By Josh Katzowitz, WCI Content Director
A few months ago, Redfin, the national real estate company, ran a housing market report with a blaring headline: “Buying a Home Costs More Than Ever.” Maybe that’s true; maybe it isn’t. People, after all, have been buying and selling homes for a very long time, so pound for pound, I doubt that housing now IS MORE EXPENSIVE THAN ANY OTHER TIME IN HISTORY. But then again, mortgage rates are high (at least compared to what they were for the last couple of decades), and there has been less inventory than normal (although that trend seems to have been corrected in the past several months).
Even though Redfin notes that housing payments have fallen in 2024, that hasn’t translated into more people buying homes (as of September 2024, pending home sales had fallen 8.4% year over year).
Housing for many people, even doctors who have substantial salaries, has become unaffordable, especially if they reside in a high-cost-of-living area. If that’s the case, maybe it makes sense to never buy a home at all. Maybe it just makes sense to rent your home forever.
The Forever Renter Class
Nick Maggiulli, the author of Just Keep Buying and one of my favorite writers in the financial space, wrote in May that he had paid more than $350,000 of rent in his life and that “I may end up paying another $350,000 in rent before I ever buy a house.” He says he’s part of the “Forever Renter” class, a subset of the Millennial and Gen Z generations who either can’t or don’t want to buy a house in the current market.
Even though interest rates have decreased thanks to the Fed’s decision to cut rates by 50 basis points earlier this month, it still might be difficult/impossible to buy a home when you’re paying 6%-7% (or even 5.5%-6.5%) on a mortgage. And if home prices actually rise after the rate cuts, a distinct possibility, that makes it even more difficult.
Home buyers need to earn significantly more money to afford mortgages (Zillow says you’d need to earn $47,000 more today than you would have in 2020 to purchase that house), so if you’ve only received cost-of-living raises in the past few years, you’re more likely to be priced out.
One study said you’d need to have a $117,000 income to afford the average-priced home in the US. But according to the Census Bureau, the median income is only about $75,000. Full-time doctors, of course, make more money than that, but if a relatively new attending with hundreds of thousands in student loan debt is looking to buy a so-called doctor home, they’d be in a similar spot.
We already know younger generations aren’t saving as much for retirement (some call it soft living). Perhaps they also can’t afford a mortgage; or perhaps they just don’t care about buying a house.
As Maggiulli wrote:
“For those that have the means to purchase a home in the current housing market, they may still choose not to if renting is much cheaper. For example, in a place like NYC, a Forever Renter could end up having to decide between paying $4,000 a month to rent or $7,000 a month to buy the same apartment. Even if they could afford such a high housing cost, would that be better than renting and investing the extra $3,000 a month into a diversified portfolio? My conservative estimate suggests not. For the time being, renting wins out.”
More information here:
The Real Reason for the Housing Unaffordability Crisis
What About Just Finding a Cheaper Home?
Another problem? The decline of the starter home, where you could buy a home for cheap, fix it up on your own timeline to your own specifications, and then live in it until you’re ready for something bigger and better.
“There's no such thing as a starter home in large [metropolitan statistical areas] anymore,” Michael Pestronk, co-founder and CEO of real estate developer Post Brothers, said, via Yahoo Finance. “There is no land available to build housing within commutable distances of jobs. And so for better or worse, the starter home in big cities has become a bigger, better apartment.”
According to USA Today, only 13% of homes sold in 2023 cost less than $200,000, a 3% drop from the year before. Homeowners are staying in their homes for an average of 10 years (in 1987, it was more like six years), and those who are buying their first home assume they’ll stay in the same place for 15 years. Even if people can afford to eschew renting and buy a home, they’re staying much longer in those homes—perhaps even forever. These days, it might not be worth the hassle of buying that home, especially if it’s going to leave you house poor.
“I have a friend who’s been looking for three years,” Stephen Freudenberg, a realtor in Atlanta, told USA Today. “I think he’s given up now and is content to rent. He got money from his family and is still being outbid by tens of thousands of dollars. Where would he get money to do repairs?”
More information here:
How to Buy a House the Right Way
Is Renting Forever the Right Move for a High Earner?
Maybe there is something to not buying a home (or at least pushing that purchase way out into the future) and renting for the long term. But what about doctors who make exponentially more money than the average citizen? Could renting forever work for them?
Consider that Clever, a real estate data company, reported earlier this year that monthly rent costs are cheaper than monthly mortgage payments in 48 of the 50 most populated cities in the US (Cleveland and Pittsburgh were the two exceptions) and that renters save nearly $300 per month more than homeowners.
Remember that your mortgage is the least amount you’ll pay to live in your house; rent is the most you’ll pay (as I’m writing this, we just got word in my household that we’ll need to spend thousands of dollars this week for unplanned plumbing work and another $1,200 to get our trees trimmed).
In 2022, Dr. Erik Hofmeister, a veterinarian who is also a professor of veterinary anesthesia, wrote a guest post for WCI on Why We’re Financially Independent and Renting.
Chief among his reasons:
- Owning a house is really freaking expensive (think of all the hidden costs that are baked on top of the mortgage payment. Like, ahem, plumbing issues that you can’t avoid forever).
- Less hassle in renting (all you have to do is call the rental company or landlord when you have a problem, and they’ll take care of it).
- Transaction costs are minimal if you’re renting (Clever noted that, in 2024, a homeowner typically has to spend more than $54,000 to sell their home).
- Freedom (as Erik wrote, “For a blog dedicated to people being financially free, I’m curious why so many are excited with the idea of being bound to a house. I suppose you could theoretically walk away and stop paying the mortgage, but that has significant consequences. If you walk away from your rental, the worst thing that happens is you pay the rent until the lease runs out. More importantly, you have a lease. You KNOW when you can get out.”).
I caught up with Erik via email recently and asked him what he thought about Forever Renters and if he was still renting his place despite the fact he’s getting very close to FIRE. For what it’s worth, Erik is still renting. But he also said retirement might change the equation for whether it makes more sense to rent vs. buy.
“I think renting ‘forever’ vs. buying depends a lot on the market,” he said. “I often use Toronto as an example for my students—you should just rent if you want to live in downtown Toronto. The same applies to a lot of very high cost-of-living cities. Run the numbers—you'll often find renting is less expensive. Don't forget to include maintenance, taxes, insurance, etc. in the comparison!
“Also, there may be intangibles. For example, there are no single-family homes for sale in reasonable walking distance of my current job, but there are plenty of rentals. The biggest downside I can think of is retirement. Having rental expenses as a required expense in retirement raises the floor of your mandatory spending, and it will probably go up with (or faster than!) inflation. Owning your own home buffers you slightly from inflation and also lowers your mandatory expenses. I would feel less comfortable renting (or having a mortgage) in retirement. If you invested the difference between renting and buying throughout your working career, hopefully you have enough to outright buy a house when you retire.”
Maybe that’s a good way for some doctors to split the difference: rent now; save up and invest all the money you would have spent on a house’s mortgage and its phantom costs; and, when you’re getting ready to retire, buy a home in cash.
“Remember that there are literally millions of people in America who rent and invest the difference,” financial podcaster and author Ramit Sethi told the New York Times. “You’re not some weirdo just because you’re choosing to rent. I do it, and plenty of other people do it.”
Money Song of the Week
I’m not sure why, but as I’ve let my brain rot recently while watching Facebook Reels and YouTube Shorts, I’ve noticed plenty of videos featuring Frankie Valli of the Four Seasons performing live. He’s 90 years old, and he’s still touring on the road. But the reason Valli has been showing up in these viral clips is because he’s clearly lip-synching in an almost robotic, animatronic way.
It looks bizarre.
But there’s no denying that Frankie Valli, in his prime, was a singing force, so let’s celebrate him and the Four Seasons (and the fact that Jersey Boys is a top-10 Broadway show for me) by listening to the classic Rag Doll, released in 1964.
According to Bob Gaudio, the band’s keyboardist and songwriter, the song was born when a young girl “with a dirty face and wearing ragged clothes” ran up to his car to clean his windshield while he was stopped at a red light in Manhattan. Gaudio looked in his wallet to find a spare buck or two, but the smallest bill he had was $10. He gave that to the girl as payment.
“The image of her stuck in my head until I wrote Rag Doll,” Gaudio said in 2009.
As Valli sings,
“When she was just a kid/Her clothes were hand-me-down/They always laughed at her/When she came into town.
Called her rag doll/Little rag doll/Such a pretty face/Should be dressed in lace.”
OK, not the most sophisticated lyrics we’ve ever heard, but it was a No. 1 hit, so who am I to criticize?
Valli’s current state, though, has fans uncomfortable and worried.
“Frankie is doing just fine and super happy to still be performing,” Valli’s PR people told the New York Post. “The audiences are filling venues and listening to some great music. Frankie is doing what he loves to do at 90. We should all be so lucky.”
Those in the FIRE movement probably would disagree.
More information here:
Every Money Song of the Week Ever Published
Tweet of the Week
. . . And how to make sure readers keep clicking on your content.
How to never be wrong as an economist: pic.twitter.com/EVGD0u6ACJ
— Ben Carlson (@awealthofcs) August 12, 2024
What do you think? Do you think renting forever is a viable solution? Would you ever consider selling your house and moving into a rental?
[EDITOR'S NOTE: For comments, complaints, suggestions, or plaudits, email Josh Katzowitz at [email protected].]
Owning might be costlier than renting on a purely monetary analysis, but I see that as a “luxury good”. In the same way, I think it is OK to buy a Lexus rather than a Toyota – though I recognize both will get you from point A to point B equally well, and a purely monetary analysis would be in favor of the Toyota. I’ve respect for Maggiuli’s and Sethi’s points of view, and certainly agree no one should overstretch themselves just to buy a house, but there are significant benefits of owning a house. I expect 90% of your readers over the age of 40 are homeowners, and I doubt if even 10% of them would be willing to make a shift to becoming renters.
I agree with that and also think that the vast majority of the time if you’re going to be somewhere long term buying will work out better financially. But there are exceptions to every rule of thumb.
I’m a happy renter in my fifth year out of residency. I’d eventually like to buy a house but renting right now has so many benefits for me in the phase of life I am in right now. Friends always comment that my rent is what they pay for their mortgage and they assume superiority in their decision. I just remind myself that they have to mow a lawn, plow a driveway, pay for repairs, pay property taxes, have TONS of unused square footage and land they are paying for while I JUST pay my rent. All of my extra money goes into taxable and a downpayment bucket at Ally. I love getting to walk to shows, sporting events, concerts, parks, restaurants, shops, grocery stores etc all from my apartment. It’s a style of life that reminds me of my time studying abroad in college. The other nice thing about it is the flexibility to change my mind if/when the right house at the right price in the right place shows up on the market.
If their mortgage is the same as your rent for a similar place you’re definitely coming out ahead. They have tons of other costs besides the mortgage. Rent is supposed to be more than a mortgage. Sounds like you may be talking about different places though.
I’m in a VHCOL area, and I just can’t get the numbers associated with purchasing a home within a reasonable commute make sense. The numbers are even more different than the NYC example you give. I pay $3,795 in rent for a condo that would cost $1.2 million. To purchase, I’d have to put down $240,000 to be left with an $8,000 mortgage that includes the very high association fees. I want to go back to being a homeowner, but with these numbers, I can’t justify it. I’m living here because it’s where my dream job is located and planning to enact Erik’s strategy of renting until I retire then buying a home for cash when I move to a more reasonable part of the country. It’s just become part of my retirement planning.
I do run the numbers every once in a while. If the difference between renting and owning here ever does narrow, maybe I’ll take the plunge and buy, but for now, that seems very unlikely.
I won’t be surprised if homeownership becomes the boat ownership of our generation. The happiest days in the lives of my homeowner friends have undoubtedly been the days they bought the home and the day they sold it for a modest profit (also known as a loss after all the time and energy sunk into it).
I’m 3 years out of residency and happily renting. My two siblings are “proud” homeowners. One has been embroiled in a lawsuit for years about undisclosed structural problems, while the other just closed and promptly experienced a basement flood from a failed sump pump which led her to replace all her furniture.
It’s mind blowing to me that this is still considered having “made it” in the modern day.
2 years out of residency in a VHCOL area (Bay Area, CA)—I am currently planning for PSLF, but I feel uncomfortable purchasing a home until my loans are actually gone. Home mortgages in my area are currently ranging 8-10k/month (not including HOA fees, maintenance, property taxes, etc). Unfortunately this is the price for starter homes! Rentals for single family homes in the same area range from 4-6k/month. Not ideal to be spending that much in rent, but I’ve been happy with my ability to invest/save a large sum of money each month instead of becoming house-poor. My hope is to someday be able to put down a very large down-payment to reduce monthly costs, but who knows where the market will trend in the future.
I would honestly be fine with renting and investing the difference and have yet to purchase a home. I would much rather put the money I’m saving for a down payment into my taxable account. But in non big cities it’s a little more unstable lifestyle wise. I rent a great house and have two kids. But the possibility of being forced to move (before I want to) is a tough thing to always have on the table. There’s not THAT many homes fit for a family of 4 that we would be happy with consistently available for rent in this type of location. Most people own and live in these types of homes. Then there’s the issue of school districts, etc.
I’m not stoked about home ownership (especially at current prices/rates) and all the costs/headaches that come along with it. But as said before, home ownership is not just a financial decision it’s also a consumption item and lifestyle decision.
As an attending >2 years out of training, I’m living and practicing in a VHCOL area. Despite having zero student loans at this point, we cannot afford a house here yet (single income family). Our rent is about 60% of what we would spend on a mortgage for a comparable place. ($3500 rent for a 2br/1.5ba townhome, mortgage in the area would easily be >$6-7k/mo. We don’t have much choice right now, we’ll continue to wait for a real estate crash while stacking Satoshis (along with aggressively adding to retirement accounts, college fund, etc).
It’s wild to see that big of a delta between renting and owning isn’t it? Hard to believe it can last that long. Good luck with your “stack.”
Thanks Dr Dahle! I’ve been reading your blog since I started med school 10 years ago. Don’t worry; I’ve got my share of index funds (VTI, VOO, etc) too. I’ve been a beneficiary of disproportionate gains in Bitcoin since I first bought some in 2015. It’s been good.
As with many life choices, it all depends.
Beyond the pure financial analysis, there are certain times in life where flexibility is paramount (e.g. the ability to move quickly for a new job). If you need flexibility in your living situation or aren’t sure that you want to stay in a specific place for longer than a couple of years, then that favors renting.
However, life often shifts where stability becomes much more of a concern, particularly with a family. It’s way different dealing with the landlord giving 30 days notice for you to move out of a small apartment when you’re a couple of years out of college or grad school compared to if you’re in a single family home with a family of 4 with school-aged kids. To that point, in my metro area (and many others), finding a single family in a highly-rated school district is already hard enough and finding one to rent is like a needle in a haystack (and those types of places may very well see rent price increases outpace inflation in many years).
In any event, there are non-financial costs and risks that can’t be taken lightly. Uprooting kids and/or having them switch schools is totally different than moving when you’re single. Being able to rent a place that you like indefinitely isn’t ever a guarantee – you’re still always subject to the landlord’s willingness to renew a lease.
A large part of the premium of owning a house is the control. There can be downsides to that control (e.g. you’re the one that needs to make repairs or do the landscaping), but it’s also pretty significant that no one can kick you out of your house (assuming you’re paying your mortgage and property taxes) and you have locked in a location with known life factors such as the commute and school district.
(Note that I just saw this with a family friend with two high school aged kids that had been renting a single family house for several years but then suddenly got notice from their landlord this summer that they had 30 days to move. They had to scramble to find a home in the same school district that ended up being 50% smaller in a worse location but still with exorbitant rent due to the lack of supply of single family homes on the market. So, this blog post topic has been on my mind as the “rent or buy” question often focuses so much on pure financial costs without taking into account broader life stability factors. To that point, you have to consider the market risks with renting, too. The rental market for 2-bedroom apartments in a downtown area for a childless couple might provide a lot of options, but the rental market for 4-bedroom single family homes with better school districts in the suburbs can be a whole lot tighter.)
I don’t think there is an absolute answer. It really depends on life circumstances, location, income, timing, luck, like everything else. For me personally buying the “Doctor’s House” 9 years ago was one of the best financial moves I have done so far. I felt very uncomfortable back then spending what I spent. I picked the location based on quality of the public school district as I did not want to send my kids to private school, highly desirable area, no empty lots for new construction, big existing lots. It was a 7,000 sq ft fixer upper mansion. The house has double in value twice since then and I have enjoyed it greatly.