Is it better to rent than buy?

You can find thousands of websites and associated calculators that purport to tell you definitively whether it makes more (financial) sense to rent or to buy. The Mortgage Calculator Blog also took a stab last month at answering this perennially difficult question and concluded: “This is not to say that it’s better to rent than to buy. Instead, think of it as an exhortation to really think critically before deciding whether to jump into home ownership, since it may ultimately prove more expensive and more stressful than renting.”

It turns out that advice is now being echoed by more and more people, who are insisting that universal home ownership was never economically viable, and not entirely desirable. In a recent Wall Street Journal Op-ed, one historian notes that renting used to be the norm, and buying/owning was the exception: “From 1900…through 1940, fewer than half of all Americans owned their own homes…But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes.” He points out further that what ultimately catalyzed the change was not a change in culture/values, but rather a shift in government policy: “It wasn’t until government stepped into the housing market, during that extraordinary moment of the Great Depression, that tenancy began its long downward spiral.”

Over the past 50 years and accelerating over the last decade, this policy assumed a grotesque form. An increase in federal housing programs/subsidies/guarantees combined with easy credit to make home ownership easier to achieve, and hence more prevalent. The results speak for themselves: “The collapse of the for-sale housing market has left many low-income people holding mortgages they can no longer afford, becoming victims of skyrocketing foreclosure rates.” Meanwhile, homeowners began to see their homes as vehicles for investment, rather than for their inherent utility. The diagnosis is clear, according to the WSJ: “It’s time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition.”

As if on cue, the Obama administration is springing into action. It recently announced the allocation of more than $4 Billion in stimulus funds to the Department of Housing and Urban Development, with the goal of mitigating the growing shortage of affordable rental housing. “The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.” Politicians are also jumping on board, some claiming cynically that they always opposed the Bush plan to expand home ownership. “I’ve always said the American dream should be a home – not homeownership,” said Representative Barney Frank, for example.

In any event, this could be the start of a huge shift in preferences. Ironically, lenders are facilitating this shift by tightening lending standards and making it more difficult for potential borrowers to secure mortgages. Personal finance columnists also appear to be on-board, advising their readers to invest their savings in traditional vehicles, rather than in the dream of home-ownership. Could this be the start of a return to the days when “holding a mortgage came with a stigma?”