Will Renting Stop Being Trendy?

[heybro]

Everyone seems to enjoy renting.  I know many investors even bought up a bunch of houses and are renting them out.

They say millennials are starting to buy houses.

Still, so many people are renting and not buying.  I have seen some rents by double how much a place would be to buy.

Will renting stop being trendy?  How would that happen?  When it does happen, what would it mean? 

[joonifloofeefloo]

I have seen some rents by double how much a place would be to buy.

But not to own. i.e. A rent may be double the month's mortgage, but equal to or less than mortgage payment + municipal utilities + taxes + insurance + maintenance + heat + buying + selling + carrying + management fees (if renting out) + + +.

Renting is trendy because in many places, it's cheaper and more flexible than owning, and allows the difference to be invested in a more diversified way.

I think ownership will become trendy again when the true costs of owning become affordable to regular people and more cost effective to high earners.

[sequoia]

Will renting stop being trendy?  How would that happen?  When it does happen, what would it mean?

Never...

I have seen some rents by double how much a place would be to buy.

But not to own. i.e. A rent may be double the month's mortgage, but equal to or less than mortgage payment + municipal utilities + taxes + insurance + maintenance + heat + buying + selling + carrying + management fees (if renting out) + + +.

Renting is trendy because in many places, it's cheaper and more flexible than owning, and allows the difference to be invested in a more diversified way.

I think ownership will become trendy again when the true costs of owning become affordable to regular people and more cost effective to high earners.

A lot (probably majority) of people, regardless of how much their income are, can not afford to put down 20% down payment / significant amount of cash to buy a house. So they rent, even if the monthly rent is a lot higher than getting a mortgage. These people know this, but can not do anything about it.

It amazes me how some people's spending habit are just out of control, but that is a whole different topic.

[FINate]

I can't speak for other parts of the country, but here in a trendy (read: HCOL) part of California renting stopped being trendy about 5 years ago. During the housing crash local media was full of accounts of smug renters going on and on about how renting was so much smarter than owning. Even coined a term for it, the "rental economy" - everyone was going to rent everything, and renters would grow wealthier as they saved money and owners shouldered the burdens of ownership.

That was the theory at least. In reality, those folks missed a once in a lifetime opportunity to buy in a HCOL area at fire sale prices.  I tend to be somewhat of a contrarian, so we doubled down and bought rental property for cheap back then. Now renters bitch incessantly about the unfairness of increasing rents, and disparage "greedy" landlords for charging market rates. No one here talks about wanting to rent and we have people begging to pay more than twice what we paid for our primary residence, a crappy track home on a tiny tiny lot. So being the contrarian that I am, we're going to sell. For about one-third of what our house is worth we can buy a much larger house with an actual yard in a MCOL area.

If it's half as expensive to rent than own in a LCOL area then it makes sense to keep renting. But as the rent vs. buy gap narrows the intangibles start to become more important, especially for families. It's super easy to move when young and single: borrow your friend's pickup truck, and make one or two trips to move your studio or one bedroom. But moving with kids is a total pain in the ass. Lots more stuff. Changing schools. Disrupting kid's circle of friends. Just a lot more work. And as families tend to value a place they can more easily "make their own" so to speak. Don't like the layout or some awkward think about the house, well, can usually change that as a homeowner. Not as much with a rental.

So I would expect Millennials to become homeowners as they start having kids, especially in areas where the difference between rent vs. own isn't too great.

What does this mean? I don't think there's a general answer to this as every location is different. In "up and coming" areas and/or places ripe for gentrification it may be better to buy sooner rather than later. However this depends completely on the specific housing market in question.

[NaN]

In reality, those folks missed a once in a lifetime opportunity to buy in a HCOL area at fire sale prices.

I get this is not general, and not related to every person but to the specific person who had 20% down available in a HCOL five years ago that said "No, we won't buy a house because renting is so much better."  However, this comment just gets my blood boiling. It recognizes the opportunity to have bought a house in a HCOL area (which for most is an area tied to jobs) five years ago was an incredible, lifetime opportunity. And damned if you just were unlucky that the timing means this is the first moment, with housing at another high, when you could buy a house (with 75% saving rate on your first job, and more than 20% down available). Yes, the MMM advice is to bank the high salaries, rent at the moment until the next recession (if it doesn't occur as a painful slow decline instead of a sharp crash), and don't buy into an expensive mortgage. This is what we are doing but again this statement is so true yet so painful at the moment because we realize how much timing is so important.

[clutchy]

Everyone seems to enjoy renting.  I know many investors even bought up a bunch of houses and are renting them out.

They say millennials are starting to buy houses.

Still, so many people are renting and not buying.  I have seen some rents by double how much a place would be to buy.

Will renting stop being trendy?  How would that happen?  When it does happen, what would it mean?

I was born in 1980 and the US population was 226M I'm now 37 and the population is 324M. 

100M people needing a place to live is a big change.  People buy houses and stop renting sure, but also have immigration and plenty of births to drive demand.

[heybro]

I tend to be somewhat of a contrarian...

I've always loved the idea of renting when everyone else is buying and buying when everyone else is renting.  There has to be some sort of 'underbelly of the pig' existence out there that is dirt cheap based on doing the opposite.  hehe.

[FINate]

I tend to be somewhat of a contrarian...

I've always loved the idea of renting when everyone else is buying and buying when everyone else is renting.  There has to be some sort of 'underbelly of the pig' existence out there that is dirt cheap based on doing the opposite.  hehe.

I watch for people I know who're "on trend" but otherwise lack specific competency/skill in a given area. These are my canaries in the coal mine, so to speak. For example, a family member who gets very excited about investing in real estate even though they don't have a clue how to crunch the numbers to judge whether or not it's a good investment. I realize this is terrible on my part, but when I see them going all in on real estate I start to worry that the market is overvalued (not my only metric, track other indicators as well). I do try to dissuade them from making what I think are poor investments, but they don't usually listen and are blinded by their optimism, and I don't push very hard... their choice, their money.

Being contrarian is easy, it's the timing that can easily bite you in the ass. Things like housing can keep increasing in value for years after you notice things going askew (or keep declining after you think its hit bottom). I deliberately avoid trying to time the stock market... too volatile and more efficient to just diversify and buy and hold for the long term. Direct holding of real estate, on the other hand, has high specific risk and is extremely location dependent and difficult to diversify, so I don't mind factoring valuation into my decisions. I guess what I'm saying is buying an individual property is more similar to picking individual stocks than passive investing in index funds. So although it's impossible to time the exact top or bottom, I do make changes based on my long-term expectations.

Did this with rental property during the housing bust. Got a good deal on a rental (in terms of cash flow and immediate ROI) so it was already a good investment, but as an added benefit figured value would probably recover from crisis levels and planned to wait it out for up to 10 years or longer if necessary.

I think we're in the opposite situation now. Getting ready to reduce real estate holdings, does not bother me if prices keep going up for a few years. I'd rather diversify now while everyone in my area is clamoring to buy.

[Dicey]

@FINate, you are making really interesting points and I'm enjoying your comments. Just curious if you need a "much bigger house" in a MCOLA. Also, your property taxes could end up being higher, depending where you move.

[FINate]

We certainly don't "need" a much larger house as our current 1800 sq ft house has everything we need and more. 

But in FIRE we're doing a lot more from home like volunteer work and have plans to home school on the horizon, so we're starting to see more of a use for an office and/or bonus room. Part of the issue is how space in our house is laid out, but also could use more space as we do more from home.

To quantify "much larger house," I mean 2000-2200 sq ft with an extra room as a home office and double as a bedroom for visitors. This would run into the $1.5M range in our current location (crazy!!), nope, no way.

RE property taxes: Currently pay $8k/year on our primary residence. The MCOL area we're exploring right now tends to have taxes in the $3k-$5k range for what we're looking at. Factoring in property taxes, housing costs (the largest component), and other cost of living factors, my calculations show that it costs us about an extra $30k per year to live in our current location vs. a MCOL area. More house for less money, less traffic, fewer crowds, more budget to travel, less hectic lifestyle. All very tempting.

[srad]

I will say this, a few years back i moved to NY and there was no way i was going to buy a place for 800k and up...  Ended up renting where the rent cost more than a few of my rental mortgages.  When i left NY 2 years later, i had the most money in my saving account than i've ever had.  My rent was expensive, but "renting" was the cheapest living i've done.  No Down Payment, no plumbers, no roofers, no appliances to buy, no working on the place on nights and weekends.  It was great and i could definitely do it again.  But i had the sense to save the spread.  So when i got back to the left coast i was able to use that savings to purchase a very good property.  I'm going to assume that there are plenty of renters that just spend that savings.  So we will always have renters.

[joonifloofeefloo]

That’s my understanding too, srad. Total cost of renting is often cheaper than total cost of owning, but many renters spend vs save the difference. For those of us who will invest the difference, renting can be crazy-smart.

I’ve owned and rented, and would be very reluctant to own again, because it would steal all my money (current and future). When I saw what my ownership costs would be even after a mortgage was paid off, I was mortified.

I don’t know why people like to compare rent with mortgage. Mortgage is a portion of ownership costs.