Renter psychology

[Dominika M]

Hi all,
Newbie question: since there seem to be many areas in the US where houses cost $20-100,000 and there are several government financing programs that let people put down very little as downpayment (less than 10%), why do so many people rent rather than just buy?
I'm from the Toronto area in Canada. Toronto has average house/condo price of $550,000 and many people can't afford to buy at those prices. I honestly don't understand the psychology of the masses of renters in US. The reason I go out on a limb with such a naive question is because not understanding the psychology is seriously holding me back from investing.
There are obviously people who have various life problems (criminality, poor credit, poor life skills) who might not have it together to buy a house. But most of BP landlords don't want to rent to those people anyway.
There are some who need to frequently relocate and can't settle down. But there are millions of family people with the American Dream of owning a home who rent. Why?
I probably have some wrong preconceptions and a world view limited by my own experience. Go easy on me and share your view point.
Thanks,

[Jon Holdman]

I think its a very serious error to think that renters are making or have made some sort of mistake, as many of the replies and even the original question seems to assume. I strongly believe that for many people renting is the correct way to have a place to live. There are many, many people who have bought a house only to end up being financially damaged by that decision. Many folks who bought during the bubble have had their entire lives devastated by that decision. Some will NEVER recover back to the point they would have been had they avoided.

Even without the bubble, owning a house is generally a poor investment. Americans have been convinced by vested interests that they should subscribe to the "American Deam" of owning a "home". People are told to compare the value of their parents home 30 years ago to the value now. Great investment, right? The biggest "investment" you'll even make. The truth is its the biggest doo-dad most people will ever buy. If you add up the true cost - purchase price; 30 years of insurance, taxes, and routine maintenance; major improvements; etc. - and compare it to the true value - what you could sell it for less the exorbitant costs of actually selling it - it is, at best, a crummy savings account. In many cases, the net is negative.

If you buy into the "starter house", "move up house", "mini-mansion", "downsizing house" scheme that's also promoted you're almost certainly negative. You're paying all those exorbitant transaction costs every time you move.

Now, thats OK. You have have a place to live. If you compare ownership to renting the cost could go either way. But in many areas and for many lifestyles renting is the cheaper alternative.

Yes, there are places where houses are dirt cheap. I have a house in one of those area that I bought in 2006 for $11,000. Many people don't won't to live in those places. The small towns around that area where I grew up are sad places. Boarded up and empty stores. A proliferation of antique stores. Limited employment opportunities. Few of the amenities people in cities take for granted. Heck, something as simple as a 24 hour pharmacy can be 50 or 100 miles away.

Owning a house locks you down. I've read analysis that claim higher-than-historical home ownership contributed to the recession. People were stuck in a house that they couldn't get rid of in an area where there were limited jobs. Had they been renting they could have packed up and moved somewhere with better prospects.

Many desirable areas are very expensive to buy but fairly cheap to rent. That $550K condo is expensive, but Toronto is a nice place to live, from what I hear. At one point in my day job we acquired some technology from a company based there and hired two of their employees. We tried to get them to come to Denver or the bay area. No luck. They absolutely wanted to stay in Toronto. I suspect the rent on that condo is quite low from. Maybe $2500 a month. Probably not $7500 a month like an investor would need for a profitable rental. So paying $2500 a month to live where you want is the right choice for many people.

For many people housing is just a place to live. Its not a "dream". Its just a roof and walls. Many folks just don't care that much about the specifics.
There's no attraction to owning such an expensive toy as a house. They like the flexibility of being able to move around, even if its just to another area of town. There's lots of other things to spend money on and some are satisified with a cheaper place than an expensive house.