AAR22 - Renting vs. Owning: No Easy Answer

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1:35Dave Ahern:This incredible chart showing between, we'll start in 1985, showing that the median home sale price was around$78 ,000 and the median household income was around$22 ,000. And just for reference, just kind of as a figure to compare things, that's a house price to household income ratio of about 3.5. In 2023, the median home sale price was$433 ,000 and the median household income was$74 ,000. And that is a house to income ratio of nearly six.

2:21Dave Ahern:Welcome back, everyone. Welcome back to At Any Rate. My name is Evan Ray, and as always, we are here to help you make sustainable financial changes without breaking any sweat. And today's episode, which is attempting to take on age-old debate of renting versus owning, hotly debated, is brought to you by my good buddy, Dave Ahern. Round of applause, everyone, please. All right, yeah. Golf clap, golf clap, hello, hello. A very polite clap. Nothing too, too much. We don't want to wake anybody up. No. No, that's not what this podcast is for. This is a sleeping podcast. Exactly. Exactly. A calm, reasoned approach to finance.

3:01Dave Ahern:100%. Well, after I have done so much work to do the intro, so, so, so much work, I want to immediately lean on Dave. So as a starting point, with the renting versus owning debate in mind, when you were a bank manager how did you see because obviously you have a lot of visibility and transparency into people's financial situations i'm sure a lot of people you know discussed parts of their lives and financial decisions with you how did you feel that most people handled their housing budget for renting versus owning and and going about making that decision for themselves i excuse me i saw a wide range of reactions, I guess, or thoughts.

3:40Most people that I worked with were renting. Then there were some younger people that were early in their journey, graduated from college, got a decent job, were getting married, hadn't started a family yet, but were working towards starting to want to buy a home in anticipation of either expanding their family or they just wanted to own a home. And so you would see more, there was kind of a wide range. So there was the, I have nothing prepared, no plan, just going to do as life takes me. And then there were a small proportion of people that were very dedicated. They were focused. They knew exactly what they wanted to do and where they wanted to go.

4:25And those people had a plan and they had a budget for housing and they were setting aside money. A lot of questions would come around, where should I put this? That was always a big, big topic. Where should I put this? Should I put this in the stock market? Should I put this in a savings account or is there a better option? And so those are the things that I saw the most. So there was a large proportion, I guess, if you had to put percentages on it, 75 to 80 % had nothing planned and were just kind of flying by the seat of their pants. 20 to 25 % actually had something organized and planned and were working towards an actual goal.

5:03Dave Ahern:And those people that were just flying by the seat of their pants, didn't want to think too much into it. What do you think was stopping them from putting more effort in, putting more thought into it and doing more careful planning? In some circumstances, it was their financial situation. Maybe they were already heavily in debt, either through something as huge as student loans or something maybe potentially smaller as in credit card debt, or maybe they bought a car that they really couldn't afford, those kinds of things. I would say the large majority of it was centered around the fact they just weren't in a financial position to do it.

5:44In some cases, they didn't see the need for it. They were single, and they didn't really see the need to own a home. And so those were probably, I guess, the two driving forces behind that.

5:56Dave Ahern:So would you see making that financial planning and maybe aiming towards a home or something like that, you would see that as the outcome and not the catalyst, if that makes sense? Like you aiming for a home doesn't make you more likely to financial plan. It's more if you're more likely to financial plan, then you're more likely to aim towards buying a home. Yeah, I would definitely say it would be the latter than the former for sure. okay okay yeah that that's i guess good to hear to a degree because it definitely aligns with with how i tend to think about things where you know whatever decisions you make now and planning you make now and thoughts you you dive into at this point in your life whatever point you're at is what opens up future opportunities for you instead of seeing it as well opportunities will come and you know when the opportunity arises then i can start making decisions and make that feasible.

6:48Dave Ahern:It's more you have to have that planning ahead of time to get anywhere feasible, which honestly aligns a little bit more than I kind of wanted to with how I see the classical view, at least, of renting versus owning. A stereotype that I've at least grown up with is definitely that renting is for younger people or people who can't afford it, and a house is the end goal. But I would say that, at least from my point of view, and I'll discuss why in just a second, is that that may have been true before, but that that has changed a ton nowadays, and that at least for me, somebody who didn't start earning my own money until less than a decade ago, I haven't personally seen that as a reality, again, just from my point of view.

7:29Dave Ahern:So for me, one of the most powerful pieces of evidence that fed into this, and for me, it's incredibly powerful visually. If we had this as a video podcast, it would be fantastic. But it shows this incredible chart showing between, we'll start in 1985, showing that the median home sale price was around$78 ,000 and the median household income was around$22 ,000. And just for reference, just kind of as a figure to compare things, that's a house price to household income ratio of about 3.5. In 2023, the median home sale price was$433 ,000 and the median household income was$74 ,000. And that is a house to income ratio of nearly six.

8:13Dave Ahern:And to me, that is a catch-all chart showing the drastic change in home affordability from quite a ways in the past, 40 years, 50 years in the past to nowadays. And so for me, when a lot of these kind of semi-modern, but still sort of classical financial views were established maybe in the 80s, 90s, early 2000s, something like the idea that renting is for young people or those who can't afford it, and a house is the end goal that everybody should be aiming for. These kinds of mindsets were made during the period of time when owning a home or purchasing a home was much more financially feasible.

8:50Dave Ahern:That isn't to say nowadays that you can't afford to buy a home. Thankfully, gratefully, we were able to purchase a home quite recently, quite young, and I'm extremely proud and privileged for that. So it's not impossible by any means, but it is much, much more difficult than it used to be. So to lean on you again, Dave, because you are more advanced in age, how have you seen... How have you seen... That's called a prime order. We didn't need to say the quiet part aloud. How have you seen home affordability prices change over time? Well, I think that chart that you just weighed out it shows exactly what we've all seen and felt that the homes have, you know, the price of a home is accelerated far faster than the average income or the revenue, the people that make.

9:42And so that's what's making it feel like these homes are way, way more expensive than they may have been, you know, air quote, when we were younger. And I think I would be curious to see what this ratio would be if you look back at like 2019 to today and see how much it jumped just from that time period. My ex-wife and I bought a home, I think it was 2010-ish. And we bought a little over 2 ,500 square foot home for almost$300 ,000 at the time. And that was considered a lot for that home in the area that we're living in. But I think if you go back and look at that house now on Zillow, it's probably selling for$600 ,000,$700 ,000 for the same home, not that too far distant past.

10:37So I think we could all say that the house affordability, at least the bottom line price, has certainly grown over a period of time. And the other thing I think that maybe we'll touch on in the future in our conversation here is the impact that's also had on a dual parent working in the home to support the ability to buy a house today, I think has a huge impact on not only just the affordability of the homes, but also just everything that's going on socially without touching on politics. Please do not touch on politics, but it is something to consider.

11:16Dave Ahern:Yeah, 100%. And that's honestly, now that you say that's probably something I should have mentioned in my previous episode of us purchasing a home, is that we are both working. And that definitely plays a massive factor. If just I was working or just she was working, we could not have made this happen for many, many years. Yet, in the past, you know, 70s, 80s, 90s, it was much, much more common for a single person, usually the man to work and the wife to stay home. And that was as much as there was to it. And things were still affordable and things could still be done. And yet nowadays, even with two people working, it's not some like, oh, yep, guaranteed you'll be good.

11:52Dave Ahern:It's still a stretch. It's still you have to be being paid well enough. You still have to be in an area that is affordable enough, whatever it is. And there's obviously far more extreme places in the U.S., New York, California, something like that, where these ratios skyrocket even further than they did. And just to kind of drive this home further, and I know this initially sounds like I'm saying 100 % rent, never buy a home. It's not affordable, blah, blah, blah. that's not where this will be leading in the end, but I like laying these kinds of concepts out in the way, ordering them of what has the greatest effect on me personally and what has the greatest impact to me towards my decision-making.

12:30Dave Ahern:But to kind of break down that math that we just did a little bit more, because yeah, that gives you a ratio to work with, but a lot of us tend to work with our finances monthly, maybe even weekly sometimes or bi-weekly, but at least breaking it down to monthly figures, for me, helps it feel much more real. You know,$400 ,000 is a crap ton of money. But when you talk about a house, it's not necessarily a crap ton of money. But bringing it down into monthly makes it feel much more real to me. So taking that$433 ,000 median sold home using actually our home buying helper calculator that we have available online.

13:05Dave Ahern:I've discussed it before, but if you want to check it out, einvestingforbeginners.com slash home, and I'll give you a good calculator to help plan for a home or help you do some fun slash depressing math like this. So if we assume that you're putting down a 20 % down payment, you're going to need around$110 ,000 upfront cash ready to go. And yes, that is more than a down payment, but you have to include things like closing costs, things like some moving, having some emergency padding outside of that, having enough for upfront payments towards home insurance. There's a lot of upfront payments that come aside from a down payment, which is definitely a whole conversation in and of itself.

13:43Dave Ahern:So how that breaks down is then that leaves you with about$2 ,200 just to the mortgage towards principal and interest. And if we assume about a 6.5 % interest rate, which is about average nowadays between 6 and 7, that runs you, to my approximation, about$3 ,100 every single month. And again, we're including things like home insurance, some utilities, just a little bit of maintenance, trying to get a good idea of total housing costs, not just your mortgage. Then if we break down the income, that$75 ,000 median household income breaks us down to approximately, again, trying to assume taxes here a little bit, a net monthly income.

14:20Dave Ahern:So we're talking after taxes, what would land in your bank account of around$4 ,300. dollars that would put you at a housing cost of 72 percent of your income that is unconscionable that is unsustainable and that is against everything that that we want to do here and even if we try to include equity as savings which i definitely think is a good idea so we take the chunk of principal interest around five six hundred dollars or so that's going towards equity and say hey actually you're saving that money that's not really a housing cost you're still left at 60 percent of your income just towards housing costs.

14:55Dave Ahern:That leaves you with very little, and this leaves you what people call quote-unquote house poor, where just all of your money is going into a house. Cool, you have a house, you have somewhere to live, that's great, but it makes it absolutely impossible to spend or save anywhere else. You are completely financially bound to nothing but that. If we compare that real quickly to, these figures are a little bit more wishy-washy because people who split rent will count their rent as only part of it. Whereas if you're talking about buying a house, it's much easier. You just get a whole figure for the home.

15:27Dave Ahern:But the median rent figures that I was finding were around$1 ,800. Now that could be per person. So if you're living two of you, then maybe you double that to 3 ,600, even if it doesn't double necessarily. But though expensive, that is actually much more affordable at leaving you about 41 % of your income. May not be perfect necessarily, but that's actually getting close to a sustainable figure that you can do other things with your income with. Dave, what are some other, aside from just this percentage that we just laid out, what are some other pros and cons that you see between renting and buying a home?

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18:00Terms apply. Cash App is a financial services platform now the bank banking services provided by cash apps bank partners bitcoin services provided by block inc brand for additional information see the bitcoin disclosures at cash.app slash legal slash podcast what's the best way to get started in the market download my ebook for free at stockmarketpdf.com oh i think i think and we've we've touched on this in the past for in other shows but i think some of the the cons that i would say about owning versus renting is that you are responsible for the maintenance and upkeep of your home. So once you plunk down your$110 ,000 to buy that home, if the refrigerator breaks, you are responsible for it.

18:43If the air conditioning stops working, that is your problem. If there is a problem, let's say there's a hole in the roof and a squirrel gets in, that is your problem. When you rent, so those are expenses that a lot of people may not account for. And if you're in that house poor situation, that puts even more pressure on you to figure out a solution to buy the new air conditioning heating section or replace a hole in your roof. Those are all things that you are going to have to out of pocket figure out a way to do. So that is a challenge. When you rent, obviously you do not have those challenges.

19:24uh the cons i guess you know a con of renting though is that your money is basically going up in in smoke right the 1800 hours that you spend you literally get nothing for it other than you put a roof over your house your your head which in and of itself is you know great especially if you live in someplace like minnesota you you want a roof but uh but so that is that is certainly a downside to renting. The pros, obviously, if you live in a house, you have more space, you are able to entertain, your family can grow if that's something that you want to do. You can also spend, if you are a person or a couple that enjoys doing housework or doing things to your own home to try to build the value of it, then there's lots of opportunities to do that.

20:18When you rent, you don't have those opportunities. A good example, let's say you buy a house and you live in an area that would be opportune to put solar panels on your roof. And that arguably could raise the value of your home. It could also save you money on your utilities. When you rent, whether it's a townhome or an apartment, you really don't have that opportunity. So there are certainly some downsides to renting. So those are some of the things that kind of spring to mind immediately. Yeah. When you're working at the bank, how did you see people

20:58Dave Ahern:decide that they wanted to own a home? What led them to decide that they wanted to? Was it entirely a personal decision? Was it more financial or a mix of the two? The primary reason was was personal. They either were married and wanted more room. They were planning on having a family and expected to need more room. There were some people that did it. This was back in 2010, 11, 12. So this was a little bit early for the whole house flipping and house investing thing. So this is a little bit different of a scenario, but I would say the vast majority of people that were looking at it financially, we're looking at the equity that they could generate from the home.

21:43And I don't know if this is a good place to kind of throw this anecdote out here, but when I was working at the bank, there was a mortgage banker that would sit behind me. And I remember having a conversation with a customer about this very thing, the pros and cons of whether they should rent or own a home. And this was in 2007, eight, in that timeframe. And so the interest rates were, no, I'm sorry, it was around 2010. I'm sorry. But the interest rates were uber low. So we're talking like 1%, less than 1%. So super, super low. To buy a house, it was 2.5%. So keep that in mind. The customer that I was talking to was adamant that buying a house was a really great investment and that the equity would be able to build up.

22:34And the mortgage banker actually got up from his desk and came over and started talking to us. I was kind of surprised. His name was Chris, super nice guy. And Chris said that in today's environment, he would argue that investing in the stock market would be a better option than buying a home because at 1 % to 2%, you could buy a 30-year bond and earn more money on the bond with the interest that you would earn on that bond than you would for having a 30-year mortgage because the interest rates were so low. So his recommendation was that put some of the money, if you aren't in a position that you could buy the house using more conservative investments like bonds, money market funds, which at the time weren't earning much either.

23:24But those were all better than putting the money into a house at a two and a half percent rate. So he could, in other words, the person could earn more money that way. So that was his thought. Now, with today's interest rates being much higher and mortgages being much higher, then yeah, a mortgage would be a better place to put your money.

23:44Dave Ahern:Yeah, that's a really, really fascinating anecdote. Yeah. To kind of lay out our decision to purchase a home, it was definitely something that we were looking forward to quite a while, knew that it was something we wanted to do eventually. And it definitely fed more from the emotional desire side of things, lifestyle side of things, than just the financial side of things. And I definitely, because again, one of our big focuses here at any rate is to make things sustainable. And so for me, if you lay out that a home seems like it will be financially viable at this very moment, I think that that is committing a long period of time in the future for a lot of unknowns and assuming that things are going to stay the same as they are now.

24:31Dave Ahern:Because also people tend a lot to talk about homeownership and say, oh, well, your mortgage is stable and therefore rent's going up, but your mortgage stays the same. So apples and oranges is completely different. It's close-ish in terms of your mortgage won't change very much or at all. However, your homeowner's insurance, your maintenance costs, your utility costs, the actual property taxes that you're paying on the home, all of these can change drastically over time. And so for me, if you're trying to bank on this just as a financial upside, things can turn around like crazy very quickly. Thankfully, I live here in Florida and we have something called the Homestead Act that actually stops our property taxes from increasing any more than 3 % every year.

25:16Dave Ahern:Dave, big thumbs up on that. Yeah, that's huge. The house that I was talking about earlier that my ex-wife and I bought, I distinctly remember that the area that we lived in, they raised the property taxes not once, not twice, but three times in three years. And so the property taxes for the home that we were living in went from, we were paying around$300 a month to almost$1 ,200 a month in a four-year span. Yeah. So that was another reason why we got out of the home was because the mortgage didn't change, yes, but the property taxes almost tripled. And so in a four-year span, we just couldn't afford that.