Home, sweet home

This article on whether you should rent or buy that has been going around the web is . . . well, it's not very good. It's heart is in the right place--home ownership is not a path to easy riches. There are plenty of good reasons to rent.

But the details are all wrong.

Myth #1: Renting is Like Throwing Your Money Away

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don't pay interest to the bank, property taxes or maintenance fees. They pay rent.

Renters pay all of these things: the landlord usually has a mortgage, certainly has property taxes, and we hope he's doing maintenance. You just call it "rent", which means it's not deductible from your federal taxes.

Myth #2: There are Tax Benefits to Owning

Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents.

Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone--including renters--is allowed to take.

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the 'tax benefits' of owning into a buying decision.

See above. Whatever these taxes are, you're paying them as part of your rent. It is true that housing becomes a better investment the farther you move up the income ladder, which is one of the many reasons that we should eliminate the mortgage interest tax deduction. But if you have one kid, you're not taking the standard deduction anyway.

A mortgage is an inflation play: you bet that rent will grow faster than your house payment. Probably not a good bet in many markets right now--but on the other hand, inflation's creeping up, so it also might not be totally crazy.

Myth #3: It Doesn't Cost Any More to Buy Than It Does to Rent

People can usually rent a home by paying first month's rent, last month's rent and possibly a security deposit. All the money that is paid initially actually goes towards monthly payment obligations, with the exception of the security deposit, which is nearly always returned to the renter in the end.

When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent 'investment' ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.

This is just wrong--wildly wrong. A lot of closing costs are flat fees, which means that as the value of the mortgage rises, the closing costs fall. Looking at this estimate from Bankrate.com I get an average closing cost of 3.6%, not 5%, on a $125,000 loan.

As for the broker's commission, that's paid by the seller, not the buyer. One could argue that it is actually paid by the buyer in the end, but all that means is that it's factored into the house price. You don't pay another 6% on top.

Myth #4: Buyers Have Assets, Renters Do Not

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.

Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the 'investment' they made through mortgage payments is gone--dried up virtually overnight through no fault of their own.

Renters may not co-own a home with a lender, but this doesn't mean that they don't have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven't been paying a lender to 'rent' money so that they could pretend like they own an asset.

This is maniacally unbalanced. It amounts to saying "asset prices change", which is true of everything, even, I'm afraid, Star Wars collectibles. Agreed, you can take the money you save not buying and plunge it into investments. Most people don't, however; a house is a form of forced saving.

I do agree with the last "myth": you shouldn't buy housing as an investment. You buy a house because you can't get what you want any other way; because you want to put down roots and have a house that you can do what you like with. If you're planning on moving every five years, and are in a lower tax bracket, you're probably better off renting. But you're much better off with something like the New York Times rent v. buy calculator than you will be with that article.