8 ms·

I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Most of my s

by hacknat 11y ago

I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Most of my savings goes to retirement, which is now in the realm of being a down payment for a nicer house. Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house. When I'm older, and I'm not trying to play catch up on my retirement account, like so many 40 and 50 year olds end up doing, more of my income can go to other things, maybe even a house. I'm super focused on my career and family right now. Why would I want to buy what amounts to a giant time sink? Bottom line, by focusing my time and money on personal growth. I'll be in a much better position than if I bought a home. When you just do the game theory on the American Dream, it makes no sense at all. Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet.

totalrobe 11y ago
Totally depends on where you live. Some areas rent is much more than a mortgage and vice versa.
kazinator 11y ago
You could get a place that isn't a "fixer upper". If there is grass, let it grow three feet high. > Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet. It really depends. Rent is also money down the toilet. If you're "old" now, and you bought a house when you were "young", and properties have gone up in your area, then if you still have the mortgage, the remaining payments are probably very low compared to what people are paying in rent. Rents don't have compound interest but they rise up and up over the years and decades. And every single dollar is wasted. Of course, the specific reasoning depends on the area, especially over shorter terms.
- toomuchtodo 11y ago
  > It really depends. Rent is also money down the toilet. Rent = mortgage payment + premium to be able to walk away.
  - chubot 11y ago
    Also property taxes -- and in many cities condo / co-op fees. I find it odd to see people stretching themselves to the limit to "own" property, when it actually means they have even more "landlords" than before (the IRS, the bank, and often the condo association). I live in SF and renting is a great deal! (admittedly, as long as you are not looking right now :-/ ) I would consider buying something relatively big in a small town that you can really own, but I don't see the appeal of these tiny starter "homes" in big cities, with so many strings attached.
increment_i 11y ago
I had the opposite experience - I never really had the desire to own a home until I had children. Once I had them, I really wanted one. Although I have to admit, paying a mortgage does make me feel slightly like a sucker.
- maaku 11y ago
  Wait until rents go up and your mortgage does not.
  - drpgq 11y ago
    Depends where you live. I live in Ontario and fortunately for me there's rent control
- maaku 11y ago
  Wait until rents go up and your mortgage does not.
- DrScump 11y ago
  Owning makes you feel more like a sucker than renting?
logicfiction 11y ago
Home buying requires certain priorities. I think you outline a different and successful financial path through life. I don't agree that home buying, in contrast, makes no sense at all. While you are correct that compound interest does amount to possibly a couple hundred thousands of dollars lost, I think that needs to be compared to the cost of renting. Two very conservative assumptions: 1. over 30 years (standard mortgage) your home/condo value only stays the same as your purchase price. 2. The rent on your apartment never goes up. In the Boston market I rent a rather dumpy and small 2 bedroom apartment for $1600 a month, which is most likely already below market value. If I stayed here for 30 years at this price it would cost $576000, all of which would be completely sunk money. Decent to nice condos in the area range from say $350k to 600k. The money lost to interest in that range is at worst only a couple hundred thousand over 30 years. Meanwhile you have a nicer place to live and equity in the property. Obviously very simplified scenario, but I don't think buying a house/condo when you are relatively young amounts "to flushing hundreds of thousands of dollars down the toilet" anymore than renting does.
nsxwolf 11y ago
A lifetime of hearing "rent is just throwing your money away" propaganda from my family convinced me to buy a condo just before the housing market crash. Result: That condo is worth half what I paid. I got married and had children so we bought a house, but I am now a landlord for the foreseeable future. It sucks. I really wish I'd thrown my money away all those years - I wouldn't have this constant source of interruption and expense hanging around my neck. My advice for anyone who really wants to buy a house... I would suggest trying to make sure it's the last house you'll ever need.
- pxeboot 11y ago
  I did the same, except values never dropped where I was at. Sold for a 20% profit 3 years later. Real Estate prices are extremely local. There are many places where buying will likely never payoff. In other parts of country, renting is significantly more expensive then buying a similar home.
- wahsd 11y ago
  Not to rub it in, but something many people also don't consider when looking at condos is that there are generally speaking condo fees associated which can easily run $300-$800 for a run of the mill condo depending on amenities. There's also a dirty little secret that really doesn't get a lot of air time, many of the condos have what are essentially builder / developer royalties that go to the developer in perpetuity. So, on top of dropping 5 digits on closing and paying thousands in property taxes, you get to pay monthly fees and part of those go to the developer that built the complex with lowest bidder and shoddy illegal immigrant labor.
  - sliverstorm 11y ago
    $800? A month?
    - e15ctr0n 11y ago
      Here is an overview of what is involved in condo fees: https://thebaverstockteam.wordpress.com/yesterdays-news/everything-you-need-to-know-about-condo-fees/ https://thebaverstockteam.wordpress.com/yesterdays-news/ever... Here is a reddit discussion from 2 years ago: https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_are_ridiculous_what_options_do_i_have/ https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_...
encoderer 11y ago
> Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house I'm interested in the analysis here. This is a thought I'd considered and when I ran the numbers they were about the equal. You're buying a house on margin with just 20% down. With 3% appreciation your house has appreciated 80% in 20 years. You're earning 400% roi. For the portfolio, if you're averaging 8% you're returning 466%. So the portfolio still wins, right? But no so fast: you don't owe a dime of taxes on that $80k appreciation. Anyway, your argument was beyond just ROI, but i'm interested if you have any thoughts about that?
- thrownaway2424 11y ago
  You wouldn't expect a house to appreciate 3% per year over any significant length of time. In the long run, houses are a wash.
foobarian 11y ago
Counterpoint to the "It doesn't make fiscal sense to buy a house" argument: I didn't buy a house to make money, there are better ways to do that. I bought a house for quality of life reasons, such as - have a big yard, - be able to nail things to the wall or paint them without asking permission, - no fear of landlord selling the house and me getting kicked out - custom improvements I put into the landscape or the interior will not be wasted
ChuckMcM 11y ago
The interesting thing about buying a house for me was that it capped my monthly housing expense. Rents can go up, you can get evicted, you can have your house burned down by your neighbor. Owning a house allowed me to plot a lifetime expense versus my retirement savings. Generally I worked backward from 70 which was the point at which I got maximum Social security to what ever was the current present, and then looked at an annualized model of costs from there to the present. Once I had the model I could plot my earliest retirement date backward from 70 as time passed. Sort of like the two trains leave the station, where will they meet. The only reason I bought the house was that my need to live somewhere was a given, and owning removed a host of variables from my model which were hard to predict. Rather than thinking of it as an investment it acted more like a cost shield which meant as my income grew all of the additional growth could go into retirement rather than being allocated to higher housing costs.
- barrkel 11y ago
  Maintenance and repair make owned housing a little bit more unpredictable than you suggest - get unlucky with something like subsidence, and you could be facing dramatic spikes in insurance rates and a much harder time trying to sell should you want to move.
  - uptown 11y ago
    Subsidence? Extremely, extremely low odds of that factoring into the vast majority of properties.
  - ChuckMcM 11y ago
    Actually maintenance and repair can be modelled fairly easily (and as I found out I over modelled it) I used $5/sqft/year as a maintenance cost. That was based on information from Popular Mechanics on home repairs, a reader's digest survey, and a blend of roofing/painting/carpeting divided by 15 years. For my house at 2500 sq feet that comes out to $12,500 (or about $1000/month). Actual costs were closer to $600/month but living in California meant things like winter/summer cycles are not as hard on the house. I analyzed the cost of moving against the cost of renting it out and buying a new place which has its own interesting quirks. My wife's parents did the keep/rent the previous house each time you move thing while my parents simply rented until my Dad retired. In retirement my wife's parents have a built in cash flow that my parents do not. Insurance has been the most variable with California adding earthquake and flood insurance requirements. As a component of cost has varied the most (it isn't included in the $600/month which is just maintenance). On the plus side, with California's no pre-payment penalty I could always use bonus money to pay down the mortgage which both kept its value in the future and mitigated future interest expense. That was always a better net use of cash funds over a savings account. I've always maintained a line of credit on the house which could allow me to "re-access" that value if something unexpected happened. Not for everyone of course but its a different way of looking at home ownership which isn't commonly discussed.
jseliger 11y ago
I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Also, my job is not to feed into the mortgage-finance-housing industrial complex.
datashovel 11y ago
To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye opening when I did some numbers a while back (can't vouch for whether this is still accurate today, but my hunch is it's not far off). If a person pays minimum monthly payment on a 30-yr mortgage (assuming certain interest rates) you ultimately end up paying approximately the cost of the house in interest over the life of the loan. This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.
- potatolicious 11y ago
  This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html
  - datashovel 11y ago
    I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
  - datashovel 11y ago
    also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.
lewisl9029 11y ago
Another point most people don't consider is the fact that a mortgage is essentially a very heavily leveraged (often 10x+) investment in real estate. Example: Consider a $500k mortgage with a $50k down payment (10x leverage). A 5% drop in value on the $500k home means you've lost 50% of your principle investment (-$25k), and vice versa with gains. Most investors have rather modest risk profiles and would never consider a 10x leveraged investment of any other type, but for some reason they give no second thoughts to putting down money for a 10x leveraged mortgage. I personally would rather pay the fixed monthly expense of a rent rather than exposing myself to the risks of a 10x leveraged investment.

by hacknat 11y ago

totalrobe 11y ago

Totally depends on where you live. Some areas rent is much more than a mortgage and vice versa.

kazinator 11y ago

You could get a place that isn't a "fixer upper". If there is grass, let it grow three feet high. > Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet. It really depends. Rent is also money down the toilet. If you're "old" now, and you bought a house when you were "young", and properties have gone up in your area, then if you still have the mortgage, the remaining payments are probably very low compared to what people are paying in rent. Rents don't have compound interest but they rise up and up over the years and decades. And every single dollar is wasted. Of course, the specific reasoning depends on the area, especially over shorter terms.

toomuchtodo 11y ago
> It really depends. Rent is also money down the toilet. Rent = mortgage payment + premium to be able to walk away.
- chubot 11y ago
  Also property taxes -- and in many cities condo / co-op fees. I find it odd to see people stretching themselves to the limit to "own" property, when it actually means they have even more "landlords" than before (the IRS, the bank, and often the condo association). I live in SF and renting is a great deal! (admittedly, as long as you are not looking right now :-/ ) I would consider buying something relatively big in a small town that you can really own, but I don't see the appeal of these tiny starter "homes" in big cities, with so many strings attached.

increment_i 11y ago

I had the opposite experience - I never really had the desire to own a home until I had children. Once I had them, I really wanted one. Although I have to admit, paying a mortgage does make me feel slightly like a sucker.

maaku 11y ago
Wait until rents go up and your mortgage does not.
- drpgq 11y ago
  Depends where you live. I live in Ontario and fortunately for me there's rent control
maaku 11y ago
Wait until rents go up and your mortgage does not.
DrScump 11y ago
Owning makes you feel more like a sucker than renting?

logicfiction 11y ago

Home buying requires certain priorities. I think you outline a different and successful financial path through life. I don't agree that home buying, in contrast, makes no sense at all. While you are correct that compound interest does amount to possibly a couple hundred thousands of dollars lost, I think that needs to be compared to the cost of renting. Two very conservative assumptions: 1. over 30 years (standard mortgage) your home/condo value only stays the same as your purchase price. 2. The rent on your apartment never goes up. In the Boston market I rent a rather dumpy and small 2 bedroom apartment for $1600 a month, which is most likely already below market value. If I stayed here for 30 years at this price it would cost $576000, all of which would be completely sunk money. Decent to nice condos in the area range from say $350k to 600k. The money lost to interest in that range is at worst only a couple hundred thousand over 30 years. Meanwhile you have a nicer place to live and equity in the property. Obviously very simplified scenario, but I don't think buying a house/condo when you are relatively young amounts "to flushing hundreds of thousands of dollars down the toilet" anymore than renting does.

nsxwolf 11y ago

A lifetime of hearing "rent is just throwing your money away" propaganda from my family convinced me to buy a condo just before the housing market crash. Result: That condo is worth half what I paid. I got married and had children so we bought a house, but I am now a landlord for the foreseeable future. It sucks. I really wish I'd thrown my money away all those years - I wouldn't have this constant source of interruption and expense hanging around my neck. My advice for anyone who really wants to buy a house... I would suggest trying to make sure it's the last house you'll ever need.

pxeboot 11y ago
I did the same, except values never dropped where I was at. Sold for a 20% profit 3 years later. Real Estate prices are extremely local. There are many places where buying will likely never payoff. In other parts of country, renting is significantly more expensive then buying a similar home.
wahsd 11y ago
Not to rub it in, but something many people also don't consider when looking at condos is that there are generally speaking condo fees associated which can easily run $300-$800 for a run of the mill condo depending on amenities. There's also a dirty little secret that really doesn't get a lot of air time, many of the condos have what are essentially builder / developer royalties that go to the developer in perpetuity. So, on top of dropping 5 digits on closing and paying thousands in property taxes, you get to pay monthly fees and part of those go to the developer that built the complex with lowest bidder and shoddy illegal immigrant labor.
- sliverstorm 11y ago
  $800? A month?
  - e15ctr0n 11y ago
    Here is an overview of what is involved in condo fees: https://thebaverstockteam.wordpress.com/yesterdays-news/everything-you-need-to-know-about-condo-fees/ https://thebaverstockteam.wordpress.com/yesterdays-news/ever... Here is a reddit discussion from 2 years ago: https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_are_ridiculous_what_options_do_i_have/ https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_...

encoderer 11y ago

> Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house I'm interested in the analysis here. This is a thought I'd considered and when I ran the numbers they were about the equal. You're buying a house on margin with just 20% down. With 3% appreciation your house has appreciated 80% in 20 years. You're earning 400% roi. For the portfolio, if you're averaging 8% you're returning 466%. So the portfolio still wins, right? But no so fast: you don't owe a dime of taxes on that $80k appreciation. Anyway, your argument was beyond just ROI, but i'm interested if you have any thoughts about that?

thrownaway2424 11y ago
You wouldn't expect a house to appreciate 3% per year over any significant length of time. In the long run, houses are a wash.

foobarian 11y ago

Counterpoint to the "It doesn't make fiscal sense to buy a house" argument: I didn't buy a house to make money, there are better ways to do that. I bought a house for quality of life reasons, such as - have a big yard, - be able to nail things to the wall or paint them without asking permission, - no fear of landlord selling the house and me getting kicked out - custom improvements I put into the landscape or the interior will not be wasted

ChuckMcM 11y ago

The interesting thing about buying a house for me was that it capped my monthly housing expense. Rents can go up, you can get evicted, you can have your house burned down by your neighbor. Owning a house allowed me to plot a lifetime expense versus my retirement savings. Generally I worked backward from 70 which was the point at which I got maximum Social security to what ever was the current present, and then looked at an annualized model of costs from there to the present. Once I had the model I could plot my earliest retirement date backward from 70 as time passed. Sort of like the two trains leave the station, where will they meet. The only reason I bought the house was that my need to live somewhere was a given, and owning removed a host of variables from my model which were hard to predict. Rather than thinking of it as an investment it acted more like a cost shield which meant as my income grew all of the additional growth could go into retirement rather than being allocated to higher housing costs.

barrkel 11y ago
Maintenance and repair make owned housing a little bit more unpredictable than you suggest - get unlucky with something like subsidence, and you could be facing dramatic spikes in insurance rates and a much harder time trying to sell should you want to move.
- uptown 11y ago
  Subsidence? Extremely, extremely low odds of that factoring into the vast majority of properties.
- ChuckMcM 11y ago
  Actually maintenance and repair can be modelled fairly easily (and as I found out I over modelled it) I used $5/sqft/year as a maintenance cost. That was based on information from Popular Mechanics on home repairs, a reader's digest survey, and a blend of roofing/painting/carpeting divided by 15 years. For my house at 2500 sq feet that comes out to $12,500 (or about $1000/month). Actual costs were closer to $600/month but living in California meant things like winter/summer cycles are not as hard on the house. I analyzed the cost of moving against the cost of renting it out and buying a new place which has its own interesting quirks. My wife's parents did the keep/rent the previous house each time you move thing while my parents simply rented until my Dad retired. In retirement my wife's parents have a built in cash flow that my parents do not. Insurance has been the most variable with California adding earthquake and flood insurance requirements. As a component of cost has varied the most (it isn't included in the $600/month which is just maintenance). On the plus side, with California's no pre-payment penalty I could always use bonus money to pay down the mortgage which both kept its value in the future and mitigated future interest expense. That was always a better net use of cash funds over a savings account. I've always maintained a line of credit on the house which could allow me to "re-access" that value if something unexpected happened. Not for everyone of course but its a different way of looking at home ownership which isn't commonly discussed.

jseliger 11y ago

I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Also, my job is not to feed into the mortgage-finance-housing industrial complex.

datashovel 11y ago

To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye opening when I did some numbers a while back (can't vouch for whether this is still accurate today, but my hunch is it's not far off). If a person pays minimum monthly payment on a 30-yr mortgage (assuming certain interest rates) you ultimately end up paying approximately the cost of the house in interest over the life of the loan. This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.

potatolicious 11y ago
This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html
- datashovel 11y ago
  I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
- datashovel 11y ago
  also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.

lewisl9029 11y ago

Another point most people don't consider is the fact that a mortgage is essentially a very heavily leveraged (often 10x+) investment in real estate. Example: Consider a $500k mortgage with a $50k down payment (10x leverage). A 5% drop in value on the $500k home means you've lost 50% of your principle investment (-$25k), and vice versa with gains. Most investors have rather modest risk profiles and would never consider a 10x leveraged investment of any other type, but for some reason they give no second thoughts to putting down money for a 10x leveraged mortgage. I personally would rather pay the fixed monthly expense of a rent rather than exposing myself to the risks of a 10x leveraged investment.