Real buyers, real trade-offs.

A buyer recently asked me a question that surprised me, yet I should have been more surprised that no one's asked it before:  if many parents are focused on getting their kids into the best schools, why don't they rent, and leave the homebuying field free for empty-nesters like herself? 

The theory behind this question is that parents can rent in the attendance area of a school with ultra-high test scores for about the same monthly payment they'd incur by buying in a neighborhood where the school has good but lower scores.  But maybe you've already spotted the question behind the question:  why do home buyers trade a measure of quality of life for the joys (and occasional sorrows) of homeownership?  Yes, it's our old friend the rent-versus-buy debate, the debate that can't be won because it's not a debate, it's a question in search of justification.

(Actually, the real question is, "is the education provided by a school with a 980 API significantly better than that provided by a school with a 920 API?")  

The original question—why not maximize test scores by renting?—has at least three answers.

First, I'm sure that some parents do, and the fact that I've never met one doesn't mean they don't exist.  Renters-by-choice are quick to point out that renters get more house, more neighborhood, more of the bundle of benefits, tangible and intangible, that go with living in a "better" neighborhood—all for less money up front. 

But with today's rock-bottom interest rates, how much more bang do renters really get for their buck?  Let's use the example our questioning buyer used, and compare renting a single-family home in the brand-name Saratoga or Los Gatos elementary school districts rather than buying an SFR in a part of neighboring Campbell where the local elementary and middle schools are excellent but have a weaker brand.  The comparison stacks up like this:

In this case, the premium the homeowner pays is about 15%.  I haven't factored in maintenance costs because they vary, and because it can be an unfair comparison, since as a former property manager I know that most rentals don't get much maintenance and some get none.  I've used an opportunity cost of 3%—the homeowner's inability to invest the money used for the down payment—so often advanced by renters-by-choice as a hidden cost of homeownership, although the stock market's negative average annual return over the past decade blunts this argument.  Not that renters-by-choice lost money in the stock market, of course.

So now we've quantified the homeownership premium at about 15% plus maintenance costs.  It's your call as to whether that's an insurmountable drawback to homeownership or not, but I can tell you that the demand for single-family homes in this price range with good schools suggests that for many it's not.

So there's our second answer:  these days, the cost difference isn't that great.  This isn't just my opinion, and it may not be your opinion, but it is the opinion of the people who count, the market.  But I'm skeptical that buyers are driven solely, or even mostly, by dollars and cents. The size of the cost-to-buy premium is relevant, of course.  But I don't believe that real buyers—as opposed to people who follow the real estate market like they follow their favorite (or least favorite) celebrity—think only in these terms.  Then what does drive residential real estate, if not the almighty dollar? 

I'm going to lay the e-word—emotion—on you, a word not often heard in polite society these days.

Some—many—people aspire to homeownership because of the emotional benefits that go with it.  They may or may not understand this, and you may not believe that those emotional benefits exist, but they do believe or at least feel it and, in real estate, they're the ones who count.  And because they aspire to homeownership so fervently, they're willing to make trade-offs.  Maybe a little less house, but still enough house.  Maybe a little lower school test scores, but still enough test scores.  Especially now, when homes sell for less than they did.  Especially now, when interest rates are at historic lows. 

If not now, then when?

And the best part is, that by coming up with answer #3 to our buyer's question, we've also come up with a serviceable definition of a "real buyer":  someone who's willing to make modest but significant trade-offs.  Someone, come to think of it, who wouldn't have to wonder why parents buy instead of rent, because in their heart they know the answer.

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