Playing with House Money

I have never agreed with the idea that “rent is throwing money away” and we really need to talk about it. Decisions are not made in a vacuum, choosing one thing always means giving up another. Known as opportunity cost, it is the value of the next-best alternative you did not choose,[i] for example what else could you do with this down payment money if you do not buy a house? If you think about opportunity cost, you realize how short-sighted it is to assume rent is just money you threw away.

Here is the truth; rent doesn’t build equity, but it buys flexibility. As work and the climate continue to change the value of flexibility is increasing while the risk of homeownership is also increasing.

When looking at how a home could build wealth, there are two assumptions underpinning that potential. One is that it will appreciate[ii], the other is that you will be there for a while. Over extended periods of time, real estate has tended to appreciate[iii] but like everything else, it cannot only go up. Carrying costs of homes have ballooned over the last few years. Insurers are realizing that they have not properly priced climate risk[iv] and premiums in many places are skyrocketing. That is if you can even get insurance “Since 2020, 1.2 million property owners who were dropped by their insurance companies have had to secure higher-priced, less comprehensive insurance coverage from state-created insurers of last resort.”[v]

An important caveat is that we are human, we seek the feeling of stability, and we associate home ownership with stability. You cannot just ignore emotions when making financial decisions, but you should consider how they are impacting your views. We need to strongly reconsider two big reasons why we associate “homeownership” with the American Dream. If we look backwards, I believe we will come to realize that COVID was a tipping point in the economics of homeownership. From the end of World War II through COVID we saw the baby boomers grow up, have careers, and control a tremendous amount of wealth. Work is changing though; job switching is much more frequently a key to career growth. Staying with a single employer close to home for your entire career is becoming the exception to the rule, instead of the path of least resistance. I would argue that flexibility has never been more valuable. Being able to pick up and go to a new city or work from anywhere has altered the value proposition of homeownership. Increasing insurance costs and climate events have put more risk onto homeowners than we had in the latter half of the 20th century.

If it has not already occurred to you. There are two huge takeaways here. The dynamics of evolving career paths and increased climate risks shifted the equation dramatically. Putting down roots to grow made sense when you expected to grow in place. If you are looking to be nimble though, roots can complicate things. If you fail to consider the possibility that your career might involve multiple companies, you ignore the chance that flexibility could outweigh the perceived benefits of “stability.” 

A primary residence near your job concentrates risks a bit differently than it had previously. 

As extreme weather events become more common, roots become a potential liability. If you do have a solid local career with upward mobility that you hope to keep, have you considered that extreme local weather might mean you lose your job at the same time your house value drops? Even Zillow®, who may have a bias, lists reasons a property’s value could decrease, and two of the four are related to job loss and environmental issues.[vi]

It is never advisable to “put all your eggs in one basket.” Owning a home near your employer has less upside than it used to with more risk. Home ownership can still make sense, but before you bemoan how it feels unattainable these days, consider the opportunity costs moving forward, not just the success stories looking backwards.

Related reading: Does the House always Win?