6 ms·

The terrible thing here is that owning a home is pictured as the American dream, a goal in itself. I think it should almost only be seen as an investment. Like

The terrible thing here is that owning a home is pictured as the American dream, a goal in itself. I think it should almost only be seen as an investment. Like any sizeable investment, a lot of calculation should be made to decide if it makes sense or not. (And spoiler alert, in most places in California it does not make any sense anymore) Buying a home is extremely emotional and I'm actually shocked to see how few homeowner actually even calculated the opportunity cost of buying a home vs renting and investing the downpayment. Or even calculated anything at all. Never forget there is a huge lobby of people that want you to buy a home. (agents, banks, realtor, people that already own a home, ...) I think there is that emotional bias to absolutely want to buy a home, mixed with the fact that people think they will get the same +200% returns that you see since 2012 in the bay area. (Please don't respond with the typical "Paying rent is like throwing money out of the window") As a reference, a blog post on this subject that I mostly agree with: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-the-bay-area-right-now-9eff37da8d6 https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...

WalterBright 8y ago
Paying mortgage interest is like throwing money out of the window :-)
- ironjunkie 8y ago
  I wish more people understood that concept.
- sjg007 8y ago
  And paying PMI just hurts...
  - derekp7 8y ago
    PMI is only if you have less than 20% equity. But taxes and insurance really hurt though. (you still pay them on a rental, just indirectly via rent).
  - masonic 8y ago
    Look into Credit Unions. Even 30 years ago, my CU's mortgages had no PMI.
- matte_black 8y ago
  But so is renting.
  - nomel 8y ago
    Renting is always 100% loss, and I would be absolutely fine with losing less. If I could lose less than ~30k/year with a house, that would be fantastic!
- opencl 8y ago
  Landlords make a profit so they are apparently throwing less money out the window than the renters.
  - ironjunkie 8y ago
    Landlords are only making a profit because of the exceptional last couple of years in California. I will bet you that if you take a mortgage today, you will most probably not make a profit vs renting.
    - jack9 8y ago
      > Landlords are only making a profit because of the exceptional last couple of years in California That's a particularly pointless bit of misinformation. Holding property isn't free, in general. Land is quite the liability in California unless you make enough to justify holding it. Landlords make plenty of money. Currently 750/mo (or more) for single rooms out of a house in southern california for anything decent. With AirBnB you do much better. The math is straightforward.
  - refurb 8y ago
    That’s not true. Landlords often ignore the opportunity cost of their down payment. They can be cash flow positive, while still overall negative compared to other investments. There is nothing that says rent has to cost more than owning.
- GauntletWizard 8y ago
  Paying rent is just as much throwning it out. There's definite tradeoffs to building equity vs. paying rent. Additionally, there's the insane gift to banks that is the mortgage tax deduction, which significantly reduces the amount you spend on interest.
derekp7 8y ago
If you are doing a financial comparison, you need to make sure you compare buying a home vs. renting one. And you need to factor in increases in rent every year, vs. increasing property taxes on a home. Where I'm from (midwest), a home gives you a lot more (and/or different) lifestyle than an apartment. For example, you typically have a garage where you can do your own auto repairs (hard to do that in an apartment parking lot), so you can save money there. And you have a yard and garden which a lot of people like (if you have pets, a yard makes midnight potty time easier). And you can store things such as a boat and/or camper on your property (unless you buy a home in a restrictive subdivision). Which opens up 3-day weekend camping / boating activities. Drawbacks of a house vs. apartment rental are more permanence (harder to pick up and move), which leaves the possibility of being stuck with bad neighbors if you are unlucky. Or not able to move to chase jobs (if you are in an area with limited number of employers).
- ironjunkie 8y ago
  yes, I fully agree with you. you need to do proper comparisons and calculation. After a lot of research I believe the New York time is one of the best online calculators: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... Then there is everything that cannot be calculated: Pro of owning a home: 1) The emotional factor and pride of owning a home. 2) The fact that it is your home and have the freedom to change or do whatever you want Con of owning a home: 1) Your investment is extremely illiquid 2) You are stuck somewhere. Not easy to relocate 3) You probably bought something that is way bigger than what you actually need right now (Like most single couple will buy a home with multiple rooms in anticipation for kids, while they typically dont need that for the next X years, de facto losing more opportunity costs vs renting).
homeintx 8y ago
This Rent vs Buy calculator is a great resource that calculates most of the factors you can think about: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... One thing that's hard to quantitatively compare is the availability of certain types of housing for rent or for sale. You can't buy a 1 or 2 bedroom apartment in many urban areas of the country, and it seems very hard to rent 20 acres with a house, a pond, and a horse pasture. A big thing which isn't accounted for in any of the buy-rent calculators I've seen is bankruptcy protection. I get it for the New York Times because the exemption is very low in NY, but in Texas the homestead exemption is unlimited. If you have a 2 million dollar house and get sued into declaring bankruptcy for some reason, you still have a 2 million dollar house when you're done. For me, even having $100k outside of retirement accounts (which is also bankruptcy protected) makes me nervous because I could lose it all very quickly if I get sick, injured, or get into legal trouble.
- sjg007 8y ago
  You just need an umbrella policy for personal liability.
gfodor 8y ago
I just bought in the Bay Area, and the primary motivator was to basically ensure I was not going to be priced out of the rental market and be forced to move, pull kids out of school, leave behind friends or career, etc. Or, in the case where the home market increased further, being priced out of being able to buy if/when it made sense. A mortgage is (typically) a fixed monthly payment for 30 or 15 years. The fact the mortgage is a fixed payment provides protection from rental market volatility and also inflation. The main forward risk you have (beyond actually being able to pay the bill) is deflationary risk and changes in property tax policy that would increase your monthly costs to maintaining your ownership. It's an investment only if you plan to sell (of course everyone would sell at the right price, so perhaps its an academic point.) But it's also a way to control risk.
- tehlike 8y ago
  Alternatively you could find a rent-controlled apartment/condo/whatever, and use its benefits while you invest in real estate elsewhere.
  - electriclove 8y ago
    Rent-controlled apartment in the Bay Area?
    - laurencerowe 8y ago
      May be found in: * Berkeley * East Palo Alto * Hayward * Los Gatos * Mountain View * Oakland * Richmond * San Francisco * San Jose https://www.sfchronicle.com/business/article/Bay-Area-rent-control-movement-continues-to-spread-11084978.php https://www.sfchronicle.com/business/article/Bay-Area-rent-c...
      - tehlike 8y ago
        Expect wider scope and more cities if prop 10 passes. Bandaid to the actual problem.
    - 8y ago
millstone 8y ago
I used to rent in Sunnyvale. After a few good years, the complex was sold and the new owners set about renovating the place. Contractors entered my home while I was at work, while I was asleep, while I was getting dressed, to install appliances I did not want or have space for. That's what drove me to buy. Home ownership ought not to be a goal in itself, but it's much more than just a financial investment. It's about autonomy in your living space.
- ironjunkie 8y ago
  yes, there are a couple intangibles that cannot be calculated. The downside of that is that your investment is illiquid and that it becomes way more difficult to move.
  - dragonwriter 8y ago
    > The downside of that is that your investment is illiquid and that it becomes way more difficult to move. It's not really much more difficult to move. It's potentially harder on either your cash position or credit rating (e.g., if you can't sell your house quickly), but you actually potentially have a very similarm with a residential lease if your timing for when you decide you need to leave doesn't likne up with the end of the lease.
sjg007 8y ago
Nerdwallet has a rent vs buy calculator you can use. It still makes sense to buy in the Bay area if you can afford the payment. Break even is about 6 years on buy vs rent. 2 million dollar house with 20% down vs ~10-14k in rent for the equivalent.
deleted 8y ago
[deleted]
shados 8y ago
There's a lot of missing knowledge for someone to make the decision that way. Eg: most people, even upper middle class, often don't know basic investing. I certainly didn't until my mid 30s. If I had known even as much as how t-bills worked or index fund investing, I'd have WAAAAAY more money than I have now. The flip side is that a lot of people don't buy real estate for the monetary aspect. They want to (figuratively) be able to drill holes in their walls. To some people, that's priceless.
- ironjunkie 8y ago
  I learned that knowledge the "hard way". I really wanted to buy two years ago, mainly guided by the hype. After spending a full weekend learning all the details and how to do a good cost-analysis of all the options I came to the conclusion that now is not a good time to buy. As a place filled with engineers, I'm still amazed that more people are not doing this down-to-earth calculation before deciding to buy and mainly rely on an emotional impulse.
  - getcrunk 8y ago
    Can u explain a little bit or post some links to help get started on understanding all that?
mnm1 8y ago
I agree with the home as an investment idea. As an investment, a home in a desirable place is much less risky than investing in the market. The chance of a home losing all its value, if insured properly, is virtually zero. I cannot say the same for investing in the market. People should consider both options and hopefully not put all their eggs in one basket if they have enough eggs to spread around. I think that's why many people prefer to invest in a home. Plus, you can live in it and maintain its value with time and work that anyone can do. Buying just because it's part of the American dream or because people think it'll return massive amounts on investment is probably a bad idea for most.
bcheung 8y ago
That article has lots of flaws: 1) It ignores the aspect of time. It is under the assumption you will only be buying for a single year. It doesn't take into account that you lock in your price (vs rents going up). You need to compare against the cost of rents 10+ years into the future vs the (current monthly mortgage + property taxes in the future). 2) It doesn't factor in the increase from equity from payments. 3) It doesn't factor in the leverage (20% down is 500% multiplier on any home price change). Comparing plain home appreciation to plain stock market is a strawman and disingenuous. I had family loan me the down payment so technically I put 0% down which makes my ROI infinity. 4) It doesn't factor in tax savings (mortgage interest is not included in the new $10K limit). 5) It doesn't factor in that principle payments increase over time, so you get more and more going towards equity in each payment. Compare that to rents going up over time. With leverage of a 20% down payment and tax savings you're actually looking at a 30% ROI for something that is a low-risk conservative "investment". That simply doesn't exist in the stock market.
- usaar333 8y ago
  Author here. The calculations used consider all of those. See https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...
robjan 8y ago
Buying a property on a mortgage is just buying a very highly leveraged asset. Any gains as well as losses in the asset value are multiplied several times.
- wahern 8y ago
  How are losses multiplied? (Assuming a typical nonrecourse home mortgage.)

WalterBright 8y ago

Paying mortgage interest is like throwing money out of the window :-)

ironjunkie 8y ago
I wish more people understood that concept.
sjg007 8y ago
And paying PMI just hurts...
- derekp7 8y ago
  PMI is only if you have less than 20% equity. But taxes and insurance really hurt though. (you still pay them on a rental, just indirectly via rent).
- masonic 8y ago
  Look into Credit Unions. Even 30 years ago, my CU's mortgages had no PMI.
matte_black 8y ago
But so is renting.
- nomel 8y ago
  Renting is always 100% loss, and I would be absolutely fine with losing less. If I could lose less than ~30k/year with a house, that would be fantastic!
opencl 8y ago
Landlords make a profit so they are apparently throwing less money out the window than the renters.
- ironjunkie 8y ago
  Landlords are only making a profit because of the exceptional last couple of years in California. I will bet you that if you take a mortgage today, you will most probably not make a profit vs renting.
  - jack9 8y ago
    > Landlords are only making a profit because of the exceptional last couple of years in California That's a particularly pointless bit of misinformation. Holding property isn't free, in general. Land is quite the liability in California unless you make enough to justify holding it. Landlords make plenty of money. Currently 750/mo (or more) for single rooms out of a house in southern california for anything decent. With AirBnB you do much better. The math is straightforward.
- refurb 8y ago
  That’s not true. Landlords often ignore the opportunity cost of their down payment. They can be cash flow positive, while still overall negative compared to other investments. There is nothing that says rent has to cost more than owning.
GauntletWizard 8y ago
Paying rent is just as much throwning it out. There's definite tradeoffs to building equity vs. paying rent. Additionally, there's the insane gift to banks that is the mortgage tax deduction, which significantly reduces the amount you spend on interest.

derekp7 8y ago

If you are doing a financial comparison, you need to make sure you compare buying a home vs. renting one. And you need to factor in increases in rent every year, vs. increasing property taxes on a home. Where I'm from (midwest), a home gives you a lot more (and/or different) lifestyle than an apartment. For example, you typically have a garage where you can do your own auto repairs (hard to do that in an apartment parking lot), so you can save money there. And you have a yard and garden which a lot of people like (if you have pets, a yard makes midnight potty time easier). And you can store things such as a boat and/or camper on your property (unless you buy a home in a restrictive subdivision). Which opens up 3-day weekend camping / boating activities. Drawbacks of a house vs. apartment rental are more permanence (harder to pick up and move), which leaves the possibility of being stuck with bad neighbors if you are unlucky. Or not able to move to chase jobs (if you are in an area with limited number of employers).

ironjunkie 8y ago
yes, I fully agree with you. you need to do proper comparisons and calculation. After a lot of research I believe the New York time is one of the best online calculators: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... Then there is everything that cannot be calculated: Pro of owning a home: 1) The emotional factor and pride of owning a home. 2) The fact that it is your home and have the freedom to change or do whatever you want Con of owning a home: 1) Your investment is extremely illiquid 2) You are stuck somewhere. Not easy to relocate 3) You probably bought something that is way bigger than what you actually need right now (Like most single couple will buy a home with multiple rooms in anticipation for kids, while they typically dont need that for the next X years, de facto losing more opportunity costs vs renting).

homeintx 8y ago

This Rent vs Buy calculator is a great resource that calculates most of the factors you can think about: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... One thing that's hard to quantitatively compare is the availability of certain types of housing for rent or for sale. You can't buy a 1 or 2 bedroom apartment in many urban areas of the country, and it seems very hard to rent 20 acres with a house, a pond, and a horse pasture. A big thing which isn't accounted for in any of the buy-rent calculators I've seen is bankruptcy protection. I get it for the New York Times because the exemption is very low in NY, but in Texas the homestead exemption is unlimited. If you have a 2 million dollar house and get sued into declaring bankruptcy for some reason, you still have a 2 million dollar house when you're done. For me, even having $100k outside of retirement accounts (which is also bankruptcy protected) makes me nervous because I could lose it all very quickly if I get sick, injured, or get into legal trouble.

sjg007 8y ago
You just need an umbrella policy for personal liability.

gfodor 8y ago

I just bought in the Bay Area, and the primary motivator was to basically ensure I was not going to be priced out of the rental market and be forced to move, pull kids out of school, leave behind friends or career, etc. Or, in the case where the home market increased further, being priced out of being able to buy if/when it made sense. A mortgage is (typically) a fixed monthly payment for 30 or 15 years. The fact the mortgage is a fixed payment provides protection from rental market volatility and also inflation. The main forward risk you have (beyond actually being able to pay the bill) is deflationary risk and changes in property tax policy that would increase your monthly costs to maintaining your ownership. It's an investment only if you plan to sell (of course everyone would sell at the right price, so perhaps its an academic point.) But it's also a way to control risk.

tehlike 8y ago
Alternatively you could find a rent-controlled apartment/condo/whatever, and use its benefits while you invest in real estate elsewhere.
- electriclove 8y ago
  Rent-controlled apartment in the Bay Area?
  - laurencerowe 8y ago
    May be found in: * Berkeley * East Palo Alto * Hayward * Los Gatos * Mountain View * Oakland * Richmond * San Francisco * San Jose https://www.sfchronicle.com/business/article/Bay-Area-rent-control-movement-continues-to-spread-11084978.php https://www.sfchronicle.com/business/article/Bay-Area-rent-c...
    - tehlike 8y ago
      Expect wider scope and more cities if prop 10 passes. Bandaid to the actual problem.
  - 8y ago

millstone 8y ago

I used to rent in Sunnyvale. After a few good years, the complex was sold and the new owners set about renovating the place. Contractors entered my home while I was at work, while I was asleep, while I was getting dressed, to install appliances I did not want or have space for. That's what drove me to buy. Home ownership ought not to be a goal in itself, but it's much more than just a financial investment. It's about autonomy in your living space.

ironjunkie 8y ago
yes, there are a couple intangibles that cannot be calculated. The downside of that is that your investment is illiquid and that it becomes way more difficult to move.
- dragonwriter 8y ago
  > The downside of that is that your investment is illiquid and that it becomes way more difficult to move. It's not really much more difficult to move. It's potentially harder on either your cash position or credit rating (e.g., if you can't sell your house quickly), but you actually potentially have a very similarm with a residential lease if your timing for when you decide you need to leave doesn't likne up with the end of the lease.

sjg007 8y ago

Nerdwallet has a rent vs buy calculator you can use. It still makes sense to buy in the Bay area if you can afford the payment. Break even is about 6 years on buy vs rent. 2 million dollar house with 20% down vs ~10-14k in rent for the equivalent.

deleted 8y ago

[deleted]

shados 8y ago

There's a lot of missing knowledge for someone to make the decision that way. Eg: most people, even upper middle class, often don't know basic investing. I certainly didn't until my mid 30s. If I had known even as much as how t-bills worked or index fund investing, I'd have WAAAAAY more money than I have now. The flip side is that a lot of people don't buy real estate for the monetary aspect. They want to (figuratively) be able to drill holes in their walls. To some people, that's priceless.

ironjunkie 8y ago
I learned that knowledge the "hard way". I really wanted to buy two years ago, mainly guided by the hype. After spending a full weekend learning all the details and how to do a good cost-analysis of all the options I came to the conclusion that now is not a good time to buy. As a place filled with engineers, I'm still amazed that more people are not doing this down-to-earth calculation before deciding to buy and mainly rely on an emotional impulse.
- getcrunk 8y ago
  Can u explain a little bit or post some links to help get started on understanding all that?

mnm1 8y ago

I agree with the home as an investment idea. As an investment, a home in a desirable place is much less risky than investing in the market. The chance of a home losing all its value, if insured properly, is virtually zero. I cannot say the same for investing in the market. People should consider both options and hopefully not put all their eggs in one basket if they have enough eggs to spread around. I think that's why many people prefer to invest in a home. Plus, you can live in it and maintain its value with time and work that anyone can do. Buying just because it's part of the American dream or because people think it'll return massive amounts on investment is probably a bad idea for most.

bcheung 8y ago

That article has lots of flaws: 1) It ignores the aspect of time. It is under the assumption you will only be buying for a single year. It doesn't take into account that you lock in your price (vs rents going up). You need to compare against the cost of rents 10+ years into the future vs the (current monthly mortgage + property taxes in the future). 2) It doesn't factor in the increase from equity from payments. 3) It doesn't factor in the leverage (20% down is 500% multiplier on any home price change). Comparing plain home appreciation to plain stock market is a strawman and disingenuous. I had family loan me the down payment so technically I put 0% down which makes my ROI infinity. 4) It doesn't factor in tax savings (mortgage interest is not included in the new $10K limit). 5) It doesn't factor in that principle payments increase over time, so you get more and more going towards equity in each payment. Compare that to rents going up over time. With leverage of a 20% down payment and tax savings you're actually looking at a 30% ROI for something that is a low-risk conservative "investment". That simply doesn't exist in the stock market.

usaar333 8y ago
Author here. The calculations used consider all of those. See https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calculator-22d0bf9bbbb5 https://medium.com/@usaar33/an-up-to-date-buy-or-rent-calcul...

robjan 8y ago

Buying a property on a mortgage is just buying a very highly leveraged asset. Any gains as well as losses in the asset value are multiplied several times.

wahern 8y ago
How are losses multiplied? (Assuming a typical nonrecourse home mortgage.)