There's No Shame in Renting, Home Prices Will Fall Dec 03, 2007 In our society, there is a prevailing assumption that buying is better than renting. The fact is, there is no shame in renting, especially right now. Home prices are due for a major correction. When prices finally hit bottom, renters are one of the few groups whose finances will survive the crash. Renters are always being bombarded by the same question: 'When are you going to buy a house?' Nobody ever assumes that the decision to rent is a conscious choice. People have become so enthralled with status that they seem to have forgotten the reason why we live under a roof and between four walls--shelter. At one point, that's all a home really was. Nowadays, things are a bit different. Owning a home has not only become the equivalent of owning a piece of the American dream, it has become a way to measure success. An overwhelming number of people embraced this concept during the most recent housing boom. Home prices began to swell beyond reasonable levels as more and more people bought into the market. It wasn't long before it became impossible for most people to buy median-priced homes on median incomes. By 2005, people were spending 60 percent more on average in the largest metro areas to buy rather than rent. This should have been enough to deter potential home buyers, but it was not. People were still buying into the idea that a home is the best investment an American can make. They were so confident in their beliefs that they were willing to finance their dreams with preposterous mortgage products like interest-only loans and option ARMs. The desire to keep up with the Joneses was so strong that some went as far as to lie about their incomes and their ability to afford the required monthly loan payments. In short, they committed mortgage fraud just so they could buy their homes. Were these people really that ashamed to admit that they couldn't afford to buy? Was renting so embarrassing that they were willing to risk their financial futures and possibly even their freedom? Why Home Prices Will Fall Source: NAR; US Census Bureau As you can see from the graph, affordability problems first began in 1997 and have since culminated in the biggest price bubble in U.S. history. The home prices we see now are not sustainable. They are built upon an artificial foundation instead of upon the traditional fundamentals that have always ruled the housing market. You see, it is not right for median incomes to increase by only 10 percent when median home prices increase by 50 percent during the same period. Any time the two deviate, a bubble forms and pops. In the end, home prices always fall back to previous levels. It's the way markets work. Renting is Smart If you want to play it smart during a housing bubble, renting is the best thing you can do. Renting is not risky. Unlike the people who bought in the last decade (or those who plan to buy in the next five years), renters have nothing to lose. When home prices begin to fall, homeowners stand to lose 100 percent of their investments. As equity erodes, any money they put down on their homes will disappear. But that's just a start. Prices are predicted to fall back to 1997 levels. If this happens, it will be devastating to homeowners who bought their homes in the last 10 years. Picture it: It's 2005. A family buys an overpriced house in San Diego for $550,000. They think they got a great deal. Flash to 2007: Home prices have already started to fall. By the time prices hit bottom (1997 levels) that $550,000 home will only be worth $250,000. But the family still owes the bank more than $500,000. Refinancing or selling is out of the question. Renting the house out to someone else is also not an option--no renter is crazy enough to cover those mortgage payments. The family is left with two undesirable choices: stay in their bad investment or hand the keys back to the bank. There is no shame in renting. If the family in the previous example had only realized this, maybe they wouldn't have been so quick to gamble with their future. Remember that the next time someone asks you when you are going to buy a house. Tell them about this example--or better yet, tell them you'll buy when buying makes sense. Agree or disagree?