“I installed a skylight in my apartment… the people who live above me are furious!”
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.
Compared to 15 years.
For comparison, let’s also look at selling after the 30 year mortgage is paid off.
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!