For many in the U.S., the concept of building equity by renting may seem almost "Un-American." Most of us were told, "Renting is tantamount to flushing money down the toilet."Owning single-family houses represents a long-established tradition in the U.S. and many other English speaking countries. Now, the paradigm may be shifting.

From World War II until 2006, owning a house was a great way to build equity.Houses appreciated 3-5% per year on average. We homeowners with a mortgage not only got a tax deduction for the interest paid, but also appreciation on the entire value of the house, not just our down payment. Starting in 1997, most of the capital gains earned on the house were tax-free. Renting was seemingly only for those who didn't have enough cash to make a down payment to get in the "no-lose" game.It was, until mid-2006.

Since that time, house values nationally have declined for 57 consecutive months. In the last twelve months alone, homes in Detroit have declined in value by 17%, in Chicago by 14%, in Seattle by 12% and nationally by 8%.The Wall Street Journal reported on May 9^th that home sales collapsed last year when the tax credit program expired and prices in many markets have been falling since.Stan Humphries, of Zillow's real-estate website, expects prices to fall another 7-9% in the next year. Yale University economist Robert Shiller (of the Case-Shiller Home Index) recently said that, "While it is unlikely, a 30-year decline in home prices (adjusted for inflation) is certainly a possibility."  Ugh!

Before 2006, American home builders regularly built as many as 2 million new houses annually. Last year is was about 400,000. Unsure of the economy, many first-time homebuyers are waiting on the sidelines. Four out of ten sales of existing homes are foreclosures. In addition, household formation is currently lower than any time since 1947, with people putting off getting married and starting a family.

The resultant increase in demand for renting has reinvigorated the apartment market. As rising gas prices increase the cost of commuting, there is evidence that urban townhouses are becoming more popular. Higher energy costs also affect heating and air conditioning, which may have the effect of discouraging homebuyers from purchasing large houses with lots of generally unused square footage. The result is that there probably will be less demand for McMansions in the future. And, those owning them today who are looking to downsize, are going to have a smaller group of potential buyers.

Renting has a number of key advantages. The monthly costs can be significantly less than owning. Renters pay one fixed monthly payment-no surprises. Homeowners pay the mortgage, real estate taxes, insurance, utilities, maintenance, repairs and renovations. Furthermore, for many homeowners, their home is their only major investment other than their retirement plan(s). When home prices decline or stagnate, homeowners make a zero or a negative return on their home equity. Renters can build equity outside the house by renting. They do this by investing the money they would have tied up in housing into a diversified portfolio of assets that have a better chance of appreciation than residential housing. Renters don't pay closing costs and they don't pay large commissions on sale. Renting is a great way to get familiar with a new area before making a permanent commitment. Lastly, renting is more flexible, with predetermined dates within a lease that allow renters to stay or move out at the renter's discretion (as compared to homeowners that are stuck in a house until the market "recovers" and then can get it sold.)

In addition, if the current US budgetary process results in the elimination of the home mortgage deduction, a key advantage to owning will be gone. This would undoubtedly produce another significant decline in housing values as well.

Certainly, choosing a location and a specific home to own or rent is much more complicated than mere dollars and cents. Homeowners typically take great pride in ownership itself. They buy a house with the intention to live in the house for many years and want to maintain 100% control over what they do to and within the house. Their house is their castle and rental would be out of the question. For many, the personal benefits of ownerships far outweigh the potentially higher monthly costs of ownership versus renting.

As we often say, everyone has unique goals and circumstances. We do believe that in today's housing market, that for some individuals, renting may build more equity than home ownership.  It's something to consider these days.

For more information,

http://online.wsj.com/article/SB10001424052748704810504576309532810406782.html