"Home Sweet Rental"

We came across this recent article by James Altucher in the New York Post. Right on, James!

Home ownership has often been considered a critical part of the American Dream -- an unwritten privilege of living in America bestowed on its financially secure citizens.

Owning a home was the ticket to financial security and, for several years earlier this decade with home values soaring, seemingly the best investment Americans would ever lay their hands on.

But in the wake of the housing crisis -- with home values down 35 percent or more and with little robust growth seen on the horizon -- it may be time to ask whether buying a home is still so vital to financial happiness.

The current economic environment is making a strong case that renting a home and smartly investing your savings can be just as rewarding.

When making the decision to buy vs. rent, people usually consider several factors -- the rent vs. mortgage payment being the primary question. But there are other financial factors to consider, including:

* Your insurance premium.

* Property taxes (which are usually higher than any tax deduction you get from your mortgage interest).

* Maintenance (pipes break, electricity problems, etc.).

* Utilities (utilities and maintenance for renters is often reflected in the rental price, but it's not reflected in a mortgage when you own).

* Yard work, pest control, remodeling, etc. (again, rents usually have this built into the price, but mortgages don't).

And let's not forget those initial costs that always seem to add up to more than you expect:

* A down payment of at least 15 percent, which is $90,000 on a $600,000 home.

* Closing costs, usually 5 percent of loan amount, or another $25,000.

* Initial remodeling costs.

Remember that you are completely out of that cash down payment you made because even if you sell, homeowners usually roll over that initial down payment into a new house for tax purposes. Cash is king and many prefer having cash in the bank.

Okay, so when you buy you definitely spend more per month and your initial costs mean that the house has to appreciate 10 percent-to-20 percent on Day 1 in order for you to break even. But that's supposed to be okay because you have the house as an investment, right?

Well, except for earlier this decade, it's been a so-so investment.

Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices that have made these numbers a lot worse), housing went up a dismal 0.4 percent annually vs. 8 percent for the stock market, according to the Social Security Advisory Board.

Critics of renting point to real estate being an asset as opposed to throwing money away renting. But they forget about the massive amounts of money that it takes to get into the home ownership game.

Rather than spend $100,000-to-$200,000 on a home's initial cost -- and that has become completely illiquid as long as you own the house -- you can put that money in a portfolio of diversified real estate investment trusts, including residential investment trusts, if you truly believe in the housing market.

Renting in today's market and investing your savings will allow you:

* To diversify your savings, something buying a home prevents you from doing.

* To keep your assets liquid, a real security blanket, particularly in times of stress.

* To keep from becoming way too leveraged in housing for a significant chunk of your portfolio.

So while the banking industry, the White House and your Uncle Bob are all telling you to buy a house already, your portfolio may be better set if you rent a place to live.

And maybe you can get your landlord to shovel the snow.

What Does The Fed Have Against Renters?

What does the Federal Reserve have against renters?

In a recent report entitled "The Homeownership Gap", the Fed implies that residential tenants are not "invested" in their communities and contribute to "less stable" neighborhoods. This is a slap in the face to the 95 million hard working Americans who just happen to rent their homes.

To say that renting leads to unstable neighborhoods ignores reality. One only needs to drive through some of the newer single family home projects in states like Arizona, California or Nevada and elsewhere that were built during the speculative fervor of the last decade to see every other home either in foreclosure or vacant. Now that's unstable neighborhoods for you.

It's hard to see, however, how communities of active seniors, young families and people who just want to enjoy life without the burdens of maintaining a home result in a situation the Fed finds unacceptable.

We have written to the Fed and Members of Congress demanding that they retract their demeaning characterizations of residential tenant communities.

U.S. Now a Renter's Market

According to Nick Timiraos at the Wall Street Journal, the housing oversupply and a weak economy have created a great opportunity for residential renters to negotiate great deals.

Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones.

The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.

Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.

Gains in home sales have been driven by government stimulus, leading some to wonder if the nascent housing recovery needs federal assistance to sustain, Nick Timiraos reports.

In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents -- which include concessions such as one month of free rent -- fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.

Landlords now must entice tenants to renew leases. "We'll shampoo their carpets. We'll paint accent walls. We'll add Starbucks cards," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns 63,000 units. He said the first half of 2010 should be "pretty ugly," but was optimistic the sector would pick up later in the year.

Few markets have been spared. During the fourth quarter, vacancies increased in 52 markets, while they improved in 17 and stayed flat in 10. Vacancies increased most sharply for the year in Tucson, Ariz.; Charlotte, N.C.; and Lexington, Ky.

Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn. Apartments have been squeezed because younger workers, who are more likely to rent, have experienced the brunt of job losses during the downturn.

Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.

Many of those developments had secured financing before credit markets seized up. The credit crunch has frozen most new development, which means that new apartment completions should fall by half in 2011. That's one potential silver lining for apartment owners: The limited new supply should give them the ability to boost rents quickly whenever job growth returns.

"If you are renting a place, now might be a good time to renegotiate that lease," said Victor Calanog, director of research for Reis, who added that the sector could see a recovery in the second half of the year, buoyed by either job growth or at least the perception that the economy was turning around.

Such oversupplied markets as Florida, Phoenix and Las Vegas are hurting, even though housing sales have picked up. "Landlords aren't benefiting because jobs aren't recovering," said Hessam Nadji, managing director at Marcus & Millichap, a real-estate firm.

Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months. The report forecasts Washington, D.C., will be the healthiest rental market in 2010 for the second straight year.

Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes. Around 13% of Camden Property's move-outs last summer left to buy homes, up from 11% at the beginning of the year. But that is still roughly half of the rate seen during the housing boom, when mortgage standards were much looser. "During the housing boom days, you had people who weren't qualified to rent but could buy a half-million-dollar home," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis. But falling rents are expected to offset some of the recent improvement in affordability, making renting more attractive than owning in some markets.

Three Housing "Truisims" That Make No Sense

Morgan Housel at the Motley Fool offered up some housing "truisms" that fail the sniff test. We couldn't agree more. And a tip of the hat to our friends at patrick.net for the heads up on this article.

1. Homeownership is superior to everything else.
Last winter, U.S. Rep. Barney Frank analogized that not having a foreclosure moratorium before implementing a mortgage modification plan would be like being killed in combat before hearing news of a cease-fire. The Wall Street Journal gave a brilliant retort, writing, "Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office."

If you listen to most politicians, you might think there are only two places to live: in a house you own, or in a box under a bridge. As a happy renter, I find this hilarious.

The fact is, many people shouldn't own a home. They belong in the rental crowd. There's nothing morally or sociologically wrong with this. Ensuring that everyone has a roof -- not a mortgage -- over their head should be the goal of public policy.

In 2002, President George W. Bush remarked, "I believe when somebody owns their own home, they're realizing the American Dream." This mentality was taken so seriously that putting no money down and having an interest-only mortgage constituted "ownership."

Owning a home makes sense if you can put down a large chunk of money, have a fixed-rate payment that's a reasonable portion of your income, still have a large emergency fund, and vow to remain in the home for many, many years. But most people can't do that. They shouldn't be ashamed. It doesn't make them bad people. But we've created a culture that refuses to accept that many of us could be better off renting. Many renters might even come closer to that American Dream Bush talked about, which is simple financial security and peace of mind.

As Niall Ferguson writes in his best-selling book, The Ascent of Money: "It's not owning property that gives you security; it just gives your creditors security. Real security comes from having a steady income." Bank of America, Wells Fargo, and JPMorgan Chase don't want you to believe this, but it's true.

2. Tax-deductible mortgage interest helps homeowners
Most interest paid on your mortgage is tax-deductible, subject to a few restrictions. This, we've come to believe, is wonderful, making housing more affordable and homeownership more attainable.

But tax-deductible interest doesn't make homes more affordable; it makes mortgages more affordable. That actually increases prices. In effect, homeowners are highly incentivized to drown in as much debt as possible, while equity is penalized. It's one of the most dangerous "gifts" to homeowners.

As New Yorker columnist (and former Motley Fool writer) James Surowiecki notes, "Advocates of the mortgage-interest deduction ... claim that it increases homeownership rates. But it doesn't: in countries where mortgage deductions have been eliminated, homeownership rates haven't dropped. Instead, the deduction simply inflates house prices."

Yes, removing the deduction would raise taxes. But if you've seen the budget deficit lately, you might find that a good thing. Yes, it would also lower home prices. But that would make homes more affordable for those who attempt to own, not just finance, a home.

3. Nonrecourse mortgages are a great thing
Flexible bankruptcy and recourse laws are vital to entrepreneurship and capitalism. If at first you don't succeed, tell your creditors to shove it and try again.

In the 1990s, Silicon Valley practically encouraged a culture of failure. That ultimately spawned Google, eBay and Amazon.com in a way not possible had failure been strictly punished. No doubt, loose recourse laws can be a wonderful thing.

But should they apply to real estate? No way.

Many states have nonrecourse mortgages. If ol' Mr. Market kicks you in the groin, just hand the keys back to the bank and walk away. Banks can't go after your other assets, garnish your wages, seize your firstborn ... nothing. You're free to try again.

Some defend this, touting the business benefits of accepting failure. But houses aren't businesses. The meaning of homeownership can't be improved through innovation or entrepreneurship. A thousand years ago, a home was a place to live. A thousand years from now, it'll be the same. As soon as we forgot this, the economy soiled itself and banks like Citigroup were obliterated -- not exactly something to be proud of.

Nonrecourse mortgages don't promote useful innovation; they promote speculation and amplify downturns.

The prospect of full-recourse mortgages freaks many people out. But just about every other industrialized nation has them, and they do just fine. People think twice before buying a home. And as I showed in this article, countries with full-recourse mortgages are less susceptible to housing booms that lead to crippling busts. Some might say that's a good thing.