THE BLOG
03/14/2014 04:50 pm ET | Updated May 14, 2014

Renting Money

I better come clean here. Yes -- I am a guy in finance, and "dare" to rent our home rather than own it. There is a philosophical aspect to this truth, but more importantly, also a deeply felt divide with most market observers over mathematical outcomes. Yes (again), I have seen, studied, and understood all the classic examples regarding purchase affordability, and yet my verdict goes to "renting space" as opposed to "renting money" (aka a mortgage). Part of my reasoning is simple: An investment that is illiquid, with little (or no) return possibility, and commonly levered 1:5 (80 percent of each dollar is financed at a cost) does not strike me to be attractive -- not even considering the opportunistic gain of other investments to be had.

The common counterargument is twofold: 1) it is a home and not an investment (the little voice inside our heads: "you gotta' live somewhere"), and 2) the financing cost can be partially deducted from income for tax purposes. Both are bonkers! First, a home can be rented as well, and the thought that a fulfilled life can only be achieved through ownership (an integral part of the American Dream) is simply inaccurate. Second, a purchasing decision based on tax considerations may be worthwhile, but this should not lead the decision-making process. With this in mind, many tax systems outside the U.S. promote real estate ownership by way of deductions related to investment properties only, but not linked to primary residences. Our neighbors in Canada "suffer" from this very tax structure, and yet average homeownership is higher across our northern border at 69 percent, compared to the U.S. at 65 percent.

Philosophically, my family likes the flexibility to be able to "pick up" whenever opportune, for personal or professional reasons. In fact, research has concluded that an increase in the rate of homeownership will lead to an increase in unemployment, mainly due to lower flexibility in labor mobility. Then there is the personal aspect: My common joke is that on the day when you encounter all the Wall Street bankers in their weekend skinny jeans, you may want to remove the "cool" from your neighborhood description, as the local real estate, likely, is no longer affordable for aspiring young artists and the like. If you are in New York, think of Chelsea, TriBeCa, and especially Brooklyn -- all of this has played out already. In "Why I Rent and Would Never Buy," architect and urban designer Ben Pentreath describes the appealing socioeconomic diversity of a small council estate village in West England, which is purely based on the fact that houses can only be rented. This aspect allows for more traditional neighborhood structures, with furniture makers, writers, mechanics, and young families living door to door.

Of course, what remains is noise, for example, "Why 2014 is a good year to buy a home" or the double-digit year-over-year rise of real estate prices. When applying one of the many buy vs. rent calculators, it becomes clear that large metropolitan areas (e.g., NYC, LA, SF) remain very expensive, and that buying trumps renting only if one is in for the very long run (or when discounting property taxes).

There is opportunity in all of this. Policymakers can make real estate more affordable, and one viable option may be to improve the outdated U.S. transportation system. Think, for example, of a high-speed train connecting Philadelphia to New York City, and what it would do to the prices of "commutable" real estate. Further, it is important to recognize that an independent(?) Federal Reserve Bank, with an objective to maintain artificially low credit cost, may trigger poor buying decisions and artificially inflate the value of real estate. We need to be reminded that affordability is not simply a function of cash flow, but a price and expected value consideration, after all.

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