The problem with comparing housing prices to the stock market is that if I were not putting $2500/mo into a mortgage, I'd be putting it into rent, not the stock market. So the comparison might work for a second home purchased strictly as an investment, but it's not really on point for a primary home that you will be living in.
If you're comparing rent vs. buy, typically: 1. rent is less than a mortgage, and 2. to buy you need a substantial down payment. The "rent discount" is what you'd put in the stock market for the purposes of these comparisons.
I think your model here oversimplifies and misses some of the key details.
In more detail, you need to consider that your mortgage is going to be more expensive than rent, so if you're renting you have an extra $X/mo to invest in the stock market. Plus you have your deposit $Y that you'd invest in the stock market as well. Then you need to make your prediction on what the growth rate per annum of stocks vs. real estate is going to be, and compound your investments accordingly over time.
Why do you say this is typical? It depends on what you rent, of course. If you rent a house that was purchased a long time ago, it can be less. But a lot of rentals are in apartment complexes, and are newer and more expensive per square foot than equivalent purchases. I also think typically rental units are smaller than houses for most people, so I wonder whether you're really comparing apples to apples. Consider that for any given house, rent must cover the owner's mortgage, so it cannot be less than the purchase costs.
> if you're renting you have an extra $X/mo to invest in the stock market.
People usually use the down payment as the capital opportunity cost that you can invest as an alternative to buying a house. My question is this: statistically, how many people actually do it and make better returns than buying a house? It's one thing to talk about it being possible, and another to actually do it. I don't know how to consistently make better returns investing than I've made on my houses, and I'm not sure I have the energy to stay on top of it every month. Note your suggestion to invest instead of rent involves monthly adjustments of your investments.
It looks like I'm just mistaken on this one, it seems that in some markets rent is cheaper.
I think you're right that it's not apples-to-apples though, I suspect that median rental stock is typically less well maintained than it would be if it were owned, in the markets where rent is cheaper. I think most people are indexing their price point on things like square footage, yard, location, etc., and not necessarily all of the factors that contribute to the cost of ownership to the landlord.
> Consider that for any given house, rent must cover the owner's mortgage, so it cannot be less than the purchase costs.
While this is true for owners that buy with a mortgage and then rent the property, I don't think this logic works in general -- it's not uncommon for the owner to own the property outright; this could be an individual that inherited a house or paid off their mortgage, or a large company where they are investing capital in houses instead of borrowing (e.g. a REIT); in that case you have a target yield to clear, but no "mortgage costs" per se.
> I'm not sure I have the energy to stay on top of it every month.
The standard recommendation here is to put your money in an index tracker, which has very low fees and essentially replicates the performance of the S&P 500 or whatever market you want to track. https://investor.vanguard.com/etf/profile/performance/voo would be one.
Anyone who bought the S&P and held it for 10 years made about 14% YoY (more like 10% if you take the last 30 years), and that's not considering the liquidity premium (i.e. you can exit your stock position whenever you need to, whereas selling a house takes time and effort).
> Anyone who bought the S&P and held it for 10 years made about 14% YoY (more like 10% if you take the last 30 years)
Anyone knows a study with other than US markets where they compare local index stock performance with housing cost? E.g. Switzerland, Eastern Europe, etc.
This is highly variable. From what I've heard this is usually the case in the USA, while in Europe renting is often much more expensive than a mortgage on a similar home.
Agreed. Even in the USA, from what I've seen, if you put a 15-20% down payment towards a home in a strong rental market (or what used to be), the mortgage will be less.
I moved into a residential development about two years ago, and people were buying houses and renting them out nearly immediately. Not sure what they pay on it, but for my scenario, renting the equivalent was about $200 more per month than getting a mortgage (taxes, maintenance and all). And the difference was increasing right up until the pandemic happened, not sure where it stands now.
If you're willing to put a solid down payment into a home, you can pay less than rent would otherwise be, it's just a matter of how much.
Where have you heard that it is usually the case in the US? I have put money into two different housing markets (Dallas-Ft. Worth and northern New Jersey) and it was not the case in either.
I'm wondering if this is a "mortgage payment amount" vs. "total cost of ownership" difference? Not my area of expertise, but a quick search gives some conflicting and unspecific articles like:
Or in your experience in these markets are you seeing rent above the total monthly cost of ownership?
When I'm saying "mortgage is more expensive" that's really a lazy shorthand for "total monthly cost of owning a house including HOA and maintenance", not sure if that was clear from the context.
From my small sample size I'm seeing around ~500$ / month (33%) more for renting vs what you'd pay on a 30 year mortgage. This difference might be covered by total costs of ownership, but according to the nyt rent vs buy calculator, you'll only be better off renting when looking at a time frame of less than ~5 years.
Greensboro, NC is on that list (which would fall in the more remote category) and the same still seems to apply. Not sure if my numbers are right, but a 2,000 sqft house from the 60s is being offered to rent for 1,500$, which is kind of ridiculous imho. Property value should be around 200k, with a monthly mortgage <900$:
agreed, variable. Lived most my life in Southern California. I've seen rent being both cheaper and more expensive than a mortgage. For a long while, the mortgage was a much better monthly payment; folks without a down payment were locked out of mortgages and stuck paying higher rents.
Looking at my flyover state on craigslist + zillow, a random house I picked rents for $1.4k/mo and has an estimated mortgage of $1.5/mo. Your rent "savings" would be $100/mo and ignoring cost of maintenance if you mortgaged.
> If you're comparing rent vs. buy, typically: 1. rent is less than a mortgage, and 2. to buy you need a substantial down payment. The "rent discount" is what you'd put in the stock market for the purposes of these comparisons.
This varies by location, no doubt. My mortgage was the same monthly cost of my rent, when I bought my first house. After the tax benefits, it was less expensive, though a wash once you factored in maintenance. And it was a fixed payment, whereas the rent was increasing every year.
You can't just compare it that simply, use the NYT Rent/Buy Calculator for a more in-depth analysis. [1]
Renting is generally cheaper than buying, especially in very high COL areas like the SF Bay Area, NYC/Manhattan, etc...
Most people don't consider all costs associated with buying a house which include closing costs (when you sell as well, renting has no such costs), property tax, maintenance, insurance, HOA, etc...
That's not 'generally' true, unless youre cherry picking data or buying expensive houses. If that was true, then landlords wouldn't be renting their property out. The standard landlord advice (from any real estate book) is to charge more for rent than your mortgage costs to cover unexpected repairs. Also, several deductions for tax, maintenance, repairs, insurance, etc exist making it even cheaper. https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductio...
I agree with you that owning a home is expensive and I caution friends from buying a home if they're not sure they want to live there for 5-15 years. The hidden costs are insane. Renting has a mostly stable price without the massive emergency spikes of making roof or foundation repairs.
Yes, you're correct, I'm mainly referring to California as that's where I've been living for a good chunk of time.
Prop 13 "locks in" your property tax rate with measly 1-2%/year increases and there is barely any new construction, restricting supply. What this means is that a lot of landlords in CA have super low mortgage/property tax costs because they bought a while ago and they can "afford" to charge a low amount of rent because their costs are so low.
The biggest factor for me in regards to buying is the mobility that I need, especially while I'm young and uncertain of where I want to settle.
> Most people don't consider all costs associated with buying a house which include closing costs (when you sell as well, renting has no such costs), property tax, maintenance, insurance, HOA, etc...
100%. I was in escrow on what would have been my first home purchase. The amount of money that goes into just buying a house was insane.
After the sale fell through I ran the numbers for my parents home and much like the article says over the last 25 years or so they made next to nothing or maybe even lost money after interest, taxes, upkeep, etc even though the cash value went up over 30%
> so they made next to nothing or maybe even lost money after interest, taxes, upkeep, etc
Don't forget that you can "lose money" on a house and still be basically ~100% ahead of where you'd be if you had rented. The only way that renting actually comes out ahead is if you're actively and aggressively investing amounts larger than your would-be down payment, and making consistent profits for the duration that are larger than bank loan interest rates.
FWIW I'm on my 2nd house, and the costs listed have never felt like they change the balance of the equation at all. I don't have HOA, most people don't (unlike all the other costs listed, HOA is a choice, you don't have to buy into a neighborhood with HOA dues). The other costs are somewhat in the noise. Closing costs are a one time thing, think of them as part of the purchase price, nothing to think about later. Tax and maintenance are ongoing but not very large (and don't forget rent is also paying tax and maintenance, bundled). The biggest additional costs of owning a house for me have been remodeling, but so far those have come back to me with returns, in the form of a higher sale price on the house.
If you don't have savings for a down payment, and are renting, then there wouldn't be a difference. But if you've saved/invested money instead of putting it in a down payment, you could probably expect returns on that.
I generally do that, does the bank still have you Cosign? I put properties into an LLC and always need to cosign on the note. I was under the impression that putting 20% was mandatory for investment properties if you're getting a note from a traditional lender (ie bank, not the mob)
That depends on the bank and the structure/finances of your LLC(s). If your LLC already has a good business relationship with the lender and enough assets, you can get them to skip this.
Also you don't have to put down 20% if you're willing to pay PMI and a bank is willing to lend to you, but to be competitive some banks are foregoing PMI (likely self-insuring the mortgage? Not sure how they can but I've seen it done)...which is craaaaazy to me.
Ah, I missed the context. I was speaking from the standpoint of investment properties. If you're buying a place to live in, then, agreed, you don't need 20% down. I think there are some products with 0% down.
Privacy, potentially. House sales are public records and anyone willing to pay $30 can track you down.
If you have a Wyoming LLC holding company (which are effectively anonymous when paying for a registered agent service) that owns & manages your in-state LLCs, then good luck finding you. This is generally how celebrities hide from stalkers, etc.
This is also beneficial when you're managing your own properties that you rent out. Tenants that know you're the owner will try to walk all over you. When you just tell them that you're the property manager, you're just enforcing the owner's wishes. You're "just the middleman". It's not their business to know that you're both. This also helps protect your separation of your business entity from yourself if for some reason they have to sue your LLC. If you don't represent yourself as the owner (because your LLC is), you have fewer problems to deal with.
Also, taxes like the other poster mentioned.
Plus if your life circumstances change and you want to turn your home into a rental, you're going to want to do this anyway and not having to sell your home to your LLC will save you a chunk of cash.
Taxes for one. Everything you do for the home is a write-off assuming you have other income rather than an out and out loss. Water heater? WRITE OFF! New roof? WRITE OFF!
The difference is that the $2500/month (+ renters' insurance) is a non-sticky ceiling (percent increases notwithstanding)
whereas the ($2500-n)/month for your mortgage is a stickly floor.
In most apartments and houses, $2500/month accounts for property tax, maintenance, and other
ancillary and unpredictable expenses. Anything out of the ordinary is covered by renter's insurance.
If you get an awesome job opportunity somewhere else that significantly increases your compensation,
at best you can hot-swap to the new place for no extra cost; at worst, you pay 1x rent to break the
lease.
The ($2500-n)/month for a mortgage doesn't include those things.
You could get homeowner's insurance, but the quality of that coverage is all over the map and
usually have high deductibles anyway. This is an unpredictable cost. (I suppose you _could_
add the deductible into your monthly budgeting, but it's still unpredictable for uncovered events.)
If you need to move for that opportunity, you either have to rent the house out and hope that your
tenants don't trash the place, or you have to sell it, which can take a long time.
Then there's property tax, which increases yearly by an unknown amount, just like rent.
One thing that I think you might not have considered is that wjile $2500 in rent does include the things you mentioned it is on top of the cost of the space itself. The landlord probably pays $1500 in mortgage.
I have considered this. Landlord (property management company in this case) makes margin on the difference between my rent and their mortgage, but they also assume the risks that come with that (leaky ceiling, structural issues, rework from bad tenants who trashed the place, etc). That’s what I meant by “sticky floor” vs “non-sticky ceiling”.
There’s money in it for sure, but it sounds like more trouble than it’s worth (for me).
I used the NYT calculator and eventually came to the conclusion that renting beat buying in a MCOL area (Kansas City.)
I live in the city center with my SO, rent is $2100 split 2 ways for a 1500sqft 2/2 in a nice building with a rooftop pool. There simply aren’t comps that can compete in terms of location, size, and amenities that don’t also have a $1200/month HOA and $900+/month taxes, interest, and insurance. In 5 years rent has gone up $50, meanwhile my 401k and other investments have maintained 10% year over year returns and I could now afford to outright buy houses and condos I was interested in 5 years ago. Or I could move out to the ‘burbs on a $600-900/month mortgage.
Now, if only I could work somewhere that I felt like I was changing the world in ways I’m more interested in (high tech vs automotive), I would feel less pull to uproot in my mid-30’s for a place where Google or Amazon are hiring.
There’s a lot of other points that work in different ways.
A mortgage has extremely low flexibility, it’s not something you’re able to diversify and you’re stuck with for a decades at times depending on your situation.
Also most predictions are based on people never ever moving around, which was the norm for a while. Nowadays it’s not crazy anymore to change country, or to at least move around depending on opportunities or life changes.
In these occasions, changing renting places is a matter of paying an extra month or two. Switching a mortgage will be a magnitude more in general.
We played that game with an apartment we bought, the different costs we hit at every corner wasn’t anything trivial or accounted for in most “why you should buy” listicles.
Propensity to move in the USA is actually _down_ recently (I supposed with the exception of the bay area right now). The USA is still by far the most frequent relocating nation - but it's way less then it used to be:
Exactly. We just bought in the greater DC area and our mortgage payment is is only $500 more than our previous rent for a house that is much bigger/better. Given that $900 of our mortgage payment contributes to equity, we are throwing less money in the trash than before. Also, I have essentially frozen the amount I have to pay for shelter for the rest of my life (except for property tax and insurance increases). Even if our house never appreciates, it still made more sense to buy than rent.
The above only applies if you are very sure you want to stay in the same house for the long term, otherwise the high cost of real estate transactions will kill any advantage.
> we are throwing less money in the trash than before.
This phrasing needs to die. You weren't throwing your money in the trash, you were exchanging it for a place to live. There's a big difference between throwing money away and using it to not be homeless.
The thing is you still "throw money away" in owning a home through maintenance, see the 5% rule: https://www.youtube.com/watch?v=Uwl3-jBNEd4. There are large, unrecoverable costs in upkeep of a home. You will have to replace the roof in 15-20 years, just to have it not go to crap. That's $20k with no actual improvement to the home. Plumbing, outdoor siding, and so on. These would normally be covered by rent.
Property tax is bundled into our mortgage payment, so even after considering the 1 % maintenance, our large house and yard worked out cheaper per month than our small rental condo and balcony. Unfortunately, we just had to replace our roof in Sept, but it only cost $6k (despite multiple quotes in the $15k range).
I will acknowledge that owning a house is sometimes like having an extra part time job. I'm forever fixing little things or gardening or changing things about the house. I consider this to be a new hobby, but if you consider it work then that's something else to consider.
edit: I put our loan details into the NYT calculator and it said "If you can rent a similar home for less than... $1,618 PER MONTH... then renting is better." That might get you a 1 bedroom condo around here, instead of a 4 bedroom house with a yard like we got.
> I will acknowledge that owning a house is sometimes like having an extra part time job. I'm forever fixing little things or gardening or changing things about the house. I consider this to be a new hobby, but if you consider it work then that's something else to consider.
This is good to know and confirms what I've noticed about homeowners. I hate maintaining stuff, whether it's my car or my furniture or whatever, and I only do it if the time/money tradeoff is worth it. Some homeowners seem delighted by it though, crafting their own castle and the like. Do you have time for other hobbies that are "big" with these tasks?
Very much so. You’re not only getting housing, but you also have an asset that you control that appreciates in value year over year. And what do you want to own and control in a zero or negative interest rate policy environment? Assets.
Of course, we can also mention that overall those changes less than growth of S&P, that you pay taxes for that (not for growth, for value) and that you're bound to spend a non-insignificant amount on supporting that asset. Tax and maintenance - and maybe insurance - are all eating from the value of the asset.
Outside of a few rare events, real estate has reliably appreciated historically. Like any investment, certain geographies have seen a decline in value, but overall it is as good, if not better, than equities as an appreciating asset depending on your investment objectives.
Pages 3-4 specifically, but the whole paper is excellent. RE has returns that are reasonably (imho) similar to securities over the long term, low volatility, and you need to live somewhere (although you might see greater returns in the capital markets depending on your entry/exit points [1] and risk tolerance).
I’d caution that recent equities returns are very likely an outlier, part central bank easing, part yield chasing, part unsophisticated money, and arguably unsustainable.
I think the article is about the opportunity cost of the down payment. Since compound interest is so powerful it will usually outpace the house in value after 20 yrs or so. Plus where I live, renting seems to be cheaper for equivalent houses mortgage. Maybe cause everyone has rushed to invest in real estate and is renting out vacant homes. If hypothetically houses outpace investing in businesses, we will eventually run into a problem where no one can afford a home no? Also part of your payment in your numbers there goes towards interest so it slightly weakens your argument.
In addition, if you are buying the second home to rent out, then you have to add the rental income as a return on investment. In practice any form of ownership to use yourself is avoiding a form of paying rent, and any ownership not meant for personal use usually involves receiving rent. That’s the thing with property, it is as much a service as an asset, and you can’t make a fair accounting without taking the service side of the equation into account.
Another problem is that people who buy a house for $1M don't have that amount laying around in cash to choose to put it in stocks or in a property. At the end, they will be making more money because their compound interest will be on the entire price of the house $1M vs the S&P compound interest on the amount they have in cash (a fraction of the $1M).
There are other considerations as well. If renting is cheaper than buying (for a given unit size / location), it might make sense to rent and invest in the market. There is a great NYT calculator for this, but it is behind their paywall:
This argument isn’t as solid as it sounds, mainly because you have to live somewhere. So you’re going to need to pay rent and you need to subtract that off the profits from S&P investments.
You also generally can’t borrow 5x your income and invest it, but you can do that on a house, so if you think house prices will rise, even a tiny bit, then you’re missing out on a chance for major leverage you won’t get elsewhere. Hint: house prices don’t really go down much, because everyone is leveraged and literally can’t afford to sell below a certain point.
Finally there’s something to be said for the security and ability to make a house your own. Not being dependent on a landlord’s whims and decisions can be of huge value.
Moreover, if you use leverage to make an investment in stock (say) and the stock market temporarily goes down enough, you can get hit by a margin call and go broke. With a house, when the housing market goes down, it is an inconvenience (e.g., it can be harder to get a home equity line of credit or refinance your mortgage), but there's NO automatic "margin call" as long as you can pay your monthly payments. For people with limited capital, a leveraged investment without any possibility of a margin call is very valuable. I'm glad I put my money into buying a house.
>You also generally can’t borrow 5x your income and invest it, but you can do that on a house, so if you think house prices will rise then you’re missing out on a change for major leverage you won’t get elsewhere.
I've been struggling with this part. I just moved to Austin, looked at the market from 2012-2020, and what do you know almost every house I look at has doubled in value in 8 years. That's a 9% annual return! Shouldn't I get the biggest house I can afford since the city is growing so fast?
Well not so fast. I have to subtract from that about 3% for interest, 2.5% in property tax, 1% for maintenance. Not to mention HOAs, PMI, insurance, etc. I might end up making 2% annually compared to 7% in the stock market and that's only if I see the same returns as the most cherry picked period I could possibly find. Anything less and I'm absolutely losing.
I agree on the you have to live somewhere part, but treating it like an investment seems like a bad bet.
>I have to subtract from that about 3% for interest, 2.5% in property tax, 1% for maintenance.
... but then you'll also probably (if you're like the average HN poster who isn't taking the standard deduction) deduct your mortgage interest and your property taxes, and you'll be exempt from up to $500,000 in capital gain if married, filing jointly, and using the home as your principle residence.
> I have to subtract from that about 3% for interest, 2.5% in property tax, 1% for maintenance.
You need to subtract those anyway, as they are baked in to your rent payment, though the interest will depend on the landlord's circumstances.
A note on property tax, though, which will complicate the comparison even more than my sibling commenter already has:
Home values are reassessed in Texas every three years, not annually. This means your taxable value is locked in for three years, and the only way your bill can go up or down is if a taxing authority changes their rate.
Additionally, in this period, a house appreciating at an average of 9% per year will appreciate at an average of 29.5% per assessment period. Texas homestead protection, which you can get and your landlord can't, limits the increase in taxable value per assessment to 10%. So, if you were renting that same property you would be eating a larger increase in rent every three years than the increase in property tax if you owned it yourself.
My family is currently renting the top floor of a regular suburb North Vancouver house and we were hoping to buy the last 2 years to be settled & stable as my daughter started kindergarten this year.
If our landowner decides to sell we would only have 3 months to find a new place and could definitely cause us to have to move my daughter to a new school.
The lack of stability and the unknown future in our housing situation is causing a lot of stress our relationship too.
You can easily access 3X levered ETFs. Also, while you start out at 5X leverage, you pay down the principal over time. Over the lifetime of a 30-year mortgage, your average leverage is closer to 2X.
Mortgages are so f* insane when you do the basic maths, such as 1/downpayment to get the leverage. If you just presented the numbers differently nobody would have ever signed up for one except people like Victor Niederhoffer.
And on top of that most of the underwriting is on central government balance sheet via frankenstein constructs like fnma.
Also in Canada the capital gains on your "primary residency" is tax free.
I know "lucky" Vancouver couples who bought the right property at the right time and it is equivalent to winning the lottery. i.e. $600K capital gains in just 2 years.
The inequality created by having huge winners in "hot housing markets" acquiring enormous wealth vs others in flat or down housing market receiving absolutely nothing (not even mortgage interest deduction which isn't available in Canada) is insanity in my mind.
> Hint: house prices don’t really go down much, because everyone is leveraged and literally can’t afford to sell below a certain point.
Until something like a 2008 happens, and it doesn't matter how much people can afford to sell a house for, they're gonna lose it regardless if they can't make those ballooning payments.
Right but that won’t affect a sensible buyer who has one property, accessible savings covering a year of repayments, a stable job, a fixed rate etc. You can just wait for the market to rebound.
Or even better, provided you’re not in negative equity and have some cash in the bank, move up to a bigger house when the market crashes.
Yeah, in the climate since 2008 I know a fair few people that are paying less in mortgage payments than they'd be paying in rent for an equivalent property.
No one should buy a home they intend to make their primary residence purely for investment reasons. But if you are settling down with kids, and don’t intend to move for 5 or more years, then having a stable home with a mortgage payment you can afford is a completely rational decision. There are significant tax benefits to owning a home, and after 5 years you don’t have to pay capital gains taxes on your first $200K (?) in gains from a sale, which is pretty huge.
If your primary goal is just to realize some ROI there’s plenty of other asset classes that are much more liquid than residential real estate.
If you are addressing a global audience, it is difficult to make statements about taxation that generalize well. I'd say even within one jurisdiction, individuals have vastly different profiles and optimal tax strategies.
Conversely, interest rates are low in all wealthy nations and anybody can buy the S&P500
> It's almost impossible to go out with friends nowadays without having a conversation about buying a home.
Posted December 10th. 2020?
However you read this (callous about a worldwide pandemic or meaningless, spammy marketing speech), that is effortlessly the one opening sentence after which to disregard any opinion of the author's.
Many, many people have been re-considering their living situation in the face of a pandemic, with a lot of their assumptions being temporarily or permanently broken.
I would have liked to interpret this as very tongue-in-cheek too - but as the author didn't drive that point home any other way, I will have to go with "the intended no humor at all in the first place".
I'm confused – do you think people are talking about getting a home less in 2020? I know that many of my friends were previously paying crazy high rents in various metropolitan areas and I know two that have already purchased houses in much smaller locale's because it made way more economic sense.
While I agree with the overall thesis that housing prices are currently overvalued in many areas, there is a lot to this analysis that I don't like because it paints with too broad a brush. E.g. it kicks off with:
"Housing market returns are very bad. Between 1948 and 2004 the real increase in value in the U.S real estate market was less than 1% a year."
While that may be true nationally, as they say in real estate: location, location, location. There is huge variation in real estate prices, and that 1% average masks giant gains in some areas and enormous losses in others.
The thing about real estate is that a desirable, greatly supply-restricted asset is always priced at whatever the top earners in an economy make. That's why real estate with unique, constrained features (e.g. waterfront, city center, etc.) has appreciated unstoppably, while there is a cap on price appreciation for easily-replicated homes (can always build another suburb further out in Phoenix).
Thus, blanket statements of "don't buy a home" are ridiculous without more context of exactly which home it is you plan to buy.
I bought a house 5 years ago for a couple of reasons.
1. I have to live somewhere.
2. I was tired of living in an apartment, and my mortgage is less than what rent on a comparable house would be.
A lot times I see people mention that you are better off putting the money into an S&P 500 fund. However what they don't account for, is that you have to live somewhere. So you either pay rent or pay a mortgage.
Also you don't have to put down 20%. With an FHA loan you can do as little as 3%. You will have to pay PMI, but if you in a market with decent appreciation you can get rid of that in a few years.
I agree that buying a home is not for everyone. If you like to move around or don't think you'll be saying in an area for 5 to 10 years, you are better off renting. Also if your financial position is not where you can afford to deal with unexpected repairs, you are probably better off renting. I also don't think you should buy a house as an investment. That just leads to over extending yourself. Instead you should buy a house because you want to live there.
My wife and I bought our home for a simple reason: we wanted to own our home and not be beholden to a landlord. We placed the value of that higher than "but you'll make more money by renting", etc.
When we decided we hated the look of the kitchen, we tore it out and replaced it. We'll get to keep any increased equity (questionable, sure) that we made for doing so. My wife is giving the bathrooms a similar look lately, so I suspect she has plans to gut them as well.
Nobody can tell us "no" (to an extent). That's a kind of freedom I'm willing to pay for.
This seems to be the defining factor of homeowners: they like the idea of owning. They are also open to having home maintenance/renovation become their main hobby in life. If you have large, nontrivial hobbies, adios to those for a few years.
I bought a house in Q3 2012 because I thought I was settling down in the area, and then ended up moving away 18 months later after unexpectedly getting a Google job offer that was too good to pass up then and in hindsight now after promotions and raises was unbelievably too good to have passed up. I still own that house and rent it out through a rental agency, but that's definitely not the best return on investment on that money (it's not the kind of property you would've bought if your goal was to maximize return on investment).
I would own a home again some day just because there's things you can do with a property you own that you can't do when you rent, but I definitely wouldn't be approaching it as if it were an investment like I did in 2012. I'd be financially better off (admittedly to an insignificant degree) had I not bought that house, and I certainly put a lot more of my time and effort into it in those 18 months than I would have if I'd continued renting.
I agree with most of the analysis. But for the average person the biggest advantage of a mortgage is that it's a form of forced disciplined investment.
A mortgage requires you to make an upfront downpayment and then recurring monthly payments into a durable asset. You could put them same amount into equities, but 90% of people won't have the financial discipline. And even of those who do, the average equity investor gets skittish and tends to panic-sell at the bottom, missing out on huge accumulated gains over time.
For one thing selling your home is a lot harder process than pressing a button. For another you don't get a constant stream of updated marked-to-market prices. If you're a perfectly rational, even-tempered homo economicus, then low-fee index fund is a much better better deal than real estate. But there's a reason why historically home ownership has created much more middle-class wealth than stocks.
I do think the cliche about "throwing away money" on rent is wrong and ignores how much of what you pay for a house is for things like interest, insurance, repairs, maintence, property taxes, etc -- but for me home ownership made sense, mostly due to expected length of stay in the home. There are also benefits, of course, that aren't dollars, to either renting or buying. For example, a homeowner may like additional freedom to change the flooring.
I think the usefulness of that calculator can't be overstated. It was incredibly helpful when I was making my decision to buy. Unfortunately now it's biased a bit more towards home ownership compared to reality. It doesn't incorporate changes in tax law like the $10k SALT cap, mortgage interest cap, income tax brackets shifting, etc. I keep hoping that the NYT will update it someday. Maybe after a few more years of wishing I'll just make my own calculator.
If homes appreciate by 1%, the market averages 8% (taking the article as given), but rent's going up 10% yearly, I'm not sure the numbers still work out in the writer's favor. The market doesn't just have to beat real estate, it has to beat Cost of Living.
Another potential problem with this analysis that weighs toward buying is that it doesn't take into account leverage. If the home appreciates 1% in the first year but you only put 10% down, then your equity has effectively increased by 10%.
On the other hand, you also have to consider that owning a home doesn't remove your ongoing housing costs. In San Francisco, the only options in my conceivable price range and preferred parts of town are condos, which come with eye-watering HOA fees. And no matter where you are, you have to pay property tax and upkeep. With Prop 13 in California, if I were to buy something similar to what I currently rent, even if I owned it outright, my monthly payments would only slightly decrease. My rent right now is covering the owner's HOA fee and property tax, but most profit they're getting (beyond appreciation) is basically tax arbitrage: the landlord has owned it long enough that their tax burden is much lower than what it would be for me.
NYTimes put out a calculator a few years back that I usually refer to (https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...). It forces you to take into account all these sources of ongoing costs on both sides. Paradoxically, in some of the most expensive metros (SF, Manhattan, etc.), renting is the better option with reasonable estimates of stock market performance, because even though the rent is much higher than the rest of the US, purchase prices are relatively even higher.
It mentions leverage in the article and the other side, being that leverage allows you to get in a much larger hole than otherwise possible. With transaction costs, you are immediately underwater from an investment standpoint.
the market returns are after transaction fees (negligible for ETFs, very significant for real estate) and maintenance - house prices might well increase, but you have to take construction/refurbishment spending into account.
The older the house, the more money you'll have to spend on upkeep - stock prices are driven by future profits, so investments required to maintain the business are already taken into account.
This argument falls into the trap of comparing the average home to the stock market. If I was primarily concerned with returns, I would never buy the average home. That would be a home in the middle of nowhere. I would only buy in major metro areas with diverse, heavily entrenched industries and a strong desire among people all over the world to live there (places like NYC). If you look at the numbers in those places, the story is very different. On home value alone, you see appreciation of 8-12% per year on average since 1990 (despite at least three recessions during that time). Covid will impact the desire to live in major metro areas but not enough to seriously impact these returns.
If I wasn't concerned primarily with returns and instead on just saving money over renting, the math is still way better in any of the top metros in the United States so long as you plan to reside there for 5+ years. And if you aren't living in a major metro, you still need to find a place to live, so you might as well make 1% annually on that money as opposed to just giving it away in the form of rent.
In my experience, renting makes sense when you need to pay for flexibility, because you aren't sure if you will stay rooted in one place for 5+ years. Otherwise, buying for many people is a win financially and has been for decades.
One thing that's often left out of these cost/benefit exercises is that owning your home is a good hedge against being priced out of the area in which you want to live. If housing prices surge and you're renting, then you might not be afford to continue to live in your rented home, and so you might need to move; insurance against this sort of disruption is worth more than $0 to pretty much everyone and so it should be included in the cost/benefit consideration.
Put more generally, your model should consider not just the possibility that growth in your real estate market is 1% YoY for the next 30 years, but also 10% YoY and -10% YoY. The advantage of renting of course is that if housing prices collapse, then you either pay less or can pay the same and upgrade.
> Between 1948 and 2004 the real increase in value in the U.S real estate market was less than 1% a year.
True but not the whole picture; buying a house doesn't give you exposure to "the US real estate market" in aggregate, you get exposure to a hyper-localized slice of the market, i.e. the neighborhood in which you buy your house. For example in the Bay Area you're looking at something like 5-10% YoY increases over the last few decades, and in the same period I imagine that prices have gone down in Flint, MI. This would be like saying "the stock market increases by 8% YoY on average" in an article about "should I buy AAPL"; you can see that it's relevant information that should be considered but it's not sufficiently specific to stand as an argument on its own.
I think we are at the top right now (especially for houses), FOMO is setting in after house prices rose due to increased demand from WFH/remote work, and of course interest rates are quite low. Once the pandemic is over/simmering, we can expect demand for SFH and interest rates to return to normal, though the interest rate part may take a while.
On the other hand, for someone who doesn't expect to sell their home for a very long time (or ever), if you can afford your desired home right now, there is no reason not to just grab it and remove all uncertainty from further price increases. Which is pretty much FOMO, but it's not necessarily irrational if you'd rather grab your dream home now than take the chance at getting a better deal.
For someone like me who would prefer not to take out a loan that is large in nominal value, even if the interest rate is low, it's actually better to wait for interest rates to increase, though you may end up waiting quite a while.
I dunno how rational this is, but I've always felt that when I pay my mortgage, I get equity in return, whereas when I pay rent, that money disappears into a hole, gone forever. Further, all the carrying costs of owning (mortgage, taxes, utilities, maintenance, etc), come out to less than renting something similar.
Maybe my down payment would have done better if I had bought an index fund, but now I have all this equity on top, too, whereas the return on all my rent paid is zero.
Yet people smarter than me when it comes to finance publish articles like this one. So what am I missing?
> all the carrying costs of owning come out to less than renting something similar.
From my experience this is really dependent on the market. When I lived in Vancouver, Canada, the opposite was true: for $X/month I could rent a much nicer place than I could afford to buy with $X/month mortgage payments. My landlord would probably have been better off selling (for redevelopment) but the market was going up fast and she didn't want to get off the ride too early.
Then I moved to a different city with 40% higher rents and 30% lower housing prices, and the equation flipped. Suddenly buying made a lot more sense. Even now though, I suspect it's pretty close to break-even financially. Most of the benefits are less tangible: customization of my house, the ability to invest in improvements, the security of knowing that my monthly payment will never go up. (Technically, taxes could go up, but that means the valuation has gone up and my equity is worth more.)
I think the comparison of a house vs other investments is a bad comparison - you need to live somewhere. You need to compare buying a house to renting a house or apartment or whatever. People do view houses as investments, sure, but I think that's fundamentally misleading. Compare the basic cash flow of the different options available. Figure out how much you're willing to pay for being close to work, close to friends, having more or less space, being in a walkable neighbourhood or whatever else matters. As much as I enjoy the illusory dollar value gains of home ownership, ultimately I had to work within the confines of my budget.
Also I think this line of thought is also misleading: "For most people, their home investment represents a large part of their net worth."
That's true but it's because of inflated house prices and reflects the fact that Americans don't save that much. Again, just treat a house as a liability and not an asset and suddenly this is meaningless and we can get back to managing cash flows and thinking about increasing savings. (Although as a side note, being very aggressive savers isn't necessarily great for a country as a whole, Germany is very conflicted about it's very high savings rates - for example, https://www.dw.com/en/why-cant-germans-stop-saving-money/a-4...)
> That is to say that if you have bought a $1m home in 1948, it will be worth, in average today, taking inflation into account, $1 745 809,82. The same investment in the S&P500 will be worth $74,426,964.60.
Yes, but does this account for the fact that you need to be leveraged at $1 million at margin rates for that period of time? Or is it just looking at the upside of putting a million in the S&P500?
It reminds me of the ole “there are lies, damn lies, and statistics” saying. Without context I’m not sure how much to trust this.
Well, if you don't have $1m then the house needs to be leveraged too. Interactive Brokers[0] has margin rates lower than my mortgage. I don't think they'd give you the 10x leverage that you can get on a house though.
Yes, but did IB offer rates lower than your mortgage rate over the course of your mortgage? Your margin rate fluctuates daily, and you’re subject to margin calls that could bring the whole house of cards tumbling down.
I did not do the math, but it seems like you’d need to simulate a stochastic process to come out with the likelihood of winning in this scenario, similar to the various FIRE calculators out there [0].
Well you have to live somewhere, right? Either buying or renting - unless you can find free room and board (in that case, invest in the stock market instead).
I used the NYT calculator and eventually came to the conclusion that renting beat buying in a MCOL area (Kansas City.)
I live in the city center with my SO, rent is
$2100 split 2 ways for a 1500sqft 2/2 in a nice building with a rooftop pool. There simply aren’t comps that can compete in terms of location, size, and amenities that don’t also have a $1200/month HOA and $900+/month taxes, interest, and insurance. In 5 years rent has gone up
$50, meanwhile my 401k and other investments have maintained 10% year over year returns and I could now afford to outright buy houses and condos I was interested in 5 years ago. Or I could move out to the ‘burbs on a $600-900/month mortgage.
Now, if only I could work somewhere that I felt like I was changing the world in ways I’m more interested in (high tech vs automotive), I would feel less pull to uproot in my mid-30’s for a place where Google or Amazon are hiring.
Strange way of comparing your main residence with an investment. Why not buy a cheap home and/or invest regularly?
If you're strictly thinking "I have X$ and should I invest it in stocks, crypto or real-estate[1]?", then sure, your arguments make sense. Otherwise, it's apples vs oranges.
[1] I did not use the word "house" in here, because that implies your main residence, for which, if not buying, you pay rent anyway.
I've always thought these conversations about home ownership are missing the reality for many people: rental agreements/legislation can be overly restrictive for many people's situations.
I had friends growing up who lived with extended family all in one house. They'd convert any space they could into rooms and house as many people as they could. That's not a situation that'd be allowed under rental agreements or housing laws but is totally fine as long as you own the house you're living in. Not to mention the nightmare of communicating with your landlord every single time someone moved in or out.
Similar for me: Before I got into tech, I bought a house on a fast food salary w/ a lot of help from housing programs. 15k of my 65k mortgage was subsidized! This allowed me to jump from a $650/month 2 bedroom apartment to a $550/month mortgage and house 4 children. An equivalent apartment would've eaten my meager salary alive and would have been untenable. Anything equivalent to the apartment I had would've not been allowed legally
Weird article. People do not lose their shirts when leveraged real estate purchases go wrong, because it's the bank holding the bag and they can't come after the rest of your assets, only the securing property. Also, in certain jurisdictions, the property tax risk doesn't exist.
That said, I am also not buying a house, but my reasons are very different from these.
> People do not lose their shirts when leveraged real estate purchases go wrong, because it's the bank holding the bag
That is not true, both parties suffer. Imagine paying 10 years worth of mortgage in a place turned bad (NY in 80s, Detroit recently, Greece even more recently) and finding out that you're still in very negative equity. All your payments have been for nothing, and the most reasonable course of action is to go bankrupt and have the house foreclosed.
Also, US mortgages are on central government balance sheet, not bank balance sheet, so it's the taxpayer that suffers.
Some states are recourse states when it comes to first mortgages. In all states (I believe!) second mortgages are recourse loans. Your second sentence is not true in a lot of circumstances.
That depends on jurisdiction. It's not generally true. In my state, which is huge and populous, if the bank isn't made whole by auctioning off the property, that's their problem and they can fuck right off.
It appears that some states have a "non recourse" law so your debt is limited to the property value.
>There are currently 12 non-recourse states: Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington
>and they can't come after the rest of your assets, only the securing property
That's not true. The come for the property FIRST. Then once they've sold that and it fails to cover the debt (plus interest and fees, plus the cost of sale) they come for whatever else you have.
"Strategic default works in California because this is a "non-recourse" state. Unlike in many states, a mortgage lender in California has only one type of legal recourse in the event that a borrower defaults on a loan: to foreclose on the property. All that the bank can do is repossess your house; they cannot sue you in court to recover payment for the deficiency, which is the difference between the outstanding loan balance and the amount that the bank recovers by selling the home in a foreclosure auction. Strategic default has the advantage that in many cases it allows the homeowner to remain in the property for an extended period because the process of foreclosure often takes a considerable amount of time. During this period, you can save the money you would normally be spending on your mortgage and use it to pay down other debts."
Depends on the loan and the state (in the US). In most US states, a mortgage can be either recourse (which is as you described) or non-recourse (lender can only cover the debt using the house, not any other assets) - no idea which is more prevalent there. I live in a non-recourse state, which forbids recourse mortgages - https://www.legalmatch.com/law-library/article/what-is-a-rec...?
It depends where you live. In some states, home mortgages are generally non-recourse loans which means that lenders are only entitled to the securing asset (i.e. the home). California is such a state, for example.
If the only thing you see in a house is the investment profit, you are already part of the bubble problem of the past and future. During ownership, a house offers you benefits that a stock investment cannot provide. Thinking strictly in terms like the stock market profiteers that fucked it up for the general population is not the solution. Part two, one of the biggest benefits to home ownership compared to rent is control. You get much more say over your living space and customization. Theres give and take with decisions across multiple factors. Just the investment potential makes for a boring ass life.
Yes. With interest rates being as low as they are, and if you’re a citizen, the federal make a ministration cosign your loan, there’s really no reason not to buy a house. Just look at the way the market has changed over the past 10 to 15 years, and how people are moving to where they want to live instead of where they have to live. Prices are only going to go up in the situation, and I think for stability, and security, it’s never too soon to buy a house. If all else fails, you can always rent it out and move somewhere else.
I'm always arguing with my parents on this topic and i have hard time explaining them the concepts that are clearly described in this article.
One point that worth analyzing further is to take into account that if you don't buy your house, you have to pay a monthly rent for your home. And, so depending on the situations there might be cases where ownership is still financially more interesting.
On other thing forgotten is that once you mortgage is payed off that outgoing is gone forever, but you'll rent until you die. I gave up a long time ago with the discussion about buying V renting. Renters who think it's better to do so will never be convinced. Their loss.
I feel like this comparison doesn't really make sense without adding in a few more factors. People who buy houses as investments aren't doing it just for capital gains, theyre doing it so they can get passive(ish) income from renting the place out
The question is housing as a investment mechanism, rather then housing as .. housing - or - housing as a revenue generation mechanism. I would point out that that.
1) One, if it's as housing, then you are actually living there. The alternative is not dumping money into the S&P 500. It's paying rent. Where I live, rent prices match pretty closely to mortgage prices, So what you are really saving by renting is the down payment. For owner-occupied, that number can be remarkably small (and should be for your first house). The current interest rates mean that outside of expensive areas (see SF, London, Tokyo) - if the rent and the mortgage are near equal, you are going to hold it for some period of time and the down payment cost is reasonable, you should try and build equity.
1a) If there is a way to swing it, it almost always makes more sense to hold on to a property once you have purchased it. Selling a house in the USA is crazy expensive. 6% commission is not that short of 10% down on property. The real investment (versus housing scenario) comes if you can find a way to rent out old properties for amounts that cover your mortgage on that property. Buying a house opens up the opportunity to take a house you might have previously lived in, and treat that as a investment.
2) In the stock crazy world we live in, people forget that stocks used to be about buying dividends, as much as speculation. This article focuses on investment as speculation, but I think the revenue generation side is much more important here.
As mentioned above, at least in my state rent and mortgage run pretty close together. So it's not that hard to get to the point that the rent covers the price of the mortgage + taxes. The difference is the down payment that you put up versus a renting (renters don't have to put the money away for that). The upside is that I am basically purchasing the rent by putting the money down for the house.. Paid back when renters rent the house.
Any appreciation is just gravy, and while deprecation over time is a concern, a severe enough running decline is likely smaller then the same decline that has hit stocks. Also, as a secured asset, there is a floor to the value of the investment, unlike stocks.
Given how overheated the market is right now - this seems much saner to me.
So would I theoretically make more money taking every cent I own, and plow it into Tesla? Maybe, but the risk that this gets completely wiped out is much higher.
Combine this with something like a 401k or a IRA, and I think it's a pretty reasonable investment strategy.
I regret not entering the housing market in Toronto sooner. There was a brief period of time my earnings meant rent was cheap, but so too were houses. The average detached home goes for $1.2mm, whereas it was roughly $500k in 2010.
The slum lord stereotype is always a fun one. I prefer it to the 'evil landlord' stereotype.
I don't have any slum properties. I have properties I'd classify as lower income, and properties I'd say are middle class. I'd live in all of them, whereas my partner would live in half of them.
I didn't really mean offense by it. I did about a 2 year stint in commercial lending and we had good and bad slum lords. Some just bought slums because it was efficient. Others bought slums because they were just real terrible people trying to screw honest folk.
None taken. Under 50 units across several buildings. We generally buy what we can afford and what is decent. Decent is the operative word there. For some, that's granite counters, for others it's a roof that doesn't leak over the bed.
We're not sophisticated enough to min/max the business out. So I'm not sure how to even operate a slum property 'efficiently.' Between the number of folks skipping out on rent and patching a derelict property, I would think you'd have negative cash flow. In addition to not generating income, it makes leveraging the property or selling it harder.
If you have a family and your significant other is adamant on it, yes. If you treat it exactly as renting and don't treat it as a private slush fund to refinance every 5-10 years, yes. If you wish to become a landlord one day, yes. If you intend on staying in the area long term and have a good feeling you will be staying long term, yes.
Otherwise, don't do it. Cheaper homes are money pits. Newer homes are occasionally farther out from the city and may not have the best service coverage such as internet. Mowing lawn/blowing snow/raking leaves? What about HOA's? Property taxes? Hey your neighbor reported some random one off violation you had no idea existed and now you've got something the city wants corrected and it'll cost $5k. In a flood zone? Want to sell? Hey remember you're in a "seller pays for buyer & seller realtors fees!
The list goes on and on. Homeownership is a monumental chore. It's only for people literally do not want to be apartment vagabonds anymore. Homes are for people who would much rather waste their time than their money living. Sure you don't get a "return" on renting, but you also have one bill: rent. Obviously I'm being a bit dramatic about the whole issues with homeownership, but the more people you talk to about owning a home, the more than have that minor minutia thing that eats up your time.
At the end of the day, you have to ask: "Do I value my time or my money more?" The former, rent; The latter, buy a house.
> For most people, their home investment represents a large part of their net worth. From a diversification perspective, it's a catastrophe. It's not even a diversified investment in different real estate assets, it's one asset in one location. This means it is also a bad move in terms of optionality. If crime rises in your neighborhood, the school closes, or if you have a good job opportunity elsewhere, it's very hard to move. If a crisis happens at this location, an investor can lose a lot of their net worth and can wait up to 15 years for the recovery.
Full stop. Housing is not supposed to be an investment. You buy a house because you need a place to live, not to turn a profit. If you treat housing as an investment, good for you. But I couldn't care less about the fact that housing isn't as good as an investment as the stock market. If crime rises or whatever, then you sell, and you take a loss. I certainly don't expect to sell my old clothes for a net profit when they wear out. Or my car, or any of the things I own out of necessity.
When I worked in banking I'd always use this to keep track of prime interest rates and when I'd have to prep borrowers to either close sooner or maybe wait and redisclose docs.
Prime is essentially the base rate for everything. If banks are matching prime, it's because they're not making money on interest but either servicing loans or the fees charged. So they just want to close the loan.
We haven't seen 3.25% since like early 2017. I'd personally recommend getting a fixed loan now just because we were teetering on 5.5% pre-covid. 3.25% is of course dependent upon the institution, FHLB or FHA, and credit score.
I'd say only buy if you retain the house for the bare minimum required for you to sell and come out even or turn into a rental property. If you can't be patient enough to do either, don't buy a house.
Of course the main point is that renting is not an investment, so it looks pretty bad compared to something that is an investment. When you rent, you don't get any money back, and when you buy you do usually get your money back.
> just need advice on when to buy.
If you think the housing market's in a bubble, then don't buy yet until it's stable. But if you think the housing market is stable and increasing with inflation, the best time to buy is now. The earlier the better.
The 'when' problem gets a little balance with your second house, since you buy and sell at the same time, so where you buy and sell starts to matter more than when.
Speaking personally, after buying my first house, I concluded I had waited much too long to buy. I was scared by articles like this one and people talking about being locked in and losing opportunity costs, etc. What is being missed in most of the comments here is an honest discussion of our actual behavior, as opposed to what's financially optimal or possible. The truth is that, while I might be able to rent + invest my down payment in the stock market and make more money than if I bought a house, that takes a lot of work beyond my job. I think it's also riskier. I'm not a savvy investor who knows how to make a 5% return on the stock market year in and year out, especially not right now, and I'm not sure I have the motivation to stay on top of it. So for the lazy investor, like me (and most people, I suspect), buying a house really is a choice between rent or buy, not a choice between real estate and stock market. In that case, buying over renting is the clear and easy win.
This all makes it worth contemplating the fact that if you buy in a bubble, and your house loses a rather rare and extreme 50% of it's value by the time you sell, you are still much better off than if you had rented without investing a lot of money elsewhere.
Why does everyone have to look at everything as an "investment"? I bought a house because I wanted my family to grow up in a house that suits us. We all need a place to live. Really tired of everything being looked at from an investment sort of view... people are OBSESSED with maximizing everything and enjoying nothing.
