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Abstract
The decision of whether to rent or own a home should involve an evaluation of the relative risks and the relative costs of the two options. It is often assumed that renting is less risky than homeownership, but that is not always the case. Which option is riskier depends on the risk source and household characteristics.
This article provides a framework for understanding the sources of risk for renters. It outlines the most important determinants of risk: volatility in the total cost of obtaining housing, changes in housing costs after a move, and the correlation of rents with incomes. The article characterizes the magnitudes of those risks and discusses how the effects of risk vary across renter types and U.S. metropolitan areas. In addition, the article shows that renters spend less of their cash flow on housing than do otherwise equivalent owners and, thus, are better able to absorb housing cost risk.
Finally, potential policy approaches to rental housing that avoid increasing rent risk are discussed. A simple way to maintain renters' capacity to absorb rent risk is to avoid subsidies that result in an incentive to consume a larger rental housing quantity. Targeting rental subsidies to more mobile households or those living in low-volatility cities, where renting is less risky, should be considered. Long-term leases would provide an intermediate position between renting annually and owning but are currently rare.
Introduction
Much of the discussion about government subsidies that are targeted at homeownership or renting focuses on the subsidies' effects on the relative cost of owning versus renting. For example, how much do tax subsidies to homeownership lower the cost of owning? Is housing affordable, and do rental subsidies lower housing costs for low-income families? Are rents higher because renting is less economically efficient than owning because of misaligned incentives for renters and landlords? Cost is just one of many differences between renting and owning, however. Another important distinction between the two tenure modes is risk. Both renters and homeowners face financial uncertainty in regard to their housing spending. How that uncertainty is manifested depends on a household's choice of tenure mode. Renters do not have large housing capital amounts at stake and thus are not affected by house price swings in...