Michael Pestronk picked a funny time to begin an apartment company. “It was 2007, and every single person wanted to buy,” says the president of Philadelphia-based Post Brothers, which has since built a portfolio of 1,500 rental units in and around the City of Brotherly Love. “People just wanted to own. They overlooked rational analysis. Now, people are realizing, ‘Wow, if I want to own, it’s going to cost more per month compared to a rental, and if I need to move in the next five years, I’m not going to make out well on the investment.’?”
Call it a readjustment to rationality. Call it renter nation. But whatever you call it, consumers seem to be finding more economic value renting right now as opposed to buying. “People have begun to realize that the for-sale market [has] real risks associated with it,” says Christine Aragon, president of Santa Monica, Calif.–based apartment ILS Rent.com. “I think that’s the more permanent shift. Whether people will have a long-term, sustained preference for renting versus owning is going a little too far out on a limb.”
When it comes to real monthly costs associated with renting versus owning, it’s nearly unanimous that apartment dwellers fare much better than their single-family counterparts. According to Troy, Mich.–based housing policy advocate Community Housing Network, average ancillary costs for homeowners range between $60 and $110 a month for insurance, $80 to $150 for property taxes, $20 to $60 for private mortgage insurance, $40 to $100 for association fees, and $100 to $200 a month for maintenance costs, averaged over a 10-year period. In comparison, renters pay only $33 to $45 per month for renter’s insurance, should they elect to even place a policy. (For more on the financial costs of both lifestyles, see “Costs of Living,” opposite.)
Then there are the intangibles. Consider that, according to an August 2011 Rent.com survey, 87 percent of U.S. adults no longer consider owning a home to be the most essential part of their American Dream. By analyzing entries to its “New American Dream Contest,” Rent.com found the top themes that American consumers dream about when they’re not dreaming about 2.5 kids and a picket fence—freedom from debt, the mobility to travel, having a greater impact on their society, financial stability, and the benefit of having a more stress-free lifestyle.
However, the real value rub between renting and owning has traditionally come down to wealth creation through the building of equity, which exists on the ownership side but not in the rental sector. In fact, it is not until year 20 that a typical homeowner pays less in interest than a renter pays for rent in a comparable dwelling, according to Tim Kane, co-founder of Seattle-based Legacy Escrow Service.
The consequent requirement that homeowners stick to their investment guns also precludes them from additional lifestyle and mobility benefits afforded to the renter—benefits that are amplified in a tough economy.
“I think the younger generation likes the mobility and flexibility of being renters. I think they like urban living with less of a commute and more of a lifestyle,” says Marcus & Millichap’s Nadji.
Nadji is right on the ball: According to Census data released in September 2011, Americans are taking 25.1 minutes, on average, to commute to work, but city dwellers often drive nearly 10 percentage points less than their suburban counterparts.
Still, the notion that the next generation won’t buy a home is not realistic, Nadji says. “At some point, rents will go up, and home prices will stay down, and [that] should compel home buying by 2014.”
Whether future homeowners create greater value by investing in hard assets remains to be seen. While owners did realize significant returns in the mid-2000s, experts suggest better earnings can be had via stocks. Since 1870, stock market real returns on investment (adjusted for inflation) have averaged 7 percent, notes Wall Street Journal financial analyst Jack Hough. The long-term real returns on housing investments? Zero.