I think what the alternative title to this blog post could be is: "How many years of life does that city cost?" What it's really comparing is the relative cost of having a roof over your head in different areas. Would you rather work 40 years and live in SF or work 30 years and live in rural Wisconsin? (I don't have an opinion on those two options. I'm sure there are many people in both of those places that are happy with their choices.)
The NYT has a buy vs rent calculator that helps make some of these decisions:
Of course, you can't ever recognize the value of your house unless you sell it and move somewhere cheaper (or buy a 2nd house and rent out the first one, but that's just another side of the same coin).
Most people have negative savings every year. They have more debt. If one has bought a house, then it is very easy to go into more debt every year, when house prices are rising. Then they fall.
Since the beginning of written history (the first written records are records of debts) there are stories and parables about the evil of debt and the need for debt jubilees. Also the idea that lending with interest is immoral is found through out time. Having such easy access to debt/credit from strangers seems not to work well over the long term for human societies.
I mean, is it a good thing that one can get a "Rocket Mortgage" where you can "Get Approved Fast. Get an approval to buy a home or refinance your mortgage in minutes."? 
I suppose shrimp and pork and beef are also unquestionably evil... Debt didn't historically work because property rights were poorly recorded. This meant enforcing one's debt involved mafia tactics. Modern debt is cleaner and subject to bankruptcy, a process that occurs on a case-by-case basis when it's needed, a far better solution than randomly cancelling debt every so many years.
For example, businesses often need to borrow money in order to get started.
For another, "bridge" loans and "revolving lines of credit" allow a business to operate when the timing of receiving payments does not line up with the timing of when bills are due.
Forgiving debts means that interest rates must rise to cover those losses.
The figures mentioned use full salary, in reality you might get some 50% of that possible to allocate to paying off the debt. You still get to pay utilities, cost of life for the family, transportation, education and probably extras.
Note I've even ignored any savings - and with high mortgage debt, you can be wiped out by any more expensive health problem.
Interest based credit is important for capitalism (use money to make more money), but certainly not for market economies (Use money as a tool to exchange goods you want/need). Both are distinct and can exist independently.
In the end it was basically just a workaround that was effectively the same as charging interest and that same Muslim family ended up taking a conventional loan when they moved instead of an "Islamic-compliant" mortgage because it was a lot easier.
Exactly. Interests rates are way too low at the moment.
Pensions are a Ponzi scheme, don't fall for it.
Pensions are mostly just highly tax advantaged wrappers for investments now. They are most definitely not ponzi schemes.
Your link is for a defined benefit pension, which is not typical anymore.
The problem is they bump up those benefits when their fund is doing well but when it isn't doing well there's little or no adjustment. It's so big it's fund is influential in the market and also in politics.
Large numbers of current retirees have been promised unaffordable pensions.
While public pensions like social security have certain features of a Ponzi scheme, they can be sustainable forever, unlike other Ponzi schemes. In fact, they can be more efficient than everyone saving and investing for retirement themselves: https://www.economist.com/news/economics-brief/21727877-fina...
Consider if you have a 5% chance to die at or before 65 who get's the money? Well what if you could get together with 10,000 people and split it with those who live. Now your investments are boosted by those who die and there is no downside as who cares what happens after you die.
Unfortunately, such schemes are illegal unless it's though a company. Because really the long tail is living to 120 which means you don't want to aim to be broke at say 95 then turn 95 and be in good health.
PS: Remember, returns after inflation can be <3% over 20 years. I want a hedge for that risk other than just having a massive amount of money I can't really spend.
However, social security and other government funded pensions are Ponzi schemes. The money you pay in is given to people who are retired at that time. The money you get out is paid by people who are working at that time.
So the real fight is what proportion of current output goes to old people. Private schemes try to ensure wealthy old people get the biggest slice. Public schemes are more vote driven. It doesn't make them Ponzi schemes.
It's also not just a pension fund as you can receive benefits well before 62. Death of spouse with under age children or permanent disability.
Now, this does not mean it's a great or even a good investment. But, the trade off of safety vs returns is not actually that bad assuming you live longer than average.
PS: Another way of looking at it is there are no 100% safe approaches to investing 10's of trillions of dollars. Your stuck leveraging GDP growth which is only slightly better than inflation and frankly that's what SS does.
Most pensions also will not be enough to cover long term care costs if you are unlucky enough to get some form of dementia.
Pensions as a concept were a great idea when life expectancy was shorter and most people could mostly look after themselves in old age.
I don't think they can survive large numbers of people living until 90 -100 with dementia and needing 24h care.
Lets hope the Ai/robotics gamble pays out.
I read a great article at some point that advised people who wanted to be writers to just go do that while they were young and poor and not wait until they had saved up money to finance it. Because the reality is that once you have the fancy high paid job and the fancy house, car and clothes that not only go with it but are essentially required, the amount you thought you needed changes.
For certain jobs, expensive suits and other things you might think are frivolous luxuries are nearly impossible to do your job without. It can be nigh impossible to unhook your income from this treadmill where the faster you run, the further behind you fall in certain metrics.
Millionaires are sometimes like the guy who needed the cart to carry cart repair supplies: Once you are rich and famous, now you need that mansion, not for the space or prestige but for security purposes, and you may also need a bodyguard, a bullet proof limo, etc.
Does someone who makes bad choices deserve to be homeless and destitute later in life?
The rest of us don't deserve to pay for their bad choices.
It seems valuable to society to not have old, homeless people causing trouble. But that's just me.
Personally, I think people should pay the price for their stupidity. Subsidizing stupidity never works out in the end.
Ultimately, saying neither of these is worth spending communal government revenues on collapses down to "I'm okay with people dying on the street."
Which is not offered as a straw man, but because that's a very possible outcome. And given that, if we're not okay with that, then we're going to spend significant resources to keep that from happening (ER care, homeless programs).
Social security attempts to invest that earlier in a person's life, so that the money treating more dire circumstances can be saved.
... And also allows for some measure of human dignity for those who might not have been taught about compound interest at age 6.
Or just sell it to pay rent for the rest of your life. Either way it's a pretty big boon.
bare-ownership is a right of virtual ownership. For example, the bare owner of a property has no right to occupy it or rent it out. On the other hand, when the usufruct holder dies, full ownership of the property is carried over to the bare owner without any liability for inheritance tax. He can then dispose of it (by sale, gift, bequest, etc.) as he wishes.
The maximum duration of usufruct generally corresponds to the usufruct holder’s lifetime – in that case, it is called usufruit viager, or life usufruct. But it is possible to set a predefined term (10 years, for example), which is called temporary usufruct.
PARIS, Dec. 28— Andre-Francois Raffray thought he had a great deal 30 years ago: He would pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then move into her grand apartment in a town Vincent van Gogh once roamed.
But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent of more than $184,000 for an apartment he never got to live in.
(My actual goal with my current property is to sell it once I'm having trouble going up the 3 flight of stairs leading to my unit and using the money to live in a much smaller place as people mentionned already)
Consider Hong Kong as an (extreme) example, where leaving the city means emigrating to another country with another language etc. (yes, HK is technically a Special Administrative Region of China, but can be considered standalone in this respect).
The median apartment price/income ratio here is 18, compared to a US average of 3.9 (the highest cities in the linked article are 13) .
These ratios also don't consider what you actually get. The average size of new apartments sold this year in HK was 610 square feet at an average price of US$1.8m and one new development offers apartments the size of Tesla Model X for ~US$500,000 .
If you want to go larger, the per square foot cost goes up. At the extreme end, consider a 4000 square foot townhouse that costs US$21,190/square foot .
A more ridiculous example is perhaps the sale of a car park earlier this year for US$600,000.
For reference, the median household income is ~US$38k. 
Unfortunately those with the most housing affordability issues are those that are least capable of leaving.
What is worse, this cancer got exported to mainland China in the 1990s and it was systematically rolled out for all major cities there. $1.8m buys you an 80sqm new apartment in Shanghai in an below average location, when the median household income in Shanghai is definitely lower than US$20k.
It is lucky to be living in HK as there are still public housing options. In cities like Shanghai and Beijing, using the national household median income figure, a Chinese peasant needs to start saving the deposit from the Ming Dynasty (1368–1644) to be able to afford an average apartment there.
The top 10 least affordable with respect to median price/income ratios:
China Hong Kong 18.1
Australia Sydney, NSW, 12.2
Canada Vancouver, BC 11.8
N.Z. Auckland 10.0
U.S. San Jose, CA 9.6
Australia Melbourne, VIC 9.5
U.S. Honolulu, HI 9.4
U.S. Los Angeles, CA 9.3
U.S. San Francisco, CA 9.2
U.K. Bournemouth & Dorset 8.9
For household who already own, their existing apartment also appreciated, so what matters is the cost of trading up. The hardest hit group are younger people between 20 and 35 who are stuck in their parents house for probably forever. 3 generations under 1 roof is pretty common.
I've lived in cheaper but boring places. The financial tradeoff is fair.
But lots of people are plenty happy in the "boonies". They just have different interests, like doing more outdoor-oriented activities like hunting, hiking, fishing, or building their own workshops from scratch. Or maybe they're more cerebral and like the peace and quiet so they can focus on writing.
It's worth pointing out that far more people live outside of San Fransisco and New York (sure, throw in LA and Chicago, too) than inside those metropolitan areas.
Each of those cities is unique in different things. So they are part of the fatter part of a long thin tail. But that's not the same as "everyone wants to live here!"
I don't disagree. Different people want different things. I'm just pointing out 1. why people like living in big metros and 2. the flaw of basing where you live entirely on the cost of living and real estate.
You can do all of those same things just living an hour east of SF.
I can't get a well-paying job, or access to any of the above without being close to the city.
No, an hour east of SF is deep in the Central Valley.
So the problem with living beyond Pleasanton is that you will spend most of your life sitting in traffic. Why do you need to sit in traffic? Because almost all the jobs are in the Bay Area. Maybe that won't be as big of a problem soon though once you have Level 4 autonomous driving. Personally I still wouldn't go for it with that.
For instance my girlfriend makes twice the money her parents ever did. She still couldn't have afforded the full down payment on her house without a 4% loan from her mother as they were entering retirement. This arrangement ends up being beneficial to all parties.
For reference, this is in southern New Jersey and I'm on the older end of the millennials.
If there is a recession can you easily find another job? Do you have a decent selection of local employers to ensure sufficient competition in terms of wages and benefits? Etc.
Living in a high CoL area seems to correlate with a healthier job market.
It took one of my coworkers a whole year to find another job during that period, even though he was in a high CoL area and initially had a "great selection" of jobs.
Now, I know my anecdote doesn't mean much, because supposedly unemployment went up. Traffic certainly got better. But my point is, the anecdotes aren't worth a ton. I'm not making mine up -- I'm dead serious. Nobody I know got laid off, nobody I know left the area.
I also know far more people who have moved TO California than out of it, and the only people I know who moved out were a couple of people in the past 3 years.
It costs much more than where I live, but it is still incredibly cheap compared to west coast.
And the more expensive homes will also be an income tap when you retire and sell the house (hint: anyone in the magenta can retire, sell and live out their lives anywhere in the green).
So if you pay X in state income taxes, you'd deduct X from your overall federally taxed income. You end up only saving your federal tax rate times X, not X in federal taxes. So if you're taxed at 13% state and 35% federally, you'd pay 13% to the state. Then you'd still pay (barring other deductions) your federal taxes on 87% of your income.
Federal taxes don't work as a bare percentage, though. You pay a lower percentage on everything up to some number, then progressively higher percentages on brackets of your income up to your maximum tax rate. https://taxfoundation.org/2017-tax-brackets/
Compared with most other states, California has lower property tax rate. Since Prop 13 passed in the 70s, the tax rate has been fixed at 1% of assessed value (with maximum yearly increments on the assessed value capped at 2%).
Ten years ago, I rented a small apartment for $350 per week. Now a literally identical apartment, 20km further from the CBD is going for $600 per week of rent.
(I'm not in the US).
Mortgages don't consistently go up in a way that meets these sorts of increases.
You can't really buy a house in such a fashion though.
Yes, but what you can say is "If I move to this other place I can work ten fewer years for my house even if I make less money."
I could buy a really decent home here (Southern Missouri) for somewhere between 0.5 to 1.5 times my yearly salary. There are many factors affecting that price but there are some really decent houses at the low end of the price range. Extra bonus: property tax, income tax and sales tax are all relatively low. Unfortunately that doesn't apply to the entire region; some neighboring counties have ~8x higher property tax than where I live.
What is the white zone?
When you rent, your money is gone. When you buy, you normally get most or all of it back later. There's barely any economic comparison between renting and ownership. The tax write offs is the one of the least of your concerns.
People go completely and absolutely nuts when they end up "underwater" with mortgages, which means the sale price of the house at some point becomes less than what you bought it for, or worse, less than the remainder of what you owe. It's an utter and total disaster if you can only get back 80% of what you paid. And yet nobody blinks an eye about sending 100% of their money down the rental drain.
With ownership, you add to the value/legacy that you can pass to your family when you die. As a renter, you add nothing.
When renting, people often get priced out of their apartments, or evicted for circumstances beyond their control. With ownership, the sale price is once, and generally only rare major disasters can push you out. The risks to renting are greater than the risks for home ownership.
These things are why it's so incredibly important that home ownership is affordable across the country. If it goes out of reach, we will have a huge economic problem with large consequences.
Either way, we could debate a whole bunch of minor costs, and it's obviously not the same for everyone. But that would be missing the point completely.
If you sell your 500k house for a very very bad return of 125k, you will be 125k ahead of where a renter is. Renting returns nothing. Whether or not I get back 100% of what I put in, the point is when you rent you get nothing back.
Regarding the example of people losing money selling a house in Detroit, it seems to me that by renting and investing the money you would have been putting into the mortgage, you are better able to diversify the risk of your housing area depreciating in price. However, there are areas that experiencing housing price growth better than stock market return, so there are advantages and disadvantages to renting vs. buying a house. By no means is it as clear-cut as you portray.
The point I'm making is that buying a house is an investment, and renting is not.
I've done both, I've rented for long periods of my life. In San Francisco, among other places. I've also bought two houses.
I wish I had seen the economics of buying much sooner, because renting is throwing money away. When I was younger I was comparing mortgage payments to rent, and it didn't seem to make much difference. But if I'd realized that rent is gone and mortgage payments come back, I'd have tried to buy much sooner.
Renting is more expensive than buying in every county I've ever lived, including SF. So the argument that you could rent and invest instead of buying doesn't make sense to me. If you can rent and invest, then you can buy and invest. As long as you can afford the down payment, which is the main barrier to entry.
In your example, I could end up with 927k, but you have to subtract your rent. If your rent is 3k/mo, then you'd have spent 375k on rent for a net return of 550k. And you had to pay both the 3k/mo investment and 3k/mo rent at the same time.
Chances are pretty good in some places that if you buy a house for 350k, after 10 years it will sell for 550k, and you could still afford the side 3k investment per month and get the 927k on top of it, for a total of ~1.4M.
It still seems really clear cut to me.
Perhaps not - but you are deducting those from your taxes the entire time.
I have no comment to make about the appropriateness of the mortgage interest tax deduction. It exists and should be factored into your economic models.
Whoa! No, not even remotely close.
*keep in mind that "most" means better than 50%. Are you claiming that the average house sold in the US gets a worse than 50% return?
In your "example", if you're very lucky and both buy and sell at the right time during a housing bubble then relocate to an area not experiencing a bubble, then maybe. (I believe you are severely underestimating the carrying costs of a typical house though, it's not just the big stuff.)
However, that's not even remotely close to the typical case. House prices rising fast enough to cover all those costs is indication of an unsustainable bubble.
>We can see that if you had bought a house at the peak in 1980 you would have lost purchasing power if you had sold in 1985 (not to mention transaction costs). And then for a little while around 1990 you would have been slightly ahead, but then through most of the 1990’s you would actually be losing money once again. So you’ve paid off half of your 30 year mortgage, you’ve paid taxes, insurance, maintenance, etc. and your house has not kept up with inflation!
You also have to keep in mind the economy of most towns and some cities is very, very volatile and depends heavily on 1-2 employers or industries. Those go away and there's economic collapse. When there's large economic collapse then buy buy home value.
(It's personal preference but I disagree with the idea of leaving family [besides spouse] any significant amount of money/assets when you die - most of my estate is going to charity upon my death)
So which would you rather have? A 50k loss on your house after 10 or 20 years, or have spent 600k renting a place in San Francisco for 10 years and having 0 dollars back?
There are good reasons to rent, but the long term economic benefits are not one of them. There's just no comparison, and bringing up taxes and fees and repair costs and whether inflation matches, none of that makes a single bit of difference.
Not necessarily, the less you put into the downpayment the more you pay in interest, the less the calculation makes sense.
I'm not disagreeing that there are many scenarios, likely including the 6k/mo example, that buying makes sense. What I take issue with, and I imagine other commenters did as well, is the idea that "When you rent, your money is gone. When you buy, you normally get most or all of it back later." This is far too simple, and there are many cases where the two are equivalent or renting comes out on top. It's easy to find such scenarios in the NYT calculator , even when you assume your house goes up in value.
That being said, a better metric might be the time to save up for a down payment that brings the mortgage and fees into a reasonable range for your salary. However, that calculation is much more complicated.
Edit: I live in SF and I accept that I will never own a home free and clear here, unless I get exceptionally lucky. My plan is to get a mortgage in SF and eventually sell the place and use the equity to buy in a more affordable market.
My taxes are 75% of my mortgage, but it's still worth 1/3 the salary to pay 1/7 the cost vs living in The Bay Area.
It's truly amazing how much the Fed (with perpetually low interest rates) and local restrictions on building (making it more expensive or impossible to build) have increased the cost of home ownership over the past 60 years.
Anyone who's seriously considering purchasing a home should read The Housing Trap by Patrick Killelea, it's a short, amazing overview of how we arrived in the situation we're in as well as a practical guide for when to buy vs rent housing.
But I suppose if your call center employees simply must be living in downtown S.F. the answer must be that we just need lax zoning and higher density!
The call center employees living en masse in SF is a very far fetched claim that requires strong evidence here, along with the implication that they are what necessitates higher density.
This framing is insensitive to both call center workers who likely could never afford to live in SF and those who are paying the price of anti development NIMBYism in the Bay Area housing market.
If you think my framing is insensitive to call center employees, I think you may have misunderstood me. I was condescending to the call center employers who are causing undue financial stress on their employees by making S.F. relo a job requirement for what should be a satellite office, if not remote work, position.
My point is also that people who struggle to afford the high cost of living in the "Real Bay Area"  -- of which I was one -- should perhaps consider, I don't know, moving -- which I did.
The idea that SF should be redesigned and reconstructed until such time as supply is so plentiful as to bring down prices an order of magnitude, to me that's the offensive bit. I think the property owners of SF are well within their rights to tell people who want to build affordable housing towers to get lost.
 - https://www.washingtonpost.com/news/the-switch/wp/2016/02/23...
 - See: http://www.burbed.com
P.S. If this comes off as a little combative, I apologize, my dad is in a house on the canal in Cape Coral, FL right now and refusing to evacuate.
Not sure where you get the idea that it should be redesigned, but I do think that incremental  upzoning in places where demand exceeds supply of housing (in SF and beyond) makes a great deal of sense.
And that is the problem!
The concept of property ownership is crucial when it comes to NIMBY vs. YIMBY. Because with politically entrenched tight zoning, property owners can tell others what to do with their property too.
Whereas in cities with lax zoning you effectively get stronger property rights. And in countries which constitutionally protect property ownership you basically see a very elastic housing market and thus not as much gentrification/housing-shortages.
Technically correct, first amendment and all. But really you are pro-NIMBY?
Zoning is pretty important. A neighbor recently subdivided his large lot into 3, and having enough frontage on the street meant they could do it without zoning board approval. The houses they are building were designed precisely to push to the max against every possible zoning bylaw; setbacks 1 inch above the minimum, building height-above-grade 1 inch below the maximum, lot coverage ratio 1% below the maximum, etc.
Then their proposed septic failed perc testing at ground level, and since they didn't want an "unsightly mound" in their backyard, they brought in about 80,000 cu yards of dirt and raised the whole lot up by ~20 ft! Because the bylaw was written as building height calculated against finished grade, not natural grade there was nothing stopping them from creating their hill. Well, they did have to build a substantial drainage system around the perimeter because it's illegal to increase stormwater runoff from a lot in the natural vs. finished state, but we'll see how long that lasts...
Builders will cut every corner, push every limit, and develop to the absolute highest density to maximize profits. Of course building codes and zoning bylaws make housing more expensive to build. Getting a glimpse at what builders will do given the chance, to literally my back yard, I really, really wouldn't want to see what would happen if zoning boards could be overridden by outside developers wanting to "increase supply".
For example, most of the new construction in SF is rental units. You can't buy it, you can't own it. It's going to be mostly corporate housing, run by corporate property managers, with cookie-cutter units, probably poorly run and poorly maintained.
I've been on a condo board for ~10 years. Building a community is hard work! But as the rental ratio in the complex climbed from 0% to 32% over the last 10 years, there's a stark difference between renters and owners in how people treat the units and common areas, treat their neighbors, and the level of involvement and care they have for the complex itself. Certainly some owners create problems, but having a vested interest makes a big difference vs. certain renters who could give a shit. And, problematically, when the owners move away and decide to rent, they usually stop giving a shit too.
Capitalism is a ladder (To paraphrase a certain GoT character). No one has to be a call center worker till the end of their days, it's just stuff you do until you can find a better job (perhaps after attaining some extra training in your off-hours).
Boston/Cambridge? Expensive. But 45 mins or so out? Far less so. And you're closer to where most of the jobs are anyway. The urban cores may be a lifestyle choice. But it's a luxury choice in many cases. Not a place that someone actually has to live if they want to work.
Is this a case where a small increase in supply would decrease the price significantly? I doubt it.
So, is there some reason we (as a nation) need to double population density of our largest cities? With the huge advances we are likely to see in autonomous zero-emission delivery infrastructure and remote communication over the next 20 years, not to mention the increasing likelihood of natural disasters and WMDs hitting these cities, I really don't see the point of pushing for so much urban growth.
Apparently my property taxes can't even cover the cost of pavement and water mains, and yet we just built a new school, and are in the process of planning a $20 million library.
 - https://www.strongtowns.org/journal/2017/1/9/the-real-reason...
From the link: "If they operated on accrual accounting -- where you account for your long term liabilities -- instead of a cash basis -- where you don't -- they would have been bankrupt decades ago"
The PF analogy to what you're saying is "yeah I'm dipping into savings to make mortgage payments and need to replace my roof next year and repair a major crack in the foundation. But they let me open a credit card and get a loan for a car, so what's the problem?"
That's just, like, your opinion, man. I prefer living in denser environments.
But to your point, if denser is so much better, will increased density lead to lower prices, or just create more demand and keep prices the same?
One cannot afford to live in the Bay Area on anything near minimum wage. So fuck "The Real Bay Area" and live just about anywhere else in the continental US.
So housing affordability on minimum wage in most of the US is closer to California at median wage than it is to most of the US at median wage.
Living on minimum wage is hard anywhere. The question is -- is it OK if there is 5-10% of the continental US where it's impossible to live on minimum wage? I think that yes that's probably OK...
Is it OK that for some [relatively small number of] cities, that median wage feels like minimum wage? Why is that a problem when people have the choice to live there or not?
Of course, it doesn't address how easy it is to find a job in the first place in those locations, but it's a great point nonetheless.
What are you comparing against? In the US, the old rule of thumb (up until the ~1990's) was that you shouldn't buy more house than 2X your income. That's more affordable than what is depicted here.
EDIT: I've added link to a Calculated Risk post on the ratio between US house prices and median income since 1976 . By their estimates, the typical ratio has been 3X, low by your standards.
It doesn't matter how cheap a house is if you can't save any money.
how does other factors like food/transportation/taxes factor in? though not always, but they tend to go hand in hand no?
the cost of real estate is factored into much of what we buy / spend money.
More significantly, investment income opportunities need to have their interest rate (or equivalent) assessed. For example, in the past 12 months, the DIA has risen 18%. Thus, if 12 months ago I had money to spare, it would have been better to put the money into DIA rather than make an extra principal payment on the mortgage, unless my mortgage is 18% or more.
With the exception of bonds and CDs, it's not possible to know the investment growth in advance, so that creates some risk of course.
One would still be better off investing that money in something until that last month, then apply the payment to save the very small amount of interest.
This assumes the mortgage is like most (all?) mortgages out there that follow an amortization schedule -- which are unlike credit cards or student loans, where early payments have a big benefit.
(That's not to say that there are no other reasons to pay off the mortgage – owning a home outright is a great security to have.)
Of course, this means that if interest rates suddenly spike then my mortgage payment will go up. But it does mean that in the short term it would not make sense to pay more off.
Also, you might not want all your money tied up in your mortgage: Buying a second home, too much risk for your taste in real estate market, etc.
An example: a friend of mine is renovating the exterior of his house for $100,000. He plans to live there until he dies (it's a lovely house), so he'll never see that money again. He'll just have a nicer house. My alternative option for him: retire 4 years early instead.
If you invest $1 now, you can expect it to double in about 14 years, give or take. So since he has more than 14 years left until retirement, that $100,000 would be $200,000. If he plans to live off $50,000/year, then he's giving up 4 years of retirement for the sake of his house looking nicer. If he plans on living off $30,000, then it's nearly 7 years early retirement.
It's not exact math, but it's a good metric to put things in perspective.
And yes, you can put a price on a feeling. If it was $1,000,000, he wouldn't do it and neither would you.
Policies that will work to drive down land values (and utilize land values to fund public infrastructure instead of private land speculation) would be very useful in many overheated land markets.
Supply and demand. Allowing builders to build higher, thereby increasing density, amortizes the land's value across more living space. Turning land into parks is nice, for people and property values, but does nothing to reducing housing prices nor rents. (If anything, by yanking land supply off the market such policies could actually exacerbate the problem if carried out in a vacuum.)
Sellers are not dumb. If land is the limiting factor, increasing the density of the buildings on the land by 10x will increase the value of the land by 10x as well.
True. But when you measure the price elasticity of land you find that density doesn't increase land value as fast as it creates space.
This occurs independently of the value of the new units. Consider a town with three occupied units: one for $5,000, one for $4,000 and one for $3,000. A new unit is built for $6,000. A simple example would involve everyone trading up, thereby leaving an unoccupied $3,000 unit on the market, but let's be more realistic. The person in the $5,000 unit doesn't budge, so the $6,000 unit gets discounted to $5,500. Our top-tier renter moves, leaving their $5,000 unit open. This must now compete for the other two renters, and so on, and so forth.
New renters will enter the market, but there is scant evidence that people move to cities to move into specific units. Instead, people choose and city and then find a place. New units more-efficiently use limitedly-available land. The other benefits from density, e.g. environmental efficiency, faster exchange of ideas and the resulting productivity boost, et cetera, are just cherries on top.
Still can't be assed to read it fully though with my scroll being screwed by intermediate textboxes though.
It may be that the author of this article on housing developed the analysis, maps, and text but not the actual web UI. That might be something provided by Esri that is common to all of these "story maps".
But to the point, it's best not to burden yourself too much with a home. I bought mine in my late 20s. My criteria was that I didn't ever want to move again (and could fit a pool table), so I bought a house big enough for a family to live comfortably that I could reasonably afford in my late 20s. It's worked out so far.
Well, we'd all love to do that, but where? (That was a rhetorical question, I personally moved to Edinburgh and bought an affordable family house in my late 30s)
I remember a website tracking London affordability that pointed out that in some years price appreciation made it literally impossible to save for a house: the value (maybe even the minimum deposit) went up faster than average income.
Imagine a $1MM house, with a $200K minimum deposit, $135K of household income. If that house goes up by 5% per year ($50K, $10K deposit), your income never goes up, and you save 8% or more of your income towards a down payment, you are still making headway towards the down payment. If you save 15-20% of your income, you are making substantial progress towards the down payment.
Scale the numbers up/down as you wish to fit your particular area/situation, but if the house is affordable by traditional mortgage underwriting requirements, it seems like it's possible to save for the downpayment in scenarios that I explored.
"The average length of time for a single first-time buyer to save a 15% deposit in the fourth quarter of 2016 was a whole year longer than in the fourth quarter of 2015"
It probably is doable, but at median incomes of £29k most people are barely keeping up with the rent in London and making zero savings.
If housing prices increase faster than your income does, there will come a time when you must spend 100% of your income on housing. If prices increase further, you will be unable to pay. In practice, you will be unable to pay long before then.
Besides that, hope residents use legislation to balance out the market... progressive taxes in aesthetically pleasing areas, education/public transportation in economically competitive areas, condos/up-zoning in popular urban areas.
If crime is your major fear there are several places with crime rates that are low. Conversely there are areas with very high crime rates.
If you don't know which is which, ask a local whom you trust for advice and maybe a tour. It's an incredible place to live but one that will challenge any simplistic description.
And yet, here I am in one of the most expensive markets in the world, and I can swing housing, but he cannot bring himself to do it. That's not to say it's less affordable there; it could be a matter of personal psychology, but regardless, I don't get it.
All I know is that I've noticed over the past decade or so, everyone who argues that they can buy property far cheaper in XYZ location far away from the bay area, and live like kings... somehow... don't.
For instance, get a few thousand people to agree to buy a large plot of land in a sparsely populated area. All the early-adopters get a cheap plot of land to build a house on, with most of the lots left unclaimed and managed by a non-profit. As people move in, the value of the land rises and the non-profit generates revenue and pays for infrastructure by selling the remaining lots. In the end, the citizens and town are better off financially because collectively they only paid rural-land prices for high value urban real estate.
This would be more practical if it's near an existing town (for basic necessity, schooling, proximity to hospitals, etc..), and could perhaps be helped along by partnering with a university or large employer wishing to establish a new campus.
There's a lot of ways this could fail, but it seems at least plausible that it could work. There's a lot of mostly-empty land, especially in those west-coast purple areas shown on the map on the linked page.
Turns out it's pretty hard to create a critical mass of population.
I've mentioned the median house price to median income ratio many times before, usually in the context of "how close are we to the bubble collapsing". Around 4:1 is about as high as it gets before something gives. It would be nice to see that map over time.
I get that renting is like throwing money in a hole, but people are so much more nomadic these days. What's the big deal in moving once every 10 years once rent gets unbearable?
Do you want to redecorate to your own taste?
Can you even find anywhere to rent? Not everywhere has a liquid rental market.
Moving only once every 10 years sounds great. Renting means maybe having to move on notice as short as one month. Back when I was renting I moved about every 3 years, although that was also house-sharing with other young professionals.
Rent is usually more expensive than mortgage payments, and house price appreciation is your only chance to make a leveraged investment that pays roughly 7% annually.
Edit: also, obviously, after 20 years you have no more payments. Frees up a whole lot of cashflow. Would you really want to go into retirement on a fixed income with a variable rent payment?
Note that a "20 year mortgage" just sets the amortisation rate of the payments; you can accelerate it, and usually will end up re-mortgaging every 3-5 years to get better rates.
You have maintenance. And if something bad happens with the foundation, that's very expensive to fix. Unless you just plan to die and have the house demolished and the property sold (which is honestly preferable in some cases of inheritance).
I had to pay $25k to have supports installed in the crawlspace and other mitigation to avoid foundation work. I might have gotten ripped off, and the annoying thing is that I can't know for sure because I'm not informed about foundation work, structural engineering, or other principles.
Simply inheriting a house and trying to sell it turned me off from owning a home in the near future due to the arduous process of paperwork, red tape, maintenance, and a low-liquid market. I'll take a comfortable living van/RV over dealing with real estate again if it means I can reduce the risk of dealing with those things to zero.
I can stomach the idea of renting for the rest of my working life. My renting life was good, had more cash to spare, good landlords, etc.
What terrifies me is the idea that I'd have to keep paying rent when I retire.
There's going to be plenty of scarcity to go around for the rest of our lives.
And unless you're already in the top 1%, or unless you believe full-on socialism will ever catch on in a country run by and for the benefit of capitalists and corporatists, you can personally expect to see a lot more of it once everything worth doing has been automated.
If you look down a street where I live (Boston area) you can likely guess which units are rentals and which are owned.
I can't tell you how many houses I looked at with peeling, worn roof shingles, but a bangin' dishwasher and stove.
The neighbors insurance paid for that, but then he still had to pay almost $3000 right away to get the rest of the tree removed from his backyard, because it was still in bad shape. Was an unpleasant introduction to the wonderful world of home ownership.
Although there is an economies-of-scale advantage to maintenance on multi-family dwellings.
I don't want to keep a pile of cash around waiting for housing emergencies (personal emergencies are a different thing), and I certainly don't want to sell stocks to fix a roof if my roof fails during a recession.
setting aside trees, fires etc it hadn't even occurred to me that a roof may need replacing, aside from maybe the occasional tile.
You have no more principal and interest payments. You still have property taxes (~$1000/mo for me) and most will pay insurance (~$300/mo) and you'll have on-going maintenance; I think it's wise to ballpark the last at 1% of the house market value.
I'm a two-time homeowner and it absolutely fits my family life situation very well, but it's a common fallacy that housing costs go to zero when the mortgage is paid off.
I like that approach as it makes clear the financial flows and put the tenant in the logical frame of mind of "am I getting what I'm paying for?" when considering new civic projects or other budget items.
At least in the competitive housing markets of San Jose and Seattle this is not much of an issue as every apartment I've visited allows pets and most even have accommodations for them as perks. I suppose there are limits though so maybe if you wanted to have 4 dogs that might not be allowed
--realtor commission (averages 6% of home price, or approximately 1.5 years of 30 year mortgage payments)
--title fees (frequently 1% of purchase price)
--other legal and bank fees
The NYT has a buy vs rent calculator that helps make decisions like these:
In my apartment (managed by a property management company at that), they allowed me to repaint some walls, bring in three appliances of my own (washer/dryer and dishwasher), completely customize a closet, and replace a light fixture. Took a week for the business manager and corporate to sign off on the modifications, but they felt the requests were entirely reasonable.
This happened because of two reasons: 1) I asked. 2) I agreed to pay a very modest additional deposit for the modifications ($400 total), and used suitably insured vendors of their choosing to have the appliances and light installed (they let me do the closet myself, as the paint with just a $100 deposit to cover changing it back), at a total cost of about $300.
To get this stuff elsewhere I would've paid FAR, FAR more in rent (+$1000-1500/mo, easily). Though I asked, was very reasonable, and made it clear that I wasn't looking to half-ass anything.
At the end of the day the new apartment was a tactical downgrade ($700/mo savings) from where I came from. With the new stuff I got approved I have "broken even" on my changes after 7 months. Now for the next 4-5 years that $700/mo savings just goes in my pocket, the apartment is now barely a downgrade from where I was prior, and I have top-notch appliances that most luxury rentals in the city don't even offer. Moreover, when I move out those appliances come with me -- I should get a good 15-20 total years out of them with proper care.
OTOH, I lived in Belmont CA on $2000 rent for a whole house blocks from caltrain for over 3 years, no adjustments.
I think you have a bit of a skewed view of reality there - people in the US are far less likely to move for work than in past generations. You may be surrounded by a bubble of digital nomads, but it’s far from common.
What you gain is not having to pay taxes. If you're working remotely on a software engineer's salary, that can free up over $50K a year. That's enough to pay your rent, and likely also your food, for a small family even in Canada's most expensive cities.
Taxes are also throwing money in a hole.
I think most people couldn't do it because they have kids (and don't want to homeschool), or one or both spouses have jobs in a physical location, or they just don't like nomadic living. But it's an interesting idea.