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Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one

Does this take into account the risk of a housing market crash? For me, the biggest reason for renting rather than buying is to avoid putting all my bags in one basket; I wouldn't buy $500k worth of shares of one company, so spending $500k on a single house seems similarly risky.

refurb 11y ago
You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money. No different than owning $500K worth of share in a public company. Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
- cowls 11y ago
  I disagree, this view is too simplistic. It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares. By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage. So there is risk in renting too If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
  - to3m 11y ago
    Why will rents go up, when they could have gone up already?
    - cloudwalking 11y ago
      Because every day there are more people and more jobs but not more land.
    - andymitchell 11y ago
      If house prices cross a threshold where first time buyers can't afford to get onto the property ladder, they're forced to rent - driving up competition for stock & thus rental prices. (This appears to be affecting more & more people in the UK).
      - to3m 11y ago
        These people pulling the ladder up behind them might be in for a rude surprise. A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent? If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.
        JoeAltmaier 11y ago
        Prices are what the market will bear. If everybody's costs go up, or supply is limited, then rent can sure go up. Renting is an inflexible demand - unless you want to go homeless.
- fennecfoxen 11y ago
  > When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
  - refurb 11y ago
    That's true. However, the risk is that you have a 60 year old, nearing retirement with 90% of his/her net worth locked up in an asset. They are counting on being able to sell and use the equity for retirement. If you own your home outright and have a nice chunk of cash in retirement funds, then you're fine. Of course that also means you're very diversified (some cash in real estate, some cash in the market).
thechao 11y ago
I know this isn't true everywhere, but the last time I did a similar calculation, based on the historic rate of rents increase in my area, buying the house, then just walking away at the end of 30 years was cheaper than rent.
- adricnet 11y ago
  This is actually sometimes the case, though please double-check your analyses before committing to outliers or "betting the farm". Since it does happen and can work for some people / some places it certainly complicates the simplified dichotomy presented in the OP and this topic.
gjm11 11y ago
It's not clear to me that, say, $500k of assorted shares + $500k of house is worse than $1M of assorted shares. You've got more in a single asset, which is bad, but you're diversified into more asset classes, which is good. The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying. Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.) Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".
- JamesBarney 11y ago
  I think one crucial difference between buying a house and an index fund is people are usually highly leveraged when they buy a house. Example. Assume you 1. Buy house and put down 100k for 500k house. 2. Buy 100k of stock. 3. Both assets drop 20% Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
  - gjm11 11y ago
    Yup, agreed; that was the point of my second paragraph.
ocdtrekkie 11y ago
But if buying is like putting $500k of shares in a company (this is a really expensive house, man), renting is throwing your cash out the window. I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place. So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.
- tinkerrr 11y ago
  This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't. With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs). The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage? Thus the calculator to do the math for you.
  - ocdtrekkie 11y ago
    What money do you get back out of renting?
    - abakker 11y ago
      The theory goes that you get a non-leveraged value of having a place to live... rent is a 1:1 cost:value on living space. Mortgage is leveraged.
    - tinkerrr 11y ago
      You don't get money back from renting. It's an expense, just like any other. However, you don't have to tie in 20% of say $500,000 into a home at 0% return. Over a long period of time, your return on this would be expected to be a little over 8% annual returns, based on S&Ps historic return rates.
ams6110 11y ago
Most of the houses that are really high-risk are at the top end of the market. Don't buy those. Buy mid-market houses, those values are much more stable. And never pay much more than the average house in that neighborhood is selling for, and don't over-improve. The last thing you want to own is the most expensive house on the block, as you'll never be able to sell it.

refurb 11y ago

You're looking at it the exact right way. Risk is a two sided-coin. If the local housing market does well, you can make out like a bandit. If it doesn't, you can lose a lot of money. No different than owning $500K worth of share in a public company. Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.

cowls 11y ago
I disagree, this view is too simplistic. It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares. By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage. So there is risk in renting too If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
- to3m 11y ago
  Why will rents go up, when they could have gone up already?
  - cloudwalking 11y ago
    Because every day there are more people and more jobs but not more land.
  - andymitchell 11y ago
    If house prices cross a threshold where first time buyers can't afford to get onto the property ladder, they're forced to rent - driving up competition for stock & thus rental prices. (This appears to be affecting more & more people in the UK).
    - to3m 11y ago
      These people pulling the ladder up behind them might be in for a rude surprise. A sketch of my argument: as we are sometimes reminded to bear in mind, prices are driven by market conditions and affordability, not costs. If prices shoot up, why will the rent increase? Is it not already set to the highest value the market can bear, or something very close to that? We'll assume it must be, because it would be silly to do anything else (and the tenancy market is liquid enough). But then, if prices are at the right level already, how will people pay for increased rent? If salaries increase as well, then this is just ordinary inflation. House prices go up, rents have go up, salaries go up - well, people have been warning about this for years! On the other hand, if prices increase, and rents go up, and salaries don't, how are people going to be able to afford to pay for any of this? The obvious answer, of course, is that they won't.
      - JoeAltmaier 11y ago
        Prices are what the market will bear. If everybody's costs go up, or supply is limited, then rent can sure go up. Renting is an inflexible demand - unless you want to go homeless.
fennecfoxen 11y ago
> When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
- refurb 11y ago
  That's true. However, the risk is that you have a 60 year old, nearing retirement with 90% of his/her net worth locked up in an asset. They are counting on being able to sell and use the equity for retirement. If you own your home outright and have a nice chunk of cash in retirement funds, then you're fine. Of course that also means you're very diversified (some cash in real estate, some cash in the market).

thechao 11y ago

I know this isn't true everywhere, but the last time I did a similar calculation, based on the historic rate of rents increase in my area, buying the house, then just walking away at the end of 30 years was cheaper than rent.

adricnet 11y ago
This is actually sometimes the case, though please double-check your analyses before committing to outliers or "betting the farm". Since it does happen and can work for some people / some places it certainly complicates the simplified dichotomy presented in the OP and this topic.

gjm11 11y ago

It's not clear to me that, say, $500k of assorted shares + $500k of house is worse than $1M of assorted shares. You've got more in a single asset, which is bad, but you're diversified into more asset classes, which is good. The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying. Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.) Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".

JamesBarney 11y ago
I think one crucial difference between buying a house and an index fund is people are usually highly leveraged when they buy a house. Example. Assume you 1. Buy house and put down 100k for 500k house. 2. Buy 100k of stock. 3. Both assets drop 20% Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
- gjm11 11y ago
  Yup, agreed; that was the point of my second paragraph.

ocdtrekkie 11y ago

But if buying is like putting $500k of shares in a company (this is a really expensive house, man), renting is throwing your cash out the window. I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place. So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.

tinkerrr 11y ago
This is a very common fallacy and I am surprised people still think 'renting is throwing your cash out the window'. It isn't. With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs). The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage? Thus the calculator to do the math for you.
- ocdtrekkie 11y ago
  What money do you get back out of renting?
  - abakker 11y ago
    The theory goes that you get a non-leveraged value of having a place to live... rent is a 1:1 cost:value on living space. Mortgage is leveraged.
  - tinkerrr 11y ago
    You don't get money back from renting. It's an expense, just like any other. However, you don't have to tie in 20% of say $500,000 into a home at 0% return. Over a long period of time, your return on this would be expected to be a little over 8% annual returns, based on S&Ps historic return rates.

ams6110 11y ago

Most of the houses that are really high-risk are at the top end of the market. Don't buy those. Buy mid-market houses, those values are much more stable. And never pay much more than the average house in that neighborhood is selling for, and don't over-improve. The last thing you want to own is the most expensive house on the block, as you'll never be able to sell it.