For decades, owning a home has been a cornerstone of the American Dream. But in 2020 that dream seems to be fading for many Americans.
As the economy continues a decade long bull run, the scar tissue of the most recent housing crisis is still at the forefront of the conversation for potential homebuyers along with other economic considerations.
Hesitation to enter the housing market is warranted. Buying a home is typically the largest transaction most people will make in their lifetime. It pays to get it right.
With surging home prices, low inventory and high transaction costs, more people are questioning the validity of purchasing a home altogether.
To avoid the downside risks associated with homeownership, renting a home has quickly morphed into a preferred alternative, keeping potential buyers on the sidelines. I predict this trend will continue.
Here are 5 reasons why renting is a better option than buying in 2020.
1. Flexibility is Key
In today’s economy, flexibility is at a premium. American workers have embraced the idea that changing jobs can bolster long-term earnings potential and professional development.
Geographic fluidity is essential to capture those opportunities. With the average American worker changing jobs 12 times during their career– a number that continues to increase -- embracing the short-term nature of rental leases has become the new norm.
The financial return from buying a home, typically not realized until after 5 years of ownership, is not economically compelling for a workforce dissuaded from longer-term employer commitment.
As flexibility remains at the forefront of financial decisions for those looking to optimize career progression, the short-term commitment of renting will be the default choice.
2. Debt Continues to Rise
Americans have a debt problem.
According to a Northwest Mutual Planning & Progress Study, the average US adult has personal debts of $30,000, excluding mortgages. This debt is a blend of student loans, credit card debt, and other consumer debt.
With revolving debt payments, Americans are forced to make large monthly payments to alleviate their debt load, leaving little room for saving, building up an emergency fund or investing.
In fact, according to a GoBankingRates survey, nearly 70 percent of Americans have less than $1,000 in savings, an indicator of the difficulty with which Americans can distance themselves from the paycheck-to-paycheck lifestyle.
The focus on meeting their immediate monthly financial commitments leaves people with little time to plan for their economic future.
3. Down Payments Remain an Obstacle
The U.S. housing market is becoming progressively more expensive, with median home prices reaching all-time highs in 2019.
As a result of this increase, consumers are finding it more difficult to save enough capital for the traditional 20 percent down payment, recommended by Personal Finance experts. This standard barrier to entry into the U.S. housing market only seems to be getting larger.
According to the online real estate company Zillow, it takes buyers roughly 7 years to save enough to put 20 percent down on the median-valued home. With stagnant wage growth, potential homebuyers are having to deferred purchasing. This leaves people destined to rent for longer than anticipated.
4. Urbanization is Costly
Over the past several decades, there has been a return to urbanization. Major metropolitan cities like New York, San Francisco, Los Angeles, and Chicago, have attracted droves of employees seeking higher-paying jobs. As a result of this metropolitan influx, housing prices and the cost of living have continued to surge.
With higher transaction costs, real estate taxes, down payments, and ever-increasing costs of living, many people feel that buying a home is perpetually out of reach.
5. Financial Success Has Been Redefined
A new definition of financial success is taking hold of American culture, especially for those entering the housing market for the first time. The previous picture of the suburban house with a white picketed fence as an indicator of economic success doesn’t quite resonate in today’s economy.
While people want to eventually own homes, they don’t value homeownership as the status symbol associated with financial success – especially after witnessing the housing crisis of 2008. Instead, they place a greater emphasis on lifestyle design, taking mini-retirements, and focusing on achieving an earlier retirement.
The redefined definition of financial success means a different set of priorities for this consumer cohort.
For all these reasons, economic and cultural factors will continue to push buyers towards renting versus buying a home in 2020.