The terrible thing here is that owning a home is pictured as the American dream, a goal in itself.
I think it should almost only be seen as an investment. Like any sizeable investment, a lot of calculation should be made to decide if it makes sense or not. (And spoiler alert, in most places in California it does not make any sense anymore)
Buying a home is extremely emotional and I'm actually shocked to see how few homeowner actually even calculated the opportunity cost of buying a home vs renting and investing the downpayment. Or even calculated anything at all. Never forget there is a huge lobby of people that want you to buy a home.
(agents, banks, realtor, people that already own a home, ...)
I think there is that emotional bias to absolutely want to buy a home, mixed with the fact that people think they will get the same +200% returns that you see since 2012 in the bay area.
(Please don't respond with the typical "Paying rent is like throwing money out of the window")
I just bought in the Bay Area, and the primary motivator was to basically ensure I was not going to be priced out of the rental market and be forced to move, pull kids out of school, leave behind friends or career, etc. Or, in the case where the home market increased further, being priced out of being able to buy if/when it made sense.
A mortgage is (typically) a fixed monthly payment for 30 or 15 years. The fact the mortgage is a fixed payment provides protection from rental market volatility and also inflation. The main forward risk you have (beyond actually being able to pay the bill) is deflationary risk and changes in property tax policy that would increase your monthly costs to maintaining your ownership.
It's an investment only if you plan to sell (of course everyone would sell at the right price, so perhaps its an academic point.) But it's also a way to control risk.
you insured yourself against the risk of being priced out, but you now face another huge risk: If there is a big tech crash in the coming years, you might lose your job and still be liable on a Mortgage for a home that lost half of its value.
If the day comes where I can’t find any software development jobs - including contract work anywhere in my large metropolitan area (not Silicon Valley) and cant find remote work, I’ve got bigger issues.
Major corporations that still needed development were still hiring here both in 2000 and during the recession. They could be a lot pickier between 2008-2011 and a lot were hiring contractors.
My house (brand new build 2 years ago) has a mortgage that’s less than a quarter of my take home pay. I could get a job paying $30K less and still be okay - and my salary is just about the median for my skill level, nothing special.
It would be pretty foolish to take on a mortgage, in general, if a job loss could jeopardize making the monthly payments on time for any reasonable period.
Being priced out doesn't necessarily mean "cannot afford" but can also mean "cannot justify paying."
In California this is true, plenty of other jurisdictions do allow collection of mortgage deficiencies.
But, yeah, you can do that and pay taxes on the forgiven amount. Which, if you're walking away for financial hardship reasons is an extra kick in the teeth, but better than being saddled with the loan.
You don't pay any taxes because nothing is forgiven. You lose the house. The loan is secured by the home but nothing else, as opposed to being secured by the home and yourself as a guarantor.
Non-recourse loans are the standard across the entire country. It has nothing to do with jurisdiction, at least not within the U.S. The people who get regular, recourse loans are speculators, people buying 2nd or 3rd homes, and commercial developers.
This has to do with the terms of the mortgage contract, not with the law. Some states do have laws which regulate mortgage matters, but those typically only matter when there are problems with the contract, such as when people sell directly to each other (e.g. a prior owner holds the mortgage). The vast majority of people purchase homes through a bank, for which the standard terms are non-recourse.
As opposed to the entire United States where you can get a fixed rate mortgage and only have to worry about slight fluctuations in property taxes and insurance.
One thing that's hard to quantitatively compare is the availability of certain types of housing for rent or for sale. You can't buy a 1 or 2 bedroom apartment in many urban areas of the country, and it seems very hard to rent 20 acres with a house, a pond, and a horse pasture.
A big thing which isn't accounted for in any of the buy-rent calculators I've seen is bankruptcy protection. I get it for the New York Times because the exemption is very low in NY, but in Texas the homestead exemption is unlimited. If you have a 2 million dollar house and get sued into declaring bankruptcy for some reason, you still have a 2 million dollar house when you're done. For me, even having $100k outside of retirement accounts (which is also bankruptcy protected) makes me nervous because I could lose it all very quickly if I get sick, injured, or get into legal trouble.
I used to rent in Sunnyvale. After a few good years, the complex was sold and the new owners set about renovating the place. Contractors entered my home while I was at work, while I was asleep, while I was getting dressed, to install appliances I did not want or have space for. That's what drove me to buy.
Home ownership ought not to be a goal in itself, but it's much more than just a financial investment. It's about autonomy in your living space.
yes, there are a couple intangibles that cannot be calculated. The downside of that is that your investment is illiquid and that it becomes way more difficult to move.
> The downside of that is that your investment is illiquid and that it becomes way more difficult to move.
It's not really much more difficult to move. It's potentially harder on either your cash position or credit rating (e.g., if you can't sell your house quickly), but you actually potentially have a very similarm with a residential lease if your timing for when you decide you need to leave doesn't likne up with the end of the lease.
Landlords are only making a profit because of the exceptional last couple of years in California.
I will bet you that if you take a mortgage today, you will most probably not make a profit vs renting.
> Landlords are only making a profit because of the exceptional last couple of years in California
That's a particularly pointless bit of misinformation. Holding property isn't free, in general. Land is quite the liability in California unless you make enough to justify holding it. Landlords make plenty of money. Currently 750/mo (or more) for single rooms out of a house in southern california for anything decent. With AirBnB you do much better. The math is straightforward.
That’s not true. Landlords often ignore the opportunity cost of their down payment. They can be cash flow positive, while still overall negative compared to other investments.
There is nothing that says rent has to cost more than owning.
Renting is always 100% loss, and I would be absolutely fine with losing less. If I could lose less than ~30k/year with a house, that would be fantastic!
1) It ignores the aspect of time. It is under the assumption you will only be buying for a single year. It doesn't take into account that you lock in your price (vs rents going up). You need to compare against the cost of rents 10+ years into the future vs the (current monthly mortgage + property taxes in the future).
2) It doesn't factor in the increase from equity from payments.
3) It doesn't factor in the leverage (20% down is 500% multiplier on any home price change). Comparing plain home appreciation to plain stock market is a strawman and disingenuous. I had family loan me the down payment so technically I put 0% down which makes my ROI infinity.
4) It doesn't factor in tax savings (mortgage interest is not included in the new $10K limit).
5) It doesn't factor in that principle payments increase over time, so you get more and more going towards equity in each payment. Compare that to rents going up over time.
With leverage of a 20% down payment and tax savings you're actually looking at a 30% ROI for something that is a low-risk conservative "investment". That simply doesn't exist in the stock market.
There's a lot of missing knowledge for someone to make the decision that way. Eg: most people, even upper middle class, often don't know basic investing. I certainly didn't until my mid 30s. If I had known even as much as how t-bills worked or index fund investing, I'd have WAAAAAY more money than I have now.
The flip side is that a lot of people don't buy real estate for the monetary aspect. They want to (figuratively) be able to drill holes in their walls. To some people, that's priceless.
I learned that knowledge the "hard way". I really wanted to buy two years ago, mainly guided by the hype. After spending a full weekend learning all the details and how to do a good cost-analysis of all the options I came to the conclusion that now is not a good time to buy.
As a place filled with engineers, I'm still amazed that more people are not doing this down-to-earth calculation before deciding to buy and mainly rely on an emotional impulse.
If you are doing a financial comparison, you need to make sure you compare buying a home vs. renting one. And you need to factor in increases in rent every year, vs. increasing property taxes on a home.
Where I'm from (midwest), a home gives you a lot more (and/or different) lifestyle than an apartment. For example, you typically have a garage where you can do your own auto repairs (hard to do that in an apartment parking lot), so you can save money there. And you have a yard and garden which a lot of people like (if you have pets, a yard makes midnight potty time easier). And you can store things such as a boat and/or camper on your property (unless you buy a home in a restrictive subdivision). Which opens up 3-day weekend camping / boating activities.
Drawbacks of a house vs. apartment rental are more permanence (harder to pick up and move), which leaves the possibility of being stuck with bad neighbors if you are unlucky. Or not able to move to chase jobs (if you are in an area with limited number of employers).
yes, I fully agree with you. you need to do proper comparisons and calculation. After a lot of research I believe the New York time is one of the best online calculators:
Then there is everything that cannot be calculated:
Pro of owning a home:
1) The emotional factor and pride of owning a home.
2) The fact that it is your home and have the freedom to change or do whatever you want
Con of owning a home:
1) Your investment is extremely illiquid
2) You are stuck somewhere. Not easy to relocate
3) You probably bought something that is way bigger than what you actually need right now (Like most single couple will buy a home with multiple rooms in anticipation for kids, while they typically dont need that for the next X years, de facto losing more opportunity costs vs renting).
Nerdwallet has a rent vs buy calculator you can use. It still makes sense to buy in the Bay area if you can afford the payment. Break even is about 6 years on buy vs rent. 2 million dollar house with 20% down vs ~10-14k in rent for the equivalent.
I agree with the home as an investment idea. As an investment, a home in a desirable place is much less risky than investing in the market. The chance of a home losing all its value, if insured properly, is virtually zero. I cannot say the same for investing in the market. People should consider both options and hopefully not put all their eggs in one basket if they have enough eggs to spread around. I think that's why many people prefer to invest in a home. Plus, you can live in it and maintain its value with time and work that anyone can do. Buying just because it's part of the American dream or because people think it'll return massive amounts on investment is probably a bad idea for most.
Buying a property on a mortgage is just buying a very highly leveraged asset. Any gains as well as losses in the asset value are multiplied several times.
This is actually the same in Australia, especially in Melbourne and Sydney where home prices have risen crazily over the past 10 or so years. We call it the bank of mum and dad:
What drove me to buy was incredibly noisy new upstairs neighbours, the near bottom of the local real estate market in 2011, and the ability to scrape together a minimum down payment out of my savings.
Were it not for the conjunction of those three suns, I might still be in my tiny apartment. I'm very glad I'm not.
Its impossible to know bottom, but its possible to know "probably relatively low." During the big recession when work was harder to find, everyone knew prices were low and it would be a decent time to buy, it's just that fewer people could afford to, hence the low prices.
The Great Recession will likely be the only period in our lifetimes where anyone could reasonably time the bottom of the market. I invested as much as I could but wasn't in a position to buy real estate, though I spent many evenings 2009-2011 trawling through Trulia and Zillow lamenting the missed opportunities.
It is way more difficult to figure it out than you think. There are plenty of "local minimums" (or false bottoms), that go a bit back up then goes down again.
Same thing is happening also for local maximum. People try to time the top of the market. People thought it was in Summer 2015, and lately around January//February 2018.
But the Great Recession really was an exception. Not literally--you couldn't know for sure. But being able to purchase a beautiful (round dining room!) 2-bedroom condo in a completely renovated building in Nob Hill for $300k or buy Ford stock for $0.99 were as close to "sure thing" opportunities as there ever has been or ever will be. And if they didn't pan out? You'd have worse things to worry about because it would have been Mad Max times...
Some may be skeptical about my examples (especially if they weren't paying attention at the time), but I assure you they were no-brainers. The reason many people didn't get rich during the time was because most of the people who normally would have had the money and inclination to make the investments were completely illiquid. And everybody else was simply scared. The flip side of irrational exuberance is irrational fear.
I didn't have enough money for the condo. But I bought 1000 shares of that Ford stock my first year of law school, and sold it at a 10x gain (!) the last year of school to pay for all my living expenses in lieu of more loans.
This is a commmon misconception: there is no $15k gift limit. There is a $15k annual exclusion of gifts that do not need to be reported. If you want to gift more than that, you simply file a form and the excess about the annual exclusion counts against your lifetime exclusion. The lifetime exclusion in 2017 was $5.49M (if you're married it effectively doubles). Oh and as of 2018 it is now $11.18M thanks to the tax "reform" bill.
In addition to this, it's per person. If you have Mom + Dad in the picture, each can gift 15K, and if it's to a couple, they can each gift 15K to each member of the couple. Thus you can pass down 60K each year without any sort of forms/taxes.
I sold my house in the bay area a year and half ago. Mine was bought by a young Indian family and funded by their parents who were both fancy doctors and 1+ million in liquid assets (asset proof was provided to me by the sellers as part of their initial offer).
I asked my realtor because I was very curious. Folks can also gift against a lifetime limit not just the yearly. There's just some extra forms the donor needs to file with the IRS but it is possible. The limit there is something like 5 million
Some of us skimped on $15 lattes, very fancy apartments in San Francisco, and food delivery to save the money to do it. Don't generalize. Not every home owner is a spoiled brat.
The median home price in SF is $1.6M. At median SWE salary in SF, the mortgage is >70% of your take-home pay assuming an improbably large 25% downpayment ($400k). More realistic assumptions put it at ~85% of take-home.
Perpetuating myths about lattes, (or avocado toast[1]) does nobody any good; they are not the reason homes are unaffordable. Homes are unaffordable due to insane zoning policy and Prop 13.
I agree there are certainly systemic issues that inflate prices beyond the reach of most Bay Area residents. However, first time home buyers are probably buying something cheaper than median. With dual tech income and no dependents, it’s certainly still possible to buy a condo or townhouse without family money.
I think it should almost only be seen as an investment. Like any sizeable investment, a lot of calculation should be made to decide if it makes sense or not. (And spoiler alert, in most places in California it does not make any sense anymore)
Buying a home is extremely emotional and I'm actually shocked to see how few homeowner actually even calculated the opportunity cost of buying a home vs renting and investing the downpayment. Or even calculated anything at all. Never forget there is a huge lobby of people that want you to buy a home. (agents, banks, realtor, people that already own a home, ...)
I think there is that emotional bias to absolutely want to buy a home, mixed with the fact that people think they will get the same +200% returns that you see since 2012 in the bay area.
(Please don't respond with the typical "Paying rent is like throwing money out of the window")
As a reference, a blog post on this subject that I mostly agree with: https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...