6 ms·

OTOH, the alternative use of mortgage payment money isn't index funds, it's rent, a guaranteed total loss every time. Merely keeping up with inflation (or even

OTOH, the alternative use of mortgage payment money isn't index funds, it's rent, a guaranteed total loss every time. Merely keeping up with inflation (or even falling behind it by quite a bit) is GREAT compared to throwing money away that you'll never see again.

SilasX 10y ago
Interest, tax, and PMI are a total loss every time too.
- superuser2 10y ago
  Sure, but if they even come close to rent on an otherwise comparable home something is deeply wrong.
  - refurb 10y ago
    Of course that's assuming housing prices never go down. That never happens...right?
    - superuser2 10y ago
      What? If housing prices go down to 0 the money you've paid for your house is gone. But the money you paid in rent is gone either way.
      - refurb 10y ago
        There are plenty of situations where renting leaves you financially better off than owning. Even in a market where housing prices are going up.
    - vonmoltke 10y ago
      Tax decreases linearly with the price of the property. At any rate, rents and taxes are sufficiently linked that tax can be ignored for the comparison. As for interest and PMI (assuming you need to pay it), I'd say housing prices falling far enough where rents start looking attractive compared to these qualifies as "something deeply wrong".
      - refurb 10y ago
        The general rule is you buy if the rent to price ratio is lower than 15. It's currently ~35 in SF.
        mac01021 10y ago
        rent divided by price? As the price increases you become more likely to buy? Also, the monthly rent?
        refurb 10y ago
        Price divided by annual rent. $200K house than can rent for $20K per year has a rent to price ratio of 10. It would be wise to buy in this market. Sice housing prices should be linked to what they can rent for, it's a check to see if the two are aligned.
        vonmoltke 10y ago
        Between Prop 13, rent control, and NIMBYism I would say there is something deeply wrong with the SF real estate market. It is terribly distorted and I want nothing to do with it, as either buyer or renter.
      - bzbarsky 10y ago
        Why would tax decrease linearly with the prices of the property? The residential property taxes I've seen are just a flat percentage of assessed value.
        vonmoltke 10y ago
        Exactly, which means the taxes have a linear relationship to the value. If my house value goes down by 40%, my property taxes go down by 40%.
        bzbarsky 10y ago
        Ah, I see. I thought you meant tax rate decreased as the price increased. My misunderstanding.
natrius 10y ago
Rent is not a guaranteed loss every time. There are tradeoffs that most people never calculate. Just use a calculator. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
- vonmoltke 10y ago
  Rent is 100% lost in all cases, which is I believe what your parent was referring to. That calculator just demonstrates that there situations where you actually spend more (directly or through opportunity costs) in situations were you are recouping some of the money put in to your housing.
- tacostakohashi 10y ago
  The problem with these calculators is that they're predicated on some guess future interest rates, rents, and property values. One can definitely make guesses using values from the past, but in practical terms, buying a property is a bit of a gamble. It's quite likely to either drop in value, or double in value. Long-term averages are interesting, but not at all representative of a particular individual.
- geebee 10y ago
  I suppose this is a good place to discuss how we make these calculations. I analyzed it by looking at the difference between buying and renting, assuming that the difference is invested. So, let's assume that you have a 20% down payment. Scenario 1: buy a house at reasonable interest rate, 30 year fixed. Scenario 2: invest the downpayment and rent, and invest the difference between rent and mortgage payments. There are a lot of factors to consider here - return on investment, increase in rent, tax considerations, maintenance. I did model these factors, and yes, they make a difference. But overall, there's one thing that emerges from the model - unless you assume extremely powerful rent control that endures for decades, eventually the mortgage costs less than the rent. As a result, a transition occurs where the owner is now able to invest more than the renter - it can take a while before this happens, but even with relatively favorable inputs for a renter, it does eventually happen. It is possible that the owner won't catch up within this lifetime - if property taxes and maintenance costs are very high, tax benefits to owning are low, investment returns are very high, and the down payment is substantial, it's possible that the renter will build an insurmountable lead. Even if you relax these assumptions a bit, it can take a long time for the owner to surpass the renter in net wealth. But under most scenarios, I'd say it is better to own, long run. The owner often ends up with a higher net worth even without considering the equity in the house, because eventually the investments catch up once the owner's mortgage is lower than the renter's rent (again, remember we're assuming the difference is invested). The time frame here is very long. You're not going to stop needing a place to live when you turn 50, 60 or 70, after all.
brandonbloom 10y ago
You're not accounting for down payment money.
collyw 10y ago
That must depend. If house prices are falling more than the amount you are paying in rent, then renting seems like a no brainier.

SilasX 10y ago

Interest, tax, and PMI are a total loss every time too.

superuser2 10y ago
Sure, but if they even come close to rent on an otherwise comparable home something is deeply wrong.
- refurb 10y ago
  Of course that's assuming housing prices never go down. That never happens...right?
  - superuser2 10y ago
    What? If housing prices go down to 0 the money you've paid for your house is gone. But the money you paid in rent is gone either way.
    - refurb 10y ago
      There are plenty of situations where renting leaves you financially better off than owning. Even in a market where housing prices are going up.
  - vonmoltke 10y ago
    Tax decreases linearly with the price of the property. At any rate, rents and taxes are sufficiently linked that tax can be ignored for the comparison. As for interest and PMI (assuming you need to pay it), I'd say housing prices falling far enough where rents start looking attractive compared to these qualifies as "something deeply wrong".
    - refurb 10y ago
      The general rule is you buy if the rent to price ratio is lower than 15. It's currently ~35 in SF.
      - mac01021 10y ago
        rent divided by price? As the price increases you become more likely to buy? Also, the monthly rent?
        refurb 10y ago
        Price divided by annual rent. $200K house than can rent for $20K per year has a rent to price ratio of 10. It would be wise to buy in this market. Sice housing prices should be linked to what they can rent for, it's a check to see if the two are aligned.
      - vonmoltke 10y ago
        Between Prop 13, rent control, and NIMBYism I would say there is something deeply wrong with the SF real estate market. It is terribly distorted and I want nothing to do with it, as either buyer or renter.
    - bzbarsky 10y ago
      Why would tax decrease linearly with the prices of the property? The residential property taxes I've seen are just a flat percentage of assessed value.
      - vonmoltke 10y ago
        Exactly, which means the taxes have a linear relationship to the value. If my house value goes down by 40%, my property taxes go down by 40%.
        bzbarsky 10y ago
        Ah, I see. I thought you meant tax rate decreased as the price increased. My misunderstanding.

natrius 10y ago

Rent is not a guaranteed loss every time. There are tradeoffs that most people never calculate. Just use a calculator. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

vonmoltke 10y ago
Rent is 100% lost in all cases, which is I believe what your parent was referring to. That calculator just demonstrates that there situations where you actually spend more (directly or through opportunity costs) in situations were you are recouping some of the money put in to your housing.
tacostakohashi 10y ago
The problem with these calculators is that they're predicated on some guess future interest rates, rents, and property values. One can definitely make guesses using values from the past, but in practical terms, buying a property is a bit of a gamble. It's quite likely to either drop in value, or double in value. Long-term averages are interesting, but not at all representative of a particular individual.
geebee 10y ago
I suppose this is a good place to discuss how we make these calculations. I analyzed it by looking at the difference between buying and renting, assuming that the difference is invested. So, let's assume that you have a 20% down payment. Scenario 1: buy a house at reasonable interest rate, 30 year fixed. Scenario 2: invest the downpayment and rent, and invest the difference between rent and mortgage payments. There are a lot of factors to consider here - return on investment, increase in rent, tax considerations, maintenance. I did model these factors, and yes, they make a difference. But overall, there's one thing that emerges from the model - unless you assume extremely powerful rent control that endures for decades, eventually the mortgage costs less than the rent. As a result, a transition occurs where the owner is now able to invest more than the renter - it can take a while before this happens, but even with relatively favorable inputs for a renter, it does eventually happen. It is possible that the owner won't catch up within this lifetime - if property taxes and maintenance costs are very high, tax benefits to owning are low, investment returns are very high, and the down payment is substantial, it's possible that the renter will build an insurmountable lead. Even if you relax these assumptions a bit, it can take a long time for the owner to surpass the renter in net wealth. But under most scenarios, I'd say it is better to own, long run. The owner often ends up with a higher net worth even without considering the equity in the house, because eventually the investments catch up once the owner's mortgage is lower than the renter's rent (again, remember we're assuming the difference is invested). The time frame here is very long. You're not going to stop needing a place to live when you turn 50, 60 or 70, after all.

brandonbloom 10y ago

You're not accounting for down payment money.

collyw 10y ago

That must depend. If house prices are falling more than the amount you are paying in rent, then renting seems like a no brainier.