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The Psychology of Renting vs. Buying

Just 25 years ago, investment guru Peter Lynch wrote that “a house, after all, is the one good investment that almost everyone manages to make.” But in today’s economic climate, the picture isn’t so black-and-white.

Following the housing crisis in 2008 and during a time of rising student debt, the American Dream of homeownership is no longer possible for many, and no longer appealing to others. In some cases, people who can afford to buy are choosing to rent because it offers more flexibility and often makes more financial sense.

With the changing real estate landscape, how do you make the right choice when the time comes? The decision to rent or buy comes down to a mix of finances and psychological fit.

 

“Neither is renting intrinsically disappointing nor is owning intrinsically satisfying.”

—Journal of Consumer Psychology

Consider the Cost

The first question to ask when it comes to renting or buying is, “What can I afford?”

Homeownership in America is at a five-decade low, and for many early-career professionals, the high cost of homeownership is still the main reason for renting. A recent survey from Fannie Mae found that 76% of young renters think owning makes more financial sense, but say their insufficient credit history and difficulty with affording a down payment are obstacles to getting a mortgage.

But is this delay in homebuying as much of a doom-and-gloom scenario as we’re inclined to think? Our implicit assumptions about homeownership as a good investment may be skewing our perception.

Nick Gross, vice president of sales at New York–based brokerage TripleMint, says if you can afford it, buying a home is a smarter financial decision than renting. Your purchase will most likely appreciate over time, build equity, and protect you from rent spikes.

But contrary to Lynch’s advice 25 years ago, homeownership may not be the best investment for everyone, and it shouldn’t be a blind goal. In fact, a 2014 study from HelloWallet found that more than half of current homeowners would have been better off financially if they had rented and invested instead of bought.

Our analysis of Earnest applicants shows that homebuying is particularly delayed in high-cost metro areas—even with higher incomes, young professionals wait longer to buy in cities like San Jose, San Francisco and New York.

Earnest Blog

“Some people see their money as more valuable invested in another way,” Gross says. “Very few of [my clients] rent because they don’t want to be attached—they do it because they can use their money in a better way, or they have an interest in something else. It’s a question of your life goals.”

He references a client who sold her apartment in New York City in favor of investing in a rare cello, and another who chose to buy real estate in Philadelphia while renting in New York himself. “In New York, the average homeowner owns for under seven years,” Gross says. “What’s good for you now may not be good for your [partner or family] in five years.”

Depending on where you live and how long you plan to stay, additional costs like home maintenance, taxes, insurance, and more may point to renting as a smarter financial move—as long as you focus on other ways to build wealth.

Kate Gilbert

Renter, San Diego, CA

"I think [the perception around homeownership] has changed, especially with younger people who can't afford to get on the property ladder. But I also meet others like us who have decided that they don't need the burden of a home anymore. I used to think that owning a home was an investment that I had to have, it felt like security.

I feel differently now. I would rather have our savings invested in a broad portfolio of accounts than a home. I actually feel much more secure knowing I can change my life easily. I can move at any time I want. I could be in a place that has a lower cost of living, or move to a location where I need to be for work, or even relocate temporarily to care for a sick relative. I have complete freedom to be anywhere."

Consider Your Motivations

Similar to our implicit assumption that buying a home is a good investment, the term “American Dream” suggests that homeownership is also the key to achieving happiness. But this idea may be flawed, too.

A study in the Journal of Consumer Psychology highlights that “neither is renting intrinsically disappointing nor is owning intrinsically satisfying.” Instead, it’s what people do with what they buy that determines how much enjoyment they experience.

In part, this is due to a concept known as the “hedonic treadmill” (also known as hedonic adaptation), which observes that our level of happiness is only temporarily impacted by big life events.

“Even if you found your dream home, you would quickly ‘adapt’ and no longer gain the same level of pleasure from it,” Joe Gladstone, assistant professor of consumer behavior at University College London, says. “Renting in that sense might be a better recipe for happiness, as it increases the variety in our lives.”

In other words, the simple act of purchasing a new home won’t lead to long-lasting happiness: It’s how you use your home that matters.

 

Consider Your Preferences

Gladstone emphasizes the importance of understanding your own motivating factors in order to help you make the best personal decision when it comes to renting versus buying. He conducted a recent study that found individual differences play a central role in determining the “right” type of spending to increase well-being—a concept known as psychological fit.

Specifically, his study found that the “big five model,” which lays out five major personality traits including extraversion, agreeableness, openness, conscientiousness and neuroticism, is useful in predicting which spending decisions will make you happiest. For example, if you are high in traits like agreeableness and extraversion, you may enjoy homeownership where people are more committed to neighborhood and community issues.

As Gladstone puts it, “Different people need different things to make them happy. Someone who has a stronger preference for freedom might be happier while renting, while someone who has a stronger preference for stability and security would be happier after buying. There is no one rule for everyone.”

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Home Is Where the Heart Is (But Understand Your Brain When Buying)