To buy the ‘American Dream’ or rent by choice?

By: J. David Chapman//December 1, 2022

One of the personal components of the “American Dream” has typically included homeownership. Frankly, I have never quite understood why homeownership was somehow correlated with happiness. I understand safe, affordable, comfortable shelter and I suppose homeownership has been related with wealth in the U.S. If one accepts that homeownership is a common dream among Americans and it indeed creates happiness, the latest studies and research might be a bit disturbing.

A change is taking place in the housing market in the U.S. More people are renting than at any point in the past 55 years. The changes appear to be in the population we refer to as “rent-by-choice” tenants. This population indicates that they could afford to purchase a home, but choose to rent instead. When questioned about why they choose to rent instead of purchasing, they have a list of rational reasons. The first is that the ongoing costs, such as maintenance and repairs, are the obligation of the landlord, making the renter’s monthly cost of living predictable and consistent. They also commented that they had the flexibility to move if their personal situation changed and/or could take advantage of career opportunities.

Access to amenities, such as pools, gyms and walking trails, also was listed as a rationale to rent instead of buying because they would have to pay for use of similar amenities. Even though the cost of moving into a rental are rising, renters claim a reason to rent is that it requires significantly less upfront money. While it was not specifically identified in this study, I believe one reason we are seeing a rise in rental populations is simply the ability to postpone the decision of purchasing. Purchasing is a significant long-term financial decision and commitment. The decision to rent allows people to focus on other obligations and defer the commitment required to purchase.

The narrative, that paying rent was somehow “wasting” money, did not seem to be an issue in this study. With increasing interest rates, property taxes, insurance and transaction costs, it takes significantly more time living in the home to actually build equity. With the prospects of any meaningful appreciation in the near future, it is understandable why some would be satisfied to become a “renter-by-choice.”

J. David Chapman is professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu)

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