Most people treat the prospect of renting a place to live as a necessary evil that they have to endure until they can buy the home of their dreams. Yet the plummeting housing market hasn't just thrown millions of homeowners under the wheels of their mortgage debt; it has also thrown into question whether buying a home really ever makes economic sense.
Deciding whether to rent or to buy has always been a controversial topic. Those who favor buying a house typically argue that because real estate has historically appreciated over time, those who rent are simply enriching their landlords at their own expense. On the other hand, renters can point at the wreckage of the housing crisis and all the homeowners who have seen their personal finances destroyed as a result of falling prices and the recession.
Looking for bottom
If you think of buying a home primarily as an investment, then recent signs of improvement may seem encouraging. With the Case-Shiller index of housing prices having risen over the past two months for the first time since 2006, some are hoping that the end of the housing bust may finally be in sight.
But from an investment standpoint, long-term home ownership has rarely been a great way to produce strong returns. Historically, the average price of homes has risen by just 4% to 5% annually, just a percentage point or two above inflation. Moreover, that doesn't even include the costs of ownership, including maintenance and repairs, financing, property taxes, and homeowners insurance. Homebuying activity may create big profits for mortgage financing companies like Wells Fargo
Fool me twice, shame on me
Nor is it likely to become so again anytime soon. Those trying to figure out whether to buy or rent in the future won't soon forget the lessons learned during the real estate boom and its aftermath. Not being able to predict their economic return from home ownership may well push many would-be home buyers into renting, especially if the supply of available homes continues to exceed demand into the future.
Clearly, that would be bad news for homebuilders like Toll Brothers
How you want to live
The main problem for renters, though, is that in many areas, finding a home to rent that you'd want to live in is a big challenge. Sure, anyone who wants an apartment or condo can usually find plenty of rentable models that are practically identical to ones they could buy elsewhere. But in certain areas, trying to rent a decent single-family home can be next to impossible.
More than anything, home ownership is just as much about one's quality of life as it is about running the numbers. Sure, you can make estimates of how much your home might appreciate over time versus the expenses you'll need to pay, and compare them to what you'd pay on rent. But such comparisons rely on what for most people is a completely false assumption -- that you have no personal preference between renting and owning.
The big question is whether the housing crisis has changed people's preferences about home ownership. Until recently, I suspect that the flexibility of calling a home your own would have beaten out renting in most people's eyes. With once-burned families potentially staying away from home ownership, though, renting may get more popular for a while. If that happens, then the problems we've seen so far in housing are just the tip of the iceberg -- and buying a home now could be like boarding the Titanic.
Want to know which banks might benefit most from a housing recovery? Read what our roundtable of experts think is in store for the financial industry.
Fool contributor Dan Caplinger bought too early in the housing bust, but he still likes his place. He doesn't own shares of the companies mentioned in this article. Home Depot and Lowe's Companies are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy loves the roof over its head.