Renting, Retirement, The Next Mortgage Crisis

Trulia's rent vs buy chart from q1 2011

The next major mortgage crisis may be caused by renters as they prepare to enter retirement. Liz Davidson of Forbes says

“that today, there’s another mortgage crisis in the works—that is, NOT having one—choosing to rent when you can afford to buy; choosing to forgo building equity in a home as a major source of retirement security…”

Home Ownership as a Source of Retirement Funds

What Davidson is point to is the fact that Americans are choosing to rent, gun shy from the recent housing market implosion and they are doing so at their own long term peril. Homes are assets and as you pay off your mortgage you are essentially creating a savings account that you draw from when you sell your home. Whereas renting does not build any asset that can be liquidated for cash later on in life.  Davidson lays out some frightening math:

Two families. A. Rents for $1,500 per month. B. Takes on a $1,500 per month mortgage.

A’s rent goes up 1% per year. Over the course of 30 years A will have paid $900,000 in total rent. (You have to assume rent increases – no one signs a 30 fixed rental agreement!)

B’s mortgage stays constant and B pays out $540,000 over the course of 30 years.

Here is where things get truly scary!  A has to continue to pay out rent. B now owns the property out right. A can not sell his rental. B can. And since we assumed that there was 1% inflation we have to appreciate the value of B’s property by 1% per year. If the original home was worth $300,000 at purchase it will be worth approximately $390,000.  That is straight cash that they can access when they sell and use to pay for retirement.

The next mortgage crisis is the crisis of not enough people having a mortgage!

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