It makes the trend of many millennials not trying (a bit of nihilism) seem reasonable. Why aspire for great career success and an above median income, when you can't get much for it? A better life, at that point, is likely to optimize for cheap hobbies and leave the high-pay work stress behind. Honestly, it sounds like a fairly rational decision.
$200k is like 130k take home pay after taxes, (which is just shy of $11k/month). 20% down on a million dollar house is 200k. If you're able to put $4k/month towards a future down payment, that's 50 months, or just over 4 years. If you were making that when you are 30 years old, if nothing changes from then (which it won't), you can buy a million dollar house before you're 35.
If you put it into stocks instead of holding it liquid for those 4 years, then before long term cap gains tax (California and Federal), then you'll need closer to $300k. Which still seems like it should be doable before you're 40. (If you bought AAPL at the height of the 2008 bubble, you'd be doing quite well today.)
Does it seem reasonable to me that housing is this expensive in the Bay area? No! Does it seem feasible for someone who's software development career is going well, to be able to afford a house, eventually, if they make that a priority? Quite.
There are many directions someone making $200k/yr at 30 can choose to go with their money, and I don't begrudge anyone the agency to make their own decisions. But let's not say that someone making those kinds of wages can't afford a house. They may prefer to use DoorDash for every meal and extravagant vacations instead of buying a home, but people who make less money are forced to make much tougher, more existential choices on how to spend their money.
I’ve know people who get a rent controlled place, work 10 years, sock away $1M+ in savings, then go somewhere cheaper with good schools to have a family.
Being able to put away $1M+ in savings by the time your in your early 30’s is huge.
I still wanted to live in a city, and Taipei has all the amenities Los Angeles or San Francisco had (nice bars, hipster coffee shops, great out doors areas). My friends wanted big wide open space and being close to family in Canada.
I was being paid on the "low end" for an engineering manager in California but in the top 1% in Taiwan.
For anyone considering trying "location arbitrage", whether that be in a "normal" city in a middle state of the USA, or a more extreme example like myself, I high recommend giving it a shot. You can _always_ move back to SF, LA, NYC, London, Hong Kong etc. The only risk you're making is the slope of your savings account decreasing slightly.
Remember, you'll never have _more_ time and _less_ responsibility then right at this moment. You'll only get less time and more responsibility as time passes on.
May be not this year, or next, but the long term trend of work-from-home will make this true.
Oh, so you live on one of the coasts, then.
Also the US: Everyone is middle class.
If you need 2x those incomes to afford A basic necessity such as housing than we’re likely to have a problem.
This is typically true if you work for a fang. These insane salaries rarely exist anywhere else.
A society that sets the bar for home ownership at this level is going to have trouble, in an inflationary environment home ownership completely changes the savings rate for an individual as inflation eats away at the mortgage payment. By the time 30 years is up and the individual owns the home, they benefit from massively reduced housing costs into their retirement.
If instead these individuals are renting into their 30s/40s/50s they won't have the cash flow to backstop their retirement, fund college, create businesses, or other activities that result from capital accumulation.
What's worse is that a larger fraction of the eventual benefits that these individuals require will be paid into rent on properties that are likely owned by investment banks and others whose borrowing power is unconstrained.
Does take home mean excluding equity grants? a lot of the compensation from tech firms these days would be some form of equity.
EDIT: For more detail, many of the higher comps you hear about for junior engineers come from stock that appreciated much faster than the company intended when they decided your comp. The more Senior roles at most big tech companies also tend to require ~8-10 years of professional experience to be hired externally.
More over you need someone to buy your 800k house you spent 600k on. It’ll be a remote worker who buys it if the local economy can’t support that so…… hopefully remote work is here to stay.
Will the appreciation of these properties be the same as that townhome? Almost certainly not. But money has time value, and the ancillary costs of ownership in CA are far greater.
I saw a house for sale there not far from my apartment complex. Literally a shack that was not fit for human habitation. It was selling for over $600k, and the land value alone was closer to $700k — yes, the “house” really was that bad.
I was a consultant, so I was barely within my “spend 1/3 of your income on housing” rule. I calculated that to be converted to an employee, they’d have to pay me north of $250k per year in order to be able to afford that same apartment.
I was not at all unhappy when they told me that my consulting contract was up earlier than expected, and I got to go back home to Austin just before Christmas of that year.
And housing prices in Cupertino has risen steadily by 20% year-over-year, and have done for at least a decade or two. Where else in the world can you get a guaranteed 20% annual increase on your investment?
California can keep their damn sky-high housing prices. I just wish they wouldn’t bring that shit with them when they move from California to Austin.
Savings and share-of-total-wealth rates (measured at same-age) are incredibly bad past the Boomer generation, dropping off with each generation.
There's going to be a whole lot more of this starting in about 10 years, when Gen X hits retirement age but can't retire at anywhere near the same rate their predecessors did.
I wouldn't count on inheritance to solve the problem, either. That's all gonna go to hospitals and nursing homes.
> Relatedly, a ~70 year old woman bagged my groceries today and I doubt she's doing it for fun. Seems the accelerating wealth inequality is destroying our society/communities if it hasn't already.
Let's not forget about the error in extending unemployment and benefits that the current administration passed. We should all hope and petition that a 4th stimulus check does NOT go out (inflation). The fact of the matter is, these policies are keeping a lot of the lower income workers out of the job market because they are still making more off unemployment than going back to the workforce. I estimate, this imbalance in the market will correct in September when these benefits end.
I don’t mean to discount inflation, as it will likely be an increasing issue in the immediate future .
But it’s very clear that the issue isn’t unemployment stipends: it’s the low wages of working class jobs that are the issue. Unemployment and the pandemic seemed to just be the push for many people to realize their worth as human beings is more than $7.50/hour.
Little things like the kitchen layout being moronic and having zero drawers get old when it isn't your choice to remodel or live with it.
And while it's nice to say "just move", let's not forget that moving costs a couple months rent and a massive time investment to find a place to move to that's actually better.
And then your current landlord gets some shitheel realtor to rent the place who repeatedly tries to schedule showings on an hour's notice.
I'm pretty convinced most people buy because they're either tired of the bullshit that comes with renting or want to buy into a specific school district, not because they're worried about making a return on their investment.
The more I get older the less I want to deal with bullshit home maintenance, and the infinite time suck that is customization and endless improvements.
Really part of a general life shift from "if you want it done right, do it yourself" and "if it's worth doing, it's worth doing right" -- to "outsourcing is a valuable tool" and "perfection is the enemy of the good".
I realize my time is valuable and I want to make sure I spend it where it counts -- on people, activities, experiences, travel.
When I rent a place, the kitchen layout and drawers are already good enough or else I wouldn't have rented it. And the things that aren't "perfect" I've decided I can live with, because nothing is perfect and there are more important things in the world to pay attention to.
To be clear: your viewpoint is entirely valid too, for yourself. But you're not speaking for everyone who "gets old enough" -- other people grow in the exact opposite direction.
Personally, I only think renting is "worth it" if you can't afford the house you want, or you just don't like homeownership. I also think owning is only "worth it" if you like the freedom to do whatever you want to your property or plan to stay put for a long time. No calculator can decide that for you.
I agree with you on your points, I have this rent-vs-buy mental agonising every few months. I'm just curious what folks are doing - if freedom is the key value, then basically you buy land somewhere where the least amount of people can harass you, and hope property prices and crime/services are at levels one can tolerate.
(No plots within the HOA land had sold at the time.)
Owning is nice. But it's more limited and more time consuming. There's a cost associated with that.
I'm not sure I agree that owning is limiting, it can be more time consuming if you don't want to hire people to do the work that the condo gives you "for free", but there are few limits.
In my last condo, a neighbor spent months trying to get approval to put a pre-fab sauna on her outdoor patio, she submitted the architectural review forms, made several changes so it would "fit into the character of the complex" even though it was on a back deck facing a natural area, no one would see it unless they walked in that 5 foot strip of land behind the complex. I'm not sure if it ever go approved, I moved out before she had final approval.
On the other hand, my wife and I decided on a whim a few months ago that we wanted to put in a hot tub in our new house’s back yard. We talked to a contractor, he came out and did a site survey, then put us on a wait list for a hot tub. A few weeks later, he had a returned unit (new owner didn't like the way it looked) that matched what we wanted, the next week he brought it out and installed it. The whole process took about a month from start to finish, and probably could have taken a week or two if demand wasn't so high.
How much aggravation was it? We own our house, so it was: Order it on Amazon, wait a couple days, then spend 90 minutes putting it together. The hardest part was finding one with fully enclosed springs that was in-stock.
He's jumped on it an average of at least 5 days a week, including sometimes in a light rain if he had excess energy to burn off. If we had a rented place or a shared yard or an HOA, who knows whether we'd have ever gotten it done?
Owning is a commitment. And there's absolutely nothing wrong with that commitment; other than the fact there are costs associated with that. Those forgotten costs are often significant.
Though what you're calling a "limit" is really lack of stability -- you're free to pick up and move at any time when you live in an apartment, but your landlord is also (usually) free to ask you to leave at any time, so you can't count on having a long term stable place to live.
I was forced into leaving my last 2 apartments, one was was the owner wanted to stop renting and move back in to her place. The other was when the owner raised the rent by nearly 50% at the end of the lease term.
Now that I'm a homeowner, it's much less likely that I can be forced out of my home.
Arguably untouched junk in American households has better housing than most people in this world.
I'm living in SEA.the cost of owning a house isn't a lot where i live. so I'm surprised to keep hearing this from those living in US.
can you elaborate a bit more what kind of cost do have when owning a house?
Other costs of ownership are property tax (generally about 1% of the property value per year), gas/water/electricity are more expensive than renting because the house is bigger, there is home owners' insurance, and possibly neighborhood association fees. And then when you sell, you have capital gains tax and seller tends to pay the broker's fees for both the buy and seller, which totals up to about 6% of the selling price. There's probably sales tax, too.
we use concrete to build houses here so fixing roof is not needed.
AC and refrigerator rarely broke down.
Owning your own home is an emotion. It is a feeling that you have a place of your own. You cannot just put numbers on it. Yes don't buy a home if you are 23 and move every 2 years in your car etc. But if you are looking to raise a family, want to settle down in a place, owning a home is almost always worth it as long as you are doing it within your means.
You're going to die.
The experiences you accumulate are what makes a life, as one moves through time in a one-way fashion.
No one gives a shit if you die old and efficent, unless that's the thing that made you sleep soundly at night.
I've rented and I've owned. They both have pros and cons. Now, as I get old, I like the idea of owning something where I can do whatever the hell I want, and moreoever, I can live away from humans who have parties, make noise or compete for space. Like you'd find in a rental building. I'd like to be able to build my own gym in a garage instead of timing my trips to a gym based on how crowded it is, and I'd like to buy a couch I'll use for many years to come instead of something that has to move around.
A cost-effective life is only a happy life if cost-effectiveness in and of itself makes you happy.
Otherwise, the type of place you want, how important mobility is to you, your freedom to make changes (and conversely your interest and willingness to do maintenance/repairs/manage projects), etc. should probably mostly be the deciding factors.
This can be true even if you've got strong opinions on lifestyle, in the case where you're pulled in multiple directions by different needs (e.g. you want to manage the risk of rent increasing at the same time as future house prices rise but you still value mobility, or you're frustrated with landlords but don't have a lot of project work planned, and so on).
Another big factor is noise. A detached house is going to be quieter than most apartments in a shared building. That was the big reason we moved to a house. I'm a light sleeper and noise from people walking around upstairs was driving me nuts. Moving to a house with no one walking around above me was a huge improvement in my sleep.
Edit: Yes, you can rent houses too, but at least where I live (Minneapolis) this doesn't seem to be very common.
I'm guessing its all dependent on how much money was spent on noise insulation. Between rooms inside my apt there is very little sound insulation which is not a big deal for me but maybe for others.
That's the difference. If you have a $2500/month mortgage, by year 10 or so that's probably $1000 equity + $1500 interest.
The "interest" portion gets tax-deducted (so you get a portion of it back), while the $1000 equity is literally yours. When you sell the house, that's the portion you get back.
So really, $2500/month mortgage (after a few years of living there) is really a $1000 cost + $1500 forced savings account. Then some maintenance / taxes on top of that.
Since you're building equity while living in a home, a $2500 mortgage is in fact far far cheaper than a $2500 rental.
If this is confusing, then think about the "down payment" when you first get the mortgage. A $100,000 down payment may have cost you cash, but its not like the down payment disappears. When you sell the house and close the mortgage, that $100,000 comes back to you (plus all the equity you gained).
I'm currently paying a $1600 / month mortgage, of which $1000 is principal, $400 is interest and $200 is escrow (tax / insurance) in an area with $2000/month rent.
So I'm really paying $600 / month for interest, tax, insurance. It's another $1400/month before I get to rent prices.
And even with a new roof and new deck last year, I'm no where close to renters prices in terms of actual cost. Especially considering that I had no maintenance costs in 2019 (lucky year)
And those $2000/month apartments are literally my next door neighbors. I get way more room than them, a private garage and lots of other benefits. (Those apartment dwellers occasionally ask me if they can park in my driveway when space runs out. That's how close they are.).
Your numbers don't seem normal. Looking at a mortgage calculator, given a new $370,000 home price, with 20% down, 3.92% interest... the P&I is $1,399. Of that, $967 is interest and $432 is principal. Those numbers are almost the reverse of yours. It wouldn't be until ~year 20 of the mortgage that the numbers would match yours.
Any homeowner with good credit scores can right now switch off their current mortgage into a 15-Y 2.375% ish loan.
If you can realistically afford a house, I don't see how renting could ever make sense, at least not when the prices are close. Basically, consider a mortgage payment as a rental payment where they match 50% of your rent into a nice investment fund you can cash out anytime you like.
- It's generally nowhere near 50% (of the cost of owning) going to principal
- Buying ties you into the house, or at least ties other costs to moving. If you're likely to need to move again in under 5 years, that cost is high.
- Related to the cost of moving, but... if you're moving to a new area and want to take some time to pick out where you're going to live for 20 years, then renting for a few makes sense.
Honestly, there's just a lot of reasons that can make it financially reasonable to rent instead of own.
Townhomes are like apartments but no worries about bothering people below your floors (or people above you annoying you when they move chairs). They also build equity at higher rates than renting. Bonus points: I have a dedicated driveway + garage while my neighbors are sharing their parking space with each other (and often run out).
Also like, +1000 sq. feet. 3 stories of space helps a lot compared to the apartment sizes.
Look, not everywhere is the crappy San Francisco housing market. There are plenty of locations in the USA where rent prices are terrible and ownership is much better financially. Any location that's constantly building new homes (pushing home ownership prices down, and therefore rent prices down) will probably have a market like mine where ownership is in fact the better financial decision.
That's very little difference, ultimately, when it comes to the equity part of the equation.
I've had some upfront costs in the first three months, but none were surprises (appliances, knew that the AC was past its usable life.
And I would expect a landlord would build estimated repair costs into the rent as well, at least to some extent. Of course that doesn't mean something unexpectedly expensive couldn't happen.
But this is only true if your landlord purchased at the time you rented. I rented a $1.8M apartment for $3,000 per month (~1/3 of total ownership costs). That's because my landlord bought 20 years before when the apartment was worth $200k. His monthly costs were maybe $1,000.
The only thing your landlord saves on by buying 20 years ago is the nominal cost of the property itself, either as a low fixed mortgage payment, or as a paid-off property.
This is just the effect of time and a fixed mortgage rate. If you were able to buy now, in 20 years you could be in the same position with respect to your property costs.
Property taxes are capped in terms of growth. Likely paying 10% of what I’d pay if I bought.
And biggest of all, he locked in his mortgage payment while rents went up 4x. And rents were still lower than cost of owning as housing prices priced in appreciation.
Home ownership, especially buying a home as an "investment" is such an emotional thing that plenty of people buy property just to buy property, the math doesn't come into it. Most of the time, even with the appreciation of the property that they sell, the landlord would have been better off putting their money into other more liquid investments with higher returns.
But, many people just buy property because they don't know any better.
Of course the landlord couldn’t sell it for $1.8M with me in it (because of SF rent control). But when I moved out and it was empty? They absolutely could.
But I'll admit that part of my reason for buying was to prevent the situation where I might be living on a fixed income some day, and having my rent go up every year. That seemed like a good thing to try to prevent.
Buying a house requires a high monthly payment, which remains constant over time, and one day ends. Renting requires a high monthly payment that rises over time, sometimes unpredictably, and never ends.
You may be right, especially absent property appreciation, but there's a lot of value in having a fairly predictable set of costs into an indefinite future absent really unpredictable problems. And not being forced to move at some point.
You may be paying more in mortgage+taxes+insurance+maintenance when you buy the house, but 10 year later, rents have almost certainly gone up.
We had our monthly house payment more than double due to hurricane insurance increases. This even tho our particular area hasn't had a landfall in 100 years & gets hit less than DC, NYC, etc.
If that's a $200,000 house, in 10 years the extra premium would cover the house... I don't see how landlords could escape levying a rent increase when faced with such a huge increase in insurance prices.
I believe you assume that the increase was tied to our increased risk. It would be more accurate to say that it was tied to risk of other places, hundreds of miles away. In my post, I had stated that we were at less risk than major mid-Atlantic cities.
I can understand that a huge insurance rate increase would make your house much more expensive than you thought it would be, I'm just trying to understand how such a rate increase only applied to residential houses, but not rental properties (many of which are just residential houses).
It's important to take into account the intangibles of buying vs. renting. It's not just a straight up financial calculation. Buying makes your living situation far more stable than renting. If I miss my rent for 3 months, I'll be getting a knock from the sheriff and put out on the street. If I miss my mortgage for 3 months it can take over a year to be foreclosed on. On top of that, buying puts you in a community of owners. It's a completely separate population from renters. People are far more incentivized to act civil and be considerate of their neighbors when everyone owns and lives somewhere long term. Not to mention the ability to renovate, add on, and otherwise make a house into a home. Buying is an emotional decision as much as it is financial.
But in the end I have 2.5x the square footage, a private yard/pool/grill vs. community, a two-car private garage with guaranteed electric vehicle charging, the ability to furnish however I wish, and to top it off much less reduced risk of housing inflation (a very real concern).
Nine years ago in the same market where I own my house an apartment unit I used to rent was ~$900/mo. The same unit on the market today is $2,352/mo. Even if home values increase and my property taxes jump it won't jump that high.
FWIW, I live in Texas so this place gets a good chunk of its tax revenue from property taxes. The odds of them cutting the tax rate just because your house shot up in cost at least to me seems pretty low. This is one of the problems of gentrification, where long time owners find they are unable to continue owning in the $90k house they bought 20 years ago because now they pay property taxes on a $750k property.
My mortgage is much more affordable than the rents that have gone up over the years to more closely reflect the 650k pricing.
But damn the taxes are gonna hurt everyone here... renter or owner (as the renter you're just covering them for the owner)
For example, in my city, 70% of households rent and half of those are in the hood. Bad neighborhood valuations are essentially a factor of Section 8 prevailing rent, and many properties fall off (as they stop meeting HUD standards) and get abandoned as they decay, because slumlords.
The effect is that in a good neighborhood, your pro rata share of the levy always climbs, even without an increase in value.
Not only is our house cheaper than a decent 3 bedroom apartment, but we’ve been here about 15 years and will own the place free and clear in ~5.
unless these cabinets are somehow standarized sizes, how can they be moved?
Moving rentals every time something annoys you could be very frequent.
Maybe it's a regional thing?
I read the above as "[an amount of extra expenses equal to] a couple months' rent" rather than literally "an extra two months' of rent checks to the landlord".
To be clear, I don't think my dog caused $1000 in damage to the carpet, but i can understand how any damage may be undesirable and there is no partial carpet replacements.
This was first apartment with dog, so this was an unknown expense.
Oh let me list all the ways a landlord will screw you!
It depends, heavily, on lease agreement. Where I was, a lease is for a given period of time, often 12 months. (Not aligned to anything: literally $DATE_WE_SIGNED to that +12 mo.) Breaking the lease requires paying it to completion. On average, that means 6 months of rent. Now, if you did the work of finding a tenant that the landlord approved of, that new tenant could then take the apartment (and you'd be off the hook once they started renting).
Since I know many people think this: leases don't necessarily turn into month-to-months: legally, they could, but my landlord typically did not allow this to happen: at the end of the 12 month lease, they will typically raise the rent at which point the lease contract gets renewed: often you have two choices: renew for 12 months at the higher rent, or renew as a month-to-month at an even higher rent; IME, around 5%. Now you have to balance the likelihood of moving vs not: if you don't move, you'll pay 60% of a month's rent over the term of the lease for nothing. Even if you are moving, you might not be moving at your lease date exactly, so even with planning, if you degrade the lease to a month-to-month on the renewal prior to your move, there might be a few months were you're paying 5% more just 'cause.
Giving notice to quit usually requires, e.g., 30 days, so you'll be on the hook for next month's rent, too, even if you'll have moved out by then. This is hard to avoid, since otherwise you risk not having a home if you can't get the next play lined up.
Now, of course, if you're going to move, and you can plan, at all, then you do everything in your power to align these stars to minimize the cost, doing whatever is appropriate for whatever state your lease is in.
(In my case, we opted to turn the lease into a month-to-month, and paid exactly 2 months at the higher rate, or ~10% or $200 over the 12 month. That renewal weirdly also came with a 15 mo option, which was new; over that rate it cost $300 to abandon ship. Honestly, other factors dominated, like pay adjustments due to new locale, local housing costs, even just the moving costs. But it did occupy time, worry, and made logistics unnecessarily more difficult. We also had no overlap due to the magic of family and the nature of our move.)
Yup. "We know you work from home so we've told the realtor to be considerate of your time". Bear in mind I have a dog and a cat.
4 days and FOURTEEN showings later (often spaced with little gaps, so it's in and out not blocks of time), I'm complaining to the landlord, who agrees that that is ridiculous. Realtor: "Oh well, it's a hot market and they'll be out of the house soon enough."
I predicted this would have happened slowly over the next 15 years, but covid and inner-city violence triggered a flight to the suburbs....hence increases in real estate.
Be careful. If you are thinking of renting out a house remember you need to return a large portion of that depreciation back to the IRS. It isn't free money. Even professional landlords don't know about this.
There’s a whole industry around this generation of “free money”. The owner of a Hampton Inn / Fairfield Inn, etc, makes more money on selling off accelerated depreciation than on renting rooms.
For example, you could avoid this issue by not deducting, or do a like kind purchase if something that produces income more passively.
If a landlord just bungles around without knowing what they are doing, recapture taxes are probably one of many issues they are facing.
I suggest that the decision whether to rent a house might want to take into account that each rental ad is getting hundreds of applicants, each day - with few new ads showing up.
Buying isn't any better with sales going to all-cash buyers who are paying way above and beyond market.
If that's the price houses are selling for, that is the market price.
I'll rephrase it this way. Cash buyers are paying way above and beyond what the house was listed for.
Likewise prospective renters are offering rents above what is advertised.
In my case, I bought a house last summer and offered exactly the seller's asking price -- which they rejected, countering $5k higher (which I agreed to).
I sold a place in the bay area 5 years ago. I knowingly listed it about $200k under what we expect it to go for based on comps. Huge swarm of interest and many buyers offering a price at around what we expected.
It's just a sales strategy.
Any other year I'd accept that. However, that's unlikely to be true this year - in most US markets. Buyers and renters alike are bidding up properties because there is one property or less for every 100 prospects.
Here, landlords get 400 applicants the first day a rental is listed. The second day they get 400 more unique applicants. The rental we just moved into was up for less than 2 hours and received 50 applications. We won by paying 6 mos in advance + last + 1.5x security.
There have always been hundreds of prospects for each house sold. When I sold the aforementioned house we got roughly 500 people the first weekend and we were in contract after just a few days. It's been a hot market for a very long time.
Sellers set a low price because the price doesn't matter. It will be bid at the market price regardless.
Most buyers know this and bid their estimate of the fair market price, which may be well above list and hopefully the reserve price. This is a sensible strategy when the seller has no idea what a reasonable price actually is but there is a large number of buyers.
Some things it takes into account:
- The actual rate of return on your down payment and extra costs of a house
- Itemized deductions on your taxes
- The impact of state taxes
- Mortgage interest deduction limit and SALT tax deduction limit
Really the most important number, but all of these suggestions are crucial to the calculation. Money that doesn't get invested in a house gets invested in other things. Pretend it's in an index fund.
One thing that I think this actually shows pretty well is the notion that part of the answer depends on how long you intend to stay in a place. If you expect to move in two or three years, it's probably not worth the hassle/expense of buying. If you intend to stay 5+ years in one place, it makes more sense to buy.
Most definitely, my apartment before buying a home was ~$100/month less than my current mortgage, now (3 years later) the rent for the exact same apartment is ~$300/month more than my mortgage.
Isn't that counting inflation twice?
California's recent rent control laws caps rent increases at 10% or 5% + the yearly CPI increase (whichever is less) every year, for example, explicitly allowing rent increases to outpace the general inflation rate. Personally, the rent I pay has gone up 9% this year.
Rents can change based on whether an area becomes more or less desirable, as insurance or other costs for landlords change, as ownership of rental units consolidates, etc.--that is, for many reasons that might be only tangentially connected or even completely divorced from the reasons that the costs of other goods and services are changing.
browsing it might give you some ideas of features you can add to your calculator. It's also a small thing but having the choice to select the downpayment based on percentage down might be nice.
I don't know why your calculator tells me getting a house is not worth even if it thinks the transaction is profitable. It states my cumulative profit is $29,030 but I shouldn't get a house.
The UI doesn’t make that clear enough.
These two functions have some value - especially the latter.
Can you give a more detailed example? What time horizon are you picturing? After you pay off the house you lose the leverage advantage of returns on selling a house you bought with a mortgage vs selling stocks, but you also stop having to pay the mortgage at all while you'd still be renting, likely at a far higher market rate, so looking at the post-mortgage-payoff curves, it's hard for me to see where the invested down payment + (mortgage + tax + upkeep - minus - rent) returns would be expected to be high enough to make up for that.
(The more rational counterargument, though, would likely be around diversification? Better to have land + stocks then just one...)
Also most people don't buy a house for life, and if you sell the house through a realtor they get 6% or so of the proceeds.
This isn't something you can just logic an answer for without running it through a rent vs buy calculator, but investment expert and author William Bernstein suggests a rule of thumb that you should not spend more than fifteen years of market rent on a house purchase. In other words you can look up what the house you are considering buying would cost to rent, and as a rule of thumb if the sale price is more than 15 years of rent it's a bad deal. This is obviously an imprecise rule of thumb since it doesn't account for variations in real estate tax per region, but it's a starting point if you don't have a good rent vs buy calculator.
If your wife wants to buy a place, I suggest finding a compromise to figure out how to make both parties happy.
Off the top of my head, some things I'd add to make this more useful to a wide audience:
- I don't know what I pay in state income and sales taxes. But I do know my income and my state's tax rate; income tax could be derived from that. I'm not sure how you'd estimate sales tax, though - you'd have to know how much of my spending is taxable.
- I've heard a rule of thumb that home maintenance costs are 1% of the home's value per year; maybe default to that, especially since a first-time home owner doesn't really know what those costs are. However, older houses will require more maintenance and that cost probably scales with square footage, not cost.
- you're assuming a 30-year mortgage - I'd put in the ability to change mortgage length. (Also, maybe a link to somewhere where I can find out what mortgage rates are.)
+1 to mortgage length. We heavily pivoted our decision to buy on getting a 7 year ARM because my friend and I knew we wouldn't grow old together there (wanting to do things like get married and have our own families). A time bomb on the mortgage was a feature, for us, and a cost savings.
It's a very poor rule of thumb. Contrary to the other comment, these costs don't increase linearly with value of the house. Sure, if I live in an expensive area, it may go up 30%, but not much more. Looking at how much my house has appreciated, I can assure you I pay not much more in maintenance than when I bought it.
The 1% rule came about when the median house price was under $200K.
Watch any one of the threads on "should I buy/can I afford/pros/cons", and you'll see a vocal subset who seem hellbent on convincing people that owning a house is nothing more than opening your wallet/checkbook/credit card every other weekend for the "next four digit maintenance issue".
(I feel the same way about having kids.)
The final cashflow amount of the house graph (in the example) ends in the negative, s this accurate?
Obviously equipment like this isn't going to appreciate either, and you'll be subject to all the same maintenance costs of owning, so in some ways it's the worst of both worlds— but it may still be cheaper than trying to rent if you can't or won't enter the market right now and mooching from family isn't an option.
Option to account for income from money in sp500.
A pilot once shared with me the rule of the three F's. If it floats, flies, or fornicates, it's cheaper to rent than to own. You may substitute a 4 letter word for that last one.
Anyway, you got a wife already so thats one. House don't start with F, so buy.
Versus, of course, for renting: "don't have to worry that the roof will need replacement, etc."
Finally, you can do all the calculating you want, but retrospectively the biggest effect on financial outcome is liable to be whether you bought in what turns out to be the Detroit vs. Silicon Valley of say 40 years ago. Who knew back then? Who knows now? You pay your money and you take your chances.
This is kind of a tangent, but worrying about maintenance is exactly why I own a house. When I rented, poor maintenance issues were my problem whether or not they were my responsibility. I'd much rather be empowered to do preventive maintenance or fix things immediately, than be forced to wait until something fails plus a few days for someone to show up to fix it.
If a roof had a leak in a rental, you could easily find yourself with a landlord who patches it, regardless of the fact it really needs replaced. What do they care if you have to make a renters insurance claim every 6 months? It ain’t their stuff!
Not so easy with a house, also excluding neighbors who do legal things that devalue your home.
This is the main thing I'm wondering about. Most people I know who own homes enjoy working on them. Home improvement becomes a hobby that they like, whether it's basic plumbing or painting the walls or building a deck. I despise this work (even though I do basic carpentry), and I fully consider it work that detracts from my life. It's like doing the dishes, it's a chore, and often stressful. Is owning a home worthwhile if I have no interest in these things? I do have great interest in privacy, not answering to a landlord, and not being priced out of an area.
I felt that way when I bought my house too. My experiences:
Get used to the house never being fully OK. Things will continue to break, but over 90% of them aren't urgent. By the time I get one thing fixed (either by myself or by paying someone), something else is broken. That's OK. As time goes by, you realize that most of these things aren't really that important.
Yes, my toilet has a leak so I've turned it off for now: I have 2 others in the house. It's not urgent.
I cannot make ice in my fridge because the water hose to the fridge is leaking - had to shut off faucet. Am I going to chuck an otherwise good fridge over this? No. So for the past so many years, I manually add the water to the ice maker to make ice.
My over-the-stove microwave died. Twice. Am I going to rush and buy another brand new one? No. I'll wait till there is a sale. In the mean time, I can get a perfectly good used microwave for $20.
The list goes on and on.
If you want everything working all the time, then it will be a major pain.
Just learn how to find decent professionals/contractors, and learn to research prices before calling them.
I do it because it's a phenomenal way to save money (and that savings is not taxed, meaning that if I avoid paying a contractor $5000, it's about the same financially as earning an extra $8500) and many of the jobs don't take an extraordinary amount of time or skill once I factor in the time required to get three contractors to actually show up and submit bids, choose the one I want to use, and do what project management is required to hold them to the standards we agreed to in the contract.
I don't know if you need to have interest in doing home repairs, but you need to have a willingness to do or to manage them.
Homeowners are at the bottom of the pecking order when it comes to contractors’ priorities. Property managers, landlords, and general contractors/builders can all give them more repeat business than homeowners can, so we get put at the bottom of the stack.
But doing this stuff yourself is so much better financially. You don't turn a profit by paying contractors to improve your house; you profit by investing your own labor to do it at 20% of that cost.
Imagine investing in a stock where you could put in some labor now and then, and have that actually result in substantially higher stock prices.
I got so sick of moving a family with an energetic one year old, I just recently purchased a place. Now my extended family has come to help on the house and I’ve found the work surprisingly pleasing(where I felt I have always hated this type of work).
After so many years moving pixels around on a screen, physical work with a group of people is just, nice.
But that’s just me, I’m sure you very well might still hate it but I was pleasantly surprised.
With a house, even if you have all maintenance outsourced, you choose who performs the labor and when they do. My last apartment was horrible with surprise inspections, and I've had similar issues with them scheduling contractors at inconvenient or unknown times. It's much nicer owning a home even if you don't like doing the maintenance yourself.
Within a couple of weeks I was staying at work later, leaving in the morning earlier and generally avoiding the place at every opportunity.
I left a few months ago at significant expense and don't regret doing so one tiny bit.
There is much more to the equation than money.
Depends on the HOA rules, if you have an HOA.
As for whether they'll be an asset, it depends on the improvement ;-) I tour open houses often, and people definitely have done some typically undesirable improvements.
That's what property taxes are for.
"Rich but not Koch and Murdoch rich" people are f-ing terrible to live with. They give a shit about everything.
A beautiful, in-depth calculator to answer "Is it better to rent or buy?"
The compound interest from allocating your resources to the faster growing of the two vastly overwhelms small compounding or even large fixed costs.
The real question is therefore - how long do you believe housing prices will keep increasing in your chosen area?
A secondary concern that is harder to price and seldom included in these models is that buying housing is a good hedge against being priced out of the area you work & want to live.
Of course it’s not a purely financial decision but I think it’s important to be aware of what you’re leaving on the table whichever option you choose.
I'm not sure where this myth came from, but as a millenial who went through the buying process in 2012 and again in 2016, I remember both times the lender just asked how much we wanted to put down. We could have gone as low as 3%, or maybe even lower.
Yes, you have to pay PMI (private mortgage insurance) for probably a couple hundred bucks extra a month if you don't have 20% equity in the house- but you can stop paying it as soon as you get to 20, and you can count increases in the home value towards that (through renovations or just market conditions). You can even have the interest rate increased very slightly instead of a separate PMI payment if you want to spread out the cost over the entire loan.
The point is, you'll likely need to have 3 months rent for first, last, and security deposit when you start an apartment rental anyway, so the initial costs might be closer than you think.
The median sale price of a home was $347,000 last month (0). 5% down on that is $17,350, accounting for closing costs you're going to need around $24,000 in cash to purchase a home.
Which isn't all that much money, except if you consider that it's more than 1/3rd of the median family income (1) and nearly 3 times the median household savings balance (2).
The takeaway from these numbers should be that swathes of people cannot afford homes.
(2) https://www.valuepenguin.com/banking/average-savings-account... (perhaps there is a better source for this).
Lower down payments meaningfully increase access to real estate. It matters hugely to be able to accelerate purchase timing by years, or decades.
Of course lower down payments increase access to real estate. The problem is half of all Americans can't even afford closing costs, let alone a down payment.
Appreciate the concession about the lower down payment mattering.
Ignoring the conclusion for the moment, that kind of an argument shouldn't just take into account the median savings balance; the median family has one or more individuals age 35+ and $40k+ in home equity -- they can afford a home as evidenced by the fact that they already bought one, and that additional factor to net worth is sufficient to allow them to easily switch homes if desired.
The conclusion itself definitely seems true in many cases, but if families are willing to move and switch careers I'm not sure it's that big of a deal. In every city over 30k people I've visited I've been able to clear $25+/hr just delivering doordash, and many of those have nice 2-3 bedroom homes under $150k. I nearly bought a $180k triplex after a couple years as a lowly pizza driver, and the only reason I didn't become a landlord then and there is because my girlfriend at the time convinced me college would be a better investment (I don't know that it necessarily was, but looking at my current career trajectory I don't have any evidence to the contrary).
Home ownership still wouldn't be totally trivial per se (maybe taking up to 3-5yrs), but in the vast majority of circumstances I'd wager without further proof that the things holding people back from home ownership are stronger alternative preferences (particular careers, cities, ...), and a lack of knowledge about what opportunities are available.
The median household in the US has >$12,000 in cash that can be saved per year after all ordinary expenses, not even just necessary expenses, per government survey data. So your $24,000 is an easily achievable two years of savings for the median household.
That’s a pretty low bar.
I bought in a buyers market and still opted to put down as much as I could, rather than as much as I was required, so that I could have a better chance to get my 1st favorite pick. I personally wouldn't want to be in the position to settle on my 15th(+) favorite house. There's a lot of people being forced to make a lot of compromises right now -- will they be happy with their decisions years from now?
Well then why doesn't everyone say zero? Why is it even a thing?
But in answer to your question putting more down can get you a better interest rate on the loan or less fees.
and lower risk = more options and lower borrowing costs
Example: 377k home, 3% down is a $1461 payment; the $673 of equity you build each month is offset by $300 of pmi (not tax deductible). To sell will cost 6% (~24k if it appreciates to 400k). The likelihood of this being > rent of a equivalent home or leaving you underwater in 3 years is high.
I just sold a house a week ago without an agent. You can list on MLS for $45 and pay a flat fee to a broker in your neighborhood for ~1-2k. If you are selling do not pay agents. The market is red hot - they wont do anything except call you in 48hrs with offers. The title company does all the important paperwork anyway.