Renting vs. Owning: Not-So-Perfect Substitutes
Every article I’ve seen in the last few years trying to divine the direction of housing prices inevitably compares renting to owning.
The underlying assumption: when the cost of home ownership is more expensive relative to renting, housing is (still) too expensive. By contrast, when owning a home is cheaper or even the same cost, housing is fairly valued — or even cheap.
But is the assumption that people readily switch between owning and renting, depending on market conditions, really valid?
Robert Shiller, Yale prof (and the “Shiller” in S&P/Case-Shiller), claims that the answer is “no”:
In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This mayinvolve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.
–Robert Shiller, “Why Home Prices May Keep Falling“; The New York Times (6/6/09)
Unlike, say, jumping out of a frothy stock market, becoming a renter takes time, and involves major lifestyle changes. Shiller again:
Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.
While Shiller’s observations appear to rest on common sense, not empirical data, they intuitively seem right.
It’s also the case, as I’ve noted many times previously on this blog, that renters and owners face very different housing choices, especially in the Midwest.
While there are certainly plenty of homes for rent in the Twin Cities today, my impression is that relatively few of them are located in the kind of stable, high-demand neighborhoods with good schools that most families seek out.