8 ms·

Should I Buy a House?

55 points by mxschumacher 6y ago

jherdman 6y ago
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.
ThePadawan 6y ago
> 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.
- throwaway2245 6y ago
  I read it as slightly hyperbolic but relatable. 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.
  - ThePadawan 6y ago
    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".
- fastball 6y ago
  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.
  - ThePadawan 6y ago
    I'm saying people shouldn't "go out with friends" to talk about anything full stop.
    - fastball 6y ago
      Ah. I know The virus pervades everything right now, but still not sure this is the right thread for COVID moralizing.
      - ThePadawan 6y ago
        I don't want to moralize :) I just read the first sentence and immediately got the impression I described in my top level comment. No more, no less.
jeffbee 6y ago
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.
- LatteLazy 6y ago
  Edit: 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 https://www.legalmatch.com/law-library/article/what-is-a-recourse-state.html https://www.legalmatch.com/law-library/article/what-is-a-rec... Original comment: >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.
  - lifeisstillgood 6y ago
    this is usually why a special purpose vehicle is used to buy the second property - buck stops there
  - telotortium 6y ago
    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-recourse-state.html#Which-States-Are-Considered-Non-Recourse-States https://www.legalmatch.com/law-library/article/what-is-a-rec...?
    - LatteLazy 6y ago
      Sorry, I spoke too soon. I've corrected me comment. Thanks for the info!
claydavisss 6y ago
This reads like the author is trying to convince himself more than we readers. Chances are, those that choose not to buy homes won't make alternative long-term investments, they'll just blow their income on consumerist junk. It doesn't matter if the SP500 does better than real estate if you just buy more non-durables with your income or opt to upscale their rental to live a luxury lifestyle. Its a very easy analysis: when a homeowner turns 67, they can sell their home and use the money to subsidize retirement. A renter is probably still working at 67.
LatteLazy 6y ago
The worst time to buy anything is when other people are rushing to buy the same thing.
anovikov 6y ago
If everyone is talking about buying a home, sure sign it's time to sell one.
- opportune 6y ago
  Completely agree. 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.
tempsy 6y ago
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.
- busterarm 6y ago
  I was surprised to see the author completely skip over the tax implications of buying a house and most of the comments here as well. This is right on the money. The tax advantages of property investment are _significant_.
  - albertgoeswoof 6y ago
    Depends where you live. In the UK there are no tax breaks for a property. You pay a duty when you buy a house, and a low yearly tax based on an estimated value/band, but generally no tax on gains either.
  - mxschumacher 6y ago
    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
    - busterarm 6y ago
      Edit: I stand corrected.
      - mxschumacher 6y ago
rootusrootus 6y ago
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.
- vecinu 6y ago
  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... [1] https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
  - g00gler 6y ago
    > 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%
    - dahart 6y ago
      > 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.
albertgoeswoof 6y ago
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.
- fastball 6y ago
  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.
  - albertgoeswoof 6y ago
    That’s the case in most capital markets in general. You’ll almost always pay less to rent money and invest it than rent the item directly.
- dcolkitt 6y ago
  > You also generally can’t borrow 5x your income 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.
  - gomox 6y ago
    3x the collateral, not 3x your yearly income.
  - davio 6y ago
    Mortgage leverage is more like 20x for first time buyers VA loans have even higher leverage
daviross 6y ago
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.
- GeneralMayhem 6y ago
  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-calculator.html 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.
  - atwebb 6y ago
    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.
- mxschumacher 6y ago
  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.
dcolkitt 6y ago
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.
nanidin 6y ago
> 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.
- titanomachy 6y ago
  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. [0] https://www.interactivebrokers.com/en/index.php?f=46376 https://www.interactivebrokers.com/en/index.php?f=46376
  - nanidin 6y ago
    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]. [0] https://www.firecalc.com/ https://www.firecalc.com/
guyzero 6y ago
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-46017138 https://www.dw.com/en/why-cant-germans-stop-saving-money/a-4...)
johncessna 6y ago
As someone with rental properties, I love articles like these. Keep on renting!
- MeinBlutIstBlau 6y ago
  Just curious, do you lease upper scale housing or more of like "slums" for the area type house?
  - johncessna 6y ago
    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.
    - MeinBlutIstBlau 6y ago
      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. How many properties do you own in all?
      - johncessna 6y ago
        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.
elicash 6y ago
The NYT calculator for this is pretty great and is a more substantive way to evaluate the decision than this article for your specific circumstances. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... 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.
- Rebelgecko 6y ago
  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.
greggturkington 6y ago
I'm considering purchasing a home, not as an investment; but because my return rate on rent is 0%. I just need a home and have a flexible ~2-year time window to buy, and just need advice on when to buy. Does this article apply to my decision making?
- MeinBlutIstBlau 6y ago
  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. http://fedprimerate.com/ http://fedprimerate.com/ 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.
- dahart 6y ago
  > my annual rate of return on my rental dollars is 0% though. Technically, rate of return on a rental is -100%. 0% means you break even and get your money back without making any more. https://www.investopedia.com/terms/r/rateofreturn.asp https://www.investopedia.com/terms/r/rateofreturn.asp 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.
davio 6y ago
My favorite analysis on this: https://earlyretirementnow.com/2018/03/21/best-investment-ever-homeownership/ https://earlyretirementnow.com/2018/03/21/best-investment-ev...
greatgib 6y ago
Excellent article. 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.
astuyvenberg 6y ago
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 found the NYT rent vs by calculator to be pretty helpful when making this decision on my own https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
- nanidin 6y ago
  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.
HenryKissinger 6y ago
> 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. Stop thinking about money.
MuffinFlavored 6y ago
I don't know what to believe. I feel like it isn't hard to cherry pick some examples. I'll a townhouse I know about. 1994: $76.5k 2020: $239.5k $76.5k in 1994 is $134.3k inflation adjusted in 2020. 75.5% increase in 26 years. 2.9%/year S&P500 opened 465.44 in 1994. With inflation it should be 817.28. It's 3737 right now. lol
yuy910616 6y ago
I have to say...I'm not sure about the content but highlighting 3-4 things every paragraph is pretty off-putting. It's almost like ALL CAPS.
mabbo 6y ago
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.
- carabiner 6y ago
  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.
  - mabbo 6y ago
    Depends on the home. We own a condo. Mostly, we're paying a condo fee every month and that stuff is all just taken care of (along with our heating and AC).
    - carabiner 6y ago
      Yea, I'm gonna get a condo for sure.
hn_throwaway_99 6y ago
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.
intrasight 6y ago
There are options in between buying and renting. One is co-living, co-housing, or whatever is the official term. Check out https://www.ic.org/ https://www.ic.org/ to see if there is a community near you. I'll second the author's point. I wish that I'd have rented and put the extra $800/month into the stock market. I'd now have millions more.
tudorizer 6y ago
Strange way of comparing your main residence with an investment. Why not buy a cheap home and/or invest regularly? If you're strictly thinking "I have X$ 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.
MeinBlutIstBlau 6y ago
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.
foolfoolz 6y ago
Interesting this post is about making money, but doesn’t mention home owners net worth is around 40x renters net worth https://www.keepingcurrentmatters.com/2020/10/07/a-homeowners-net-worth-is-40x-greater-than-a-renters/ https://www.keepingcurrentmatters.com/2020/10/07/a-homeowner...
- karlerss 6y ago
  The article just means "young/poor people don't buy homes", not "buying a home makes you rich".
ink_13 6y ago
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?
- julianlam 6y ago
  > Yet people smarter than me when it comes to finance publish articles like this one. So what am I missing? They got lucky. There's always a hedge fund that's never lost money, until they do.
- titanomachy 6y ago
  > 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.)
deleted 6y ago
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mrlala 6y ago
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.
webinvest 6y ago
If you plan on living in one place for more than 3 years; buy one. If your investment horizon is shorter than 3 years; don’t.
pickle-wizard 6y ago
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.
CydeWeys 6y ago
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.
Rebelgecko 6y ago
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
NoOneNew 6y ago
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.
andrew311 6y ago
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.
igneo676 6y ago
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
shrimp_emoji 6y ago
Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to--zzzt \electrical noise\ Circuit fault. Real estate propaganda bot 23372 requests maintenance.
underseacables 6y ago
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.
InTheArena 6y ago
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.
theptip 6y ago
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.
- catern 6y ago
  More along these lines in this post, with the pithy title "You are naturally short housing": https://thezikomoletter.wordpress.com/2012/12/10/you-are-naturally-short-housing/ https://thezikomoletter.wordpress.com/2012/12/10/you-are-nat...
CrazyPyroLinux 6y ago
Since this article didn't link to this prior work, I feel like I should: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...
sys_64738 6y ago
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.
rognjen 6y ago
Better title for the article would be: "Should I buy a house in the US as an investment?" For an actual answer whether to buy a house I'd consider one of the many region specific rent vs. buy calculators instead.
theriddlr 6y ago
This calculator shows when renting > buying. Rent if renting is cheaper and/or if you're planning to move. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

55 points by mxschumacher 6y ago

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.

ThePadawan 6y ago

> 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.

throwaway2245 6y ago
I read it as slightly hyperbolic but relatable. 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.
- ThePadawan 6y ago
  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".
fastball 6y ago
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.
- ThePadawan 6y ago
  I'm saying people shouldn't "go out with friends" to talk about anything full stop.
  - fastball 6y ago
    Ah. I know The virus pervades everything right now, but still not sure this is the right thread for COVID moralizing.
    - ThePadawan 6y ago
      I don't want to moralize :) I just read the first sentence and immediately got the impression I described in my top level comment. No more, no less.

jeffbee 6y ago

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.

LatteLazy 6y ago
Edit: 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 https://www.legalmatch.com/law-library/article/what-is-a-recourse-state.html https://www.legalmatch.com/law-library/article/what-is-a-rec... Original comment: >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.
- lifeisstillgood 6y ago
  this is usually why a special purpose vehicle is used to buy the second property - buck stops there
- telotortium 6y ago
  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-recourse-state.html#Which-States-Are-Considered-Non-Recourse-States https://www.legalmatch.com/law-library/article/what-is-a-rec...?
  - LatteLazy 6y ago
    Sorry, I spoke too soon. I've corrected me comment. Thanks for the info!

claydavisss 6y ago

This reads like the author is trying to convince himself more than we readers. Chances are, those that choose not to buy homes won't make alternative long-term investments, they'll just blow their income on consumerist junk. It doesn't matter if the SP500 does better than real estate if you just buy more non-durables with your income or opt to upscale their rental to live a luxury lifestyle. Its a very easy analysis: when a homeowner turns 67, they can sell their home and use the money to subsidize retirement. A renter is probably still working at 67.

LatteLazy 6y ago

The worst time to buy anything is when other people are rushing to buy the same thing.

anovikov 6y ago

If everyone is talking about buying a home, sure sign it's time to sell one.

opportune 6y ago
Completely agree. 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.

tempsy 6y ago

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.

busterarm 6y ago
I was surprised to see the author completely skip over the tax implications of buying a house and most of the comments here as well. This is right on the money. The tax advantages of property investment are _significant_.
- albertgoeswoof 6y ago
  Depends where you live. In the UK there are no tax breaks for a property. You pay a duty when you buy a house, and a low yearly tax based on an estimated value/band, but generally no tax on gains either.
- mxschumacher 6y ago
  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
  - busterarm 6y ago
    Edit: I stand corrected.
    - mxschumacher 6y ago

rootusrootus 6y ago

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.

vecinu 6y ago
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... [1] https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
- g00gler 6y ago
  > 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%
  - dahart 6y ago
    > 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.

albertgoeswoof 6y ago

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.

fastball 6y ago
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.
- albertgoeswoof 6y ago
  That’s the case in most capital markets in general. You’ll almost always pay less to rent money and invest it than rent the item directly.
dcolkitt 6y ago
> You also generally can’t borrow 5x your income 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.
- gomox 6y ago
  3x the collateral, not 3x your yearly income.
- davio 6y ago
  Mortgage leverage is more like 20x for first time buyers VA loans have even higher leverage

daviross 6y ago

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.

GeneralMayhem 6y ago
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-calculator.html 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.
- atwebb 6y ago
  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.
mxschumacher 6y ago
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.

dcolkitt 6y ago

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.

nanidin 6y ago

> 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.

titanomachy 6y ago
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. [0] https://www.interactivebrokers.com/en/index.php?f=46376 https://www.interactivebrokers.com/en/index.php?f=46376
- nanidin 6y ago
  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]. [0] https://www.firecalc.com/ https://www.firecalc.com/

guyzero 6y ago

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-46017138 https://www.dw.com/en/why-cant-germans-stop-saving-money/a-4...)

johncessna 6y ago

As someone with rental properties, I love articles like these. Keep on renting!

MeinBlutIstBlau 6y ago
Just curious, do you lease upper scale housing or more of like "slums" for the area type house?
- johncessna 6y ago
  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.
  - MeinBlutIstBlau 6y ago
    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. How many properties do you own in all?
    - johncessna 6y ago
      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.

elicash 6y ago

The NYT calculator for this is pretty great and is a more substantive way to evaluate the decision than this article for your specific circumstances. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... 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.

Rebelgecko 6y ago
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.

greggturkington 6y ago

I'm considering purchasing a home, not as an investment; but because my return rate on rent is 0%. I just need a home and have a flexible ~2-year time window to buy, and just need advice on when to buy. Does this article apply to my decision making?

MeinBlutIstBlau 6y ago
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. http://fedprimerate.com/ http://fedprimerate.com/ 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.
dahart 6y ago
> my annual rate of return on my rental dollars is 0% though. Technically, rate of return on a rental is -100%. 0% means you break even and get your money back without making any more. https://www.investopedia.com/terms/r/rateofreturn.asp https://www.investopedia.com/terms/r/rateofreturn.asp 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.

davio 6y ago

My favorite analysis on this: https://earlyretirementnow.com/2018/03/21/best-investment-ever-homeownership/ https://earlyretirementnow.com/2018/03/21/best-investment-ev...

greatgib 6y ago

Excellent article. 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.

astuyvenberg 6y ago

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 found the NYT rent vs by calculator to be pretty helpful when making this decision on my own https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

nanidin 6y ago
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.

HenryKissinger 6y ago

> 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. Stop thinking about money.

MuffinFlavored 6y ago

I don't know what to believe. I feel like it isn't hard to cherry pick some examples. I'll a townhouse I know about. 1994: $76.5k 2020: $239.5k $76.5k in 1994 is $134.3k inflation adjusted in 2020. 75.5% increase in 26 years. 2.9%/year S&P500 opened 465.44 in 1994. With inflation it should be 817.28. It's 3737 right now. lol

yuy910616 6y ago

I have to say...I'm not sure about the content but highlighting 3-4 things every paragraph is pretty off-putting. It's almost like ALL CAPS.

mabbo 6y ago

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.

carabiner 6y ago
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.
- mabbo 6y ago
  Depends on the home. We own a condo. Mostly, we're paying a condo fee every month and that stuff is all just taken care of (along with our heating and AC).
  - carabiner 6y ago
    Yea, I'm gonna get a condo for sure.

hn_throwaway_99 6y ago

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.

intrasight 6y ago

There are options in between buying and renting. One is co-living, co-housing, or whatever is the official term. Check out https://www.ic.org/ https://www.ic.org/ to see if there is a community near you. I'll second the author's point. I wish that I'd have rented and put the extra $800/month into the stock market. I'd now have millions more.

tudorizer 6y ago

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.

MeinBlutIstBlau 6y ago

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.

foolfoolz 6y ago

Interesting this post is about making money, but doesn’t mention home owners net worth is around 40x renters net worth https://www.keepingcurrentmatters.com/2020/10/07/a-homeowners-net-worth-is-40x-greater-than-a-renters/ https://www.keepingcurrentmatters.com/2020/10/07/a-homeowner...

karlerss 6y ago
The article just means "young/poor people don't buy homes", not "buying a home makes you rich".

ink_13 6y ago

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?

julianlam 6y ago
> Yet people smarter than me when it comes to finance publish articles like this one. So what am I missing? They got lucky. There's always a hedge fund that's never lost money, until they do.
titanomachy 6y ago
> 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.)

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mrlala 6y ago

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.

webinvest 6y ago

If you plan on living in one place for more than 3 years; buy one. If your investment horizon is shorter than 3 years; don’t.

pickle-wizard 6y ago

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.

CydeWeys 6y ago

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.

Rebelgecko 6y ago

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

NoOneNew 6y ago

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.

andrew311 6y ago

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.

igneo676 6y ago

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

shrimp_emoji 6y ago

Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to live somewhere. So you're either renting or buying. Well you have to--zzzt \electrical noise\ Circuit fault. Real estate propaganda bot 23372 requests maintenance.

underseacables 6y ago

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.

InTheArena 6y ago

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.

theptip 6y ago

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.

catern 6y ago
More along these lines in this post, with the pithy title "You are naturally short housing": https://thezikomoletter.wordpress.com/2012/12/10/you-are-naturally-short-housing/ https://thezikomoletter.wordpress.com/2012/12/10/you-are-nat...

CrazyPyroLinux 6y ago

Since this article didn't link to this prior work, I feel like I should: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...

sys_64738 6y ago

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.

rognjen 6y ago

Better title for the article would be: "Should I buy a house in the US as an investment?" For an actual answer whether to buy a house I'd consider one of the many region specific rent vs. buy calculators instead.

theriddlr 6y ago

This calculator shows when renting > buying. Rent if renting is cheaper and/or if you're planning to move. https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...