Personal Finance FAQ

Rent or Buy a House? How Oswald Affects Your Decision

For rent sign
To rent or not to rent? That is the question.

“I installed a skylight in my apartment… the people who live above me are furious!”
–Stephen Wright

When we first started our software development company, the three co-founders figured that we could be a virtual company and hire our team members anywhere in the world. It was software, and we were technologically savvy, so we could use the tools that were available to make it as if everyone was one seat over.

For a while, that arrangement worked out well, but then we decided that we wanted to hire employees. We quickly came to the conclusion that it was better, at least for us, to have our employees all locally-based so that we could do things together physically. Even in a technology-based organization, there are psychological benefits to that in-person time that even Skype sessions could not replicate.

We still had a broad footprint of contractors and potential candidates across the country, and we were willing to relocate people to get them to move close to our office.

In a very broad, sweeping generalization, I found that people who had houses were reluctant to move. They’d say things like “I’m settled” or “I’ll have to sell the house.”

Renters were more willing to pay the break fee and move.

My sample size, relatively speaking, is exceptionally small, and there are many other factors that came into play in our hiring efforts, but, generally speaking, people who perceived themselves as more mobile were willing to entertain the idea of relocating for the job.

British economist Andrew Oswald proposed a hypothesis about this situation, basically positing that people who rented would be able and willing to move to take better jobs, whereas people who owned their homes would not move and would, therefore, have to take whatever local jobs were available.

According to his hypothesis, higher home ownership → higher unemployment rates.

He subsequently used data from the United States to support his hypothesis.

Based on the Oswald hypothesis, you’d conclude that renting is the way to go, at least if you’re at a point in your career where you’re looking for upward progression and higher wages.

“But renting is simply giving the landlord money!” you may cry out.

True, and in exchange, you’re getting a place to live. Home ownership has its costs too.

If we make the following assumptions, we can see just how much that ownership, in absence of other costs (e.g. differences in income and cost of rent), really takes out of our pocket:

  • Property tax rate: 1.38% of purchase price
  • Average homeowner’s insurance rate: 0.75% of purchase price
  • Average annual maintenance cost: 1% of purchase price
  • Average purchase closing cost: 2.25% of purchase price (includes 1 point in mortgage origination fees)
  • Average sale closing cost: 8% of purchase price (includes 6% of Realtor commissions)
  • Average 30 year fixed mortgage rate: 4.33%. Mortgage interest is treated as an expense.

Before we get into the results, let’s consider the average length of home ownership. According to the National Association of Home Builders, there are two main lengths. The first is the time in which the more apt to move will move: 4 years. The second is the average length of overall home ownership: 15 years.

Obviously, the longer you own a home, the more time you have to amortize the costs associated with buying and selling the home. Additionally, if the price of the home rises or falls, it will affect how much money you get at the end.

Home Ownership Costs as a Percentage of Purchase Price After 4 Years by Fort Worth Financial Planner Hull Financial Planning

Compared to 15 years.

Home Ownership Costs as a Percentage of Purchase Price After 15 Years by Fort Worth Financial Planner Hull Financial Planning

For comparison, let’s also look at selling after the 30 year mortgage is paid off.

Home Ownership Costs as a Percentage of Purchase Price After 30 Years by Fort Worth Financial Planner Hull Financial Planning

Thus, according to Oswald’s hypothesis, if you can spend less in rent and/or make more in income by renting, then you’re better off renting.

But, wait! There’s more!

Gift from greg
Buy 1 get 3 free but only if you call within the next 8 seconds!

The Primary Factor in Home Ownership That Affects Your Income

MIT’s Lynn Fisher and Penn State’s Edward Coulson believed that more factors played into Oswald’s hypothesis than merely home ownership. According to economic theory, if there are home owners who perceive themselves to be stuck in a given location, then it will encourage employers to come in to take advantage of the situation. Since the home owners can’t move to get better jobs, they’ll take lower wages, and employment will rise. Furthermore, employers don’t want to invest in hiring people who are going to move later. I can attest to this personally; we wanted to make sure that if we hired someone and spent differentially on that person’s development, he or she wasn’t going to jet off to the next great thing in six months. We wanted those people around for a long time.

Fisher and Coulson evaluated state data to see if their theory was true, and, by and large, it was. In areas of higher home ownership, there was higher employment, and lower wages.

Not all home owners are made equal

There are other factors that play into home ownership. In general, home owners tend to be better educated and have steadier jobs a priori. In most cases, they buy because they feel secure about their situation and want to be in the same place for a long time.

But, that doesn’t mean that all house buyers are rational (see “The Endowment Effect: Why You Should Buy a Foreclosure and Never Sell to an Investor” for more). Some of them don’t buy less house than they need, either because they’re speculating or they went off of some mortgage broker’s self-interested “rule of thumb” about how much house they could afford.

The market tanked.

And they’re underwater.

These are the people who, according to Fisher and Coulson’s research, are in deep trouble.

Once they segmented out people who had positive home equity versus those who had negative home equity (and renters who received subsidies), they were able to conclude that it wasn’t home ownership, per se that led to lower income. It was being underwater on your house that led to lower income.

After all, if you’re underwater on your mortgage, you can’t sell unless you have the cash to make up the difference, unless you’re willing to take on risk by renting it out and hoping that you can rent the property out to at least cover the mortgage (and that the tenant stays in the property and maintains it immaculately until the day it sells).

If you have equity in the house, you’re not as tied to it if a better job offer comes along elsewhere. It has costs, but so does breaking a lease if you’re not month-to-month.

From a financial standpoint, the decision between owning a home and renting is probably relatively close.

However, the difference between owning an underwater house and any other option is enormous.

Oswald may have killed Lincoln, but he didn’t quite kill home ownership.

But, you better buy a house that you won’t be underwater on. Not only is the psychological toll of being underwater strong, so is the effect on your future earning potential.

Did you consider income impacts in deciding whether or not to buy a house? Let’s talk about it in the comments below!


Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

2 replies on “Rent or Buy a House? How Oswald Affects Your Decision”

I’m generally in favor of home ownership, but there is an additional point to consider about how renting increases flexibility. As a renter I always kept the amount of stuff I owned in check because in the back of my mind I always knew I would be moving it somewhere else. People move from homes too, but it feels more permanent. It isn’t the biggest reason, but one reason I’m disinclined to sell and move is that I simply don’t want to recon with the absurd amount of accumulated things that would need to be sorted through. I’m not a pack rat but owning a home tends to make you complacent in this way.

We have noticed that as well. Even when we downsized from a 2,200 sf house to a 1,100 sf condo, we got rid of a bunch of crap stuff and didn’t really reaccumulate much. Now that we are in an apartment, we feel even less attached to our stuff. We really like our place, and can’t envision moving for a while, but it would be much easier if we decided to go.

A parallel upshot to this strategy is that when we retire, we can become semi-permanent expats fairly easily, as we won’t have a ton of stuff to worry about.

That said, we picked up and moved from our house in Texas fairly quickly once we decided to move to an apartment. Having no mortgage certainly helped us with that decision.

Leave a Reply