6 ms·

Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface

Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface in an HN discussion. It's probably worth making a closer comparison though: * Buying a House on Loan: commit to paying off a $450k loan over 30 years at 5% interest, with an immediate $50k down payment and the home itself as collateral. So ~$2500/mo payments, another 400k in interest by the time you're done. Your home probably appreciates by that much in most markets, which gives you a million dollar asset at the end. In some good markets, it may appreciate by 3-4 times, which would mean you have a 1.5-2 million dollar asset. * Pure Financial Investment: put $50k into a fund, add sustained regular $2500/mo contributions. Let's imagine that the fund averages a conservative 5% annual return and we do this for 30 years. The outcome should be... a bit above 2 million dollars. All investment involves risk and variable outcomes, but the BHL plan probably has a more varied outcome. Parity may be as common as substantial profit. The PFI plan, on the other hand, performs really well even considering conservative 5% returns: over 2 million dollars (minus 400k you would have probably paid in rent). Bump it to 8% returns and we're looking at 3 million, a performance even many good real estate markets couldn't match. Its major problem is that you need to be disciplined about putting the chunky contributions in, which means you need to consistently have rent-payment-level disposable income to make this work. Many working people don't. Leverage lets housing costs go to equity and interest payments, which is key leverage for people who don't have disposable investment income. But less key for people who do.

vardalab 4mo ago
You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.
- skeptic_ai 4mo ago
  Exactly lol
- hbarka 4mo ago
  They forgot to mention that they will move back to mom’s house.
- wwweston 4mo ago
  That point is in the analysis after the bullet points (in phrases like "minus 400k you would have probably paid in rent" and "you need to consistently have rent-payment-level disposable income to make this work. Many working people don't."). I considered putting it up in the bullet points. Apparently deciding against that lost my expressions of this point to some readers, including yourself. But yes, this is why the analysis after the bullet point mentions the profile of people who don't have $2500 disposable income. The leverage matters more to people in this situation. Having seen this conversation play out more than a few times and even turn a tad fighty, I think this is the fault line: * people who do this kind of analysis frequently and generally have high disposable income often see that they can leverage compound interest rather than pay it, so the Pure Financial Investment plan seems like a slam dunk to them, and for their profile they're probably right. * people who generally don't have high disposable income see that they can use leverage to make their rent payment do double duty, which seems like a huge win for them, and for their profile they're probably right. What I did leave out is how a mortgage can bound your living costs. Another commenter correctly pointed out rents can expand dramatically. Where incomes track rents, I don't think this makes a dramatic difference, and that's why I didn't include it, but it's true this isn't guaranteed, and mortgage can function pretty well as a hedge.
  - blks 4mo ago
    Then analysis that includes buying a home should as well include investing $rent amount every month in addition to mortgage.
alistairSH 4mo ago
The one thing missing from that calculation... the rent goes up over the 30 year period while the mortgage is fixed (subject to changes in tax rate and insurance as value hopefully increases). 9 years into my current home and my 20 year mortgage is substantially less than renting a similar house in the same subdivision. And because it's 20 year, the interest rate is lower, and when I retire, I'll only have to cover tax and insurance at a fraction of the future rent.
- jp191919 4mo ago
  Exactly. After 8 years there is absolutely no way I could rent a comparable house in my area for what my mortgage costs.
- mancerayder 4mo ago
  And people aren't including the interest deduction on income - up to 750K loan amount worth. This is a form of subsidy that renters are handing over to mortgaged owners.
  - deleted 4mo ago
    [deleted]
iteria 4mo ago
A house is an inflation hedge. Any calculation about investing the difference has to subtract the rent you are paying and rent goes up every year. There is no where where you can pay a rent anywhere close to what I'm paying for my mortgage in my area and I'm only 5 years into this. Of course I lucked out by locking in that sweet sub-3% rate, but still, I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term. A house in a long term play. I didn't buy until I know where I wanted to anchor. That's the deal. I didn't want to be in a situation where late age destitution came because I couldn't afford where I wanted to live anymore. I got to see that play out with older relatives who did go the rent only route. Course I have to pay property taxes, but as it stands it's less than $200/mo and I don't imagine it'll rise above that taking inflation into account. That is something I can afford in retirement even on social security. There is maintenance, but living in a neighborhood full of elders, a lot of it is truly optional. And honestly I think the only maintenance I've paid thus fair is the yard only because I don't want to do it myself. For me financially this is a hell of a deal with the only trade off that I must stay here. And... I'm settled enough that I'm willing to do that. I moved all over in my early career to find where I wanted to be.
- lesuorac 4mo ago
  > A house is an inflation hedge. So are Stocks ... > I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term. You are not alone. The thing is this is such a common argument that there are a zillion rent vs buy calculators [1]. That said, yeah sub 3% the math often does work out in terms of buy (assuming you don't sell before 7 years which the average person _does_ sell before). But sub3% and holding for 30 years is actually rare. It basically comes down to that the down payment gives renters such a headstart in gains that the homeowner takes forever to overcome it. But keep in mind they're also comparing a similar rental house to the bought house. So If you'd rent a smaller 1 bedroom apartment but only going to buy a 4 bedroom house then you're really behind in the math. [1]: https://www.google.com/search?q=rent+vs+buy+calculator https://www.google.com/search?q=rent+vs+buy+calculator
  - 4mo ago
tootie 4mo ago
I always consult this calculator: https://www.nytimes.com/interactive/2024/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal... It forces you to make some assumptions on market returns and such, but it gives a pretty clear picture. The biggest variable is how long you expect to live in the same place (longer favors buy) and the next biggest is the ratio of average rent to average housing payment. The inflection point being that if you live in one place long enough to pay off the mortgage, then it obviously starts to be much more advantageous to buy, but that requires you predicting your life 30 years in the future.
- pc86 4mo ago
  > but that requires you predicting your life 30 years in the future. This is true, but the vast majority of people - especially in the US - don't move around the country or even state every few years. One of the biggest, perhaps the biggest, pro of renting is that you're not tied down to one place for very long. It's pretty rare that someone buys a house then is suddenly forced to move hours away.
  - lokar 4mo ago
    I think people sell their (occupied) house after about 10 years on average, for whatever reason.
  - lorecore 4mo ago
    Moving around a lot incurs its own costs. Time, transportation, movers, deposits (which you're unlikely to get fully returned), new furniture... I think it's an additional "hidden" cost to renting that doesn't get talked about much.
    - tootie 4mo ago
      The cost of moving from owned home to owned home is far higher. Brokers, lawyers and all the associated closing costs can be huge. And you still have to pay movers and worry about new furniture.
pc86 4mo ago
The house gives you a place to live, so the PFI plan is either a huge miscalculation (not a great place to start when you're making a numerical argument) or intentionally disingenuous. Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes. If you're getting a $2500/mo mortgage, what's rent for a similar house? Could be $2k/mo, could be $3500/mo. And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years. After the initial post-purchase increase, taxes are usually capped to some degree as well. For most people rent is capped for at most 1 year. So every year you rent you will have less money to invest, and eventually you'll have to start taking money out of that account because your rent has surpassed what your mortgage payment would have been 5, 10, 15, 25 years ago. When you run the numbers honestly it's really, really hard to get similar gains renting as you can buying, especially 30 years in the future.
- notnaut 4mo ago
  I understand it’s more complicated than this, but it seems really really confusing at a basic level. In one situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you’re out on the street. In the other situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you have a house.
  - jandrewrogers 4mo ago
    Renting gives you a giant pile of additional money you can save and invest so that after 30 years you could buy a house in cash if you wanted to. The person with the house does not have this cash, they have a house instead. After 30 years you either have a house or enough cash to buy that house. In many cases, the rate of return on the cash is sufficiently greater that it is significantly more than the value of that house.
    - what 4mo ago
      Eh, not really? If you have money to invest after rent, you’ll also have money to invest after mortgage payments.
deleted 4mo ago
[deleted]
notnaut 4mo ago
Uhhhh where are you getting that $2500 a month to invest? That’s your landlord’s money, dawg. And they’re gonna expect at LEAST another $100 year over year if you don’t want to move.
barchar 4mo ago
Eagh, the leverage really isn't that cheap, and you can think of renting as giving you cheap leverage too (it's just your borrowing the house instead of the money).
- bombcar 4mo ago
  The leverage only matters in an appreciation market (which we’ve been spoiled with in the USA since boomertimes). If you distill the math on assumed zero appreciation (or zero “real” appreciation) it becomes not so terribly pretty. It’s really a form of various hedges wrapped up with a bow, that for many people is desirable (and since we HAVE had appreciation it doesn’t “turn out bad” most of the time anyway). Anyone who says “renting/buying” is the only way to go is missing something.
  - barchar 4mo ago
    Renting also has hedges embedded, and every hedge can be a risk position. In particular the interest rate options in foxed mortgages are pretty expensive and it only hedges the cost of a particular house not housing in general. Housing cost is correlated with local incomes so in some ways it's doubling down. In particular recessions are deflationary in the immediate aftermath.
crooked-v 4mo ago
The 'Pure Financial Investment' one is overlooking that you still need a place to live for those 30 years.
deleted 4mo ago
[deleted]
Galanwe 4mo ago
Your calculation is bogus, you are 1) assuming infinite money 2) assuming infinite time. 1) When you say "add sustained regular $2500/mo contributions", you forget that compared to buying your place, you also have to pay rent, most likely at the same amount you would pay back your mortgage assuming same quality of life. So either you have a free $2,500 to spare (in which case you could also have invested that amount in the buying case, or borrowed more), or you have $0 to invest. 2) You cannot just take the expected value of two different returns distribution and assume you would earn it in both cases. That would assume you have infinite time to wait for the average rate of returns to converge. If your life depends on said returns, you cannot just say "oh nevermind I'll wait another 15 years to withdraw". In your example, stock market returns are immensely more volatile than real estate.
namanyayg 4mo ago
You can live in a house, but you can't eat stocks

vardalab 4mo ago

You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.

skeptic_ai 4mo ago
Exactly lol
hbarka 4mo ago
They forgot to mention that they will move back to mom’s house.
wwweston 4mo ago
That point is in the analysis after the bullet points (in phrases like "minus 400k you would have probably paid in rent" and "you need to consistently have rent-payment-level disposable income to make this work. Many working people don't."). I considered putting it up in the bullet points. Apparently deciding against that lost my expressions of this point to some readers, including yourself. But yes, this is why the analysis after the bullet point mentions the profile of people who don't have $2500 disposable income. The leverage matters more to people in this situation. Having seen this conversation play out more than a few times and even turn a tad fighty, I think this is the fault line: * people who do this kind of analysis frequently and generally have high disposable income often see that they can leverage compound interest rather than pay it, so the Pure Financial Investment plan seems like a slam dunk to them, and for their profile they're probably right. * people who generally don't have high disposable income see that they can use leverage to make their rent payment do double duty, which seems like a huge win for them, and for their profile they're probably right. What I did leave out is how a mortgage can bound your living costs. Another commenter correctly pointed out rents can expand dramatically. Where incomes track rents, I don't think this makes a dramatic difference, and that's why I didn't include it, but it's true this isn't guaranteed, and mortgage can function pretty well as a hedge.
- blks 4mo ago
  Then analysis that includes buying a home should as well include investing $rent amount every month in addition to mortgage.

alistairSH 4mo ago

The one thing missing from that calculation... the rent goes up over the 30 year period while the mortgage is fixed (subject to changes in tax rate and insurance as value hopefully increases). 9 years into my current home and my 20 year mortgage is substantially less than renting a similar house in the same subdivision. And because it's 20 year, the interest rate is lower, and when I retire, I'll only have to cover tax and insurance at a fraction of the future rent.

jp191919 4mo ago
Exactly. After 8 years there is absolutely no way I could rent a comparable house in my area for what my mortgage costs.
mancerayder 4mo ago
And people aren't including the interest deduction on income - up to 750K loan amount worth. This is a form of subsidy that renters are handing over to mortgaged owners.
- deleted 4mo ago
  [deleted]

iteria 4mo ago

A house is an inflation hedge. Any calculation about investing the difference has to subtract the rent you are paying and rent goes up every year. There is no where where you can pay a rent anywhere close to what I'm paying for my mortgage in my area and I'm only 5 years into this. Of course I lucked out by locking in that sweet sub-3% rate, but still, I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term. A house in a long term play. I didn't buy until I know where I wanted to anchor. That's the deal. I didn't want to be in a situation where late age destitution came because I couldn't afford where I wanted to live anymore. I got to see that play out with older relatives who did go the rent only route. Course I have to pay property taxes, but as it stands it's less than $200/mo and I don't imagine it'll rise above that taking inflation into account. That is something I can afford in retirement even on social security. There is maintenance, but living in a neighborhood full of elders, a lot of it is truly optional. And honestly I think the only maintenance I've paid thus fair is the yard only because I don't want to do it myself. For me financially this is a hell of a deal with the only trade off that I must stay here. And... I'm settled enough that I'm willing to do that. I moved all over in my early career to find where I wanted to be.

lesuorac 4mo ago
> A house is an inflation hedge. So are Stocks ... > I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term. You are not alone. The thing is this is such a common argument that there are a zillion rent vs buy calculators [1]. That said, yeah sub 3% the math often does work out in terms of buy (assuming you don't sell before 7 years which the average person _does_ sell before). But sub3% and holding for 30 years is actually rare. It basically comes down to that the down payment gives renters such a headstart in gains that the homeowner takes forever to overcome it. But keep in mind they're also comparing a similar rental house to the bought house. So If you'd rent a smaller 1 bedroom apartment but only going to buy a 4 bedroom house then you're really behind in the math. [1]: https://www.google.com/search?q=rent+vs+buy+calculator https://www.google.com/search?q=rent+vs+buy+calculator
- 4mo ago

tootie 4mo ago

I always consult this calculator: https://www.nytimes.com/interactive/2024/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal... It forces you to make some assumptions on market returns and such, but it gives a pretty clear picture. The biggest variable is how long you expect to live in the same place (longer favors buy) and the next biggest is the ratio of average rent to average housing payment. The inflection point being that if you live in one place long enough to pay off the mortgage, then it obviously starts to be much more advantageous to buy, but that requires you predicting your life 30 years in the future.

pc86 4mo ago
> but that requires you predicting your life 30 years in the future. This is true, but the vast majority of people - especially in the US - don't move around the country or even state every few years. One of the biggest, perhaps the biggest, pro of renting is that you're not tied down to one place for very long. It's pretty rare that someone buys a house then is suddenly forced to move hours away.
- lokar 4mo ago
  I think people sell their (occupied) house after about 10 years on average, for whatever reason.
- lorecore 4mo ago
  Moving around a lot incurs its own costs. Time, transportation, movers, deposits (which you're unlikely to get fully returned), new furniture... I think it's an additional "hidden" cost to renting that doesn't get talked about much.
  - tootie 4mo ago
    The cost of moving from owned home to owned home is far higher. Brokers, lawyers and all the associated closing costs can be huge. And you still have to pay movers and worry about new furniture.

pc86 4mo ago

The house gives you a place to live, so the PFI plan is either a huge miscalculation (not a great place to start when you're making a numerical argument) or intentionally disingenuous. Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes. If you're getting a $2500/mo mortgage, what's rent for a similar house? Could be $2k/mo, could be $3500/mo. And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years. After the initial post-purchase increase, taxes are usually capped to some degree as well. For most people rent is capped for at most 1 year. So every year you rent you will have less money to invest, and eventually you'll have to start taking money out of that account because your rent has surpassed what your mortgage payment would have been 5, 10, 15, 25 years ago. When you run the numbers honestly it's really, really hard to get similar gains renting as you can buying, especially 30 years in the future.

notnaut 4mo ago
I understand it’s more complicated than this, but it seems really really confusing at a basic level. In one situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you’re out on the street. In the other situation you are paying someone else for a place to live, and when you stop doing that after 30 years, you have a house.
- jandrewrogers 4mo ago
  Renting gives you a giant pile of additional money you can save and invest so that after 30 years you could buy a house in cash if you wanted to. The person with the house does not have this cash, they have a house instead. After 30 years you either have a house or enough cash to buy that house. In many cases, the rate of return on the cash is sufficiently greater that it is significantly more than the value of that house.
  - what 4mo ago
    Eh, not really? If you have money to invest after rent, you’ll also have money to invest after mortgage payments.

deleted 4mo ago

[deleted]

notnaut 4mo ago

Uhhhh where are you getting that $2500 a month to invest? That’s your landlord’s money, dawg. And they’re gonna expect at LEAST another $100 year over year if you don’t want to move.

barchar 4mo ago

Eagh, the leverage really isn't that cheap, and you can think of renting as giving you cheap leverage too (it's just your borrowing the house instead of the money).

bombcar 4mo ago
The leverage only matters in an appreciation market (which we’ve been spoiled with in the USA since boomertimes). If you distill the math on assumed zero appreciation (or zero “real” appreciation) it becomes not so terribly pretty. It’s really a form of various hedges wrapped up with a bow, that for many people is desirable (and since we HAVE had appreciation it doesn’t “turn out bad” most of the time anyway). Anyone who says “renting/buying” is the only way to go is missing something.
- barchar 4mo ago
  Renting also has hedges embedded, and every hedge can be a risk position. In particular the interest rate options in foxed mortgages are pretty expensive and it only hedges the cost of a particular house not housing in general. Housing cost is correlated with local incomes so in some ways it's doubling down. In particular recessions are deflationary in the immediate aftermath.

crooked-v 4mo ago

The 'Pure Financial Investment' one is overlooking that you still need a place to live for those 30 years.

deleted 4mo ago

[deleted]

Galanwe 4mo ago

Your calculation is bogus, you are 1) assuming infinite money 2) assuming infinite time. 1) When you say "add sustained regular $2500/mo contributions", you forget that compared to buying your place, you also have to pay rent, most likely at the same amount you would pay back your mortgage assuming same quality of life. So either you have a free $2,500 to spare (in which case you could also have invested that amount in the buying case, or borrowed more), or you have $0 to invest. 2) You cannot just take the expected value of two different returns distribution and assume you would earn it in both cases. That would assume you have infinite time to wait for the average rate of returns to converge. If your life depends on said returns, you cannot just say "oh nevermind I'll wait another 15 years to withdraw". In your example, stock market returns are immensely more volatile than real estate.

namanyayg 4mo ago

You can live in a house, but you can't eat stocks