Renting: The new American dream?

The American dream of home ownership has turned out to be the American nightmare for those who could never really afford a home in the first place.

Many borrowers are now in deep trouble as home prices have plummeted and the payments on bubble-era adjustable rate mortgages have shot up. Foreclosures are still continuing at an alarming pace.

If the so-called Great Recession has taught us anything, it's that buying a house is not a divine right. It's a privilege to be earned only after you've saved up a nice chunk of cash for a down payment and are in a healthy enough financial position to keep making those monthly mortgage payments .

So for many consumers, renting is not necessarily the worst thing in the world. That's worth keeping in mind now that some experts think home prices are close to bottoming and fixed mortgage rates are still fairly low.

Sure, we've all been taught that buying real estate is the smartest thing you can do in order to build wealth. That's probably still true for the long haul.

But like with any investment, you should only make a purchase if you can afford the near-term hit that comes from doling out all that money now. Plus, you have to be able to stomach the possibility that the value of the house may actually fall over a short period.

And guess what? It seems many people are in fact coming to the realization that, for now at least, it makes more sense to rent instead of buy.

Jerry Davis, senior vice president of property operations for UDR (UDR), a Denver-based real estate investment trust (REIT) that owns and manages apartments, said that before the housing market collapsed, about 25% of the company's renters that moved out of apartments did so because they were buying a home.

Now, only about 12% are moving out to purchase a home, and in some of the harder hit real estate markets, such as California, Davis said that fewer than 10% of movers are buying a house of their own.

"Even though prices have come down, you're not seeing a big exodus of renters to buy homes," Davis said. "Buying a house used to be the way to get rich, but people are afraid to jump back in."
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In addition, banks also appear to have learned lessons from the housing crash. Many remain reluctant to give mortgages to even the most credit-worthy consumers.

"It was Shakespeare who wrote that when home prices are declining, neither a borrower nor a lender be," joked Edward Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and professor at UCLA's Anderson School of Management.

Simply put, many consumers just aren't buying the notion that the economy is getting better. For many, the stock market rally does not make their daily lives any easier. Consumers are more interested in the job market improving than the Dow or S&P 500 hitting highs.

"This is a frugal recovery. People are more reluctant to buy homes as they would in a normal recovery," Leamer said. "If you don't have a job or are worrying about your job, you're not going to buy a home. That's the ultimate statement of optimism about the future."

Add that up and it's reasonable to expect a rental boom that could last for some time. That's not lost on Wall Street. Shares of UDR, for example, are up 20% this year.
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Other apartment REITs have also surged this year and an analyst at RBC Capital Markets upgraded UDR, BRE Properties (BRE), Camden Properties Trust (CPT) and Apartment Investment and Management (AIV) last week, citing their growth potential.

Thomas Toomey, CEO of UDR, said that favorable demographics will also probably drive more people to rent than buy. He pointed to the increasing number of retiring Baby Boomers who may look to downgrade from bigger houses to apartments.

He also said that record-high college enrollment levels are a boon for UDR and other apartment owners. Most recent college graduates, particularly those finding work in cities, are not in a position to buy a home.

Toomey added that cities are also interested in building more apartments closer to where people work for environmental reasons.

"So if you look toward the future, it's not just demographics and people making a conscious decision of whether they can afford a home that will lead to more renters. Cities want more apartments for younger and older generations," he said.

Of course, that's exactly what you'd expect the head of a company that owns apartments to say. But I also agree with him. And I'm curious to hear what you think.

Are any of you long-term renters finally looking to buy? Homeowners that want to sell and not deal with a mortgage anymore? E-mail me and if I get enough feedback, I may do a follow-up column about renting versus buying.

6 smart ways to spend your tax refund

Expecting a large chunk of change back from the IRS? Think carefully about where you want to spend it.

Nearly 90% of Americans are set to receive refunds this year at an average of $3,036, up 10% from last year. That's a lot of extra cash in your pocket, especially if you're just barely scraping by, or don't have any income at all.

Instead of spending that check on a shopping spree or splurge, it's important to put that money -- or at least some of it -- into something that will benefit you in the long term.

But that doesn't mean you can't enjoy it too. Just make sure you come up with a plan before you hit the stores.

Writing it down is a good place to start, suggests Diahann Lassus, co-founder of wealth management firm Lassus Wherley.

"The most important thing is to really think about where you want to spend that money and put it all down on a piece of paper," said Lassus. "Because many times, the dollars are bigger in your head than they are in your bank account so you end up spending more than what you've got."

Here are a few suggestions to help you craft your strategy:

Pay down debt: The last thing most people get excited about when receiving a refund in the mail is paying down debt.

But unfortunately, this is where the majority of your refund should go if you have a lot of debt, said Lassus. Just how much depends on what you owe.

"If you have huge credit card debt, a much larger portion of the refund needs to go to paying off this debt," said Lassus.

With lenders hiking fees and raising rates, debt is becoming increasingly expensive. So while it might not seem that exciting, you'll be able to sleep a little easier when you start making a dent in your debt. And once you've paid it off, you'll have more money in your pocket for discretionary spending and enjoyment.

Lassus usually recommends paying off the cards with the highest interest first. But if you have a few credit cards with small amounts on them, it might make more sense to pay some of these off first, she said.

Save for a rainy day: Everyone should have at least 3 months' worth of expenses in a liquid savings account. But especially if you're unemployed or worried about keeping your job, this is a crucial way to allocate some of your refund, said Tom Orecchio of Modera Wealth Management.

Chances are that at some point throughout the year, you will need to replace an appliance, pay a medical bill or repair something that's broken. Planning for a large expense later in the year can take the stress off of your weekly paycheck and give you a little extra wiggle room.

"Making sure you have adequate short-term savings is the second most important thing you can do [behind paying off debt]," said Orecchio. "And those who are employed but don't feel like they are on solid footing really need to make sure they have an emergency fund to dip into."

Orecchio suggests keeping this money in a high-yield money market or savings account that comes with a debit card or an electronic link to checking or ATM access.

Save for retirement: If you've taken care of your outstanding debt and have a healthy emergency fund, the next step is to tuck away some money for retirement.

To plan ahead, Orecchio said he advises people to look into whether they are eligible for a Roth IRA, or a tax-deductible IRA in order to save money on a tax-deferred basis.

Contributing as much of your refund as possible to a fund like this will allow you to worry a little less about your golden years, he said. The government allows you to contribute up to $5,000 a year into an IRA, or $6,000 if you're age 50 or older.

Invest in yourself: If you're unemployed or may be in danger of losing your job, earmarking a chunk of your refund to help you learn a new skill isn't a bad idea either, Orecchio said.

"If you have enough money put aside and don't have major debt, you might want to use this money to invest in yourself," said Orecchio.

"Go back to school to train for a new field of work, buy nice clothes for interviews, take a course on improving your résumé and interviewing skills or anything else that will improve your chances of getting a job."

Buy something you need: Saving up for a new home? This year's refund could help you make that down payment.

If you don't have debt to worry about and have a good amount of emergency cash on hand, go ahead and use your refund to complete a big purchase, said Lassus. While it might be tempting to make impulse purchases with your refund, putting it toward a planned purchase is a smarter choice.

"If you need a new car because yours is dying or want a washing machine because your old one is broken, put a certain amount of the refund aside for things like that," she said. "Refund dollars are really good for certain purchases you know you'll have to make."

Have a little fun: Even if you do need to shore up savings or pay off debt, that doesn't mean you can't enjoy some of your money. Making sure to do something for yourself can make you feel a little better about writing a check to the credit card company, or tucking it away in a retirement account for the next 20 years.

"You should save some of [your refund] for fun," said Lassus. "Whether it's something as simple as getting ice cream or eating out once a week or putting some dollars aside for a family vacation, sometimes you want to take at least 5% and do something fun with it."

And after the filing deadline, retailers, restaurants, hotels, spas and auto centers are ready to lure you in with tax season specials.

From clever $10.40 and $9.90 discounts at hotels and restaurants to half-priced spa treatments, be on the look out for deals reserved especially for IRS checks.