Wednesday, June 11, 2014

What Drives the Decision to Rent vs.Own?

By Rachel Bogardus Drew
Guest Blogger
What drives someone's decision about whether to own or rent their home?  Economists tend to focus on financial factors such as user costs and return on investment. Sociologists, on the other hand, generally emphasize lifestyle factors, such as family status and mobility. Overlooked in most prior research on housing tenure (i.e. whether to own or rent) are the effect of individual beliefs about the benefits of homeownership on such decisions. Said another way, how do our expectations of outcomes associated with homeownership influence our desire to own?

My new working paper examines whether the stated beliefs of renters (ages 25-64) about the benefits of homeownership can predict their intentions to purchase a home in the future. Such beliefs include both financial outcomes (investment potential, value versus renting) and lifestyle factors (having control over living space, a better place to raise children) that are commonly associated with homeownership. These beliefs are considered alongside other known determinants of tenure preferences, such as age, race, income, and family status. The analysis also controls for some potential constraints on renters’ tenure options that might sway their intentions, such as their ability to qualify for a mortgage and the amount of financial sacrifice they would need to make to buy a home.

The analysis finds that, while most of the demographic and economic conditions considered are still strongly correlated with intentions to buy a home, they are less predictive than stated beliefs in the benefits of homeownership. Indeed, renters who hold strong beliefs in the financial and lifestyle benefits of owning have between 1.7 and 3.8 times higher odds of wanting to buy in the future, regardless of their individual characteristics (see Figure 1). Perceived constraints on tenure options, meanwhile, are generally unassociated with intentions to buy; renters who report requiring a lot of financial sacrifice to own, for example, are only slightly less likely to expect to buy than those who would need to make only some or not very much sacrifice, but no different from those who don’t have to make any sacrifice to own. Ability to qualify for a mortgage was also insignificant to expectations about future home purchases.


Source: Tabulations of Fannie Mae’s National Housing Survey data from 2011 on renters ages 25-64 who expect to move in the future.
Notes: Odds ratios over 1 indicate a greater likelihood of expecting to buy in the future, relative to the excluded group in each category (i.e. white, unmarried, unemployed, 55-64 years old, income under $25,000, debt under $10,000, very positive experience renting, a lot of sacrifice to own, and very difficult to get a mortgage). Bars in grey were not significant (at the 10% level) in the analysis. 

The results of this analysis have important implications for both policy and research on housing tenure. First, they suggest that decisions about homeownership can be biased by beliefs about homeowners, particularly beliefs based on unsupported assumptions about the outcomes realized from the purchase of a home. Policymakers should consider the potential effect of these biases when designing policies that promote and facilitate homeownership, and if necessary take steps to counteract them to improve the efficiency of tenure decisions. Second, these results demonstrate that behavioral factors such as beliefs are significant to individual tenure decisions, and should be included along with other drivers of housing tenure in future studies on this topic. Finally, it should be noted that this analysis is based on survey data collected in 2011, following the recent recession and foreclosure crisis, which may have temporarily skewed views on both the desirability and feasibility of homeownership for some renters. Further research will be needed to assess the enduring effect of beliefs on tenure decisions during the current recovery and potential future housing booms.

Rachel Bogardus Drew is a former research associate at the Joint Center for Housing Studies and recently completed her PhD in Public Policy at the University of Massachusetts.

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