Homeownership for the poor might not be such a bad idea

In an op-ed piece in today's Wall Street Journal, Rutgers economist Eugene N. White argues that "the poor are better off renting."

While he's certainly right that homeownership is not always the best option for everyone at every stage of life, some of his arguments are misguided:

While suffering through the Great Depression, my grandparents never faced the challenge of making a fixed mortgage payment. Instead, they rented and moved every year. Their circumstances dictated whether it would be a move to a larger or smaller apartment. But mostly, in that era of deflation that lowered wages and prices, they were driven by the need to move because it was not easy to bargain for lower rent from their current landlord ... As renters, they were able to adjust more easily to economic decline and even save some money for education and retirement.



This is true as far as it goes but it refers to the Great Depression -- a very, very specific and unusual time in history. While declining rental rates and lower wages were the reality of the 1930s, the arc of history swings overwhelmingly in favor of higher rents and higher wages -- especially when the government is running up massive debts. Homeownership with a fixed-rate mortgage offers a powerful hedge against rising rents -- from 1990 to 2000, rents increased at an average annual rate of 3%, according to the United States government, and that's in-line with longer-term trends. Saying that you poor people shouldn't own homes because rents could fall along with wages is like saying that you shouldn't move to Miami because temperatures could fall to 30 degrees Fahrenheit.. Yes. They could, and they have. But it's not the norm.

No financial adviser would ever suggest that they invest all savings in one asset. But that's effectively what has happened because of the relentless promotion of home ownership for everyone.

This is a fair point except that, for people who can live in rental housing or own a home at a comparable after-tax monthly expense while building equity as a bonus, the choice is really between having no savings and having no savings but significant home equity at retirement. I'd prefer the latter, but that's just me. You have to live somewhere. You can own or you can rent and, if the monthly costs are similar, you might as well build equity for yourself instead of for a landlord.

In the wake of a housing meltdown like we've just witnessed, it's tempting to rearrange your entire view of personal finance and become firmly pro-renting. But if you recognize that the housing bust of the past few years has been a once in US history anomaly driven by the collapse of the housing bubble, you realize that the conventional wisdom is actually right in this case: people who own homes are much more likely to accumulate wealth than people who don't.

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