11 ms·

Home ownership is still mostly renting

paxys 5y ago
I went in expecting hyperbole or clickbait but the author has a very sensible breakdown. Nothing shocking, and the conclusion is really that it comes down to being a numbers game. Either renting or buying could be better financially based on a hundred different variables, some of which you know in advance and others you don't.
kindle-dev 5y ago
This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.
- gruez 5y ago
  20x leverage = 20x return, but also 20x risk.
  - vmception 5y ago
    Don't forget that the only reason housing works is because the margin calls take years, in contrast to instant (forex, crypto) or days (equities).
  - shapefrog 5y ago
    Except it is 1x risk for example in the US - see jingle mail. The debt is against the property not the person thus 20x return 1x risk (plus your destroyed credit). For other countries in the world there is bankrupcy.
    - kindle-dev 5y ago
      This only applies to non-recourse state, of which there are only 12.
      - runako 5y ago
        Doesn't this only matter if the property is worth less than the mortgage? If the lender can foreclose and sell the property for enough to clear the outstanding mortgage, there's no additional loss beyond the down payment (and any equity paid in since then).
        gruez 5y ago
        But you're still out the downpayment? Your loss is still 20x.
        runako 5y ago
        If the down payment was x, how are you out 20x? Let's use real numbers: House cost: $200,000 Down Payment: $10,000 (5%) (Time passes...) Value at foreclosure: $200,000 (no price change) EDIT: I changed the math on this a few times, updating to reflect that you indeed get your downpayment back (minus fees). The bank sells the house for $200,000. You get your $10,000 back after paying the $190,000 mortgage balance. But you're not on the hook for anything. You walk away with only a hit to your credit. You went from owing the bank $190,000 to owing $0 and having $10,000 in your pocket.
        deleted 5y ago
        [deleted]
        shapefrog 5y ago
        Also (for non-recourse state): House cost: $200,000 Down Payment: $10,000 (5%) (Time passes...) Value at foreclosure: $100,000 (massive change) The bank sells the house for $100,000. You don't get your $10,000 back. But you're not on the hook for anything. You walk away minus $10,000 (i.e. 1x) and a hit to your credit. You went from owing the bank $190,000 to owing $0.
        runako 5y ago
        Exactly this. If the property goes up $100k, you earn a 10x return on your $10k. If it goes down $100k, you only lose your $10k (in non-recourse states). It's asymmetric leverage.
- tinbad 5y ago
  This! Putting down 20k on a house in my late twenties was one of the best investments I’ve ever made. I was especially surprised so many of my peers who had no clue that’s how little it takes to get into a mortgage. Of course, assuming you have a steady job/income.
- dsizzle 5y ago
  Do you mean 5X? I believe 20% down is more common. If you do only put down 5% you'll also have PMI on top of interest. That said, your point stands that it's easy to get low interest leverage. Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).
  - kindle-dev 5y ago
    I believe the average down payment on a house for first time buyers is around 5% these days (in the US): https://www.bankrate.com/mortgages/how-much-is-a-down-payment-on-a-house/ https://www.bankrate.com/mortgages/how-much-is-a-down-paymen...
    - dsizzle 5y ago
      Looks like the answer is in the middle of our guesses: your link says the median down payment is 12% for all buyers.
- anotherman554 5y ago
  Using leverage to buy something not expected to increase in value more than inflation is not necessarily a savvy move. Maybe you'd take issue with my "not expected to increase in value more than inflation" statement, but ultimately you are certainly in no way guaranteed to "make a lot of money putting 5% down on a house". Everyone thinks they are a financial genius after a 10 year bull market.
  - dsizzle 5y ago
    If it moves exactly with inflation, then levering up actually is savvy. Ex: if inflation is 1% and you put down 5%, your return in real dollars is nearly 20%.
    - anotherman554 5y ago
      I don't follow, you need to account for things like property tax, home repair costs, insurance and the realtor fee to know what the return would be. If you are considering renting vs buying the best calculator I know for these things is here: https://michaelbluejay.com/house/rentvsbuy.html https://michaelbluejay.com/house/rentvsbuy.html But the results are all dependent on your assumptions. If you assume houses will increase in value you get much better results than if you assume they will lose value, or not keep up with inflation. If you assume stocks will go up a lot, it makes housing a comparatively "worse" investment.
      - dsizzle 5y ago
        Yes, my calculation ignored property tax, repairs, etc. I thought you were making a claim that being at the inflation level meant leverage wouldn't help you. I agree you'd have to take the total cost into account before deciding whether to buy or rent, but then in that larger analysis I don't see how comparing to the inflation rate is so crucial: it's possible that the home value increases faster than inflation but it still makes better sense to rent (if taxes or repairs are prohibitively expensive). I think I misunderstood your point.
- paxys 5y ago
  This completely depends on the "modest appreciation". Even though it seems like it, growth in housing is not a given in the way you can reasonably assume stock market appreciation over the long term. Plus there is a lot more uncertainty since you cannot hedge your investment in a home. The entire market could be doing great but your particular house may be affected by local zoning laws or a homeless shelter in the neighborhood or a new highway or anything else.
joshstrange 5y ago
I'll conceded that I might be missing something but houses in my area cost significantly more to rent ($1.5K+/mo) than my mortgage ($1.2K) and have a ton more restrictions (pets, modifications, etc). Every house or apartment I've rented I've had to fight tooth and nail with the owner/manager to get anytime fixed (I once had water seeping out of my kitchen floor for over 2 months in an apartment, it just finally stopped, they came out multiple times and did nothing). This doesn't even start to take into account the yearly monthly rent hikes to the tune of $50-$100. One apartment complex I lived in did these rent hikes like clockwork all while removing/closing amenities left and right. The author here seems to be making the point that "not really that much money is going to the principal in the end and even the money that does could be better invested". Maybe that's true but it ignores a ton of other upsides to owning a home IMHO.
- AshleyGrant 5y ago
  Are you including taxes, insurance, and maintenance (both minor and major) in your comparison? That $1,500 rent wraps all of those costs up, while only part of those costs are in a mortgage payment. Over time, it's easy to see how the $3,600 per year difference can be eaten up by maintenance on things like broken/dead appliances/general & major home repairs. A new roof may only be necessary every 20 years or so, but it's very expensive when it happens. That being said, I just spent 10 years renting the same house. My rent did not go up during that time, and my landlord had fairly average maintenance costs during that time including: * replaced broken fridge * paid to have dangerous trees removed * paid to upgrade flooring after a sewer backup flooded the house. Most of this cost was borne by insurance. My former landlord is now selling the house. The market value of the house is double what it was when I moved in. That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund.
  - dahfizz 5y ago
    > That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund. Yeah, he made a 7% return on the real estate itself. BUT, he was also collecting rent on the house the 10 years you were living there. That's a lot more than what he would have gotten from the S&P.
pbnjay 5y ago
In the first year of a 30y mortgage, yes interest is a big component... But even in year 5 or especially in year 10+ interest is much smaller and the principal impact greater. The long term impacts of ownership are the benefit, of course a large purchase will not stack up against renting in the short term!
- tclancy 5y ago
  Yes, unless I missed something, the analysis doesn't account for the decrease in interest costs over time. Still an interesting piece, just would be a fairer comparison.
- hellisothers 5y ago
  Also that interest is largely (if not totally) tax deductible.
  - niij 5y ago
    Almost 90% of Americans file the standard deduction which precludes you from deducting mortgage interest. https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/ https://taxfoundation.org/90-percent-taxpayers-projected-tcj...
    - sumtechguy 5y ago
      The std deduction is fairly large now. You have a tough time getting past it for most people. There is also a cap on how much you can deduct. When I had a mortgage I calculated that about half way through the loan I would no longer be able to deduct the interest because the std one was bigger. One guy I worked with said this 'i love using the standard deduction it means I am not paying money to get my money back I am getting a lower tax rate'.
      - niij 5y ago
        That person has a good point. It's definitely a lot simpler.
ubermonkey 5y ago
Not a great argument, really. In much of the country ownership is a much better deal both financially (cost for equivalent housing per month) and in terms of stability. Once you buy, unless you're foolish enough to get an ARM, your costs are fixed -- but rent is subject to capricious shifts upward annually.
- MeinBlutIstBlau 5y ago
  ARMs are not bad. You can re-lock in the rates at the time when it comes up. It's no different than a commercial balloon payment. Also homeownership is only a "better deal" when things work out perfectly. In reality, you spend far more time with maintenance, cleaning, and are required to stay exactly where you are for a minimum of 7-10 years before you start putting a real dent in equity. Not to mention is an illiquid asset on top of significant closing fees on both ends (my state in particular is a "seller pays both realtor fees" state, regardless if you got a realtor). Homeownership is egregiously expensive in time and money. The only nicety it gives to lower income people is an asset then can refinance and get loan money out to put them further in debt bondage. Homeownership should only be considered if you've got a ridiculously stable job/market as well as the time and money to maintain the property (assuming you can't just construct a new home or buy one made within the last 10 years).
- paxys 5y ago
  ARMs can be advantageous if you know you don't want to live in the house for 10+ years.
  - ubermonkey 5y ago
    Few people are able to accurately predict their own futures this way.
naveen99 5y ago
Renting or speculation, pick your poison. property taxes participate in the rent, and 30yr mortgages backed by the fed drive speculation.
- MeinBlutIstBlau 5y ago
  The reason why everybody could afford a house back in the day was cause the government didn't guarantee anybody a home and banks only lent money out to the best of credit because they had a cap they could only lend. Once that cap was met, no more mortgages for the year.
PaulDavisThe1st 5y ago
MB seems to make a simple error a couple of times here: > So, the financial case for homeownership is much weaker than I think most realize, especially when compared to alternative ways of investing the same money. > So these principal payments are generating a net return of 1.795 percent (2.295 – 0.5). These same dollars, if placed in a diversified stock/bond portfolio, would generate a much higher return than that. The problem with this angle is that people in general have to have housing, and so they're going to pay a substantial part of their income either on rent on on a mortgage. There's rarely an option to invest "the same money" in anything else. Overall this seems like a solid analysis, but the contrast with "what else you could do with the money" seems a little weird when that's not really a choice (unless you live somewhere with a huge difference between the cost of renting vs owning).
- sayonaraman 5y ago
  The “what else you could do with the money” argument is standard in finance/economics , in fact it’s the cornerstone of the famous Black-Scholes formula for pricing options which takes into account "risk-free" interest rate.
  - Enginerrrd 5y ago
    Alternative investment is of course a thing. However, you're missing the point. People MUST live somewhere. Their only alternative investment is with regard to their down payment for money saved, or the amount of money that is (mortgage - equivalent rent), which is usually negative! The BULK (or entirety) of the money they spend on their mortgage is not money that would otherwise be available for alternative investment.
    - FreezeInTheDark 5y ago
      In my experience in the recent market (in a HCOL city in the U.S.), rentals (even only compared to the costs in homeownership, i.e. ignoring principal payments) are much cheaper than mortgages for an equivalently sized house/unit. That's the assertion of the article, and it rings true. You're right that the bulk of the mortgage payments, especially towards the beginning, do not go towards building any capital, which makes the investment even less appealing.
encoderer 5y ago
> Betting on home value appreciation has paid off on average over time, but it’s definitely not a risk-free bet for any given property or over any given time period. Ok, but the same applies to the stocks you might buy as well. But with housing you also have real property ownership benefits. Nobody can evict you! That’s a wonderful feeling.
trey-jones 5y ago
I guess it's a good thing for homeowners that there are other considerations than financial ones in their favor. I think the decision to build or buy a house rather than renting has a lot in common with starting your own business rather than working for someone else: The risk is higher, and the reward may or may not be any good, but at the end of the day you get to make the decisions. I think that has more value than most of HN tends to acknowledge.
simonh 5y ago
The sleight of hand here is presenting the breakdown in the first years of a mortgage, when the interest payment is at it's highest, as though it's representative of the mortgage as a whole. Suppose I presented the analysis based on the last year of a mortgage. The interest payment would be almost nothing, with most of that swinging over into the payment on the principal. Presenting that as being representative of mortgage economics would be grossly misleading, and so is this. The other thing to bear in mind is that mortgage payments, including interest, can be half as much as the rent on a similar property. That's certainly the case in my area. Even factoring in tax and insurance it's often significantly cheaper to pay a mortgage than to pay rent, quite apart from the wealth building argument.
- shapefrog 5y ago
  > The other thing to bear in mind is that mortgage payments, including interest, can be half as much as the rent on a similar property. It can also be twice as much. It can also be the same amount. It can be anywhere between negative a lot & positive a lot. The point is to do the maths and not just parrot the bullshit line 'renting is wasting money' because it may or may not be true.
  - simonh 5y ago
    Yes, absolutely and I don’t think I’m parroting any line. I’ve rented before and it can be the best option depending on your circumstances.
- aswan 5y ago
  In addition to the proportion of interest decreasing over time as the principal is paid down, there's an additional factor: the mortgage payment is fixed for the full term of the loan at purchase time. So suppose you take out a 30 year mortgage with a monthly payment of $2000 in 2021 and you never pre-pay or refinance. In 2050, you'll still be paying $2000 per month even though rents will have risen with inflation over that time.
skyde 5y ago
he said mostly renting but then say 25% go to your principal. So it’s as if it’s 25% cheaper assuming you pay same monthly amount. But I agree If you have HOA burning your money overpaying on useless stuff renting could actually be cheaper.
hash872 5y ago
I basically agree with Bruenig. To put what I said in a couple of comments in one place: The idea is that if renting is cheaper than owning in your city, you pocket the difference you would've spent on owning and put it in the market. So your total market gains will exceed (home appreciation minus repairs minus taxes/insurance/water&sewer minus real estate commissions and taxes to sell) Over a long enough time span, 90+% of the building has to be replaced- everything from the roof down to the basement is essentially on a clock to obsolence from the moment you sign the deed. So even calculating what your expenses are in a given year doesn't cover every 5 or 10 year expenses (a new bathroom, say), or the tail risk of a new roof or new heating system. Over multiple decades of ownership, you have to renovate the house- just to stay at the same level of quality. So yes you could theoretically sell your home you've owned for 30 years for a profit- but if you didn't replace the kitchen, bathroom, repaint, redo the roof, etc. etc.- the value's going to be pretty low. No one wants your kitchen from 30-40 years ago! So you probably renovated the house at least once- so subtract $50-200k renovation cost from your profit & loss. Once you want to sell your house, you encounter even more expenses- even without a real estate agent, you say a few % just to the city/state/attorneys! Yes, a landlord can make money on rent (and if you consider all the risks of being a landlord in a blue state, I'd argue that's an excessively risky business). But, they're paying income taxes on the rent, while my gains in the market are tax free
vel0city 5y ago
One big thing I often see missing in these comparisons of renting versus owning a home is the difference of the housing stock. Sure, I could rent an apartment less than my mortgage + insurance + taxes + maintenance savings, but then I'm most likely living in much less square footage, I probably don't have a private garage, I don't have private outdoor spaces, and I get much less say over the features of the space. My mortgage + escrow amount is a roughly $200 more per month than the last apartment I rented at, but with that I gained over twice the square footage, a two car garage, a pool, and a good bit of private yard. I can run cables in my wall for whatever I want, I can put amateur radio antennas throughout my attic and in my yard, I can install an electric vehicle charger in my garage, I can mount speakers and WiFi AP's on my ceiling, I can do practically whatever with my home without having to get approval from people. For a few hundred dollars a month more, I get significantly more. The apartment and my home are pretty much the same market, they're about 2mi away from each other. The other aspect is home ownership helps hedge against housing inflation. That rent I paid a couple years ago at the apartment is now more than my mortgage + escrow. True, you still feel the effects of housing inflation through higher taxes and insurance premiums, but even MB's numbers show that to only be 30% of the overall costs of the house. You're going to feel the effects of housing inflation much more being a renter signing new leases every year rather than having a significant chunk of your costs completely fixed (P&I), and maintenance costs when truly budgeted right can be somewhat fixed. Other than that I really do agree with MB in this. It always amazes me how people don't quite get the idea that your home price going up doesn't really mean great things for you unless you're planning on trading down. A house is worth what a house is worth, you're going to have a hard time really realizing those gains unless you plan on living under a bridge with your pile of money. Finally, if all you're wanting to do is maximize returns on every dollar that passes through your hands, owning a home isn't necessarily the best choice. The best choice is to rent the cheapest, crappiest apartment with absolutely no amenities in the crappiest part of town and invest everything. But then you're choosing a vastly different lifestyle, so its really a question of what you value in life. Personally, I enjoy floating in my pool after a stressful day of work and find a lot of value in that but maybe you find looking at your Coinbase wallet more relaxing.
silicon2401 5y ago
What I've learned is that when people have to make a decision on whether to take on a 6-figure loan to own a whole home and maybe even land with it, they'll get very emotional about their decision. Some people are fervently anti-owning, some people fervently anti-rent. Both options have their ups and downs and depend on many factors. I've chosen not to buy a house yet and I'm glad. I've been able to move at the drop of a hat, have any issue inspected and fixed with a ticket submission, and have had access to excellent amenities. I would never go back and change these years renting. At the same time, I'm getting to a point where I want land, quiet, privacy, and control, so I'm planning to buy a house in the next year or two (if all goes well). This plan works great for me, probably not for everyone.
throwmamatrain 5y ago
On an excel spreadsheet level I would agree, but this ignores a couple parts of renting reality that are awful: - You can have the property sold out from under you, and you have to scramble to move. This one is the worst in my mind. - Rulesets for rentals are often more restrictive compared to home ownership. Pets, parking, HOA rules, etc. - Quality is often lower in rentals. Sometimes by more than you would expect. Appliances are a great corner to cut by rental properties. The owner occupied places I've bought had vastly better quality appliances, and I can tell the difference. To get equivalent level in my city, you'll be paying much more. - You determine the quality of work in your place. Renting insulates you from the cost, but often this means your landlord sends someone with duct tape to fix a window instead of weather stripping or replacing the window. It's hard to compare like for like, but these are very real problems. I've had a few friends forced to move, and for some it's been more moves than years. Fine if you live out of a backpack+laptop, but the logistics of renting are a huge pain. Recently, I've noticed an uptick in this behaviour last two years due to landlords flipping their properties, and the subsequent owners out of state. This is definitely worse, I see a pattern of task rabbits and other bottom tier services replacing local work. Leverage is the magic in mortgages, and everyone along the way is getting their cut, the city, the real estate agents, etc. There are a ton of misc expenses in the transaction. Property tax is kind of rent junior edition. There are negatives to owning, parking a bunch of capital, can't escape longer term negative neighbourhood problems, you're responsible for fixes. For all the investing advice you see, you cannot live in a bitcoin/stock account, etc. You have to live somewhere, why not have more control over it.
runako 5y ago
The forced saving angle is often maligned by the sort of hyper-rational people that become engineers, but it's a real benefit. Things that happen to real people: - job loss - startup fails - sudden medical expense - freelance contract customer decides to spend less next month - is married, spouse experiences any of the above - decides to invest in something that fails - decides to invest in VC, but that VC performs at or below the median of VC funds (e.g. far below S&P) - takes a lower-paying job for external reasons (to learn new tech, exciting new space, etc.) Financial stress situations like these challenge the "just save the difference in an index fund" plan. The simple fact is that when you are going through something like this, the temptation is going to be very strong not to make 100% of the index fund investment. If you miss it enough times over the decades, you won't see any benefit from this strategy (and you still will not own a home). On the contrary, if you owe a mortgage every month, you will (if it is possible) find the money somehow.
compsciphd 5y ago
the primary benefit to home ownership is stability. While in the US, one has a "sane"/"professional" rental market (i.e. buildings that are built as rentals and managed as a whole). In many other markets, one doesn't have this. One essentially has individually owned apartments that are rented out by those individuals, without any strong form of protection in terms of required maintenance that needs to be done or the knowledge that as long as you're willing to pay market rent, you can stay for as long as you want. In those cases, its better to buy, simply for the security / control, even if its not the best "financial" use of money.

I went in expecting hyperbole or clickbait but the author has a very sensible breakdown. Nothing shocking, and the conclusion is really that it comes down to being a numbers game. Either renting or buying could be better financially based on a hundred different variables, some of which you know in advance and others you don't.

kindle-dev 5y ago

This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.

gruez 5y ago
20x leverage = 20x return, but also 20x risk.
- vmception 5y ago
  Don't forget that the only reason housing works is because the margin calls take years, in contrast to instant (forex, crypto) or days (equities).
- shapefrog 5y ago
  Except it is 1x risk for example in the US - see jingle mail. The debt is against the property not the person thus 20x return 1x risk (plus your destroyed credit). For other countries in the world there is bankrupcy.
  - kindle-dev 5y ago
    This only applies to non-recourse state, of which there are only 12.
    - runako 5y ago
      Doesn't this only matter if the property is worth less than the mortgage? If the lender can foreclose and sell the property for enough to clear the outstanding mortgage, there's no additional loss beyond the down payment (and any equity paid in since then).
      - gruez 5y ago
        But you're still out the downpayment? Your loss is still 20x.
        runako 5y ago
        If the down payment was x, how are you out 20x? Let's use real numbers: House cost: $200,000 Down Payment: $10,000 (5%) (Time passes...) Value at foreclosure: $200,000 (no price change) EDIT: I changed the math on this a few times, updating to reflect that you indeed get your downpayment back (minus fees). The bank sells the house for $200,000. You get your $10,000 back after paying the $190,000 mortgage balance. But you're not on the hook for anything. You walk away with only a hit to your credit. You went from owing the bank $190,000 to owing $0 and having $10,000 in your pocket.
        deleted 5y ago
        [deleted]
        shapefrog 5y ago
        Also (for non-recourse state): House cost: $200,000 Down Payment: $10,000 (5%) (Time passes...) Value at foreclosure: $100,000 (massive change) The bank sells the house for $100,000. You don't get your $10,000 back. But you're not on the hook for anything. You walk away minus $10,000 (i.e. 1x) and a hit to your credit. You went from owing the bank $190,000 to owing $0.
        runako 5y ago
        Exactly this. If the property goes up $100k, you earn a 10x return on your $10k. If it goes down $100k, you only lose your $10k (in non-recourse states). It's asymmetric leverage.
tinbad 5y ago
This! Putting down 20k on a house in my late twenties was one of the best investments I’ve ever made. I was especially surprised so many of my peers who had no clue that’s how little it takes to get into a mortgage. Of course, assuming you have a steady job/income.
dsizzle 5y ago
Do you mean 5X? I believe 20% down is more common. If you do only put down 5% you'll also have PMI on top of interest. That said, your point stands that it's easy to get low interest leverage. Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).
- kindle-dev 5y ago
  I believe the average down payment on a house for first time buyers is around 5% these days (in the US): https://www.bankrate.com/mortgages/how-much-is-a-down-payment-on-a-house/ https://www.bankrate.com/mortgages/how-much-is-a-down-paymen...
  - dsizzle 5y ago
    Looks like the answer is in the middle of our guesses: your link says the median down payment is 12% for all buyers.
anotherman554 5y ago
Using leverage to buy something not expected to increase in value more than inflation is not necessarily a savvy move. Maybe you'd take issue with my "not expected to increase in value more than inflation" statement, but ultimately you are certainly in no way guaranteed to "make a lot of money putting 5% down on a house". Everyone thinks they are a financial genius after a 10 year bull market.
- dsizzle 5y ago
  If it moves exactly with inflation, then levering up actually is savvy. Ex: if inflation is 1% and you put down 5%, your return in real dollars is nearly 20%.
  - anotherman554 5y ago
    I don't follow, you need to account for things like property tax, home repair costs, insurance and the realtor fee to know what the return would be. If you are considering renting vs buying the best calculator I know for these things is here: https://michaelbluejay.com/house/rentvsbuy.html https://michaelbluejay.com/house/rentvsbuy.html But the results are all dependent on your assumptions. If you assume houses will increase in value you get much better results than if you assume they will lose value, or not keep up with inflation. If you assume stocks will go up a lot, it makes housing a comparatively "worse" investment.
    - dsizzle 5y ago
      Yes, my calculation ignored property tax, repairs, etc. I thought you were making a claim that being at the inflation level meant leverage wouldn't help you. I agree you'd have to take the total cost into account before deciding whether to buy or rent, but then in that larger analysis I don't see how comparing to the inflation rate is so crucial: it's possible that the home value increases faster than inflation but it still makes better sense to rent (if taxes or repairs are prohibitively expensive). I think I misunderstood your point.
paxys 5y ago
This completely depends on the "modest appreciation". Even though it seems like it, growth in housing is not a given in the way you can reasonably assume stock market appreciation over the long term. Plus there is a lot more uncertainty since you cannot hedge your investment in a home. The entire market could be doing great but your particular house may be affected by local zoning laws or a homeless shelter in the neighborhood or a new highway or anything else.

joshstrange 5y ago

I'll conceded that I might be missing something but houses in my area cost significantly more to rent ($1.5K+/mo) than my mortgage ($1.2K) and have a ton more restrictions (pets, modifications, etc). Every house or apartment I've rented I've had to fight tooth and nail with the owner/manager to get anytime fixed (I once had water seeping out of my kitchen floor for over 2 months in an apartment, it just finally stopped, they came out multiple times and did nothing). This doesn't even start to take into account the yearly monthly rent hikes to the tune of $50-$100. One apartment complex I lived in did these rent hikes like clockwork all while removing/closing amenities left and right. The author here seems to be making the point that "not really that much money is going to the principal in the end and even the money that does could be better invested". Maybe that's true but it ignores a ton of other upsides to owning a home IMHO.

AshleyGrant 5y ago
Are you including taxes, insurance, and maintenance (both minor and major) in your comparison? That $1,500 rent wraps all of those costs up, while only part of those costs are in a mortgage payment. Over time, it's easy to see how the $3,600 per year difference can be eaten up by maintenance on things like broken/dead appliances/general & major home repairs. A new roof may only be necessary every 20 years or so, but it's very expensive when it happens. That being said, I just spent 10 years renting the same house. My rent did not go up during that time, and my landlord had fairly average maintenance costs during that time including: * replaced broken fridge * paid to have dangerous trees removed * paid to upgrade flooring after a sewer backup flooded the house. Most of this cost was borne by insurance. My former landlord is now selling the house. The market value of the house is double what it was when I moved in. That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund.
- dahfizz 5y ago
  > That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund. Yeah, he made a 7% return on the real estate itself. BUT, he was also collecting rent on the house the 10 years you were living there. That's a lot more than what he would have gotten from the S&P.

pbnjay 5y ago

In the first year of a 30y mortgage, yes interest is a big component... But even in year 5 or especially in year 10+ interest is much smaller and the principal impact greater. The long term impacts of ownership are the benefit, of course a large purchase will not stack up against renting in the short term!

tclancy 5y ago
Yes, unless I missed something, the analysis doesn't account for the decrease in interest costs over time. Still an interesting piece, just would be a fairer comparison.
hellisothers 5y ago
Also that interest is largely (if not totally) tax deductible.
- niij 5y ago
  Almost 90% of Americans file the standard deduction which precludes you from deducting mortgage interest. https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/ https://taxfoundation.org/90-percent-taxpayers-projected-tcj...
  - sumtechguy 5y ago
    The std deduction is fairly large now. You have a tough time getting past it for most people. There is also a cap on how much you can deduct. When I had a mortgage I calculated that about half way through the loan I would no longer be able to deduct the interest because the std one was bigger. One guy I worked with said this 'i love using the standard deduction it means I am not paying money to get my money back I am getting a lower tax rate'.
    - niij 5y ago
      That person has a good point. It's definitely a lot simpler.

ubermonkey 5y ago

Not a great argument, really. In much of the country ownership is a much better deal both financially (cost for equivalent housing per month) and in terms of stability. Once you buy, unless you're foolish enough to get an ARM, your costs are fixed -- but rent is subject to capricious shifts upward annually.

MeinBlutIstBlau 5y ago
ARMs are not bad. You can re-lock in the rates at the time when it comes up. It's no different than a commercial balloon payment. Also homeownership is only a "better deal" when things work out perfectly. In reality, you spend far more time with maintenance, cleaning, and are required to stay exactly where you are for a minimum of 7-10 years before you start putting a real dent in equity. Not to mention is an illiquid asset on top of significant closing fees on both ends (my state in particular is a "seller pays both realtor fees" state, regardless if you got a realtor). Homeownership is egregiously expensive in time and money. The only nicety it gives to lower income people is an asset then can refinance and get loan money out to put them further in debt bondage. Homeownership should only be considered if you've got a ridiculously stable job/market as well as the time and money to maintain the property (assuming you can't just construct a new home or buy one made within the last 10 years).
paxys 5y ago
ARMs can be advantageous if you know you don't want to live in the house for 10+ years.
- ubermonkey 5y ago
  Few people are able to accurately predict their own futures this way.

naveen99 5y ago

Renting or speculation, pick your poison. property taxes participate in the rent, and 30yr mortgages backed by the fed drive speculation.

MeinBlutIstBlau 5y ago
The reason why everybody could afford a house back in the day was cause the government didn't guarantee anybody a home and banks only lent money out to the best of credit because they had a cap they could only lend. Once that cap was met, no more mortgages for the year.

PaulDavisThe1st 5y ago

MB seems to make a simple error a couple of times here: > So, the financial case for homeownership is much weaker than I think most realize, especially when compared to alternative ways of investing the same money. > So these principal payments are generating a net return of 1.795 percent (2.295 – 0.5). These same dollars, if placed in a diversified stock/bond portfolio, would generate a much higher return than that. The problem with this angle is that people in general have to have housing, and so they're going to pay a substantial part of their income either on rent on on a mortgage. There's rarely an option to invest "the same money" in anything else. Overall this seems like a solid analysis, but the contrast with "what else you could do with the money" seems a little weird when that's not really a choice (unless you live somewhere with a huge difference between the cost of renting vs owning).

sayonaraman 5y ago
The “what else you could do with the money” argument is standard in finance/economics , in fact it’s the cornerstone of the famous Black-Scholes formula for pricing options which takes into account "risk-free" interest rate.
- Enginerrrd 5y ago
  Alternative investment is of course a thing. However, you're missing the point. People MUST live somewhere. Their only alternative investment is with regard to their down payment for money saved, or the amount of money that is (mortgage - equivalent rent), which is usually negative! The BULK (or entirety) of the money they spend on their mortgage is not money that would otherwise be available for alternative investment.
  - FreezeInTheDark 5y ago
    In my experience in the recent market (in a HCOL city in the U.S.), rentals (even only compared to the costs in homeownership, i.e. ignoring principal payments) are much cheaper than mortgages for an equivalently sized house/unit. That's the assertion of the article, and it rings true. You're right that the bulk of the mortgage payments, especially towards the beginning, do not go towards building any capital, which makes the investment even less appealing.

encoderer 5y ago

> Betting on home value appreciation has paid off on average over time, but it’s definitely not a risk-free bet for any given property or over any given time period. Ok, but the same applies to the stocks you might buy as well. But with housing you also have real property ownership benefits. Nobody can evict you! That’s a wonderful feeling.

trey-jones 5y ago

I guess it's a good thing for homeowners that there are other considerations than financial ones in their favor. I think the decision to build or buy a house rather than renting has a lot in common with starting your own business rather than working for someone else: The risk is higher, and the reward may or may not be any good, but at the end of the day you get to make the decisions. I think that has more value than most of HN tends to acknowledge.

simonh 5y ago

The sleight of hand here is presenting the breakdown in the first years of a mortgage, when the interest payment is at it's highest, as though it's representative of the mortgage as a whole. Suppose I presented the analysis based on the last year of a mortgage. The interest payment would be almost nothing, with most of that swinging over into the payment on the principal. Presenting that as being representative of mortgage economics would be grossly misleading, and so is this. The other thing to bear in mind is that mortgage payments, including interest, can be half as much as the rent on a similar property. That's certainly the case in my area. Even factoring in tax and insurance it's often significantly cheaper to pay a mortgage than to pay rent, quite apart from the wealth building argument.

shapefrog 5y ago
> The other thing to bear in mind is that mortgage payments, including interest, can be half as much as the rent on a similar property. It can also be twice as much. It can also be the same amount. It can be anywhere between negative a lot & positive a lot. The point is to do the maths and not just parrot the bullshit line 'renting is wasting money' because it may or may not be true.
- simonh 5y ago
  Yes, absolutely and I don’t think I’m parroting any line. I’ve rented before and it can be the best option depending on your circumstances.
aswan 5y ago
In addition to the proportion of interest decreasing over time as the principal is paid down, there's an additional factor: the mortgage payment is fixed for the full term of the loan at purchase time. So suppose you take out a 30 year mortgage with a monthly payment of $2000 in 2021 and you never pre-pay or refinance. In 2050, you'll still be paying $2000 per month even though rents will have risen with inflation over that time.

skyde 5y ago

he said mostly renting but then say 25% go to your principal. So it’s as if it’s 25% cheaper assuming you pay same monthly amount. But I agree If you have HOA burning your money overpaying on useless stuff renting could actually be cheaper.

hash872 5y ago

I basically agree with Bruenig. To put what I said in a couple of comments in one place: The idea is that if renting is cheaper than owning in your city, you pocket the difference you would've spent on owning and put it in the market. So your total market gains will exceed (home appreciation minus repairs minus taxes/insurance/water&sewer minus real estate commissions and taxes to sell) Over a long enough time span, 90+% of the building has to be replaced- everything from the roof down to the basement is essentially on a clock to obsolence from the moment you sign the deed. So even calculating what your expenses are in a given year doesn't cover every 5 or 10 year expenses (a new bathroom, say), or the tail risk of a new roof or new heating system. Over multiple decades of ownership, you have to renovate the house- just to stay at the same level of quality. So yes you could theoretically sell your home you've owned for 30 years for a profit- but if you didn't replace the kitchen, bathroom, repaint, redo the roof, etc. etc.- the value's going to be pretty low. No one wants your kitchen from 30-40 years ago! So you probably renovated the house at least once- so subtract $50-200k renovation cost from your profit & loss. Once you want to sell your house, you encounter even more expenses- even without a real estate agent, you say a few % just to the city/state/attorneys! Yes, a landlord can make money on rent (and if you consider all the risks of being a landlord in a blue state, I'd argue that's an excessively risky business). But, they're paying income taxes on the rent, while my gains in the market are tax free

vel0city 5y ago

One big thing I often see missing in these comparisons of renting versus owning a home is the difference of the housing stock. Sure, I could rent an apartment less than my mortgage + insurance + taxes + maintenance savings, but then I'm most likely living in much less square footage, I probably don't have a private garage, I don't have private outdoor spaces, and I get much less say over the features of the space. My mortgage + escrow amount is a roughly $200 more per month than the last apartment I rented at, but with that I gained over twice the square footage, a two car garage, a pool, and a good bit of private yard. I can run cables in my wall for whatever I want, I can put amateur radio antennas throughout my attic and in my yard, I can install an electric vehicle charger in my garage, I can mount speakers and WiFi AP's on my ceiling, I can do practically whatever with my home without having to get approval from people. For a few hundred dollars a month more, I get significantly more. The apartment and my home are pretty much the same market, they're about 2mi away from each other. The other aspect is home ownership helps hedge against housing inflation. That rent I paid a couple years ago at the apartment is now more than my mortgage + escrow. True, you still feel the effects of housing inflation through higher taxes and insurance premiums, but even MB's numbers show that to only be 30% of the overall costs of the house. You're going to feel the effects of housing inflation much more being a renter signing new leases every year rather than having a significant chunk of your costs completely fixed (P&I), and maintenance costs when truly budgeted right can be somewhat fixed. Other than that I really do agree with MB in this. It always amazes me how people don't quite get the idea that your home price going up doesn't really mean great things for you unless you're planning on trading down. A house is worth what a house is worth, you're going to have a hard time really realizing those gains unless you plan on living under a bridge with your pile of money. Finally, if all you're wanting to do is maximize returns on every dollar that passes through your hands, owning a home isn't necessarily the best choice. The best choice is to rent the cheapest, crappiest apartment with absolutely no amenities in the crappiest part of town and invest everything. But then you're choosing a vastly different lifestyle, so its really a question of what you value in life. Personally, I enjoy floating in my pool after a stressful day of work and find a lot of value in that but maybe you find looking at your Coinbase wallet more relaxing.

silicon2401 5y ago

What I've learned is that when people have to make a decision on whether to take on a 6-figure loan to own a whole home and maybe even land with it, they'll get very emotional about their decision. Some people are fervently anti-owning, some people fervently anti-rent. Both options have their ups and downs and depend on many factors. I've chosen not to buy a house yet and I'm glad. I've been able to move at the drop of a hat, have any issue inspected and fixed with a ticket submission, and have had access to excellent amenities. I would never go back and change these years renting. At the same time, I'm getting to a point where I want land, quiet, privacy, and control, so I'm planning to buy a house in the next year or two (if all goes well). This plan works great for me, probably not for everyone.

throwmamatrain 5y ago

On an excel spreadsheet level I would agree, but this ignores a couple parts of renting reality that are awful: - You can have the property sold out from under you, and you have to scramble to move. This one is the worst in my mind. - Rulesets for rentals are often more restrictive compared to home ownership. Pets, parking, HOA rules, etc. - Quality is often lower in rentals. Sometimes by more than you would expect. Appliances are a great corner to cut by rental properties. The owner occupied places I've bought had vastly better quality appliances, and I can tell the difference. To get equivalent level in my city, you'll be paying much more. - You determine the quality of work in your place. Renting insulates you from the cost, but often this means your landlord sends someone with duct tape to fix a window instead of weather stripping or replacing the window. It's hard to compare like for like, but these are very real problems. I've had a few friends forced to move, and for some it's been more moves than years. Fine if you live out of a backpack+laptop, but the logistics of renting are a huge pain. Recently, I've noticed an uptick in this behaviour last two years due to landlords flipping their properties, and the subsequent owners out of state. This is definitely worse, I see a pattern of task rabbits and other bottom tier services replacing local work. Leverage is the magic in mortgages, and everyone along the way is getting their cut, the city, the real estate agents, etc. There are a ton of misc expenses in the transaction. Property tax is kind of rent junior edition. There are negatives to owning, parking a bunch of capital, can't escape longer term negative neighbourhood problems, you're responsible for fixes. For all the investing advice you see, you cannot live in a bitcoin/stock account, etc. You have to live somewhere, why not have more control over it.

runako 5y ago

The forced saving angle is often maligned by the sort of hyper-rational people that become engineers, but it's a real benefit. Things that happen to real people: - job loss - startup fails - sudden medical expense - freelance contract customer decides to spend less next month - is married, spouse experiences any of the above - decides to invest in something that fails - decides to invest in VC, but that VC performs at or below the median of VC funds (e.g. far below S&P) - takes a lower-paying job for external reasons (to learn new tech, exciting new space, etc.) Financial stress situations like these challenge the "just save the difference in an index fund" plan. The simple fact is that when you are going through something like this, the temptation is going to be very strong not to make 100% of the index fund investment. If you miss it enough times over the decades, you won't see any benefit from this strategy (and you still will not own a home). On the contrary, if you owe a mortgage every month, you will (if it is possible) find the money somehow.

compsciphd 5y ago

the primary benefit to home ownership is stability. While in the US, one has a "sane"/"professional" rental market (i.e. buildings that are built as rentals and managed as a whole). In many other markets, one doesn't have this. One essentially has individually owned apartments that are rented out by those individuals, without any strong form of protection in terms of required maintenance that needs to be done or the knowledge that as long as you're willing to pay market rent, you can stay for as long as you want. In those cases, its better to buy, simply for the security / control, even if its not the best "financial" use of money.