Reprinted from the Enricher, December 2005

Renting Vs. Owning In Houston
by Wojciech Kic, CPM, CCIM

There is a certain amount of perplexity in Houston's real estate market. The Houston real estate market is unlike any real estate market in the world. The real estate here is abundant. There are no real estate shortages in any price category or category type. Anybody who is employed for at least minimum wage can afford to own real estate. For example, there are still condominiums and townhouses with, say, two bedrooms and two full baths, appliances, central a/c and heat, carpet, fireplace and hot water selling for about $25,000. For those with higher incomes, there are plenty of choices for downtown two bedroom lofts selling for $250,000. There are also houses and high rise condominiums selling for more than a million. For those wishing not to own, many of the same properties are available for lease. These opportunities are not unique, and they exist in many different parts of town.

These opportunities exist mainly because the local real estate market is very much free of any interference that would limit its expansion. There are no zoning laws that prevent owners from building homes exactly where and when needed. There is a building permitting process that is fast and efficient. There is also a property tax, whose most positive impact, more important than funding of local public projects and services, is continuous utilization and consistently highest and best use of all real estate lots in the Houston area.

Yet, with all the real estate abundance and affordability, the distribution of tenants and property owners in Houston is approximately 50/50. In an abundant and affordable real estate market, when compared to other markets, the question that immediately suggests itself is: Why do we have so many tenants in all different price levels when it is possible and better to be an owner?

It appears that being an owner and a tenant fulfills different rational needs for different individuals. Some people want stability (a piece of the rock) while others prefer the flexibility of a lease. The distribution of these choices in the abundant Houston market is a statistically perfect 50/50. It appears that the two choices reflect two different perceptions of reality similar to the effect of PUT and CALL options on the Wall Street: both lead to an increase in wealth based on totally opposite outcomes. Therefore, the value of both choices, while opposite, are about equal to the owner and the tenant.

Being a tenant or an owner in Houston is an arm's length choice. Many people will remain tenants, and many will remain owners for life unless their individual needs change. There is continuous migration between tenants and owners, and owners and tenants, which appears to be in balance overall.

Thus, if tenants are tenants voluntarily why did so many recently choose to become owners? Low interest rates are an oft quoted reason. This answer is an outcome of rationality that ownership represents a higher value than renting. Given low enough interest rates, everyone prefers to own.

But doesn't the rationality of a tenant in an abundant real estate market lead to different decisions? Yes. Therefore, it appears that the recent migration from tenancy to ownership is an involuntary choice for many tenants. In Houston what forces tenants into ownership is rent higher than the cost of ownership for a similar type of housing. Given the opportunity expressed by comparatively lower rents, local tenants continue to prefer renting instead of owning even in a low (and affordable) mortgage rate environment.

Thus, in Houston, landlords must be prepared to continuously update their marketing strategy to determine competitive rental rates for their property. Pricing the rent lower than the cost of ownership maximizes occupancy rate and retains the rental market in near equilibrium.