up in a sin­gle as­set. If your town has an eco­nomic slump, or if lo­cal zon­ing laws change, or if there's a pol­lu­tion in­ci­dent your home's value will go down, tak­ing your net worth with it. But if you rent, and you in­vest the ex­tra money in a di­ver­si­fied port­fo­lio of fi­nan­cial as­sets -- stocks, bonds, real es­tate in­vest­ment trusts -- you will be safe from lo­cal shocks like that.Home­own­er­ship also puts you in dou­ble jeop­ardy if you lose your job. Since both house prices and lo­cal la­bor mar­kets are tied to the lo­cal econ­omy, the same slump that cost you your job, and which makes it harder for you to find a new work in the area, also tends to cut the value of your house. So own­ing a house makes it more likely that ev­ery­thing will go wrong in your fi­nan­cial life at the same time.

The third big down­side of own­ing is mo­bil­ity. Sell­ing a house takes time and money, mak­ing it in­con­ve­nient to move -es­pe­cially if you need to sell the old house to raise the money to buy a new one in a dif­fer­ent place. This ex­ac­er­bates the dan­ger of get­ting caught in a lo­cal eco­nomic slump -- the ex­act time when you need to move to find a new job will be the time it's the most dif­fi­cult to do so. Some of the rea­sons usu­ally given for own­ing a home are ac­tu­ally just rea­sons to buy REITs. Peo­ple like Lee point out that houses have lower re­turns than stocks, but they also have lower risk, be­cause their prices fluc­tu­ate less than stock prices. House prices are also not per­fectly cor­re­lated with stocks, so they can ac­tu­ally help di­ver­sify. But both of th­ese are ar­gu­ments in fa­vor of buy­ing not one house, but a small piece of many houses scat­tered across the city, state or na­tion -- in other words, shares in a REIT. Home­own­er­ship isn't with­out true up­sides, of course. It means you don't have to pay rent each month (though you do have to pay prop­erty tax, main­te­nance costs and in­ter­est and prin­ci­pal on your mort­gage loan). Rent it­self can be highly volatile and home­own­er­ship de­frays this risk.

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