Wednesday, May 23, 2012

Renting Prosperity

I've long been a fan of the benefits of renting -- in terms of building wealth, increasing time, and increasing quality of life by living in more ideal locations. Economist Daniel Gross seems to agree. In his recent WSJ article, Gross explains why he thinks renting will lead to the next boom in American economic efficiency (emphasis mine):
Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom...
For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.
It's tempting to view the rise of rentership as an economic step backward. Renters can't build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you've failed as a homeowner or are not yet ready to be one. But I'd argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities. 
The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can't easily take his skills to where they are needed in North Dakota or Wyoming if he's underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership...
The renting is not just taking hold in housing.  Gross goes on to describe how the renting business model is taking hold in markets for cars, textbooks, and fashion as well.  Services like Netflix and Rhapsody allow average consumers access to video and music library that rival the largest collects in the world.  Renting could have substantial impacts on economic productivity through more efficient allocation of resources, fewer unnecessary redundancy of goods in the economy, and allowing producers and consumers of these goods to take advantage of economies of scale.  In my own neighborhood of Arlington, VA and around Washington, DC, the idea of renting has even come to bicycles in a brilliant way.

Given that renting is more common in urban areas, if Americans increasingly adopt a renting lifestyle, there could be additional gains in economic efficiency due to lower transportation costs, reduced energy consumption in smaller homes, and additional economies of scale that are enabled by individuals living in areas with higher population density.  Harvard economist, Ed Glaeser, argues that people living in cities are healthier, wealthier, and living greener lifestyles than those in less urban environments.  Additional gains from the Rentership Society?

(See Glaeser's new book, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier.  It is currently near the top of my reading list.)

On a personal note, being a lifelong renter has yielded enormous benefits for me.  The flexibility has helped give me opportunities to travel the world, save a substantial portion of my income in my 401k in my 20s, quit my job to pursue my JD and PhD full-time, take risks that allowed me to rapidly increase my income early in my career, keep my commute down to about 10-minutes for most of my adult life, and shift careers into a job that I thoroughly love, and live in an exercise friendly community that helped me in the best shape of my life.  Could I have done all of this if I owned a home?  Maybe.  But each of these would have been a lot more costly and entailed much greater risks.
Finally, perhaps, Americans are absorbing a piece of wisdom not from Gatsby, but from Thoreau: "And when the farmer has got his house, he may not be the richer but the poorer for it, and it be the house that has got him."
If Daniel Gross is right (and I think he is), we may be in for some significant improvement in quality of life in the near future.

Rentership Society?  Bring it on!

(HT Life Edited)

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