Why the Wealthy Are Renting

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The sour economy is pushing affluent Americans out of expensive mortgages and into rental agreements – and many seem happy in the bargain. New York City is a good case study of this phenomenon, as its residents' demand for rentals has continued to rise during the Great Recession.

Even the Hollywood set is opting to rent. Actor Will Smith doesn’t own a home in New York City, and apparently doesn’t want to. When he needed a pad for a long-term movie shoot, he didn’t think twice about buying in the Big Apple – he rented a 7,326 fourth-floor condo for $55,000 per month. The property had been listed for sale at $19.5 million, according to The New York Post.

Like Smith, more and more wealthy Americans are turning their back on mortgages, opting instead to sign a rental agreement. The trend does mirror that of most Americans, as a December 2010 Fannie Mae study says that 33% of Americans would rather rent their next home than buy it, up from 30% in January 2010. Among those who strictly rent, 59% say they will continue to rent even if they move, up from 54% in January 2010.

"Despite Americans' strong desire to own their homes, our study reveals that life events are greatly influencing families' decision to rent. This trend, coupled with the housing crisis, has caused consumers to approach homeownership with greater caution and thoughtfulness," said Doug Duncan, Fannie Mae (Stock Quote: FNM) Vice President and Chief Economist.

CNBC.com reports that affluent Americans are putting their money where their mouths are. In Manhattan, 200 new apartment leases valued at more than $10,000 per month each were signed and rented in the third quarter of 2010. Compare that to the same period one year earlier, when only 89 such properties were rented.

“More affluent Americans are opting to rent as oppose to buy,” Jack McCabe, CEO of McCabe Research and Consulting in Deerfield Beach, Florida, told CNBC. “Within the last year, so many people have seen their family and friends get burned in real estate. They don’t see it as being a risk free investment as they used to.”

It’s not just New York City, either. Real estate agents in Chicago, Miami and San Francisco also report that more affluent homeowners are looking to shed their mortgages and rent instead.

Why the rush, aside from the reduction in cash expenditures? Here are some possible reasons:

•    Affluent owners used to view home ownership as a safe investment. That’s not the case anymore, as housing values continue to stagnate.

•    With the high price of home ownership, affluent Americans feel a double-whammy: the exorbitant monthly mortgage and added costs (in taxes and upkeep) that accompany homeownership.

•    The rich are renting as a hedge. Some affluent renters are likely waiting out the housing market, waiting for ultra-desperate homeowners to sell out for pennies on the dollar. At the same time, renters can “test-drive” new neighborhoods and cities for a year or so, then decide to buy again in the area that they like.

•    Even the affluent get stuck in “underwater” mortgages (when the value of the debt owed on the mortgage exceeds the value of the home). Some wealthy owners simply dump their property and withdraw to a rental apartment to lick their financial wounds.

Wealthy Americans are no different than the rest of the country in one financial outlook – they know a raw deal when they see one. With housing prices languishing, many view a rental as a better financial move than a home and a mortgage.

In a year or two, of course, this trend could change. But for now, wealthy Americans looking to rent rather than own are just another sign of the “New Normal."

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