First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again.
Next, an 800 sq. ft. apartment isn't equivalent to a 1000 sq. ft. house with a yard. If you really want to cheap out on a house, get a mobile home -- though of course that doesn't include land, which is often leased.
Further, in this example, it assumes you have the difference between the two prices free and clear to invest -- you'll certainly need to make sure your investments do well, because at the end of 30 years, you aren't going to be a homeowner, and will still need a place to live.
Not to mention, pets are typically a problem; you're at the mercy of your landlord; the rent can be increased at any time; you have to deal with shared walls with neighbors; and your 6% return is not going to seem very exciting in 5 years when housing picks up again and that $400k house is worth $800k. It WILL pick up -- the country isn't becoming LESS crowded.
Your monthly investment amount will decrease every year as your rent gets increased, meaning your return is not going to be as good as depicted, especially if wages stagnate (as they effectively have in many sectors for the last 8 years). At 5% rent increase per year, you'll eventually be paying around $4000 for that same apartment in 30 years. Around year 20 the apartment costs more per month than the house. (This is a great area, remember, so the demand will be high. In some areas the rent can jump by 20% in a year instead of 5%.) This would mean you'd do significantly worse than if you bought the house.
The basic premise of this article is really "what if you live cheaply and invest your money vs. what if you spend all your money on housing and your house appreciates more slowly than an index fund".
Step 1. Live in your parents' basement for 30 (more) years.
Step 2. Invest the WHOLE $2400 per month on an index fund.
Step 3. Profit!
As you can see, the article ignores things about having your own house that are nice -- like a stable place for people to visit since you don't move every few years to cheaper places; not being at the mercy of parents or landlords; having a yard; not having to obey "quiet hours", and so forth.
I agree, the article ignores many positive aspects of homeownership. However, some of the points you make are poorly founded. For instance, there's no guarantee a 400k house in Sacramento will be worth 800k in five years, solely because US is becoming more crowded. It's a bold claim. Also, the idea of being at the mercy of your landlords is weird. In markets with a lot of excess inventory, some landlords can't find tenants. This puts them at the tenant's mercy. Second, if you own a house, you can be at the mercy of the bank, or the local home owner's association, or some such.
Some points are good, though; if one takes out a fixed-rate mortgage, payments are fixed and will become less painful as inflation makes them smaller in absolute terms.
> For instance, there's no guarantee a 400k house in Sacramento will be worth 800k in five years
Sure, but based on historical events with housing in "great" areas, this can and does happen. If you buy right before a bubble, it can even happen sooner -- in a couple years. A 6% fund is not going to even have the chance to do that.
> In markets with a lot of excess inventory, some landlords can't find tenants.
A given, per the article, is a "great" area. Great areas are always in demand. I have not yet lived in an area that lacked for tenants.
Sure, but based on historical events with housing in "great" areas, this can and does happen. If you buy right before a bubble, it can even happen sooner -- in a couple years.
If you buy a good stock right before a bubble, you can double your money quickly, too (ask me about INTC or CSCO or AMZN in 1998). The point is, what's going to happen under likely circumstances? More importantly, what's going to happen in a rational market?
Home prices are coming down from the largest asset bubble in US history. If you've never thought about homeownership before 1995 or so, you might assume that home prices always increase by at least 5% per year. You'd be wrong, however. Homes in the US are historically an under-performing investment; over the long-term, their returns approximately match the rate of inflation.
There are exceptions to this rule, but I think that the parent comment is generally well-taken: it's not guaranteed that your home is going to double in value in five years. (In fact, in some parts of the country, there's a real chance that your home will be worth 50% less in five years' time.)
> The point is, what's going to happen under likely circumstances?
In high-demand areas, it's likely housing prices will see another bubble.
> it's not guaranteed that your home is going to double in value in five years.
We're all in agreement on that.
The point I was making is that real estate bubbles recur and so there's always the possibility of a large, rapid gain, which doesn't happen with mutual funds (correct me if I'm wrong there).
> In fact, in some parts of the country, there's a real chance that your home will be worth 50% less in five years' time.
The article specifically stipulates a "great" area. So we're not talking about parts of the country that aren't in demand. :)
Ok, that makes much more sense. As I said in my earlier comment, his ratio seemed really far off.
Sacramento must have been hit pretty hard eh? I looked there 2 years ago and seem to remember prices being considerably higher. I was looking at a new 2 br attached for about $350k in East Sac.
"It WILL pick up -- the country isn't becoming LESS crowded."
That's less important than the fact that the country is getting richer (despite wage stagnation). Poorer people can lower their expectations for safety, space, etc, but the richer you get, the more you want. I moved from 800sf in an old high rise to 1000sf in a suburban apartment complex to an 1800sf house within 2 years as I got out of school and my income increased. I could save 60% if I had stayed in my apartment, but I'd rather pay extra.
First, the rental value doesn't take into account inflation. House payments are fixed, which means it gets effectively cheaper every year. Meanwhile, rents keep increasing. This means that while you can catch a house at the bottom of a bubble and lock in the price, if you rent in that same area, you'll find rents going way up when the housing bubble rises again.
Next, an 800 sq. ft. apartment isn't equivalent to a 1000 sq. ft. house with a yard. If you really want to cheap out on a house, get a mobile home -- though of course that doesn't include land, which is often leased.
Further, in this example, it assumes you have the difference between the two prices free and clear to invest -- you'll certainly need to make sure your investments do well, because at the end of 30 years, you aren't going to be a homeowner, and will still need a place to live.
Not to mention, pets are typically a problem; you're at the mercy of your landlord; the rent can be increased at any time; you have to deal with shared walls with neighbors; and your 6% return is not going to seem very exciting in 5 years when housing picks up again and that $400k house is worth $800k. It WILL pick up -- the country isn't becoming LESS crowded.
Your monthly investment amount will decrease every year as your rent gets increased, meaning your return is not going to be as good as depicted, especially if wages stagnate (as they effectively have in many sectors for the last 8 years). At 5% rent increase per year, you'll eventually be paying around $4000 for that same apartment in 30 years. Around year 20 the apartment costs more per month than the house. (This is a great area, remember, so the demand will be high. In some areas the rent can jump by 20% in a year instead of 5%.) This would mean you'd do significantly worse than if you bought the house.
The basic premise of this article is really "what if you live cheaply and invest your money vs. what if you spend all your money on housing and your house appreciates more slowly than an index fund".
Step 1. Live in your parents' basement for 30 (more) years.
Step 2. Invest the WHOLE $2400 per month on an index fund.
Step 3. Profit!
As you can see, the article ignores things about having your own house that are nice -- like a stable place for people to visit since you don't move every few years to cheaper places; not being at the mercy of parents or landlords; having a yard; not having to obey "quiet hours", and so forth.