Econ Duel: Rent or Buy?

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!

[melvinthefisherman]

Interesting. I am an Econ undergrad I had one of my micro professors insist not to buy a house until we had a family. His argument was basically buying a house is a huge investment and keeps you grounded in one location. Earlier in life a big career move could also involve a location move. It is much easier to move as a renter than a person who owns a home.

[DimitrisAndreou]

The diversification argument nailed it!

[thechord]

Should have asked each other if they own a house personally or rent

[aflenoir]

I think you should unbutton your suit jacket when you sit. Great video.

[ShubhamMishra-eciy]

In India, the general rule of diversification does not apply as far as real estate is concerned. In a marriage, especially when only the man is earning, it is imperative for the man to buy his family a house. No matter how he rationalizes his decision on the basis of economic theories, he would end up buying a house, just for the sake of his family's welfare. I think this angle is missed in the discussion - that when it comes to real estate, people not only consider the financial outlay but also the security a permanent roof provides to a family, which makes it an emotional investment. I believe it is true for the US too. I mean, not all people are selling off their real estate like Elon Musk. Middle-class has different priorities.

[NotMadeOfManitobaFlour]

I'm not quite sure any of them really explicitly mentioned the opportunity cost of renting instead of buying. What I mean by that is, for instance in the UK, you may be able to rent two rooms in your home for yearly gains of up to £7.5k tax-free; that should, at the very least, cover the utility bills and lower your mortgage expense, whilst building equity. On top of that, statistics wise you have an edge of your asset appreciating on a yearly basis, magnified thanks to the leverage. Whereas with renting all you seem to get is flexibility. Obviously if you're buying it as an investment vehicle you should do your due diligence, make sure gross rental yields are at the very least above 7% and that strong demand exists, location is key.
If you do all that, to me personally buying seems to be a no-brainer.

[Bruhaha]

It’s always seemed to me that the only point needed to choose ownership is that paying a mortgage pays for an asset you own. Paying rent just buys you time in a room. It’s like food, you spend a bundle and then you just eat it and it’s gone.
There are many points about not buying a house that are interesting, but you have to spend each month one way or another - rent or mortgage. So why not pay money for something you can sell later instead of for thin air? Too simplistic? Please tell me where that’s wrong.

[Raoni]

+Marginal Revolution University I remember watching a video where you establish the connection between free market, innovation and scale - couldn't find it. Can you give me the link?

thanks, and congratulation on the excellent work!

[Illawarra]

You guys are missing a huge point. What happens if you are still renting when you retire and your income falls but then are faced with increasing rental costs? If you have bought with a mortgage when you are working, this debt is paid off when you retire and your home is rent and mortgage free. With respect guys, I don't think we should be following your investment advice!

[alexanderfischer]

Professors, paying rent is like burning the money isnt it? After all, having rented an apartment for 20 years leaves you with nothing in the end, opposed to having bought it and paying of the mortage monthly. Assuming both strategies cost equal amounts of money, one cannot forget that the latter leaves the person with the asset at the end.

[Kevin-cmkc]

I get what they are saying but here is my observations:
I dont know about the USA but in the UK rent is almost universally *more* expensive per month than a mortgage would be. So at least with buying the house you physically own it at the end. Even if it doesn't *increase* in value, you can pass on a 100k house that you bought as your kids inheritance. Meanwhile, if you spent the same 100k over decades renting, you don't have any assets to show for it.
And you don't really have the option of saying 'well i'll spend my money elsewhere'. There isn't the same aspect of opportunity cost as other purchases; you *must either* rent or buy. Because you will need *a* house.

[BoxOfGators]

If you’re a landlord, aren’t you setting the rent high enough to pay for all of those expenses? Are landlords just absorbing the cost of maintenance / repairs out of the goodness of their hearts?

[run_rich_run]

What a great video! Thank you for putting this one (and many other great videos) on YouTube.

[stanleyho]

No, I don't agree. It is all able supply and demand. If you find a house at an area with high demands. The house price will goes up to cover X times more of the cost on fixing the roof. You don't have to buy a fancy house that you can't afford. You can also rent out your house to passive income. Just like stock market, the majority of years are up. We don't need to scare ourself for the few years of big down term.

Diversification is for those who don't know what there are doing. They basically give up and hope diversification will reduce the investment risks

[agu]

5:20 best advice, " be on the wealthier side of the equation."

[mgozaydin]

I bought 6 houses in my 30 years of professional life by installments. Now I am retired and happy with the rent I collect for my liiving .

[mickmickymick]

The last point he makes is a good one. For me, I'm planning to buy a house for the stability, I will always own this home, I can leave my crap there, I don't have to deal with landlords or worry about getting kicked out. I also think it's cheaper in the long run, though this is not always the case. I'll be buying in a big city so his point about your employer going bust shouldn't effect me, though other aspects of that point may well.

[anamikachaudhary]

What if someone looks at buying a house as only a financial asset? meaning I buy a house which I have analyzed is going to g up in a city which is developing and I am sure the prices are gonna go up (like a share in the stock market that this company will really do well based on the management practices, team's capabilities, future of the idea, innovation and even performing fundamental analysis). And like the stock market if I am right in this decision making, it can make me earn a lot of profit by selling it at some point of time or just renting it out?? If more stability is not what I want and I just look at it as way of beating the market by diversifying into real estate, isn't real estate a good investment in that case?

[bluelotus.society]

"Be wealthy" isn't good advice.

[edwardcasas]

What if you loose your job at least you have asset to sell if you have a house. You can also rent it out, with a apartment you can not do that. Another point is if you retire you can stay in your house after you paid it off. You might need to pay taxes on the house it might not be so expensive since you do not have a mortgage . If you are retired and rent the rent goes up every year this is an issue if retired since your income is fixed.