Policy- Buying a home will remain out of reach of many Americans in the years to come.
- A Yale economist says, for some Americans, renting might be the better financial decision anyway.
While housing prices have started to fall in recent months, buying a home still remains out of reach for many Americans. But some of them might be better off as renters anyway.
That's according to Yale economist James Choi, who said on a recent Freakonomics Radio podcast that he's a "renter for life."
"There is this popular notion that renting is throwing your money away," Choi said, adding that "it's not really clear whether financially it's better to rent or own."
Most major forecasts say home prices will only fall modestly, if at all, in the years to come. It comes as rent prices are also beginning to fall across the US.
But Choi told Insider that from a financial perspective, renting could be the better option for them in the years to come.
There's no guarantee home values will rise in the future
In a September paper for the National Bureau of Economic Research, Choi analyzed how popular personal finance advice differs from that of economists.
While many Americans view home ownership as a path to building wealth for themselves and their families, Choi says the jury is still out on whether home ownership will be a great investment in the decades ahead.
He points to historic data on US housing prices, which show that for most of the 20th century, home ownership provided close to "zero" return on investment when adjusted for inflation. In the last 30 to 40 years, however, he says inflation-adjusted home values have risen "quite a bit." This is among the reasons the US homeownership rate is roughly 65%, and many renters are eager to add a home to their investment portfolios.
But Choi told Insider there's no guarantee this rise will continue.
"Is the experience of most of the 20th century what will predict what's going to happen in the future?" Choi said. "Or are we in the new normal where home prices on average go up over time because of land restriction, NIMBYism, that sort of thing? Nobody really knows."
Even as home values have risen in recent decades, the challenge of properly timing one's home purchase and sale — buying low and selling high — have put a dent in the wealth gains of many homeowners.
A homeowner's down payment could be invested elsewhere for higher returns
The money homebuyers dedicate to their homes, which go towards a down payment, property taxes, maintenance, and insurance, could be invested elsewhere if they were renting — potentially for a higher return, Choi says.
Speaking of a hypothetical homebuyer who put down $100,000 for a down payment, Choi said "that's a hundred thousand dollars that is now tied up in my home instead of available for me to put in the bank and earn interest or invest in the stock market."
Even as home prices rose 5.3% over the 30 years preceding March of this year, for instance, the S&P 500 saw a 9.7% return over the same time span.
There are risks to homeownership as a recession looms
While there's no guarantee the stock market will rise in the future either, Choi says investors at least have more access to information to assess the risks of their stock purchases. Stocks are bought and sold often, while an individual home isn't. This makes it difficult to assess a home's "financial risks," Choi says.
As seen during the Great Recession, these risks can be significant, particularly when home values fall and borrowers become underwater on their mortgages — when a home is worth less than the outstanding mortgage balance.
If an underwater borrower wanted to sell their home, they'd have to "come up with cash right up front for that difference," Choi said. And if they can't afford that, then they might have to pass up on a great job, for example, because "they can't afford to move."
That might not seem like a big deal during normal economic times, but it could become a bigger problem during a recession.
"If you lose your job, you might get locked into your current home and not be able to move to a new professional opportunity," Choi said.
While Choi is a "renter for life," he acknowledges that for many Americans, owning a home is about more than just the investment itself. People derive a "real psychological pleasure" from knowing that they own the place they live, he says.
That said, Choi says if these feelings "drive up the price" someone is willing to pay for their home, this could make the purchase less valuable — from a purely financial standpoint. And the more people who think this way, the more Choi says competing homebuyers will push prices even higher.
"If people put a lot of value in the idea of owning a home, it's going to increase the price they're willing to pay to own the home, and that's going to make the return going forward to owning the home lower," he said.
It all depends on your personal goals
Of course, not everyone has enough savings to even consider buying a home. And for those who can, the decision to rent or buy depends on the particular situation of every individual.
Despite the potential financial benefits, renting has plenty of potential downsides. Renters have to deal with a landlord, have less freedom to renovate their space, can be subjected to large rent hikes, and don't benefit from rising property values.
For someone who can afford to buy in one of the country's most expensive rental markets, for instance, home ownership is likely more financially attractive. And if home values do rise considerably in the decades ahead, owning a home could generate wealth for many Americans .
But for Choi, the uncertainty of future home values, the risks of homeownership, and the extra costs associated with it make the rent vs. buy decision more complicated than many have painted it out to be.
"It's not all roses on the side of owning," he said.