Cliff Jumping: Investigating Homeownership and Renting in Nevada

"If everyone jumped off a cliff, would you jump too?" I'm so often reminded of this cliche when vetting the never-ending pile of cultural "best practices" people center their lives upon. After just two years of living in Nevada I am thoroughly convinced that homeownership is still the default answer when most decide between renting or buying, despite recent setbacks.

Houses have sprung up around me faster than I could have ever imagined. Parking lots are constantly littered with fliers from realtors and investors. Television commercials and internet ads are dominated by mortgage lenders. Yet to this day, when I tell my neighbors that I choose to live in an apartment instead of buying a home, I'm nearly always met with the same rebuff: you're throwing my money away.

Nevadans are made up of a rather large, culturally diverse group of people, which is what makes Nevada unique from many other states. While I've always felt confident in my position on renting, for little 'ole me to answer the "rent vs. buy" question for all Nevadans is ridiculous. I do not represent all Nevadans. Choosing a home is a deeply personal matter, influenced by an unknown number of factors unique to our own space and time. Indeed, the burden of understanding housing needs rests solely on the shoulders of the prospective buyer, which in all honesty is a pretty heavy burden. Many unseen forces are at work within the housing industry, as many of us discovered during the 2008 housing crisis. Yet despite the crash, homeownership in Nevada is steadily recapturing its popularity. Nevadans appear to be much more focused on homeownership when other choices are readily available. Are houses really that good of a long-term investment for most Nevadans?

In Nevada, the decision to rent or buy a home should be based on a careful consideration of individual financial circumstances, local housing market trends, and the long-term implications of homeownership, as opposed to blindly following cultural expectations.

Many Las Vegas residents are employed by a considerable number of casino, hospitality and restaurant services, earning an income much lower than Nevada's $63,000 annual median income (for a family of four). For many lower-income families, affording rent is a significant burden, and getting the information and assistance necessary to make an informed decision is difficult. Homebuilders typically create homes for median income families, effectively locking low-income families out of both homeownership and rental opportunities. New apartment properties are being built, but rental properties are simply not keeping up with demand. (Davidson) In the Las Vegas Review-Journal article "Poor face affordable housing crisis in Las Vegas Valley," Nevada Housing Division CFO Michael Holliday remarked, “We need to build about 8,000 [rental] units a year for the next 10 years to close the gap. We’re only able to produce about 2,500 to 3,000 units in a great year.” (qtd. in Davidson) This is unfortunate, as it implies that rent will continue to increase as Nevada's housing shortage persists.

Despite the shortage of rental properties, purchases of homes since the 2008 housing crisis have increased, though not as quickly as it did in the early 2000s. Home sale prices in Las Vegas have increased 15% since March of 2017, resulting in a median home price of $280,000. (Segall) However, increasing home prices and the housing market crash did not seem to have a negative long-term effect on the decision to purchase a house. Many homeowners forced into rentals after the market crashed eventually returned to houses. I find this trend to be disconcerting, especially given just how much negative attention the housing market crash brought about. Understanding the exact motivations of a buyer is nuanced, so instead, let's focus on the science behind homeownership and how financial markets view homeownership. This is likely to provide a much better understanding of the forces at work within the housing market.

Long-term home sales data is necessary to accurately predict the financial gains of homeownership. The S&P/Case-Shiller Consumer Price Index tracks home sales data from several cities, including Las Vegas, going all the way back to the 1890s. The index provides a statistical baseline of an unchanging single-family house that investors and researchers may use to determine market opportunities and avoid risk. (Shiller 18-20) However, using the Case-Shiller Index to determine long-term financial gain for a homeowner is striking. In USA Today's "Why your home is not a good investment," Morgan Housel explains that "for millions of Americans, a house is a large liability masquerading as a safe asset." (Housel) As the S&P/Case-Shiller Index shows, long term capital gains in the housing market, adjusted for inflation, are far less than expected. Robert Shiller, co-creator of the Case-Shiller Index and an American Nobel Laureate, provides an example the book Irrational Exuberance:

For example, in closing out the estate of an elderly couple in the early 2000s, one may have been surprised to see that they purchased a house in 1948 for only $16,000 and that the estate sold that same house in 2004 for $190,000. The appearance is that the investment in the house did extremely well. But, in fact, the Consumer Price Index rose eightfold between 1948 and 2004, and so in fact the real increase in value was only 48%, an increase of less than 1% a year. Moreover, part of the increase should be attributed to a sequence of investments in the house or the neighborhood that improved its quality. Even if the house sold in 2004 for twice as much as the median then, $360,000, it still does not imply great returns on the investment, for that price would imply only a tripling of real value in over fifty years, a real annual rate of increase of a little less than 2% a year. (Shiller 28)

Additionally, the average homeowner lacks the accounting and technical prowess necessary to be able to take advantage of sudden changes in the housing market, largely turning homeownership into a high-risk investment. Homeowners in Las Vegas would need to be capable of moving out of their house and handing over the keys in less than 48 hours.

Instead, the housing market has proven to be much better at creating housing-related services that continue to inflate the cost of homeownership. But what exactly is a housing-related service? Construction is an obvious answer, but it's important to note that construction costs over the last century have stayed consistent with advances in technology, inflation, and population growth. Instead, housing services have evolved into a new market of consumer-oriented products and services that purport to increase the value of your home far beyond realistic estimates. (Housel) Changes in fashion drive us to buy new clothes, cut our hair differently, and subsequently, devalue whatever is now deemed unfashionable. This same mentality exists in our housing market. Robert Shiller touches on this with Morgan Housel of USA Today, stating, "What kind of houses will they be building in 20 years? … They may have lots of new amenities. They will be computerized or something in some way that we can't anticipate now. So people won't want these old homes." (Housel) Faced with the ever-changing ebb and flow of human expectations, homeowners are, in a sense, obligated to continue to invest more and more money into a home that is not likely to produce capital gains.

The S&P/Case-Shiller Home Price Index has been available for nearly two decades, yet despite this, consumers still believe that houses are a good financial investment. How is that possible in such a data-driven society? My assumption is that much of our decisions are being influenced behind the scenes through the information services we use every day: Google Search, Facebook, Podcasts, YouTube, News Media, Print Media, Twitter, Instagram, etc. These services represent a large majority of sources that most Nevadans use to seek out information, but that information changed depending on the unique characteristics of the person requesting it and receiving it.

Google has long been a strong proponent of the algorithm-supported, query-based search engine, and has seen much success from it. However, Google search results are unique to the person using Google. As Sep Kamvar explains in the Google blog post “Search gets personal,” personalized search allows you to "use that search history you've been building to get better results." (Kamvar) What isn't mentioned is that Personalized Search is the consumer-facing side of Google Analytics and Google Adwords. Two services that, when tied together, give marketers a significant amount of power. Everything you do on the internet, from checking your email to routing your GPS, leaves a digital footprint. Unfortunately, your digital footprint also gives marketers the ability to target your specific social class, as well as discriminate against others. ProPublica emphasized this by successfully creating dozens of discriminatory housing ads on Facebook, despite Facebook's efforts to step up enforcement against such tactics. (Angwin et al.) However, Google has been data-mining for far longer than Facebook and is far more likely to be the research tool of choice for most Nevadans. Looking into Google Search should provide a bit of insight into which resources Nevadans are using to influence their decision.

Using Google Adwords, I was able to construct a database of over 700 buying and renting related keywords used most often in Nevada. I focused on the top ten keywords used by renters and buyers, amounting to between 590 and 735 million keyword searches per week. I then searched for each keyword on Google and logged the first 10 search results, including text-based advertisements masquerading as search results. For the purposes of data collection, my network was not utilizing any sort of advertising filters or geolocation blocking software. Representing 46% of my total results were the Zillow Group, Redfin, and Move, Inc., all of which are real estate brokerage firms. Additionally, more than two thirds of my results were dominated by real estate brokerages and lenders. Could this be the reason why people are still favoring ownership over renting? More good quality, peer reviewed research is necessary to truly answer that question.

So, what is a prospective homebuyer to do when faced with a housing market that has become increasingly complicated? Seek out a Financial Advisor acting in a 'fiduciary relationship' prior to speaking with a bank or realtor. Fiduciaries, up until recently, were required by the U.S. Labor Department to only recommend products, services, and advice, that is in the best interest of the customer, much like a doctor or lawyer. In "Fiduciary rule: Key steps to protect yourself from a bad financial adviser," Adam Shell from USA Today explains, "the retirement funds and products an adviser steers you toward must not only be "suitable" for your needs but also low-cost — rather than mainly for the purpose of generating a higher commission or fees for the adviser." (Shell) The Fiduciary Rule — also referred to as the "conflict-of-interest rule" — was expected to save consumers 23 billion dollars per year but was struck down by the U.S. Court of Appeals in March of 2018. Opponents of the fiduciary rule insisted that forcing advisors to act in the best interest of the consumer would increase, rather than decrease, the overall cost of investment services. (Shell) It is unclear to what effect this ruling will have over the long-term.

With the absence of the fiduciary rule, it becomes the consumer's ultimate responsibility to make intelligent and responsible decisions when deciding upon a future home. The housing and financial markets have a vested interest in your decision, and within the boundaries of a capitalistic economy appear to be operating mostly within those confines. However, the side effects of market fluctuation tend to hurt homeowners first, and often the hardest.

It is paramount that prospective homebuyers understand that their decision affects not only themselves, but the community as a whole. Houses require constant attention and failing to meet the demands of your house will quickly reduce the resale value of your house, as well as your neighbor's houses. Residence within a neighborhood is much like a social contract, and in that contract you have pledged to always water your grass, pick up the rubbish, put away the hose, close the garage, hide the garbage, be quiet, and follow every other old and new rule that your landlord, homeowners association, neighborhood, city, state and federal government will choose to impose on you. Are you ready for that kind of commitment?

Whether you rent, buy, or do something entirely different, the choice comes down to what do you want and if you are able to afford it. Use your freedom of choice.

This poorly written essay was the outcome of one semester of English 101 at a Community College in Nevada. I'm pretty stoked I finally get to put "Some college" on my resume now! /s

Works Cited

Angwin, Julia, et al. “Facebook (Still) Letting Housing Advertisers Exclude Users by Race.” ProPublica, 21 Nov. 2017, https://www.propublica.org/article/facebook-advertising-discrimination-housing-race-sex-national-origin. Accessed 1 Apr. 2018.

Davidson, Michael Scott. “Poor Face Affordable Housing Crisis in Las Vegas Valley.” Las Vegas Review-Journal, 26 Mar. 2018, https://www.reviewjournal.com/business/housing/poor-face-affordable-housing-crisis-in-las-vegas-valley/. Accessed 1 Apr. 2018.

Kamvar, Sep. “Search Gets Personal.” Official Google Blog, 28 June 2005, https://googleblog.blogspot.com/2005/06/search-gets-personal.html. Accessed 10 Mar. 2018.

Housel, Morgan. “Why Your Home Is Not a Good Investment.” USA Today, The Motley Fool, 10 May 2014, https://www.usatoday.com/story/money/personalfinance/2014/05/10/why-your-home-is-not-a-good-investment/8900911/. Accessed 27 Feb. 2018.

Segall, Eli. “Median Las Vegas Home Prices Edge up to $280K.” Las Vegas Review-Journal, 6 Apr. 2018, https://www.reviewjournal.com/business/housing/median-las-vegas-home-prices-edge-up-to-280k/. Accessed 7 Apr. 2018.

Shell, Adam. “Fiduciary Rule: Key Steps to Protect Yourself from a Bad Financial Adviser.” USA Today, USA TODAY, 16 Mar. 2018, https://www.usatoday.com/story/money/2018/03/16/fiduciary-rule-how-protect-yourself-financial-adafter-court-ruling-striking-down-retirement-how-prot/431785002/. Accessed 7 Apr. 2018.

Shiller, Robert J. “The Real Estate Market in Historical Perspective.” Irrational Exuberance. Revised and expanded third edition, Princeton University Press, 2015, pp. 18–36.

Acknowledgements

Anita, Naomi, Jamie, and Molly. Thank you for your support and guidance in overcoming my own personal hurdles in life.