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"Wasting" Your Money on Rent?

posted by Katie Porter

An earlier post by co-blogger Melissa Jacoby (Turning Stucco Into Sand) commented on homeowners who file bankruptcy. That demographic seems likely to grow in light of rising interest rates and falling home prices. New mortgage products, including interest-only loans and adjustable rate mortgages in which the initial rate is the floor, leave consumers bearing all the risk of these market fluctuations. Higher loan to value ratios are positively correlated with foreclosure, and yet today’s first-time home-buyers put down only 3 percent when they purchase a house.

What do these trends mean for financial advisers, educators, advocates, and even parents who are concerned with ensuring financial success and security for today’s young people? While more research is certainly needed, an article in USA Today offers one possible answer—rent! (“For Some, Renting Makes More Sense”, 1A, Aug. 10, 2006) The traditional advice to buy a home as soon as possible and stop “throwing away money on rent” may need to yield to the costs and risks of modern mortgages. The USA Today article examines the gap between the median mortgage payment and the median rent in several housing markets. It finds that many consumers would have a couple of thousand extra dollars each month if they rented. The national gap between mortgage payment and rent was calculated at $816 monthly. If families put this money into tax-advantaged retirement programs or into an emergency fund would they be better protected from financial failure? Is a home no longer the best way to achieve financial security? Does the government do too much to promote homeownership at the expense of urging and enabling families to save for retirement, purchase insurance, or save?

By the way, the Wall Street Journal had an interesting piece on Tuesday on NINA mortgages (no income/no asset verification) loans and some of the “red flags” created by that lending product. ('Stated Income' Home Mortgages Raise Red Flags, Wall Street Journal, D2, August 22, 2006).


Others interested in scrutinizing the assumption that it invariably is financially best to jump into the housing market as early as possible should check out a working paper by Harvard's Joint Center for Housing Studies researchers Eric Belsky, Nicolas Retsinas, and Mark Dudas, Financial Returns to Low-Income Homeownership (Working paper W05-9 Sept. 2005). I can't do their findings justice in a brief comment, but the researchers are trying to get at exactly what the title suggests, including a comparison with renting.

But does anyone on low income have the experience and knowledge to handle a complete true review of the difference between RENT costs and MORTGAGE costs? Most would be hard pressed to do the review perfectly and accurately.

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