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> Housing is strictly a significantly worse investment over the long run than stock markets, if you consider just appreciation and expenses. But if you live in

by pdonis 3y ago

> Housing is strictly a significantly worse investment over the long run than stock markets, if you consider just appreciation and expenses. But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit: you have a place to live without spending any other money. If you buy and rent, you have to spend additional money for your own place to live. The latter situation is comparable to investing into the stock market instead of in buying and then renting a house, but the former is not. That's why so many people take the former option even though, "on paper" (i.e., leaving out the huge benefit of living in the house), it looks like a "bad investment".

_huayra_ 3y ago
> But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit: you have a place to live without spending any other money. What matters at the end of the day are the irrecoverable costs. When renting, it is just the rent. When owning, it is certainly not free: you're paying other irrecoverable costs (e.g. out of PITI+HOA, everything but P is irrecoverable; add on separate costs for when you must pay for repairs and it gets steeper). Sure, you have stability and can write off mortgage interest when you own (although the latter is an extremely unfair policy), but unless one is absolutely sure that one can stay in the home for close to ~7 years (the rough time it took for many HCOL cities in the US to recover their nominal prices from the GFC peak), it can be considered to be a risky time to make such a big financial commitment. Ben Felix has some videos on this concept of "irrecoverable costs" which I find helpful to illustrate this, such as this one [0]. Although I disagree with his idea that leasing cars is a good idea (expressed in some of his podcasts), I find his ideas on renting vs. buying to be quite sound. Personally speaking, I just doubled my compensation by moving from one HCOL city to another in the US because I was renting and not "locked in" to a mortgage. So many colleagues at my former place could not afford to come to the closing table with cash to close out their mortgage at a loss to move (the company I went to basically wanted to hire my whole team, but I was the only one who could manage because I wasn't committed to a mortgage). Eventually I do want to own a home myself, but it was eye-opening how poor of a choice it was for my former colleagues (although my choice to go to grad school during most of the QE decade probably more than compensates for this one win...). [0] https://www.youtube.com/watch?v=q9Golcxjpi8 https://www.youtube.com/watch?v=q9Golcxjpi8
- pdonis 3y ago
  > What matters at the end of the day are the irrecoverable costs. No, what matters at the end of the day are overall costs vs. overall benefits. Many of both are not monetary, so any analysis that only takes monetary costs into account is obviously not going to be a complete or valid analysis. And different people will evaluate the non-monetary costs and benefits differently: for example, some people value the freedom and independence that comes with ownership of the place you live in much more than others. > unless one is absolutely sure that one can stay in the home for close to ~7 years Many people live in the same home for much longer than that.
- jjav 3y ago
  > When renting, it is just the rent. When owning, it is certainly not free: you're paying other irrecoverable costs (e.g. out of PITI+HOA[...] What is too often overlooked is that the rent also includes all those PITI+HOA+maintenance costs, plus a slice of profit for the landlord. If you own it you still pay the same PITI+HOA(hopefully not)+maintenance, but you cut out the middleman which saves you some money. The ease of moving is a factor, but not always easier. If you can have a month-to-month rent then yes, it's certainly easier. In many places though, you're locked into a year lease. Most of time as a renter my leases were year-to-year. Which made moving difficult unless I could time it perfectly to coincide with the yearly lease renewal.
  - _huayra_ 3y ago
    > What is too often overlooked is that the rent also includes all those PITI+HOA+maintenance costs, plus a slice of profit for the landlord. If you own it you still pay the same PITI+HOA(hopefully not)+maintenance, but you cut out the middleman which saves you some money. The rental market is decoupled from the ownership market. This hasn't been an issue for a while because multi-family had not been built up enough (i.e. there had always been an apartment shortage, especially after the GFC), but given that the US is building these more than ever [0], this is going to become clear in the very near future. There is a carrying cost to an empty unit, and price will likely reduce to get someone into a unit. Unless there are significant job losses that push people out of their ~3% mortgages and into the rental market, this may persist for quite a while. Anecdotally, in my VHCOL city that built out these ugly 5-over-1s like crazy in the past couple of years, most are offering multiple months of free rent just to get units to be occupied. Also, while it is true that these irrecoverable costs are "included" in the rent, what is not included in the rent is the time machine to go back in time to purchase a property before the pandemic. This means one's landlord can cover these irrecoverable costs with the rent, plus the mortgage (if any), and still make a profit, all while having the total rent be less than the total irrecoverable cost if one were to buy the same thing today. Anecdotally, this is the exact dynamic I've observed in colleagues and friends who have bought houses in the usual VHCOL tech cities (Seattle, Austin, Bay Area); it's possible to rent a similar house for vastly less money per month. But yes, as a renter, one always has to be ready to make good on the "threat" to move out at the end of a lease, which is difficult to time and tiring to have to execute upon :( [0] https://fred.stlouisfed.org/series/UNDCON5MUSA https://fred.stlouisfed.org/series/UNDCON5MUSA
bachmeier 3y ago
After I bought my house, the combination of maintenance, taxes, insurance, and mortgage interest was quite a bit higher than what I paid in rent (as I recall, $400/month or more). That's money down the drain. I could have put $400 per month plus the entire principal repayment in the stock market. I'd have had less headache, less time spent on maintaining the property, and less stress from figuring out how to deal with problems while working crazy hours, plus a much better return. In my case, the house was a terrible investment. I didn't buy it as an investment (if I had, I'd have failed miserably).
- pdonis 3y ago
  > I didn't buy it as an investment Yes. So was buying the house a good idea for you, all things considered?
  - bachmeier 3y ago
    Yes. A terrible investment relative to the stock market (I could easily pay cash for my house right now if I'd rented and put the leftover money in the stock market) but a good purchase. The answer would have been very different if had no kids.
- reducesuffering 3y ago
  It’s not that simple. If your principal is ~$1.5k/mth, then you actually own an extra $1.1k/mth, but it’s invested into SFH real estate rather than stock market. Then there’s the opportunity cost trade-off of the down payment being invested in SFH real estate or stock market. Maintenance problems can be solved purely by your equity savings put towards handymen. As that is exactly what most property owners do that would be renting to you.
  - bachmeier 3y ago
    > If your principal is ~$1.5k/mth, then you actually own an extra $1.1k/mth The cost of the house (not counting principal repayment) was $400 above my rent, not $400.
jjav 3y ago
> But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit Indeed. If you bought a house stricly as a speculative asset and neither live in it nor rent it, it's a terrible investement. But since you can live in it, the equation changes completely. You can't live in a stock certificate and you have to live somewhere. If you could live for free somewhere (e.g. with parents) then sure, invest in the market and don't buy a house.

by pdonis 3y ago

_huayra_ 3y ago

> But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit: you have a place to live without spending any other money. What matters at the end of the day are the irrecoverable costs. When renting, it is just the rent. When owning, it is certainly not free: you're paying other irrecoverable costs (e.g. out of PITI+HOA, everything but P is irrecoverable; add on separate costs for when you must pay for repairs and it gets steeper). Sure, you have stability and can write off mortgage interest when you own (although the latter is an extremely unfair policy), but unless one is absolutely sure that one can stay in the home for close to ~7 years (the rough time it took for many HCOL cities in the US to recover their nominal prices from the GFC peak), it can be considered to be a risky time to make such a big financial commitment. Ben Felix has some videos on this concept of "irrecoverable costs" which I find helpful to illustrate this, such as this one [0]. Although I disagree with his idea that leasing cars is a good idea (expressed in some of his podcasts), I find his ideas on renting vs. buying to be quite sound. Personally speaking, I just doubled my compensation by moving from one HCOL city to another in the US because I was renting and not "locked in" to a mortgage. So many colleagues at my former place could not afford to come to the closing table with cash to close out their mortgage at a loss to move (the company I went to basically wanted to hire my whole team, but I was the only one who could manage because I wasn't committed to a mortgage). Eventually I do want to own a home myself, but it was eye-opening how poor of a choice it was for my former colleagues (although my choice to go to grad school during most of the QE decade probably more than compensates for this one win...). [0] https://www.youtube.com/watch?v=q9Golcxjpi8 https://www.youtube.com/watch?v=q9Golcxjpi8

pdonis 3y ago
> What matters at the end of the day are the irrecoverable costs. No, what matters at the end of the day are overall costs vs. overall benefits. Many of both are not monetary, so any analysis that only takes monetary costs into account is obviously not going to be a complete or valid analysis. And different people will evaluate the non-monetary costs and benefits differently: for example, some people value the freedom and independence that comes with ownership of the place you live in much more than others. > unless one is absolutely sure that one can stay in the home for close to ~7 years Many people live in the same home for much longer than that.
jjav 3y ago
> When renting, it is just the rent. When owning, it is certainly not free: you're paying other irrecoverable costs (e.g. out of PITI+HOA[...] What is too often overlooked is that the rent also includes all those PITI+HOA+maintenance costs, plus a slice of profit for the landlord. If you own it you still pay the same PITI+HOA(hopefully not)+maintenance, but you cut out the middleman which saves you some money. The ease of moving is a factor, but not always easier. If you can have a month-to-month rent then yes, it's certainly easier. In many places though, you're locked into a year lease. Most of time as a renter my leases were year-to-year. Which made moving difficult unless I could time it perfectly to coincide with the yearly lease renewal.
- _huayra_ 3y ago
  > What is too often overlooked is that the rent also includes all those PITI+HOA+maintenance costs, plus a slice of profit for the landlord. If you own it you still pay the same PITI+HOA(hopefully not)+maintenance, but you cut out the middleman which saves you some money. The rental market is decoupled from the ownership market. This hasn't been an issue for a while because multi-family had not been built up enough (i.e. there had always been an apartment shortage, especially after the GFC), but given that the US is building these more than ever [0], this is going to become clear in the very near future. There is a carrying cost to an empty unit, and price will likely reduce to get someone into a unit. Unless there are significant job losses that push people out of their ~3% mortgages and into the rental market, this may persist for quite a while. Anecdotally, in my VHCOL city that built out these ugly 5-over-1s like crazy in the past couple of years, most are offering multiple months of free rent just to get units to be occupied. Also, while it is true that these irrecoverable costs are "included" in the rent, what is not included in the rent is the time machine to go back in time to purchase a property before the pandemic. This means one's landlord can cover these irrecoverable costs with the rent, plus the mortgage (if any), and still make a profit, all while having the total rent be less than the total irrecoverable cost if one were to buy the same thing today. Anecdotally, this is the exact dynamic I've observed in colleagues and friends who have bought houses in the usual VHCOL tech cities (Seattle, Austin, Bay Area); it's possible to rent a similar house for vastly less money per month. But yes, as a renter, one always has to be ready to make good on the "threat" to move out at the end of a lease, which is difficult to time and tiring to have to execute upon :( [0] https://fred.stlouisfed.org/series/UNDCON5MUSA https://fred.stlouisfed.org/series/UNDCON5MUSA

bachmeier 3y ago

After I bought my house, the combination of maintenance, taxes, insurance, and mortgage interest was quite a bit higher than what I paid in rent (as I recall, $400/month or more). That's money down the drain. I could have put $400 per month plus the entire principal repayment in the stock market. I'd have had less headache, less time spent on maintaining the property, and less stress from figuring out how to deal with problems while working crazy hours, plus a much better return. In my case, the house was a terrible investment. I didn't buy it as an investment (if I had, I'd have failed miserably).

pdonis 3y ago
> I didn't buy it as an investment Yes. So was buying the house a good idea for you, all things considered?
- bachmeier 3y ago
  Yes. A terrible investment relative to the stock market (I could easily pay cash for my house right now if I'd rented and put the leftover money in the stock market) but a good purchase. The answer would have been very different if had no kids.
reducesuffering 3y ago
It’s not that simple. If your principal is ~$1.5k/mth, then you actually own an extra $1.1k/mth, but it’s invested into SFH real estate rather than stock market. Then there’s the opportunity cost trade-off of the down payment being invested in SFH real estate or stock market. Maintenance problems can be solved purely by your equity savings put towards handymen. As that is exactly what most property owners do that would be renting to you.
- bachmeier 3y ago
  > If your principal is ~$1.5k/mth, then you actually own an extra $1.1k/mth The cost of the house (not counting principal repayment) was $400 above my rent, not $400.

jjav 3y ago

> But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit Indeed. If you bought a house stricly as a speculative asset and neither live in it nor rent it, it's a terrible investement. But since you can live in it, the equation changes completely. You can't live in a stock certificate and you have to live somewhere. If you could live for free somewhere (e.g. with parents) then sure, invest in the market and don't buy a house.