“Trapped” in Rental Contracts

30 July 2013 at 9:18 am 4 comments

| Peter Klein |

In today’s feature on the US housing market, an NPR correspondent sadly notes that foreclosure victims are “trapped” in rentals. Why, those poor, unlevered souls, choosing to purchase a flow of housing services over time, rather than buying a huge, illiquid housing asset outright, using borrowed funds. Tragic!

It made me think of similar tragedies:

  • Mercedes and BMW drivers trapped in lease contracts, rather than buying their cars with cash or credit
  • Individuals trapped in wage and salary contracts, rather than raising the capital, arranging the inputs, and bearing the uncertainties to be sole proprietors
  • Companies trapped in outsourcing agreements, rather than owning all upstream and downstream production processes directly, as vertically integrated firms
  • Vacationers trapped in resort hotels, rather than owning their own vacation condos or timeshares
  • Readers trapped by downloading and reading books on their Kindles, essentially “renting” them from Amazon, rather than buying physical books
  • Movie fans trapped in DVD rental agreements with Netflix, rather than owning massive DVD libraries

Don’t these suckers know that goods and services should always be purchased outright, rather than rented or borrowed?

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4 Comments Add your own

  • 1. Elena Kosmopoulou  |  31 July 2013 at 3:17 am

    Although, I find the observation interesting one can consider on the other hand, that
    – a company can be trapped into an expensive investment that proves very costly as markets change
    – books and DVDs require space to be (and even delivery time may be important), and
    – the leasing a car spreads the cost over the period of several years and, depending on the country and specific accounting standards, it is easier to process a lease in the company accounting (and taxation), and one does not have to deal with the process of the sale of a second-hand car in the end.
    My point is not about glass half-full or half-empty. The pros and cons should of course be carefully weighted, but more importantly I want to point out that the above cases are all excellent examples of…new products that consumers as well as institutions have to adjust to.

  • 2. Peter Klein  |  31 July 2013 at 8:19 am

    Yes, that’s exactly my point. All these options have pros and cons. None is a priori “superior” to the other. But 99% of the commentary on housing markets assumes that owning is superior to renting.

  • 3. Kenneth  |  8 September 2013 at 9:32 pm

    Well, it might be a better idea to simply borrow a book from the library, read it and then return it. That’s pretty much the definition of a shared economy. As far as leasing high end vehicles goes, the individuals simply cannot afford the image outright, so they lease the perception of wealth and success instead. It makes sense, because they do not want to hold onto a depreciating asset, but to appear driving the latest model vehicle every other year or so. As far as homes go, once they’ve gone through a foreclosure, lenders are a lot more skeptical of their ability to pay back the loan, therefore they are going to be tenants until their credit scores are squared up.

  • […] via “Trapped” in Rental Contracts | Organizations and Markets. […]

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