Why renting over buying might be the favored choice in today’s real estate landscape

Geoff Bennett:

Is it better to buy or rent a home? Buying has almost always been favored over renting when it comes to housing. For generations, the prevailing wisdom has been that renting is wasting money.

But what about now, with a tough real estate market characterized by elevated listing prices and interest rates?

David Leonhardt has long covered this issue for The New York Times. He's the author of the book on the economy called "Ours Was the Shining Future: The Story of the American Dream."

David Leonhardt, thanks so much for being with us.

David Leonhardt, Author, "Ours Was the Shining Future: The Story of the American Dream": Thanks for having me.

Geoff Bennett:

So, considering this daunting real estate market, limited inventory, interest rates for a 30-year fixed somewhere between 6.5 and 7 percent, and a median U.S. home price of $420,000, what is a prospective homebuyer to do? Is renting these days actually a better option?

David Leonhardt:

For most people, it is a better option. That is if you don't already own. I'm not saying that most people should sell their homes if they own. If you own, you probably have a pretty good mortgage rate.

But for people who don't yet own a home and are trying to make a decision, the economics of renting have not looked this good in a long time. And I think — I understand why people have so long been down on renting. There's even been some shame associated with renting.

And I think it's important to say, look, for most people right now, who are trying to figure out whether to buy or rent, renting is the smarter option financially. You will save money. And there's a reason there's so much of a sense that Americans should never rent, which is, we have this huge industry, the real estate industry, that makes a lot more money from selling homes than renting them.

And it helps to get out this message that people should buy, rather than rent, when, in fact, many people should rent.

Geoff Bennett:

On the other hand, David, rents or sky-high right now. As of November, the national median for a one-bedroom apartment was roughly $1,500 a month. In New York City, it was $4,300 a month.

So isn't that throwing away money, in the sense that you're not building equity when you're paying that much money?

David Leonhardt:

It's important to remember all the ways that you also throw money away by buying.

There is a very large fee, often in the tens of thousands of dollars, that goes to a real estate agent. That's throwing the money away. You're paying the bank huge amounts of interest, and the mortgage interest deduction reduces that interest, but it doesn't eliminate it. That's throwing away money. It's giving it to a bank.

You have to do repairs when you own a home, often repairs that don't really add to the value of the house. Like, if your roof is leaky and you have to fix it, you have no choice but to do that. That's not a renovated kitchen. It's just throwing money away to keep you where you are.

And then, finally, there's the opportunity cost. If you didn't buy a home, if you didn't use all that money for a down payment, you could have invested it in the stock market. You could have invested it in other ways. And so it's true that renting involves throwing money away, but so does buying.

Geoff Bennett:

Well, why are home prices so high right now? Because it strikes me that, with high interest rates, that would or should suggest that demand would be lower and that sellers would then have to cut the price of the home in order to drive up demand. But that's not happening.

David Leonhardt:

No, it's not.

And, Geoff, the way you describe it is exactly the way a market should work. It's just the housing market is a bizarre market in which psychology plays a really big role. And so what a lot of people do is, they say, I'm not willing to accept less than a certain price for their home. Maybe they think about the price they bought it for and they add on the cost of all the repairs and renovations they have done, or maybe it's a round number.

But we have all done this ourselves, or we have known family members who've done it. They have said, well, I'm just not willing to accept less than $350,000 or less than $850,000 or whatever for their house.

And so what they do when they don't find the demand for housing that they want, when they don't get the offers that they want, they pull their house off the market and they think, I will put it back on later. And so housing ends up having this really artificial quality in which prices don't fall to meet reduced demand.

And that's where we are right now. So, if you're a would-be homebuyer right now, you kind of have the worst of all worlds. Interest rates have gone way up, but prices haven't fallen. And so you really have to pay a huge amount of money to buy a home. And that's exactly why, for most people, again, not forever, but in the short or medium term, renting makes a lot of sense for a lot of people in the Northeast, on the West Coast, in major markets like Atlanta and Dallas and places like that.

Geoff Bennett:

The worst of all worlds is a really good way to describe it, especially for would-be first-time millennial homebuyers.

Looking at the 2023 census data, it shows that 20 percent of men between the ages of 25 and 34 live with their parents, and that's a number that has ticked up since the 1980s.

What are some of the cultural costs of this country's housing crisis?

David Leonhardt:

So, it is — it does make it difficult for people to get launched into their lives.

I actually think multigenerational households are fine, even good in many ways. Throughout much of human history and in many other places, multigeneration households let younger people take care of older people. They allow families to spend more time together.

But, obviously, if younger people want to leave their house and they can't, that's a problem because you want people to do what they want to do. And so what we have seen is that we have a large amount of generational inequality in our country.

I understand that older people may have their own frustrations, but older people have really had a lot of benefits of the American economy. They got to buy into the housing market when it was cheaper. If they're in their 60s or 70s, they got to buy into the stock market when it was much cheaper than it's been over the last several decades.

And it's really been much harder for younger people to get themselves established. And high home prices are another example of generational inequality. High home prices benefit older people, at the expense of younger people, and so they serve to aggravate generational inequality.

Geoff Bennett:

David Leonhardt, always enjoy speaking with you. Thanks so much for your insights.

David Leonhardt:

Thanks for having me.