Renting can pay off if you invest the savings

Ken Johnson is a former real-estate agent who delivers a message most agents don't want to hear: Consumers may be better off renting than buying.

Johnson just published his second major paper debunking the idea that owning a home is a better way to build wealth than renting.

"On average, renting and reinvesting win in terms of wealth creation," said Johnson, a real-estate economist at Florida Atlantic University in Boca Raton.

Before Johnson became a professor, he was an Alabama real-estate agent for a dozen years. He found himself often repeating one of the industry's main articles of faith — that over time, owning a home wins out over renting.

In 2012, Johnson and a colleague, Eli Beracha, who is now at Florida International University in Miami, took a closer look at the assumption by comparing a hypothetical renter with a buyer.

They assumed the buyer would pay 20 percent down, take out a 30-year mortgage, pay closing costs of 2 percent of the purchase price, pay annual property taxes worth 1.5 percent of the home's value and pay maintenance and insurance costs of 2 percent. They assumed the owner would take a mortgage-interest deduction on taxes, live in the home eight years and pay a 6 percent commission when selling.

Johnson and Beracha also assumed roughly a 4 percent appreciation rate on homes, though they created different models for 23 cities.

On the other side, they assumed the renter would invest the money spent on buying the home (the 20 percent down and 2 percent closing costs) and invest any monthly difference between the cost of renting and owning.

After eight years in the homes, they concluded: “When you assume that those monies are reinvested, renting, on average, wins.”

The key, of course, is the “reinvest” part: Renters must invest money they would have otherwise spent buying, paying off and maintaining the home.

As a member of the real world, Johnson knows that money can instead vanish in “beer and cookies,” which leads to the worst-possible combination for growing your bank account: renting and not saving.

In the summer, Johnson and Beracha, along with Alexandre Skiba, at the University of Wyoming, revisited the 2012 finding in a study published in the Journal of Housing Research.

Their study looks more closely at two questions raised by the earlier report: Do renters also win in a booming housing market (like today’s)? And, do they win if they rent over a long period of time?

The answers: yes and yes. “The main reason is the portfolio of stocks and bonds outperforms homeownership, no matter what the housing appreciation or time length,” Johnson said.

This year, for example, while home prices are up about 5 percent nationwide, the Dow Jones Industrial Average is up almost 20 percent and the S&P 500 Index is up about 17 percent. Either way, despite a soaring housing market, an investment in stocks would have yielded far more.

Johnson isn’t suggesting people skip buying a home. In our conversation, he urged me to make sure I conveyed that “we’re in strong favor of homeownership.”

But he does think the conversation needs some balance.

“We should be more truthful to the American public and let them know, on average, that if you’re a disciplined saver you might be better off, but if you’re not, perhaps you should own because it forces you to save.

“But, of course, we don’t say that. We tell them a fairy tale.”