Own or Rent? Shifting Equation

Posted by Alana Semuels

Meredith Carr and Vince Melamed of Brentwood are just the sort of couple real estate agents have always counted on to buy a home.

Melamed is a successful keyboardist and songwriter who wrote hits including Trisha Yearwood’s “Walkaway Joe,” and Carr is a freelance editor. They owned a home in Nashville, but when they moved to Los Angeles last year they decided they did not want to tie up their money in real estate, or be on the hook for home repairs and upkeep.

“I never want to let the mortgage stand in the way of a business decision,” Melamed said. “I don’t want to be in a position where I want to buy a piece of equipment but I can’t because all my money is tied up in the house.”

Carr and Melamed are part of what many economists see as a larger trend. Skittish after seeing home prices crater and eager to put money aside for a retirement that won’t include pensions, working-age people are increasingly skeptical about buying a home.

Surveys tend to support the premise. Two-thirds of Americans still see a home purchase as a safe investment, but that’s down from 83% in 2003, according to a study by Fannie Mae. Homeownership has fallen to 66.5% of the adult population, down from down 69.2% in 2004. A Harris Interactive polls says 70% of Americans aspire to homeownership, down from 77% a year ago.

The economic downturn and stricter mortgage standards are driving much of that decline, but economists say there’s also a growing belief among many that they can live better by renting rather than straining their finances to buy a house.

Adding to that is a sense among many younger adults that they will need to move for their careers, making them hesitant to buy lest they be forced to sell at a loss.

“We’re becoming more of a renting/sharing society,” said David Sleeth-Keppler, a psychologist who tracks consumer sentiment for Strategic Business Insights. “People are staying less bogged down, in case something bad happens.”

Real estate industry advocates contend that this is a passing phase, brought on by the plunge in home values from their peaks and the weak economic recovery.

People are still in a “financial fetal position,” said Rich Simonin, owner of Riverside-based Westcoe Realtors. “People who are nervous about jobs and money are still fence-sitting.”

Agents such as Simonin believe that attitudes will change as the economy improves, and that most Americans still want to own their home. Further, as more renters flood the market, rents will rise, eventually making homeownership more affordable than renting, according to Esmael Adibi of Chapman University.

The real estate website Trulia.com publishes a rent-vs.-buy formula showing that renting is the smarter choice right now in many cities, including Los Angeles, New York, Seattle and Kansas City.

There’s been a long-running debate over home purchases as an investment proposition. Many personal finance experts and investment advisors contend renting often makes more sense, strictly from a financial point of view.

“Homeownership is not right for everyone, nor has it ever been right for everyone,” said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. “That’s part of what got us into trouble — the idea that every American should own a home.”

Residential real estate had a rate of return of about 6% a year between 1978 and 2008, according to a study by economists Jack Clark Francis and Roger G. Ibbotson. The broad Standard and Poor’s 500 index of blue chip stocks, by comparison, had an annual return of 11%.

“Real estate does well in the long term, but it doesn’t do as well as the stock market,” said Ibbotson, a finance professor at Yale School of Management.

Real estate groups counter that owning a home essentially forces people to save, and the equity they build can be used to fund a wide range of expenses, from college tuition to retirement.

On the other hand, homeowners have to shell out thousands a year on upkeep, repairs and taxes. What’s more, many believe home prices will take years to regain their peaks. In Southern California, median home values fell again in January, to $270,000, down from $505,000 in July 2007.

“When you do the math on it, it’s not necessarily a great deal for everybody,” conceded Steve Sachse of Nova Real Estate Services in Dana Point. His clients used to scrape together the money for a down payment and assume their house would appreciate enough in value that they’d become rich. Now, many of them are renting instead.

What the real estate industry fears most is that people won’t buy again when the economy picks up, as some people assert.

When she was growing up, Lise Marken, 33, always presumed she would buy a house. Her great-grandfather bought property in Beverly Hills in the 1930s and her parents bought in the Westside in the 1980s.

Marken and her husband, a financial analyst, looked into buying a home when they moved to Los Angeles from Palo Alto in 2009. But after crunching the numbers, they estimated that a house wouldn’t gain enough in value to justify the investment.

Instead, they live in a luxury apartment building downtown with a pool, hot tub and workout room. “We think there are better things that we can do with our money,” said Marken, a graduate student. “It’s definitely a financial decision.”

Even if housing demand picks up, fewer Americans may be able to buy. Last week the Obama administration called for phasing out seized mortgage giants Fannie Mae and Freddie Mac and dramatically reducing the role of the government, which through all its entities now guarantees about 90% of all new mortgages.

If the plan goes forward, it probably will mean fewer people will qualify for loans, and those who do will have to pay higher interest rates.

That could have long-term consequences for the economy — especially in Southern California, which historically has been heavily dependent on the home-building industry and related jobs, including building and selling household goods such as furniture.

Still, many real estate agents and developers say it’s only a matter of time before things pick up again, pointing out that housing is a cyclical market. What’s more, they say, most people still prefer to own instead of rent.

“There’s a zillion reasons why people aren’t buying, but honestly, they would if they could,” said Jane Peters, a real estate agent in Beverly Hills.

As for Peters? She leases. Her rent is so low, she says, that buying just doesn’t make sense.

This story was first published on Feb. 19, 2011 in the Los Angeles Times. This article from Tribune Company news outlets has been republished for additional  education purposes.  Please note that this editorial content was produced by Tribune news staff who are not employed by ForSaleByOwner.com or  by Tribune Digital Marketplaces.  This article is not affiliated with any links or products that appear on the on the same pages.  Read more about our editorial policy.