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Imagine, for a second, that there is no tax benefit to home ownership. In such a world, there is basically no reason to own a home. The cost of renting a home i

by ouid 10y ago

Imagine, for a second, that there is no tax benefit to home ownership. In such a world, there is basically no reason to own a home. The cost of renting a home is about the same as the interest on a mortgage. The money that would go towards "principle" instead goes into your bank account. The interest that you pay on a mortgage is tax deductible, which is essentially a subsidy exclusively available to people who make more than the amount of money required to own a home where they live. This subsidy for decentralized living is equivalent to a tax on the vastly more efficient centralized plan. It's not intrinsic to our economic system.

cosmie 10y ago
The cost of renting a home is about the same as the interest on a mortgage _when you purchase_. If you purchased around my house two years ago, your mortgage would be less than $800. But current rates have it at about $1,300. As a rental, you can start renting that at $1,300/month even though you bought in when market rate was $800. Plus, there's a huge number of tax benefits to investment property ownership, far more than for owner-occupied [1]. If you're going to remove the tax advantages of owner-occupied, you should also reduce the benefits of investment properties. But then you'll likely see rent rates hike as a result and the bar will tip in favor of ownership again. [1] http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html http://www.nolo.com/legal-encyclopedia/top-ten-tax-deduction...
- refurb 10y ago
  The cost of renting a home is about the same as the interest on a mortgage _when you purchase_. It depends on the market. Price to rent ratios can vary a ton.[1] The link is from 2016, but the extremes are: San Francisco 48x (housing price is 48x monthly rent) Detroit 6.5x The neutral rent to price ratio is ~15. If it's higher than that, it's better to rent. If it's lower, it's better to buy. [1]https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...
- ouid 10y ago
  Yes, I would also remove investment property tax benefits, were I emperor, but it would not cause rental rates to rise. That's not how the rental rate is decided. The rental rate is based on vacancy and income, ie supply and demand. If rental is harder to make money on, the only effect will be to drive down the cost of the property as the actual number of houses is fixed.
erroneousfunk 10y ago
> The cost of renting a home is about the same as the interest on a mortgage. What's your source for this? I've rented in and around the Boston area for 10 years now, and my husband and I just purchased a home last week. Our rent for a 975 sqft 2br apartment on the seventh floor of a large complex out in the suburbs was $2,100/month. No balcony, no yard, no storage, although utilities are included. We definitely weren't getting a good deal, but our rent had increased from $1800 over the last 3 years. Our house is in a better location (more convenient to public transportation, better schools, "cooler" restaurants), much bigger (1410 sqft, 3br/1.5 bath, office, plus unfinished basement with 6'6" ceilings, attic, front and back decks, backyard, 2 car detached garage), and our monthly costs -- INCLUDING taxes and estimated utilities are $3,200/month. Renting a house like this would run you $2400-$3400 month, if Craigslist is any indication (searched for 3br full houses in the same neighborhood as ours -- near a college, lots of rentals). So, yes, we're on the higher end of rent, and we have to do our own repairs, but the costs of rent are paying for far more than just interest on a mortgage. The tax benefit is nice icing on the cake, but it barely factored into our decision to buy, rather than rent.
- ouid 10y ago
  The "source" is a pretty typical economic argument. The opportunity cost of a home is rent. A home is for living in, that is how it gets used. The cost people will pay to live in that home is determined by supply and demand. so a house just sits there, generating money. This means that it has an investment value. That value is "determined" by the cost of comparable investments because of arbitrage. If I have some money invested making less than 1 rent/month (minus expenses and so forth), then I will happily buy the house for that money. Likewise if there is some cheaper investment which will give me the same return on my investment, I will sell the house and switch, pocketing the difference. One example of such an investment is the mortgage itself. as a bank, by signing a mortgage with someone, I am extracting the interest rate on the value of that house every month (plus some portion of the principle).
  - erroneousfunk 10y ago
    You're missing the part where not everyone can pay for the down payment or qualify for a mortgage (or buy the house outright, for that matter). Even if you can, it's a nail-biting month or so of crap just to go through the process. And even THEN, you're basically forced to stay in one place for the foreseeable future, or you risk losing a lot of money, and going through a ton of stress all over again. This creates an economic inequality that tilts in favor of the people who are able and willing to buy a house. I mean, you can sit there all day and say "well, it doesn't make sense that people would buy instead of rent if it were economically disadvantageous, so the market must be relatively balanced." But that's simply not the case. You can look at actual numbers to show you this.
maxsilver 10y ago
Your not including the always-rising cost of housing into your argument. When you buy a mortgage in the US, the payment and interest is fixed. Even taxes are, occasionally, protected from market inflation. When you rent a home, you have absolutely none of those protections. Rental costs go up, nearly every year, for the rest of time immortal. Even if there is no tax benefit to home ownership, I would always choose ownership, because it's the only way to protect myself against extreme housing cost increases. (And before someone says "that's just NYC and SF, live somewhere cheaper" I'm already in small-town Midwest US, even here 10-15% yearly rent increases are common).
- ouid 10y ago
  The income tax credit means that people largely buy the most expensive home they can get. This has a very serious effect on the market value of real estate, and means that the cost of housing increases non-linearly with the number of people in the middle income bracket. Those extreme housing cost increases are result of the tax credit, and an increase in the number of people able to take advantage of it. Were unemployment to rise, the price of real estate would similarly drop non-linearly. The price of your house is extremely volatile, don't let anyone convince you otherwise.

by ouid 10y ago

cosmie 10y ago

The cost of renting a home is about the same as the interest on a mortgage _when you purchase_. If you purchased around my house two years ago, your mortgage would be less than $800. But current rates have it at about $1,300. As a rental, you can start renting that at $1,300/month even though you bought in when market rate was $800. Plus, there's a huge number of tax benefits to investment property ownership, far more than for owner-occupied [1]. If you're going to remove the tax advantages of owner-occupied, you should also reduce the benefits of investment properties. But then you'll likely see rent rates hike as a result and the bar will tip in favor of ownership again. [1] http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html http://www.nolo.com/legal-encyclopedia/top-ten-tax-deduction...

refurb 10y ago
The cost of renting a home is about the same as the interest on a mortgage _when you purchase_. It depends on the market. Price to rent ratios can vary a ton.[1] The link is from 2016, but the extremes are: San Francisco 48x (housing price is 48x monthly rent) Detroit 6.5x The neutral rent to price ratio is ~15. If it's higher than that, it's better to rent. If it's lower, it's better to buy. [1]https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...
ouid 10y ago
Yes, I would also remove investment property tax benefits, were I emperor, but it would not cause rental rates to rise. That's not how the rental rate is decided. The rental rate is based on vacancy and income, ie supply and demand. If rental is harder to make money on, the only effect will be to drive down the cost of the property as the actual number of houses is fixed.

erroneousfunk 10y ago

> The cost of renting a home is about the same as the interest on a mortgage. What's your source for this? I've rented in and around the Boston area for 10 years now, and my husband and I just purchased a home last week. Our rent for a 975 sqft 2br apartment on the seventh floor of a large complex out in the suburbs was $2,100/month. No balcony, no yard, no storage, although utilities are included. We definitely weren't getting a good deal, but our rent had increased from $1800 over the last 3 years. Our house is in a better location (more convenient to public transportation, better schools, "cooler" restaurants), much bigger (1410 sqft, 3br/1.5 bath, office, plus unfinished basement with 6'6" ceilings, attic, front and back decks, backyard, 2 car detached garage), and our monthly costs -- INCLUDING taxes and estimated utilities are $3,200/month. Renting a house like this would run you $2400-$3400 month, if Craigslist is any indication (searched for 3br full houses in the same neighborhood as ours -- near a college, lots of rentals). So, yes, we're on the higher end of rent, and we have to do our own repairs, but the costs of rent are paying for far more than just interest on a mortgage. The tax benefit is nice icing on the cake, but it barely factored into our decision to buy, rather than rent.

ouid 10y ago
The "source" is a pretty typical economic argument. The opportunity cost of a home is rent. A home is for living in, that is how it gets used. The cost people will pay to live in that home is determined by supply and demand. so a house just sits there, generating money. This means that it has an investment value. That value is "determined" by the cost of comparable investments because of arbitrage. If I have some money invested making less than 1 rent/month (minus expenses and so forth), then I will happily buy the house for that money. Likewise if there is some cheaper investment which will give me the same return on my investment, I will sell the house and switch, pocketing the difference. One example of such an investment is the mortgage itself. as a bank, by signing a mortgage with someone, I am extracting the interest rate on the value of that house every month (plus some portion of the principle).
- erroneousfunk 10y ago
  You're missing the part where not everyone can pay for the down payment or qualify for a mortgage (or buy the house outright, for that matter). Even if you can, it's a nail-biting month or so of crap just to go through the process. And even THEN, you're basically forced to stay in one place for the foreseeable future, or you risk losing a lot of money, and going through a ton of stress all over again. This creates an economic inequality that tilts in favor of the people who are able and willing to buy a house. I mean, you can sit there all day and say "well, it doesn't make sense that people would buy instead of rent if it were economically disadvantageous, so the market must be relatively balanced." But that's simply not the case. You can look at actual numbers to show you this.

maxsilver 10y ago

Your not including the always-rising cost of housing into your argument. When you buy a mortgage in the US, the payment and interest is fixed. Even taxes are, occasionally, protected from market inflation. When you rent a home, you have absolutely none of those protections. Rental costs go up, nearly every year, for the rest of time immortal. Even if there is no tax benefit to home ownership, I would always choose ownership, because it's the only way to protect myself against extreme housing cost increases. (And before someone says "that's just NYC and SF, live somewhere cheaper" I'm already in small-town Midwest US, even here 10-15% yearly rent increases are common).

ouid 10y ago
The income tax credit means that people largely buy the most expensive home they can get. This has a very serious effect on the market value of real estate, and means that the cost of housing increases non-linearly with the number of people in the middle income bracket. Those extreme housing cost increases are result of the tax credit, and an increase in the number of people able to take advantage of it. Were unemployment to rise, the price of real estate would similarly drop non-linearly. The price of your house is extremely volatile, don't let anyone convince you otherwise.