
Is it better to buy or rent? - matthijs_
http://www.nytimes.com/interactive/2015/06/17/upshot/100000002894612.app.html?smid=fb-nytimes&smtyp=cur&_r=0
======
saurik
16 hours ago:
[https://news.ycombinator.com/item?id=9741374](https://news.ycombinator.com/item?id=9741374)

20 hours ago:
[https://news.ycombinator.com/item?id=9739544](https://news.ycombinator.com/item?id=9739544)

393 days ago:
[https://news.ycombinator.com/item?id=7783201](https://news.ycombinator.com/item?id=7783201)

1775 days ago:
[https://news.ycombinator.com/item?id=1586757](https://news.ycombinator.com/item?id=1586757)

1884 days ago:
[https://news.ycombinator.com/item?id=1283190](https://news.ycombinator.com/item?id=1283190)

~~~
MrBuddyCasino
Important comment from an earlier thread: don't ignore the human factor.
Buying instead of renting forces you to live more frugal, which is a reason
why people who buy are often better off financially when they retire.

~~~
nkozyra
> Buying instead of renting forces you to live more frugal

As a home owner, I'm going to ask someone to elucidate on this sentiment.

~~~
refurb
Here is my take....

1\. People think they can afford to buy a place at $X

2\. People find a place at $X+Y and say "it'll be tough, but I love this
place"

3\. People find out actually owning a house costs $X+$Y+$Z and they can barely
make their house payments and supporting costs

4\. Eventually (after enough mortgage payments) your principal payments become
large enough to take on the form of "forced savings"

I think this might work for some, but there are plenty of examples where
people lose their homes because they underestimated the costs. Someone get
sicks and goes on LT disability at 60% of their salary and end up missing
mortgage payments.

~~~
branchless
This is just nuts.

~~~
ha470
Agreed, this is an insane (and insanely stressful) way of saving.

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todd8
There is an important oversimplification that these
formulas/programs/spreadsheets often make, and I see it happening here.
Consider two alternatives where everything is the same except the amount of
money used for the mortgage down payment. The formula assume that money not
used for the down payment is invested at a certain rate of return. If the
mortgage interest rate is greater than the investment return, then the formula
always indicate that the largest down payment possible should be made and if
the rate of return for investments is assumed to be greater than the mortgage
interest rate then the smallest possible down payment should be made.

Its easiest to understand the problem with specific numbers. Assume a home
buyer has $120,000 that could be put into a down payment, but that the minimum
required is only $20,000. What should the buyer do? Assume that the investment
rate of return is 5% and the mortgage rate is 4%. Investing the $100,000
instead of using it for the down payment is essentially borrowing $100,000 at
4% and investing it at 5%. All the formulas/worksheets/programs like this one
and even professional investment advisors will end up showing that is better
to put down the minimum down payment and investing the $100,000. This ignores
the risk between alternatives. Putting the $100,000 into the down payment
produces a guaranteed, riskless, return the buyer of 4% per year (by saving
him or her the mortgage interest payments on the $100,000). The 5% potential
return from investing the money isn't a fair comparison. The comparison needs
to be made to a riskless investment (e.g. US Treasury Bills). Currently the
riskless rate of return available to investors is approximately 0%. This means
that in the current environment the correct alternative is to put the $100,000
extra into the down payment (absent any liquidity concerns).

One may say that they are willing to take some risks to obtain a higher rate
of return. Modern Portfolio Theory has its detractors, but as far as home
buyers are concerned, its implications are still apropos. Having one component
of your overall portfolio earning the equivalent of a riskless 4% (by making
the larger mortgage down payment) is likely to produce better aggregate
returns (on the home and additional equities etc.) at whatever risk tolerance
one designs for their overall finances.

I have no formal training in finance or investing so none of what I've
described here should be interpreted as advice, instead it is intended to spur
discussion.

~~~
glomph
There is risk in the mortgage as well though. The value of the house could
drop.

~~~
Nelson69
Isn't that only a risk if you need to sell the house at a time when the value
is below what you paid?

Buying houses for shorter terms is just more risky, period. The housing market
can crap out in catastrophic ways. Just like the stock market. The risk aversi

It would be an unrealized loss if you were living in a house with a mortgage
bigger than the value of the house, so long as you pay though, you've still
got a house to live your life in.

------
markbnj
We rented for the first ten years of our married life, and then purchased. All
of the financial arguments aside, don't discount the value of having a place
with your name on the deed. We had been forced to move out of two previous
townhouses when the leases expired and the owners decided to sell. Knowing
that your place is your place (yes, the bank's really, but they can't easily
take it from you) is maybe an undervalued benefit.

------
logicchains
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
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
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
Why will rents go up, when they could have gone up already?

~~~
andymitchell
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
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
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.

------
swingbridge
It's good to get people thinking about all the things included in the
calculator. Most people are totally clueless when it comes to the real
cost/value of owning. They only see what someone bought a property for and
what it sold for some time later.

A home you live in is almost always a net cost. It's not really an investment
so much as its a cost avoidance (vs renting). Buying more house than you need
"because this is an investment" is almost always a bad idea if you live in the
home and thus are the one footing the bigger tax bill, interest, maintenance,
utilities, improvements...

~~~
ekianjo
> A home you live in is almost always a net cost.

Plus it "prevents" you from moving somewhere else. Or let's say, it increases
the friction of moving somewhere else. Most home owners stay at the same place
for the rest of their lives.

~~~
vonmoltke
There are a whole lot of other factors that increase friction more than owning
your domicile, and those factors tend to be stronger with people who are
motivated to buy:

\- Deep networks of friends \- Strong community ties \- Strong local family
ties \- Children with their attendant social networks \- General aversion to
moving frequently

Also, the idea that "most" homeowners never leave is antiquated. Nearly
everyone I know who has bought a property has bought more than one before 40.

~~~
ekianjo
> Also, the idea that "most" homeowners never leave is antiquated. Nearly
> everyone I know who has bought a property has bought more than one before
> 40.

I'm guessing you live in the US ? Outside people are way less mobile.

------
jbb555
The money is certainly important. But buying is better than renting in many
ways. Want to rip out your kitchen and have a new one? Want to pave part of
the garden? Want to move a wall? Want to paint it all, or fit blinds?

If you own it you can do all that. If you rent you have to ask permission
which you might not get. Plus why spend money on somewhere you don't own?

~~~
batou
It's a trade off.

I live in London, UK in a flat I rent for £950 pcm. This would cost me
£379,000 to buy, at the very least as it's a relatively nice area.

I could scrape the deposit and get a £379,000 mortgage but the insurance,
maintenance and other costs on top would result in zero disposable income.

Currently I have £1750 left over every month which is nothing but bags of
freedom to do whatever I want.

If I was to drop dead on Monday, the last great event wouldn't be getting
Magnet in to do my kitchen, painting the living room ceiling and sitting in
all weekend eating Tesco Value food. It would be chilling next to Lake Geneva
in Lausanne with my other half which is exactly what I'm doing.

Live life now before it's over.

Edit: This is based on the advice of my wife's grandparents who are just about
hanging on at the age of 84 and 86 respectively. They had to cancel their
cruise this year due to poor health and openly admit that they worked way too
hard for a house. They have a nice £1m house in London and a pile of savings
but it's worth nothing to them now because their health is gone. It's empty as
the children have left and they realised the memories were more important than
the bricks.

So, sod buying a house. I'll live an irresponsible yet fulfilling life now.

~~~
giulianob
Not sure if it's a difference in location but where I live it would cost me
more per month to rent a similar property than what I own. If I wanted to
save, I'd have to rent a smaller place instead.

~~~
batou
You're probably right but will it in 5 years is the question you need to ask?

You always pay over the odds to rent initially but due to inflation and
relative property prices it becomes good value rather quickly.

~~~
giulianob
It wasn't before the market crashed but it's been much cheaper to buy than to
rent where I live at least.

------
derekp7
One thing to consider -- avoid the 30-year fixed mortgage if you can. If you
are buying, then buy a cheaper property that you can pay off in 5 years or so.
Then in 5 years, you can sell that and take out another loan for the next
property. Example: I bought my house for 180,000 on a 30-year mortgage, and
20% down payment (36,000). 15 years into it I've barely made a dent. I would
have been better off buying a $100,000 smaller house or town house/condo, and
I could have paid that off in 5 years with what I'm currently putting out per
month (counting lower taxes and insurance on the smaller property). Then I
could have sold it, and bought a $160,000 house, and 5 years or so later owned
that one outright.

This is also a market proof strategy -- if the market goes down, the your
current house may lose value (but you're not upside down on your mortgage,
because you don't have one after 5 years). But the next house will also be
proportionally cheaper too. And if the market goes up, the house you just paid
off has gained in value, making for a bigger down payment on the next house.

------
suany
One factor that's never discussed is the availability of rental inventory. In
some cities it's very hard to find a single family home (instead of an
apartment) for rent - hence buying becomes the only path to getting the type
of home you want.

------
lbradstreet
I've always wanted a model like this to point people to. I don't have a dog in
the buy/rent column, but I feel like most of these decisions are made without
a regard for many pertinent considerations. The main one that bugs me is how
long you will likely stay in a place. Completely disregarding market effects,
if you're not going to hold onto it long then it's probably not going to work
out.

------
cletus
Some people don't buy to, in their words, avoid being exposed to the property
market or some variation thereof. This a fallacy. As long as you need
somewhere to live you are exposed to the property market.

A good way of looking at this is: not owning is equivalent to having a large
short position in the property market. If prices go down, you "win" by not
losing money and/or your rent going down. If prices go up, you "lose" because
your rent goes up and what you can buy now is less than what you could've
before.

That's a fine position to take but my point is that it IS a position.

You don't necessarily need to own where you live but you should own
_something_. It could be in the area you plan to retire to (to hedge against
rising prices), an investment property to generate income or whatever.

IMHO REITs aren't the answer here. Residential and commercial real estate are
different beasts. Commercial real estate is generally a means of generating
income. Residential is far more speculative.

Some people compare long term returns on property vs equities. These compare
reasonably favourably.

In all those cases borrowing to buy property is far more favourable. In the US
at least you can get 30 year fixed mortgages that are currently hovering about
4% for 80%+ of the purchase price. You just can't get those terms on anything
else.

Even on day 1 your mortgage payment is ~30% principal at these interest rates.

Property tends to be a great hedge against inflation too and higher interest
rates and higher inflation seems to be a risk with the amount of quantitative
easing occurring in the developed world.

Lastly, the ability to essentially fix your housing costs is (IMHO) huge,
particularly in major urban centers.

------
normloman
For me, it's better to buy. And that's not a financial decision either. I've
just always wanted to restore an old house.

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nroose
This model doesn't seem to consider risk. If you finance 75% of your home
value, your equity is 4x as volatile as the market.

------
amalag
Very nice calculator. It is missing a PMI option for loans with a downpayment
under 20%. That is a significant expense.

------
owly
It totally depends on the area and timing. I've bought and sold a number of
places for a decent profit (all in cities) AND I managed to hold onto my last
one and rent it for a good deal more than the mortgage payment. Renting IS
throwing money away, plus none of my friends who rent live in as nice of a
place as I do for the same monthly payment. Sure they can move to another city
faster than I can, but the longest I've taken to sell a place it 4 months, not
a big deal.

------
ocdtrekkie
It heavily depends on the area. In very urban areas, property is a lot more
expensive, and renting is probably the way to go. In my area, it's almost the
same cost to buy as to rent. The difference being, you can get some of the
money back on your purchase by selling your property, whereas your rent just
entered a black hole.

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pjc50
So I pretended that "$" meant "£", and entered some plausible UK figures,
including recent house price growth of 8% and rental growth of 10%, and it
told me I should buy unless I could rent for -£391 a month.

Taking out a mortgage is clearly the best investment I ever made.

------
uberneo
Any github link to the actual visualisation would be handy .. looks like
crossfilter types
[http://square.github.io/crossfilter/](http://square.github.io/crossfilter/)

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doc_holliday
I think this has been mentioned a couple of times when it has come up, but it
would be nice to be able to add / remove local taxes e.g stamp duty here in
the UK.

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JDiculous
I would buy, but Manhattan is expensive as hell and I don't want to live in
the Bronx.

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JustSomeNobody
Yes.

(It was obligatory.)

