This week we’ve been running a series called The Depreciating American Dream. We’ve heard from homeowners who wish they’d never bought. We’ve heard from renters relieved to be renting.
The question of owning versus renting is something Nicolas Retsinas has studied quite a bit. He co-directs the Joint Center for Housing Studies at Harvard University. Retsinas sat down with WBUR's Bob Oakes to answer some questions about who should own and when.
BOB OAKES: This series has pointed out some of the painful downsides to owning. Have we gone too far in touting renting?
NICOLAS RETSINAS: I don't know we've gone too far. Certainly, renting has reemerged as a viable and plausible option. I think what we may have done, however, is understate the value of owning. And I think that's something that perhaps has to be revisited.
What do you mean by that?
Well, I think it's become pretty clear in the past few years that if you bought a home expecting appreciation to climb, expecting it to be the best investment you've ever made, you were really disappointed. Indeed, it turned out to be a very bad economic decision if you bought at the height of the boom.
But at some point, when we're reminded that you buy a home to live in, I think what you'll find — if all things are equal — that most people would prefer to own than rent.
So profile this for us. Who should own?
People who should own are: people who clearly are unlikely to move in at least five to seven years, therefore, they can withstand another down cycle; people who want some control over their property and, in particular, are interested in making some modifications to their property overall; and people who find the the neighborhood where there are more owning options than rental options more conducive to the way they want to live.
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Do you find that potential homeowners ask themselves questions that get to those points you're making?
I think more so today than yesterday. Within the past five or so years, people were more likely to look at the purchase of a home as an investment choice — their own sense of what was happening on the market, how much their home would increase in value.
I think we've learned that home prices don't always go up. We've learned that it may not necessarily be a good investment.
So I think people are going to be more likely to ask those questions. Are they going to ask them sufficiently with enough detail? I'm not sure. But I think they're more likely to ask them today than they were yesterday.
What's the one question you think homeowners most ignore and the one they really need to be looking at?
The key question is: Am I pretty sure I can't imagine any plausible circumstances where I'm going to be forced to sell over the next sort-of five or six years. If they ask that question and answer it positively, that is to say: there will be some stability to where they live, where they work, over time, then owning a home can be an OK option. If they don't ask it, they run the risk of having it be a very poor investment.
What do you think homeowners and people who are thinking about home ownership have learned from the housing crash?
They've learned a lot. First and foremost they've learned it is not a risk-free purchase. They've learned that prices can go down as well as can go up. And I hope they've learned — I really hope they've learned — that you can borrow too much. And you should only borrow what you can comfortably afford to pay back. You shouldn't borrow based on what you expect future values to be.
On the downside, has the housing crash also taught some homeowners that it's all too simple to walk away from what turns out to be a bad investment?
I think it has. In investments, sometimes you don't want to throw good money after bad. Again, it's that re-definition of what a home is. When we start rethinking of the home as a place to live, then I think we'd be a little more cautious about walking away.
Are banks and lending institutions at least at partial fault for making people think of their homes not necessarily as your home, but as an investment? Because you have to go far and wide now to find a bank or lending institution that keeps the mortgage.
You're absolutely right. The mortgage industry changed. And mortgage bankers got paid for transactions. They did not get paid based on the performance of the loan. Indeed, they very often sold the loan to another investor.
Secondly, the other major change is for many banking institutions — not all — underwriting was based on future valuation of the property, not on the ability to pay of the borrower. We have to get back to banking where ability to pay becomes the primary criteria.
Will that help reinstate this image of the house as your family home?
I think it will. Maybe we'll reach a point in time where you won't have to turn on the TV and see "flipper" being promoted as a viable sort of option. Maybe it's just: homeowner or renter.
Indeed, when the dust finally settles, for some people owning is going to be best. For other people renting is going to be best. We need to ensure that balance and both options exist.
What should government do now to help buyers make better decisions?
The government has to make sure that the risk of buying a home — in terms of the mortgage, the characteristics of the mortgage — are completely transparent to the borrower. The government has to make sure it doesn't skew or stir the family to one decision or another.
It seem to me the goal of government should try to promote that every household, every family has a decent place to live. Not that every family is an owner.