No, renting is not "throwing your money away"

Ugh.

Photo by Tanya Kukarkina on Unsplash

Several weeks ago I was a guest on the Mortgage Note Podcast. Most of the interview focused on potential changes to the real estate market wrought by the recent ruling that Realtors were illegally colluding to keep fees high, but we diverged briefly when I said, “I have never been a fan of the idea that when you rent you are throwing your money away.”

The host of the podcast, Nicole Murray responded, “You are probably the first person I’ve ever heard who has said, ‘You are not necessarily throwing your money away renting.’ Can I ask why?”

This surprised me. I know that people say that renting is throwing your money away, but it usually comes from some home-owning boomer who’s always been told that and never really thought about it. This is coming from a journalist who covers the real estate market for a living and talks to people in the industry every day. I’m the first person that’s ever said that to her?

The rot is deep.

So many people believe that renting is a bad idea because they have been fed this lie by the real estate industry. And that’s what it is. A complete bald-faced lie that has been repeated ad nauseam by self-interested parties and then parroted by credulous journalists to the American people. Renting is not throwing your money away! It’s such an incoherent, nonsensical mindset that I don’t know where to begin.

From an economic standpoint, it’s hard to know what throwing your money away even means. As Milton Friedman said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” Anytime I trade my money for a good or service, it’s because I benefit (or at least I believe I will). Now, am I occasionally wrong? Of course. Sometimes my money goes to bad uses. I buy food from a restaurant I dislike or buy a shirt that I rarely end up wearing. Renting, however, is not a one-off purchase. I made the conscious decision to rent every year for a decade, never regretting it once. I correctly perceived that my value of living in an apartment was higher than the price the property owner was charging me to live there. We both benefited from the exchange.

People like to say renting is throwing money away because they are comparing it to owning a house. The thinking goes that houses generally gain value (a problem of its own), and therefore every time you pay your mortgage you will get that money back. If you pay $24,000 over a year in a mortgage, all that money will be returned when you sell the house. Paying $24,000 in rent, on the other hand, means that money is gone forever. The problem is that someone isn’t paying $24,000 a year in rent for nothing, they are paying $24,000 to live in someone else’s property. People always have to decide when to buy things for themselves versus have others provide it for a fee. For housing, that means either owning or renting, but the same decision exists in other markets as well. Take the auto market. Are people who lease their car “throwing their money away”? Absolutely not. I go to Jiffy Lube and have them change the oil in my car instead of doing it myself. I buy meals from restaurants for far higher prices than it would cost to cook myself. Is that throwing money away? Of course not.

The counterargument might be, well yes, you could cook meals yourself, but it’s going to taste different than the restaurant, and the experience of eating at a restaurant is different than eating at home. To which I say it’s the same with housing. My wife and I’s first apartment was in a great urban location. We could walk out our front door and be just steps away from shops, restaurants, and bars. We would have loved to own a house in that neighborhood, but what type of house could we have afforded? Certainly not a house with a rooftop, workout room, or swimming pool. In our apartment, we had all three.

Owning and renting are far from perfect substitutes. Just like cooking versus eating out, there are many differences between renting and owning. I’ve had two apartments where my refrigerator died. In both cases, I had a new fridge cooling in my unit within 24 hours. It took a five-minute phone call to make that happen. When the fridge in my house eventually goes to the big junkyard in the sky it’s going to take a lot longer than five minutes to get a new one. On the other hand, at my house I don’t have to worry about my upstairs neighbor’s water heater leaking while I’m on vacation and coming home to a disaster zone (that was fun). In most cases, renting and owning have significant differences. I suppose that renting the same single-family home for ten years straight is probably not a good financial decision. In that case, buying would be the better option, because owning and renting are close substitutes. But that’s the exception to the rule.

There are many, many tradeoffs between renting and owning. Often there isn’t going to be a “right” decision. It will depend on financial status, personal preferences, and the state of the housing market. For someone with a young family and a secure job who is comfortable living in the same place for 10 years, then yes, owning often makes financial sense. For someone whose life is uncertain and who has no firm plans, renting will probably be the better option. The New York Times has a useful rent vs. own calculator that compares financial outcomes. Even then, personal preferences could flip the script. Some people love home improvement projects. In that case, own. Others can’t so much as change a lightbulb and place a high value on being able to call the maintenance guy whenever something goes wrong. Then rent.

On top of all that, as a thought experiment, let’s say that renting is throwing your money away. That because owning means getting money back once the property is sold, it’s the way to go. If that’s the case, wouldn’t taking out a mortgage also be throwing money away? After all, every mortgage payment has two components; principal and interest. A homeowner is likely to make the principal back, but that’s it. All that interest doesn’t ever get paid back. It goes straight to the bank and disappears forever. If it’s true that renting is throwing your money away, the only real option is to live with your parents until you have enough money to buy a home outright. Everyone else is a sucker.

The fact is this lie about throwing your money away is being peddled by parties who have a vested interest in the housing market. It’s being told by homeowners and realtors and mortgage brokers and bankers, all of whom have an incentive to convince everyone else that owning is the way to go. These are not objective observers. This lie has been repeated for years, perhaps since time immemorial, and I don’t think it will stop anytime soon. Many in the industry probably even believe it’s true. As Upton Sinclair so aptly said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”