Owning a home is a huge part of the American Dream. But is the dream of homeownership really all it’s cracked up to be? In this new Econ Duel from Marginal
Owning a home is a huge part of the American Dream. But is the dream of homeownership really all it’s cracked up to be?
In this new Econ Duel from Marginal Revolution University, Professors Tyler Cowen and Alex Tabarrok weigh in on the issue. Each representing a side of the home ownership debate, the two professors ask what’s smarter—to rent, or to buy?
On the “buy” side, Tyler Cowen shares the tax advantages of buying a home as well as the effect homeownership has on one’s stability and savings regimen. Does buying a home force us into better savings habits?
Against those arguments, we have Alex Tabarrok, coming down on the “rent” side of the equation.
Among other points, he talks about the real beneficiary of tax breaks (hint: It may not be you!). Along with that, Alex tackles the trials and tribulations of home-buying, in places like San Francisco, New York, or Boston, where a combination of scarce building permits and increased demand drive up home prices. Plus, doesn’t owning a home -- and committing a 20% down payment -- break the diversification rule of good investing?
All that said, though, here’s the real question that matters—which side are YOU on? Watch and let us know in the comments!
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Let's say your mortgage plus all costs associated with owning a home are the same as rent in the same house. How could renting be preferable in this situation?
First, isn't the biggest tax advantage from home ownership the non-taxability of imputed rent (the rent you save by owning rather than renting)? If you and your neighbor owned identical homes and rented them to each other for equal amounts, then you would each owe taxes on the rent. When you both live in your own homes, then you pay no rental tax. That seems like a bigger deal than mortgage interest deductibility. For example, one benefits from non-taxability of imputed rent even after one has paid off one's mortgage.
I think Alex's broader point is correct though: all the features of home ownership --- tax treatment, hedging against future rent increases, maintenance responsibilities, etc. --- are all priced into the home. Thus, one should only buy a home if one values these features more highly than average. As an analogy, muni bond interest is tax free, like imputed rent. But because the interest is tax free, pre-tax yields are lower on muni bonds than equivalent taxable bond. Hence, muni bonds make more sense for those in high tax brackets than those in low tax brackets.