

Homeowner vs. Renter:  Why Should You Ever Buy a House (at all)? - vlad
http://patrick.net/housing/contrib/servitude.html

======
mechanical_fish
Of course, at this time the housing bubble is still deflating, so this kind of
calculation heavily favors renters in many areas.

The guy at Shadenfreude Central, a.k.a. www.irvinehousingblog.com, recommends
computing the ratio of a house's sale price to the monthly rent for an
equivalent house. The charts on this page:

[http://www.irvinehousingblog.com/blog/comments/wot-3-22-2008...](http://www.irvinehousingblog.com/blog/comments/wot-3-22-2008/)

assert that the national historic norm for this number is about 180: i.e. a
house that rents for $3k should cost about $3k x 180 = $540k. As a rule of
thumb, if the sales price is significantly more than this calculation would
suggest, it's a good time to rent instead of buying.

Having said all that: The reason to buy a house was well articulated by
Christopher Alexander in _A Pattern Language_ (which, as all pattern-wielding
Java programmers should know by now, is a classic):

 _Pattern 79. YOUR OWN HOME

People cannot be genuinely comfortable and healthy in a house which is not
theirs. All forms of rental - whether from private landlords or public housing
agencies - work against the natural processes which allow people to form
stable, self-healing communities...

This pattern is not intended as an argument in favor of "private property," or
the process of buying and selling land. Indeed, it is very clear that all
those processes which encourage speculation in land, for the sake of profit,
are unhealthy and destructive, because they invite people to treat houses as
commodities, to build things for "resale," and not in such a way as to fit
their own needs.

And just as speculation and the profit motive make it impossible for people to
adapt their houses to their own needs, so tenancy, rental, and landlords do
the same. Rental areas are always the first to turn to slums. The mechanism is
clear and well known. See, for example, George Sternlieb, The Tenement
Landlord(Rutgers University Press, 1966). The landlord tries to keep his
maintenance and repair costs as low as possible; the residents have no
incentive to maintain and repair the homes - in fact, the opposite - since
improvements add to the wealth of the landlord, and even justify higher rent.
And so the typical piece of rental property degenerates over the years. Then
landlords try to build new rental properties which are immune to neglect -
gardens are replaced with concrete, carpets are replaced with lineoleum, and
wooden surfaces by formica: it is an attempt to make the new units
maintenance-free, and to stop the slums by force; but they turn out cold and
sterile and again turn into slums, because nobody loves them.

People will only be able to feel comfortable in their houses, if they can
change their houses to suit themselves, add on whatever they need, rearrange
the garden as they like it; and, of course, they can only do this in
circumstances where they are the legal owners of the house and land; and if,
in high density multi-story housing, each apartment, like a house, has a
welldefined volume, in which the owner can make changes as he likes._

------
mattmaroon
$400k for a 2 br place is expensive by national standards, which would make
Sacramento a high-priced real estate market (not hard to believe, most of
California is).

He claims $949 a month is much higher than median for a 1 br. That does not
seem to fit with what I've seen in high priced real estate markets. By
comparison, in Ohio, a brand spanking new two bedroom detached condo (nobody
builds 2 br homes in most parts of the country, so you couldn't find a newish
one) in a great area would cost maybe $150-175k. But rent on a good one BR
apartment is still $750/mo.

I've looked at places in a lot of markets (midwest, Vegas, Bay Area among
them) over the last 5 years and if what he says is true, it makes me think the
rents in Sacramento are depressed for some unusual reason, and the ratio of
mortgage to rent is atypical, and therefore not permanent.

My off the cuff guess as to why would be the terrible real estate market
there. It's so hard to sell a house right now for more than you owe the bank
on it that a lot of people have taken to renting them out instead, creating an
unusually high number of rentals. It's a lot easier to rent a place out at a
few hundred bucks below mortgage and pay the difference out of pocket than it
is to sell it and pay the bank the 50k you'd owe them after. If you're doing
well enough to afford two mortgages, you can pick another house up at a good
price, move there, and rent the old. That's exactly how we got our place in
Campbell, and what a lot of the places we looked at in the bay area were doing
as well.

So maybe he shouldn't buy a home in Sacramento, at least right now. There are
lots of times in various markets where this happens and it's financially
beneficial to rent until the ratio swings the other way.

~~~
timr
_By comparison, in Ohio, a brand spanking new two bedroom detached condo
(nobody builds 2 br homes in most parts of the country, so you couldn't find a
newish one) in a great area would cost maybe $150-175k. But rent on a good one
BR apartment is still $750/mo._

Where are you getting your numbers? I grew up in Columbus; most of my friends
and family still live there. The cost of a condo there is anywhere from 30-50%
more than what you cite, and the rent for a 1BR apartment is 20-30% less.

------
tesla
What the author seems to miss is that if you rent for 30 years, you still have
to buy or rent a home for year 31. Whereas, if you own your home for 30 years,
in year 31 your housing payment is $0 + maintenance, which I'll guarantee is
less than the rent the author would be paying.

~~~
johnrob
Yes, but the renter's balance is higher than the future value of the owner's
house (which the renter could then buy in cash and still have money left
over).

One thing that was ignored is the increase in rent over time. By year 30, the
monthly rent will probably be higher than the mortgage payment (in the
calculation, we assumed fixed rent over 30 years).

------
axod
Surely arguing that renting is cheaper than owning implies that landlords make
a loss - which I'm sure is very rare.

~~~
Tichy
What makes you think it is rare? Genuine interest, I have no knowledge about
it. I know cases were renters pay less than the monthly rates paying of the
credit for buying the house.

Wouldn't it be kind of zero-sum? Either you live in the house yourself, than
the calculations apply, or you live somewhere else, but then (simplified) your
rent equals the rent your renters pay, so it cancels out and the calculations
would still be correct.

~~~
axod
Of course. I'm sure it's common in some parts that landlords make a loss in
month to month terms, but then once the mortgage is paid off they own it and
sell it, and it's gone up massively in price. Maybe that's their big pay day.

I'm sure other landlords make a very good profit month to month also. But if
landlords were making a loss in real terms over years, they would probably
stop doing it.

~~~
pchristensen
Even if the property loses money, the owner gets tax deductions for
depreciation on the property, and the owner can apply the loss to their own
taxes (useful if you have high income like a doctor or lawyer).

------
petercooper
This article is wrong. Admittedly, some problems occur due to its US-focus. In
the UK, for example, _residents_ pay property taxes, not just owners, so you
pay the same property tax whether you own or rent the property, removing that
advantage of renting.

The figures for the mortgage versus renting are bogus in any case. The writer
has not compared like to like. An apartment with people walking around above
you is not the same as a HOUSE. It is therefore no wonder the rent is 2.5
times cheaper than the mortgage.. it's on a property that's subjectively at
least 2.5 times worse. Like for like, the mortgage on a similar apartment
would be a lot less than $2500 a month.

Given increasing population, rents and property prices are unlikely to rise at
just 0.4% above inflation over the next 30 years. While the mortgage payment
can only go up based on interest rates (and it's not /that/ hard to lock into
a fixed rate right now..), the rent will go up in absolute terms. Assuming a
3% rise after inflation, the unlucky renter will be paying $2303 per month at
year 30, and very little will have been put into savings for the last 10
years. Worse, they won't have an asset - the homeowner will.

Buying a property with a mortgage gives you incredible leverage you'd struggle
to obtain with other investments. The bank won't loan you $400,000 to invest
in stock, but you can invest in a property this way.

Given that rising rents will cause the renter to barely be saving anything by
year 20, that the renter will have no property and a less than exciting
savings account come year 31, and that the renter has had to put up with all
sorts of restrictions that come with rental properties (no modifications,
often no pets, no guarantee you can stay there), I think the homeowner is a
lot more wise if they plan on staying put for at least a few years.

Renting is a nightmare even if it proves to be cheaper in the /short-term/. If
you're an automaton that doesn't mind uprooting whenever your landlords say
so, perhaps it'll work for you. But for those of us with kids, pets and
geographical attachments, owning a home gives us both an asset we're invested
in using the bank's money for leverage, and a permanent base that only severe
economic conditions can take away from us.

------
TheWama
Investment return rate, rent/buy cost ratio, inflation and home appreciation
(or depreciation) rates all matter. It's a lot to consider.

Luckily, the NYTimes put out a great calculator for just this:

[http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAP...](http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html)

------
vlad
A good benefit of renting is that you could travel anywhere you want to for
months or years, especially if you're in a startup in the digital space that
focuses on making money every month instead of raising Venture Capital. You
could travel across the country or internationally. You could do this
frequently, and live in places that are cheaper per month than your mortgage
or rent--which is going to be especially true for almost every other country
if you live in an expensive city already, but still true if your current rent
is $1,000. One might not want to buy a house unless they plan on living in it
for at least a few years (there are web site calculators that compute how long
you have to live in a house to make it worth it, factoring local rent, buying
and selling costs, and the small interest you would earn on the difference
between the rent and mortgage price.)

------
fharper1961
One thing nobody seems to mention is that the owner has to pay for the
maintenance of the home, while the renter doesn't. Over a 30 year period there
will be quite a lot to do.

~~~
raganwald
Landlords factor that in to the rent. Here in Ontario, we have rent control
legislation, so rents do not move with the market. However, the landlord is
permitted to raise the rents when the cost of maintenance rises.

If you don't want the hassle of actually dealing with maintenance, you can
purchase something like a condominium, where a management firm handles the
maintenance and you write a cheque each month.

So... I'm suggesting the maintenance issue is orthogonal to the ownership
issue.

~~~
rsheridan6
True, but landlords usually either do their own maintenance or know who's good
and cheap. The average person might tend to get ripped off by incompetent or
unscrupulous repairmen.

------
geebee
The economist and the financial times started recommending renting a few years
ago - and they acknowledge that this was a remarkable turn of events.

That said, I think that deliberately renting is a short term play - one that
paid off for folks who stayed out starting 2004 or so. These people will
probably be in a stronger position to jump in later (though it's incredibly
hard to know exactly when... and I suspect this bust will go on for a long,
long time).

That said, when I was looking for apartments in SF a few years ago, I met
people over the age of 50 who were losing their rent controlled apartments.
They were truly shocked at the prices, and were angry about it. Of course, I'd
never actually come out and say this, but I thought it: "you've been in SF for
25 years, was there really never a good time to buy?"

Maybe not. I grew up in SF, and over the course of my life, housing has gone
from quite expensive ( early 70s) to very expensive (late 80s) to brutally
expensive (early 00s). I actually think that a lot of people just never quite
managed to get a toehold, and I feel bad for them.

Personally, I'm making payments on an expensive 1200sqft house with a little
yard in an unfashionable corner of the city. It may well be worth less than I
paid for it, but I locked in a 30 year fixed loan, and I'm not struggling to
pay the morgage (though it is a big chunk of my pay).

When I bought, I actually would have predicted a downturn as well. But I don't
really act on those beliefs - any more than I get into and out of equities
based on where I see the stock market going. My best _guess_ is that housing
has a lot further down to go (something I believed as early as 2002 or so) -
but my guess is no better or worse than what any other astute reader of the
business section could come up with. But I'm a lot more confident in my belief
that when I'm 55, I'll be glad that I own my hous and that I'm not worrying
about whether I'll lose my rent controlled apartment.

I still think that starting early, investing in stocks and owning your own
house, is by far the winning long term strategy.

------
brfox
It is rather ridiculous that this author would not include the simple fact
that rents nearly always go up... especially over 30 years.

~~~
rsheridan6
I expect rents to go up considerably, given that people are avoiding buying
houses, population is increasing (expected to be 500M by mid-century), and
inflation is high (I don't see any way out of the US government's debt mess
other than inflation to reduce its real value).

So in 10, 20, 30 years a renter will be paying considerably more while a buyer
will be paying a rate locked in long ago.

Imagine the relative pittance you'd be paying now on a loan locked at 1988
housing prices - and that's after 2 decades of inflation rates that were lower
than those of the next 2 decades will probably be.

~~~
icey
I bought my house in 2001, and for me to rent an equivalently sized house now
is already $600 to $1000 more expensive per month than my mortgage. It was a
bit worse a couple of years ago, but still; people who forget about rent
increases are in for a big surprise if they could have gotten a house for a
reasonable price.

------
alps
Try explaining this "logic" to a family with a newborn when the landlord
decides to kick them out! Owning a home is security. Also, as noted by tesla,
at year 31 you no longer have a house payment. I hope the people who advocate
renting for life like paying rent _after_ they are retired!

------
axod
Not this old chestnut again :/ Buy a house. Now. In a stable or up and coming
area. Do it. I know things.

------
vaksel
I think having the ability to have a home equity line is reason enough to buy.
That's 100-200 thousand dollars credit you have at your disposal for a rainy
day. And unlike credit cards its not at 30% apr.

~~~
ssharp
If you have decent credit, you can generally get credit cards at, near, or
even below a HELOC rate. I have two credit cards that I don't use (well I put
1 fixed payment on each every month to keep my credit score up) with limits at
$30k on each. With the money access checks they give me with promo rates, I
could easily sit on 30k each year, just bouncing the balance back and forth
anywhere between 0 and 2.99%.

~~~
vaksel
yes thats an option but those credit cards last like 6 months before you need
to bounce them. And you need to qualify for the credit. With equity line you
qualify once at your best at then you can still get access to it if you no
longer work/have bad credit etc.

~~~
rsheridan6
Not necessarily. I have 15K credit card debt at less than 6% until the loan is
paid off. The trick is to max out a credit card, make a big payment, and then
they send you a blank check for some ridiculously low rate for an indefinite
period on your account with a note that says they hope they're not losing you
as a customer. Then you pay the rest of the credit card off and write the
check for (almost) your entire credit line. At least that's what Chase did for
me.

I do have good credit, but then you have to have good credit to get a low
enough interest rate on a mortgage to make it worthwhile, right?

------
aardvarkious
If you want to play with numbers, the New York Times has an excellent tool:

[http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAP...](http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=2&adxnnl=1&oref=slogin&adxnnlx=1210623109-gRZfVKFPW6Lum2KGvsXGwA)

It allows you to play with multiple variables and then tells you how many
years you need to own a home for in order for it to become profitable.

------
nradov
Of course the answer is always "it depends". If you want to run the numbers,
here is an excellent Excel spreadsheet that will analyze the rent vs. buy
decision for your personal circumstances.
[http://randolfe.typepad.com/randolfe/2006/04/bubblizer_a_req...](http://randolfe.typepad.com/randolfe/2006/04/bubblizer_a_req.html)

------
altano
It's harder to rent a _nice_ place than it is to buy one. In general,
landlords don't take care of rental units as well as they would their own
house, and the same goes for the tenants. Of course, we're just talking
percentages, but in the end it makes it much harder to rent a nice place.

------
nazgulnarsil
1\. pay downpayment 2\. let other people rent from you, pay mortgage with that
rent 3\. profit.

the downpayment you made gets paid back into the equity on the house within
the first couple of years. everything after that is FREE EQUITY.

~~~
nazgulnarsil
also: I blame this partly on the attitudes of today's generation. they can't
seem to distinguish between owning and borrowing.

Is music DRM preventing people from making good financial decisions in other
aspects of life?

------
chris
This may hold true, in certain areas, if you keep the same house for 30 years.
I read somewhere that the average American home changes ownership every 11.9
years.

I did a quick calculation on the percentage ROI after 1 year of owning a $300K
house.

home cost: $300,000

10% down payment: $30,000

30/yr mortgage @ 6%: $1,618.79

tax at 1.25%: $312.50

maintenance/misc: $200.00

actual mortgage payment: $2,131.29

investment after 1 year (($2,131.29 * 12) + $30,000) = $55,575.48

appreciation after 1 year at 4%/yr: $12,000

percentage ROI: ($12,000/$55,575.48) = 21%

what index fund are you going to see a 21% return on investment from? did I
make a horrible mistake?

~~~
dmv
Three obvious ROI friction factors you missed:

1\. Closing costs.

The mortgage is not a free transaction, for the buyer. There are a lot of
services (inspection, title insurance) and misc charges. That's a couple
thousand dollars. I don't know what the rule of thumb is; I know that it ended
up being about $11k for a mortgage less than $300k, and that's without points
or any other mortgage instrument issues.

2\. Equity.

Almost all of your payments in year 1 go to interest with 10% as the
downpayment, you'd probably owe about $266.7k -- play with an amortization
calculator. If you sold the house for $312k, the difference would be about
$45k. That's $45k back for your $55k... except

3\. Selling fees.

The seller in a transaction is typically responsible for paying the real
estate agent fees for some combination of seller and buyer. That's 3% each (if
you both used something like redfin.com, it would still be 4% total). That's
up to 6% of the $312k -- $18.7k.

So, with #1 you increase your investment requirements (call it $10k, so $65k
for the year). With #2 you decrease your net ($45 on the $65k). With #3 you
decrease your net even more ($26 on the $65k). On the plus side, you typically
only make 11 payments in the first year, so you're only out $37k instead of
$39k!

Summary:

Real Estate transactions are not efficient, low-friction or highly liquid
investments. Duh. This has a positive and negative aspect - you have the
potential for outsized appreciation because of the illiquidity, and because
transaction costs keep the potential market (somewhat) more constrained. But
you also have greater penalties on shorter ownership cycles.

Conclusion:

One year is an awful timespan for a house purchase unless you're completely
confident in an extreme appreciation or you are investing additional sums or
sweat equity which may guarantee the extreme appreciation (ie, a flip). It has
to be extreme.

------
timcederman
<http://www.burbed.com/> makes me glad I am a renter.

------
keating
Some items the article is glossing over:

First, the rental value doesn't take into account inflation. House payments
are fixed, which means it gets effectively cheaper every year. Meanwhile,
rents keep increasing. This means that while you can catch a house at the
bottom of a bubble and lock in the price, if you rent in that same area,
you'll find rents going way up when the housing bubble rises again.

Next, an 800 sq. ft. apartment isn't equivalent to a 1000 sq. ft. house with a
yard. If you really want to cheap out on a house, get a mobile home -- though
of course that doesn't include land, which is often leased.

Further, in this example, it assumes you have the difference between the two
prices free and clear to invest -- you'll certainly need to make sure your
investments do well, because at the end of 30 years, you aren't going to be a
homeowner, and will still need a place to live.

Not to mention, pets are typically a problem; you're at the mercy of your
landlord; the rent can be increased at any time; you have to deal with shared
walls with neighbors; and your 6% return is not going to seem very exciting in
5 years when housing picks up again and that $400k house is worth $800k. It
WILL pick up -- the country isn't becoming LESS crowded.

Your monthly investment amount will decrease every year as your rent gets
increased, meaning your return is not going to be as good as depicted,
especially if wages stagnate (as they effectively have in many sectors for the
last 8 years). At 5% rent increase per year, you'll eventually be paying
around $4000 for that same apartment in 30 years. Around year 20 the apartment
costs more per month than the house. (This is a great area, remember, so the
demand will be high. In some areas the rent can jump by 20% in a year instead
of 5%.) This would mean you'd do significantly worse than if you bought the
house.

The basic premise of this article is really "what if you live cheaply and
invest your money vs. what if you spend all your money on housing and your
house appreciates more slowly than an index fund".

Step 1. Live in your parents' basement for 30 (more) years.

Step 2. Invest the WHOLE $2400 per month on an index fund.

Step 3. Profit!

As you can see, the article ignores things about having your own house that
are nice -- like a stable place for people to visit since you don't move every
few years to cheaper places; not being at the mercy of parents or landlords;
having a yard; not having to obey "quiet hours", and so forth.

~~~
daniel-cussen
I agree, the article ignores many positive aspects of homeownership. However,
some of the points you make are poorly founded. For instance, there's no
guarantee a 400k house in Sacramento will be worth 800k in five years, solely
because US is becoming more crowded. It's a bold claim. Also, the idea of
being at the mercy of your landlords is weird. In markets with a lot of excess
inventory, some landlords can't find tenants. This puts them at the tenant's
mercy. Second, if you own a house, you can be at the mercy of the bank, or the
local home owner's association, or some such.

Some points are good, though; if one takes out a fixed-rate mortgage, payments
are fixed and will become less painful as inflation makes them smaller in
absolute terms.

~~~
keating
> For instance, there's no guarantee a 400k house in Sacramento will be worth
> 800k in five years

Sure, but based on historical events with housing in "great" areas, this can
and does happen. If you buy right before a bubble, it can even happen sooner
-- in a couple years. A 6% fund is not going to even have the _chance_ to do
that.

> In markets with a lot of excess inventory, some landlords can't find
> tenants.

A given, per the article, is a "great" area. Great areas are always in demand.
I have not yet lived in an area that lacked for tenants.

~~~
timr
_Sure, but based on historical events with housing in "great" areas, this can
and does happen. If you buy right before a bubble, it can even happen sooner
-- in a couple years._

If you buy a good stock right before a bubble, you can double your money
quickly, too (ask me about INTC or CSCO or AMZN in 1998). The point is, what's
going to happen under _likely_ circumstances? More importantly, what's going
to happen in a _rational_ market?

Home prices are coming down from the largest asset bubble in US history. If
you've never thought about homeownership before 1995 or so, you might assume
that home prices always increase by at least 5% per year. You'd be wrong,
however. Homes in the US are historically an under-performing investment; over
the long-term, their returns approximately match the rate of inflation.

There are exceptions to this rule, but I think that the parent comment is
generally well-taken: it's _not_ guaranteed that your home is going to double
in value in five years. (In fact, in some parts of the country, there's a real
chance that your home will be worth 50% _less_ in five years' time.)

~~~
keating
> The point is, what's going to happen under _likely_ circumstances?

In high-demand areas, it's likely housing prices will see another bubble.

> it's _not_ guaranteed that your home is going to double in value in five
> years.

We're all in agreement on that.

The point I was making is that real estate bubbles recur and so there's always
the possibility of a large, rapid gain, which doesn't happen with mutual funds
(correct me if I'm wrong there).

> In fact, in some parts of the country, there's a real chance that your home
> will be worth 50% _less_ in five years' time.

The article specifically stipulates a "great" area. So we're not talking about
parts of the country that _aren't_ in demand. :)

