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I am also skeptical of the conventional wisdom of home ownership. I think a mortgage is simply a way to force yourself to save money. If people save with the

by johnrob 18y ago

I am also skeptical of the conventional wisdom of home ownership. I think a mortgage is simply a way to force yourself to save money. If people save with the same commitment as mortgage payments, even while paying rent, they should end up doing just fine.

mattmaroon 18y ago
That's not even remotely true. The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. That's not even counting the tax deduction for the interest. A mortgage is basically borrowing money with which to make more money. Your mortgage payment on a place is generally not much more than your rent payment would be, and it's tax deductible and, over time, builds equity. You can't save with the same commitment while paying rent because you have to pay rent.
- nostrademons 18y ago
  > Your mortgage payment on a place is generally not much more than your rent payment would be This is not true in most of the formerly booming real estate markets in the U.S. My coworker just bought a condo for $500K in Boston. At 6%, his interest payments are $30K/year, or $2500/month. My friends are renting a similar place for $2200/month. I've heard it's worse in California, eg. people paying $3500/month in mortgage payments for houses that rent for $2000 or so. The recent Businessweek article on Merced mentioned homes with $3400/month that the owners walked away from, then out-of-state speculators bought it at a foreclosure auction and are now renting it back to the original owners for $1200/month. > The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. First rule of finance: any truly risk-free profit opportunities will be arbitraged away as soon as large numbers of people become aware of them. That's exactly what happened in the 1990s. People suddenly realized that the stock market, on average, returned higher rates than a 30-year mortgage, so they took out mortgages and invested it in the stock market. As a result, the stock market quadrupled between 1995 and 2000. Then they pulled it out of the stock market and back into real estate between between 2001 and 2005. It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.
  - mattmaroon 18y ago
    Most economists still believe it will be above 7%. Thus a fixed rate mortgage now would still be worth it. Of course the cost of renting vs buying is different depending where you go.
  - netcan 18y ago
    Down Here (Melbourne) it's a lot more extreme then that. $2200 p/m for a $500k place is >5% return. Here it's about 3.5%-4% for a normal family house and 4%-5% for a flat. *Interest rates are about 8%
  - xiaoma 18y ago
    True. However stock market returns have averaged about 10-12% a year going all the back to 1830. Furthermore, they've beaten real estate, bonds, gold and every other asset class over any given 15-year period. Even people who bought the day before the great crash in 1929, came out ahead of those who put the same money into real estate... as long as they didn't panic and sell at the bottom as most people did. Of course we can't expect every decade to be like the 90's, but I think it is a reasonable expectation that the 200-year trend will continue barring a kurzweillian singularity or other freakish phenomena.
  - petercooper 18y ago
    > It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market. Why? Stock market rises tend to be linked to technological advances. We are pretty close to some significant technological breakthroughs and these will only accelerate over the next 50 years. Consider, for example, that within 15 years, it should be cheap and practical to use solar panels for almost everything. Consider robotics and the way robots will radicalize many industries as much as industrial robots have revolutionized factories, etc.
tristian 18y ago
If it's an investment property the tax advantages are very nice. Deductions for interest, depreciation, insurance and maintenance can seriously add up. Add rent to that and the yearly cost compared to the medium-long term capital gains turns out to be quite nice. Of course it depends on the state of the market, but if it's a long term investment, and you don't buy out in hicksville, that shouldn't be to much of an issue. As for owning and occupying a home you're paying a mortgage on... well that's more of a lifestyle choice. I would agree that it's not really the best investment. Note that I live in Australia, so much of this may not apply to other regions.
netcan 18y ago
Work it out. Play with unknown factors (future rent, interest & house prices) and see what you come up with. Mostly it's about even. But just as you say a lot of human elements come into play. People choosing a rental or a purchase choose radically different properties so usually saying 'I would be paying this rent' is meaningless since you would be living somewhere completely different paying different rent. And saying 'I would be saving X' is also meaningless because you probably wouldn't be. I think these usually outweigh the pure financials. many people purchase houses that would have never saved a dime. But of course, that's beatable.
tricky 18y ago
(heavily adapted/paraphrased/quoted from 28 Feb 2006 Berkshire Hathaway Chairman Letter by Warren E. Buffett) The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns. True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves. Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.
nazgulnarsil 18y ago
okay, let's compare scenarios. scenario 1 you "save" 2000 a month by spending it on a mortgage scenario 2 you pay 1500 a month for rent and save the other 500. in which scenario do you come out ahead? that 1500 a month is GONE.
- johnrob 18y ago
  If the math were really that simple there would be a massive arbitrage opportunity :). I think there are other variables at play, such as: - down payment: the renter takes the down payment and gets interest on it for N years - closing costs - repair costs - property taxes
  - nazgulnarsil 18y ago
    and you think that difference will exceed $18k a year for 30 years?
    - johnrob 18y ago
      I think your example is more realistic if the numbers are more like 3000/mo to buy and 1500/mo to rent. If rental prices were as close to mortgage rates as 2000/1500, then not only would buying be obvious, it would not even be a much larger financial commitment. The extreme case is when rent equals mortgage.
- pchristensen 18y ago
  If you have a new mortgage, then somewhere between $1000-1800 is spent on interest, NOT saved, and it is GONE (well, it's a little less because of the tax advantage for mortgage interest).
  - coliveira 18y ago
    Yes, you're right, but this value goes down year by year. While the rent costs never go down.
coliveira 18y ago
You just spelled out the problem: you still need to pay your rent. Why paying rent when you could be paying yourself? In the long run, owning the place you live is smarter.

by johnrob 18y ago

mattmaroon 18y ago

That's not even remotely true. The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. That's not even counting the tax deduction for the interest. A mortgage is basically borrowing money with which to make more money. Your mortgage payment on a place is generally not much more than your rent payment would be, and it's tax deductible and, over time, builds equity. You can't save with the same commitment while paying rent because you have to pay rent.

nostrademons 18y ago
> Your mortgage payment on a place is generally not much more than your rent payment would be This is not true in most of the formerly booming real estate markets in the U.S. My coworker just bought a condo for $500K in Boston. At 6%, his interest payments are $30K/year, or $2500/month. My friends are renting a similar place for $2200/month. I've heard it's worse in California, eg. people paying $3500/month in mortgage payments for houses that rent for $2000 or so. The recent Businessweek article on Merced mentioned homes with $3400/month that the owners walked away from, then out-of-state speculators bought it at a foreclosure auction and are now renting it back to the original owners for $1200/month. > The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. First rule of finance: any truly risk-free profit opportunities will be arbitraged away as soon as large numbers of people become aware of them. That's exactly what happened in the 1990s. People suddenly realized that the stock market, on average, returned higher rates than a 30-year mortgage, so they took out mortgages and invested it in the stock market. As a result, the stock market quadrupled between 1995 and 2000. Then they pulled it out of the stock market and back into real estate between between 2001 and 2005. It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.
- mattmaroon 18y ago
  Most economists still believe it will be above 7%. Thus a fixed rate mortgage now would still be worth it. Of course the cost of renting vs buying is different depending where you go.
- netcan 18y ago
  Down Here (Melbourne) it's a lot more extreme then that. $2200 p/m for a $500k place is >5% return. Here it's about 3.5%-4% for a normal family house and 4%-5% for a flat. *Interest rates are about 8%
- xiaoma 18y ago
  True. However stock market returns have averaged about 10-12% a year going all the back to 1830. Furthermore, they've beaten real estate, bonds, gold and every other asset class over any given 15-year period. Even people who bought the day before the great crash in 1929, came out ahead of those who put the same money into real estate... as long as they didn't panic and sell at the bottom as most people did. Of course we can't expect every decade to be like the 90's, but I think it is a reasonable expectation that the 200-year trend will continue barring a kurzweillian singularity or other freakish phenomena.
- petercooper 18y ago
  > It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market. Why? Stock market rises tend to be linked to technological advances. We are pretty close to some significant technological breakthroughs and these will only accelerate over the next 50 years. Consider, for example, that within 15 years, it should be cheap and practical to use solar panels for almost everything. Consider robotics and the way robots will radicalize many industries as much as industrial robots have revolutionized factories, etc.

tristian 18y ago

If it's an investment property the tax advantages are very nice. Deductions for interest, depreciation, insurance and maintenance can seriously add up. Add rent to that and the yearly cost compared to the medium-long term capital gains turns out to be quite nice. Of course it depends on the state of the market, but if it's a long term investment, and you don't buy out in hicksville, that shouldn't be to much of an issue. As for owning and occupying a home you're paying a mortgage on... well that's more of a lifestyle choice. I would agree that it's not really the best investment. Note that I live in Australia, so much of this may not apply to other regions.

netcan 18y ago

Work it out. Play with unknown factors (future rent, interest & house prices) and see what you come up with. Mostly it's about even. But just as you say a lot of human elements come into play. People choosing a rental or a purchase choose radically different properties so usually saying 'I would be paying this rent' is meaningless since you would be living somewhere completely different paying different rent. And saying 'I would be saving X' is also meaningless because you probably wouldn't be. I think these usually outweigh the pure financials. many people purchase houses that would have never saved a dime. But of course, that's beatable.

tricky 18y ago

(heavily adapted/paraphrased/quoted from 28 Feb 2006 Berkshire Hathaway Chairman Letter by Warren E. Buffett) The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns. True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves. Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.

nazgulnarsil 18y ago

okay, let's compare scenarios. scenario 1 you "save" 2000 a month by spending it on a mortgage scenario 2 you pay 1500 a month for rent and save the other 500. in which scenario do you come out ahead? that 1500 a month is GONE.

johnrob 18y ago
If the math were really that simple there would be a massive arbitrage opportunity :). I think there are other variables at play, such as: - down payment: the renter takes the down payment and gets interest on it for N years - closing costs - repair costs - property taxes
- nazgulnarsil 18y ago
  and you think that difference will exceed $18k a year for 30 years?
  - johnrob 18y ago
    I think your example is more realistic if the numbers are more like 3000/mo to buy and 1500/mo to rent. If rental prices were as close to mortgage rates as 2000/1500, then not only would buying be obvious, it would not even be a much larger financial commitment. The extreme case is when rent equals mortgage.
pchristensen 18y ago
If you have a new mortgage, then somewhere between $1000-1800 is spent on interest, NOT saved, and it is GONE (well, it's a little less because of the tax advantage for mortgage interest).
- coliveira 18y ago
  Yes, you're right, but this value goes down year by year. While the rent costs never go down.

coliveira 18y ago

You just spelled out the problem: you still need to pay your rent. Why paying rent when you could be paying yourself? In the long run, owning the place you live is smarter.