>>I'd love the city I'm sure, but after glancing around I've come to the conclusion that home ownership is unthinkable to anyone who hasn't had a cash-out event.
I've never understood this crazy, if not outright insane obsession with home ownership. Why does everyone want to tie significant amounts of their lifetime earnings into physical property that historically has had very low appreciation in value? It's like people have forgotten about the housing bubble popping just five years ago, causing large portions of the population to take big hits financially. (And what is the current real estate craziness in SF, if not another bubble that will inevitably pop?)
Even seemingly rational reasons for home ownership, such as being able to raise a family in good school districts, fail to stand up to critical scrutiny. There are many stable renter neighborhoods with great schools.
> I've never understood this crazy, if not outright insane obsession with home ownership.
And, I don't understand why so many people on HN seem to think it's insane. I'd like to be more in control of my environment. I don't want to be at the whims of a landlord, particularly in the future, when I have children.
I want a place that is mine to customize as I see fit. I don't want to have to ask if I can paint, I want to be able to pick my own appliances, I want to be able to tear down walls if I want.
Some people are homebodies, and some are not. I don't understand why people get so worked up and insist that their personal tastes are correct. To me, renting is insane. To you, owning is insane. Let's just agree to disagree.
I'm guessing that there's nearly a 100% correlation between the people accusing prospective homeowners of having an "insane obsession" and people who live in apartments in SF. SF is one of my favorite cities in the world, but there are a LOT of downsides to it. I find that a lot of the people I know who live there adopt a borderline Stockholm Syndrome attitude about those downsides.
If you live in SF, you have easy access to all sorts of great things, but the downside is that unless you are fabulously wealthy, you are most likely renting an old and not necessarily well-maintained apartment with one (or two or three or more...) roommates, in a neighborhood with a disturbing number of homeless people and/or occasional violent crime, and you have to take the bus (or ride a bike) everywhere you go because it's just too much of an expensive hassle to drive anywhere. I'm not describing the living standards for college students or blue collar people, these are living standards for people who are probably in the top 5% income bracket in the entire country.
Those same people will tell you stuff like, why would you want to own a home? Why would you want to live by yourself? What do you have against homeless people? Why would you want a car in the first place? What's wrong with you, you barbarian!
There's something to be said for those perspectives, and I appreciate the value of living in a really dense and culturally rich city with great public transportation. But so many of the SF residents that I know go way beyond looking on the bright side, to the point of fetishizing the very things that can make SF an unpleasant place to live.
Maybe if I lived there I'd be like that too. It's natural to always want to look on the bright side of whatever your living situation is, it's just annoying when people get super militant about it, to the point of accusing you of being a bad or stupid person if you don't want to live there too.
You have some good points, but some of them miss the mark. I entirely disagree with you sentiment that "you have to take the bus (or ride a bike)" is a downside. I consider this a major selling point to SF, you can get drinks with friends and not have to worry about driving under the influence. Almost every other city I have been to, you either need a DD, or you have to pony up a ton of money for a cab.
Regarding the old houses, roommates, and homelessness, by themselves none of these are really that big of a deal, and are probably pretty common in any major city. What is a little absurd (and you sort of alluded to this), is that we are paying some of the highest rent in the country, for these 'privileges'. However, I imagine most people who live here, including myself, don't exactly look at it that way. Instead, we look at it as we are paying high rent, for the privilege of living in SF and all it's perks (good jobs, active social life, etc..), and the old houses, roommates and homelessness are just a part of SF life.
I actually agree with what you're saying, I was more responding to people I know (and/or people that I see post here from time to time) that put SF on a pedestal, and seem to have convinced themselves that the downsides to SF are actually upsides.
I always ride the public transport when I go to SF, it's a great convenience and much less of a pain than driving up there and around there. I wasn't saying that public transport in SF is a bad thing (quite the opposite), but rather that it's often the only choice.
Like, even when it would be way, way more convenient for any number of reasons to just drive to wherever it is that you're going, various factors (parking, traffic, whatever) make it just too much of a pain. Even just owning a car when living in the city can be too expensive and more trouble than it's worth. I do see this as a downside to living up there (or just visiting), even though I would still ride the public transport most of the time anyway.
I know lots of people that live in SF and don't have a car (or in some cases even a valid driver's license), and they will swear up and down that having a car is totally pointless and why would anybody ever do that and what the hell is wrong with you anyway, do you enjoy filling up your tank with evil every week? :) But they spend 100% of their free time wandering around SF. It's not as feasible for them to go on day trips or weekend trips up and down the coast, or get out in the wilderness (at least, out beyond the reach of the bus system), so they just don't. They just hang around SF all the time, which is a rather wonderful place to be stuck in, but they are stuck there nonetheless. I love going on long drives and exploring all the remote corners of the Bay Area and beyond, and I couldn't imagine life any other way.
> I'm guessing that there's nearly a 100% correlation between the people accusing prospective homeowners of having an "insane obsession" and people who live in apartments in SF.
Ha! It seems that statement is based on... nothing?
I'm pretty militant anti-home ownership. This is partly to combat the omnipresent, uniquely American, societally-negative idea that you really ought to dream of owning a home some day. It's also some sour grapes because of the insane tax treatment home owners get and the difficulty in renting good houses because of it. How is it in the government's interest to encourage that behavior?
I live in a cozy little apartment in Boston and don't really expect to own a home for a long time, if ever.
From a theoretical perspective you should expect home ownership to be about as economically beneficial as renting. There's No Such Thing As A Free Lunch and it drives me crazy that people think lottery tickets pay off, multi-level marketing schemes are a good idea, and buying things "on sale" saves you money.
The only reason home ownership appears to be a better idea, is because people ALWAYS fail to look at it in the risk-adjusted sense.
There's very little special about real estate as an asset class over any other investment vehicle. And buying ANYTHING on so much debt that you're levered up 10x is insane. That implies a 10% depreciation wipes out ALL of your investment.
I have a degree in Economics from MIT and worked in finance for 2.5 years so I tend to see things in that light. But no one talks about home ownership that (correct) way, and it frustrates me that there's so much pressure on people with little financial knowledge to make this massive un-diversified bet without understanding of the implications.
If someone gave advice to an unsophisticated median american to go out and buy tons of stock options, or short sell stock on margin, they'd be rightly chastized. It's unethical. But no one seems to bat an eye when the exact same advice is given regarding real estate.
And that's why the real estate crash was such a disaster trapping so many people in crushing debt.
If America had a sane perspective, wealthy investors who can afford big bets on real estate while still being diversified would take the huge risk in buying a several hundred thousand dollar asset, and middle income earners would have a much easier time renting decent homes in good areas.
So, no, it's not about "fetishizing" homelessness or anything inane like that; it's about recognizing a terrible corrupting influence in America and doing our best to correct it.
> I'm pretty militant anti-home ownership. This is partly to combat the omnipresent, uniquely American, societally-negative idea that you really ought to dream of owning a home some day.
But, what if I really want to own a home? I'm a homebody. I want a place to call my own, and I want to make it comfortable for me. I enjoy entertaining guests, cooking for them, and making everybody comfortable -- when I move back to Boston, I'll invite you over. :)
> The only reason home ownership appears to be a better idea, is because people ALWAYS fail to look at it in the risk-adjusted sense.
It's not strictly an investment. What if I derive pleasure and comfort from living in a place that I can customize as I see fit? Every time I rent an apartment, there are things that I hate and drive me crazy: carpet, electric range, no outdoor space, awkward floor plan, etc.
> If someone gave advice to an unsophisticated median american to go out and buy tons of stock options, or short sell stock on margin, they'd be rightly chastized. It's unethical.
Agreed. I'm a fellow MIT alum who graduated in 2005. I know what I'm doing -- and what I want to do is own a home... and in the Boston area, to boot. I wouldn't advocate pushing the "dream" on other people, but I know what I'm doing; why chastise me?
You say that your "militant anti-home ownership" view is "partly to combat the omnipresent, uniquely American, societally-negative idea that you really ought to dream of owning a home some day". Do you find the fact that I want to own one repulsive?
I'll be back in Boston soon. I'll take you out for a beer (or tea, or any alternative beverage, if you don't drink), if you want to talk.
> Do you find the fact that I want to own one repulsive?
Ha, no no no... it's okay. I would certainly never say it's "repulsive" – at worst "unwise". But as long as it's a considered position, and you have the resources not just to cover your downpayment/mortgage but also to justify such a large stake in a single asset, then it can certainly make sense.
> I'm a homebody. I want a place to call my own, and I want to make it comfortable for me. I enjoy entertaining guests, cooking for them, and making everybody comfortable
Well that's certainly admirable. I would add, though, that part of the problem with finding an apartment that doesn't drive you crazy is most of the nice places are on the market for sale, rather than renting. So the more I can convince people that they'd be happy with renting, the better the rental supply is for me (and them). :-)
I can certainly understand the appeal of owning property for the additional flexibility and control it gives you, and sounds like that's what you're looking for. It's the allure of ownership qua ownership that I'm opposed to. But as you say, if you're not "pushing the "dream" on other people" live and let live.
> I'll be back in Boston soon. I'll take you out for a beer (or tea, or any alternative beverage, if you don't drink), if you want to talk.
I'd really like that! Shoot me an email to connect (my info is in my hackernews info box; I can't see any contact info for you).
It's a reaction against the "home ownership is doable and always a better idea than renting" sentiment that the previous generations knew to be true. The answer is probably a bit more nuanced in that sometimes ownership is great and sometimes it's a terrible idea, but I think it's just a case of the pendulum swinging the other way.
Neither option is actually insane, but the prevalent opinion that renting is an unacceptable waste of money that should only be utilized as a last resort is not correct.
I don't live anywhere near SF and I rent because I got a good deal on the monthly payment, I have a great landlord who fixes all issues promptly (which is awesome for me, since I am not much of a fix-it guy) (and relatedly, I'm not that interested in making renovations at this stage), and I don't want an asset that'll tie me down since I'm not sure I want to live in my current living area forever.
People constantly bug me to buy a house, but rent works out fine for us for now. I imagine at some point I will want the freedom to modify my home, but that'll be a little ways down the road, and I'm content "throwing my money away by not building equity" at present, especially since I don't necessarily consider significant real estate appreciation a forgone conclusion, as others mistakenly have (see: 2008) and many mistakenly continue to do.
I live in a duplex in the Bay Area, and I know for a fact that both tenants pay ~65% of the monthly mortgage. The landlord is making a healthy profit every month -- that's the real reason that I have an issue with renting.
That being said, I will not buy in the Bay Area. I'll move back to Boston and buy a condo or house there. Parts of the Bay Area and the Boston area benefit from proximity to universities, and see much less fluctuation in the real estate market. Personally, I miss seasons -- so, I'm not going to spend more money for "better weather".
Probably because we came of age when Fight Club, American Beauty, and AdBusters were popular and questioning the American dream. Home ownership usually implies suburbs and crushed dreams to people born in the 1980s.
I'm not so sure that there's as strong a correlation to age as you think. I was born in 1983, so I don't think that I missed the window that you're talking about.
What, exactly, is "crazy" about it? As a renter, you don't control your own destiny. You're at the whim of your landlord. As a home-owner, or better yet, a property-owner, you have much more control over your living situation. Don't like the paint color? Change it. Don't like your stove? Get a new one. Want to plant some new flowers? Go for it.
As a renter, you're going to be dealing with rents rising year over year. Those with fixed mortgages will see the same payments for decades.
If you have kids, you want some more stability, most likely. If the building you rent in is sold, or the rent is raised too much, you have to move. You want to install anything permanent for the kids? Have to ask permission from the landlord.
Not to mention the fact that, if you're paying $1,000/mo for rent, at the end of the year, you have almost nothing to show for your $12,000. In a house/home, you have equity in said house.
And since when did the housing bubble have anything to do with "obsession with home ownership"? I was under the impression it was a combination of unsound investments ("home prices always go up, so it's OK to spend more than you can afford!") and shady mortgage companies dishing out loans with no regard as to whether a person could pay for them.
>>What, exactly, is "crazy" about it? As a renter, you don't control your own destiny. You're at the whim of your landlord. As a home-owner, or better yet, a property-owner, you have much more control over your living situation. Don't like the paint color? Change it. Don't like your stove? Get a new one. Want to plant some new flowers? Go for it.
This is hilarious.
As a home-owner, you have control over your own home, but you have no control over your neighbors or your neighborhood in general. If things go badly, your house depreciates in value and there isn't much you can do to change it. Therefore, when you buy a home you are buying control of your immediate living situation while simultaneously surrendering yourself to the whims of those around you.
If you don't like your stove, you can get a new one. But what if you don't like your neighbors? That's a much bigger problem than not liking your stove, and there isn't a single thing you can do about it. They aren't going away anytime soon, and neither are you.
That is an asinine argument. You're more likely to run into terrible neighbors in an apartment setting, with the higher turnover in living spaces. Your argument is done in by basic research into the neighborhood.
That's like saying that you shouldn't buy a home simply because it might burn down one day, whereas living in an apartment is fine, because if it does burn down, it's not your building.
>>That is an asinine argument. You're more likely to run into terrible neighbors in an apartment setting, with the higher turnover in living spaces.
Except in a rental setting you can complain to the landlord if your neighbors are noisy, or simply pack up your shit and move if things don't change.
With a house, you're literally rooted in that space for 5-10 years. If you get bad neighbors after making the purchase, you get screwed. If someone decides to build a factory half a mile away, you get screwed. If the nearby school that you purchased the house for degrades in quality, you get screwed. If the HoA decides for some reason (that they don't even need to justify) that they don't like your front yard, guess what: you get screwed. These things cannot be insured against or researched in advance. You simply have to live with them.
That is an asinine argument. You're more likely to run into terrible neighbors in an apartment setting, with the higher turnover in living spaces. Your argument is done in by basic research into the neighborhood.
Disagree. A lot of neighborhoods have homeowners' associations, which are like New York co-op boards and basically an excuse for non-working house-spouses to get in peoples' way because they have literally nothing else to do.
He's right. Homeownership can be a pain in the ass if you care strongly about the subjective aspects of living in a place. You have an investment that other people can fuck with by building shit near it, and you have people trying to prevent you from changing what you have.
HOAs do exist, and can be intrusive, but OP's final line still applies: "Your argument is done in by basic research into the neighborhood."
Anyone buying a home knows if the home their looking at has an HOA or is a condo. I know many people who would never consider buying a home covered by an HOA, and many other people who like knowing that their neighbor can't paint their house pink and do car repair in the front yard with death metal playing. Caveat emptor.
Finally, many of these risks are reduced by actually being a part of the community. Don't want a factory built 0.5 miles from your home? Go to the planning meetings, talk to your city planning staff/council members. Join the HOA board. Being a homeowner means that you have an incentive to invest in your community and make it the community you want it to be. If you just disconnect and let others make decisions for you, yes you can be screwed. However, if you participate, get to know your neighbors, and become a part of the community, you can make it everything you want it to be, and more.
>>Finally, many of these risks are reduced by actually being a part of the community. Don't want a factory built 0.5 miles from your home? Go to the planning meetings, talk to your city planning staff/council members. Join the HOA board. Being a homeowner means that you have an incentive to invest in your community and make it the community you want it to be. If you just disconnect and let others make decisions for you, yes you can be screwed. However, if you participate, get to know your neighbors, and become a part of the community, you can make it everything you want it to be, and more.
I think you're grasping at straws here and it shows. All of the things you listed are incredible time-sucks. If you have ever been to an HOA meeting, you will know exactly what I'm talking about.
And did you just suggest going to city planning meetings to prevent the building of a nearby factory? I'm sorry, but do you even understand how these things work?
There are laws against most of the things neighbors could do to annoy you. Which means you can involve police and/or the courts, until your neighbors stop annoying you.
If you're renting, especially in an apartment complex, and go to sue, that likely means involving the landlord, and thus getting kicked out as soon as the legal retaliation period is up.
What, exactly, is "crazy" about it? As a renter, you don't control your own destiny. You're at the whim of your landlord. As a home-owner, or better yet, a property-owner, you have much more control over your living situation. Don't like the paint color? Change it. Don't like your stove? Get a new one. Want to plant some new flowers? Go for it.
Want to move to San Francisco to work at a new startup? Oops, you have a house, you're fucked. Breaking a lease is a lot easier than selling/renting your home. Being mobile is a lot better, for job prospects if you aren't in one of the hot spots already.
For one very specific subset of society. For other people with different priorities (friends, family, what-have-you), owning a home might be "a lot better" for them.
Yes, specifically people with wives and children like me. This is what's driving the property market in cities like Austin and Boulder. Talent is moving there because they can work for a startup and still have a healthy family life, work/life balance, and non-insane commute.
I've always considered rent as an expensive form of insurance.
Something major happens like the furnace going out mid winter, or a huge roof leak developing, or some other catastrophic event, or heck, even basic maintenance, It's not my problem, and my actual (dirt cheap) renter's insurance will take care of any damage.
$12,000 a year buys a lot of peace of mind. And honestly, unless I'm actually using my house as an investment rather than a place to live, equity is mostly meaningless to me.
> Not to mention the fact that, if you're paying $1,000/mo for rent, at the end of the year, you have almost nothing to show for your $12,000. In a house/home, you have equity in said house.
Suppose you buy a $300k house with a 15% downpayment. That means you spent $45k to GET the house. Now if the rent payments and the mortgage payment are both about the same, both spend $12k/year to keep their house, but the homeowner gains a very small amount of equity (most of the payment in the early years goes to interest on the mortgage) but the renter has an extra $45k of liquid net worth! If the renter invests in the stock market or a money market fund he gets some ROI from that - income the homeowner can't get. Plus being more solvent is valuable in itself in these hard times.
>There are many stable renter neighborhoods with great schools.
You forgot "...in other parts of the country." The "great" schools in the Bay Area are pretty much exclusively in places with $1m+ house prices, and with few places to rent for a reasonable amount.
Also consider that the bubble primarily affected the distant 'burbs. House prices in San Francisco, and close in to the city, didn't really drop appreciably at all, and have now regained any losses. So either the "pop" was delayed (and another one is still coming, as you suggest), or there wasn't a "bubble" in SF at all. Not to say that I think it's sane to pay those prices, but I don't live the Bay Area any more for that exact reason.
There are those of us who really want to own a house just so that we can change it however we like. There's something smothering about living in a rental when you've previously been free to do what you want. I know, first world problems, but still, home ownership means that I can't be kicked out (or priced out) on the whim of a landlord.
And leaving the Bay Area is one way to achieve both. I've got better (for some measures of "better") public schools near me now than even exist in California any more, and yet I own my home (and paid only about $320k for it -- still not cheap, but much more reasonable). In my case (having bought and sold at good times in the Bay Area), I own the house outright, so living expenses are even lower than if I were renting, giving me the ability to pursue my own dream projects for more of the time.
Exactly. The heyday of SV (think microprocessor and early PC heyday) had insanely low real estate prices. A guy could get buy doing manual labor and tinker on computers as a side project in the garage back then. Today that's unthinkable. It sucks that tech companies willingly WANT to be in SF/SV, as if it's some magical technological cloud city where the rest of the world can't compare.
It is a magical technological cloud city. For certain business models.
If the company in question is betting on very strong growth, then it needs a large pool of experienced talent to draw upon. Paying 3X or 5X as much to get top talent can easily save money in the long run.
If you want to be taken seriously by big fish VCs, you have to be able to speak intelligently about how to spend more for a disproportionately positive payoff. The problem here is not the VCs, but the aspirations of the founders.
Finding less experienced talent for cheap may be the smarter move. For other business models.
I think the problem is the belief that top talent only exists in SV - which is false. To me, I think top talent would be less willing to work insane hours, less willing to have long commutes, and less willing to spend a TON on housing. If Google and Apple HQ moved - it would be seen as the end of SV. The VCs would go too. And I think stuff like this will be happening soon.
Schools actually aren't bad in SF, they're uneven. Take a look at greatschools.net and filter by public school. SF has an unusually large number of schools rated "10" - keep in mind, anything over 7 is good by California standards (not exactly a great standard, but that is the basis for comparison to the wealthy burbs). This is based on adjusted API (test) scores, which don't tell the whole story about a school, of course.
In SF, school assignment is by lottery rather than by residence, which drives wealthy people nuts. I get it, if you live in a nice neighborhood across the street from a good school, and the city tells you you have to drive somewhere else, that'll piss you off - and if you can convert a high mortgage payment into access to a public school that the poor don't get in the suburbs, you may very well up and leave. Of course, if you live in a crappy neighborhood across the street from a failing school, you might not mind the lottery so much.
SFUSD is moving to a more district residence model, though it won't be the overwhelming factor.
Not everyone thinks it's a wise choice to spend as much as a used house on a new condo where it's hard to find parking.
Not everyone likes living in a cement jungle.
Not everyone likes to have to turn down the volume of a good movie because or their neighbors.
If you want to buy an all electric car, you think you can plug it in on the street?
There are many reason why owning a home is a good idea. The best option is owning an inexpensive home in a market with reasonable prices and a decent income.
I think there are many reasons, some more rational than others.
1 - everyone is long housing, and sfbay has had major price swings. Buying a house caps what you'll pay. I lived in a neighborhood in sf where market rents for my apartment went from $2200 to at least $2700/mo in a little over a year and a half.
2 - the US, via mortgage interest deduction, privileges home ownership
3 - california in particular privileges home ownership by basically freezing property taxes
4 - rental stock in california is often complete shit. If you don't want to hear your neighbors walking or running the bathroom fan or etc... you probably need to buy a home.
5 - good luck finding a 3 bedroom rental, which is highly desirable if you have 2 kids
6 - if you have good credit, a $1mm house in the peninsula costs roughly (within $700/mo) what rent does on a similar apartment
7 - want to have a dog? Good luck with that in a rental.
8 - want to not have to ask permission for X, Y, or Z while paying $3500+/mo? Don't live in a rental.
The original origin of the "obsession with home ownership" was the idea of escaping the need to pay fealty to the rentier class by owning your own home. I completely agree that "house as investment" and house flipping bubblemania is insane, and is partly responsible for ruining the real estate market.
Actual ownership is now impossible for ordinary middle to upper middle class people in markets like the Bay Area, and in fact renting is more rational there. But there are plenty of other markets where it's not impossible.
> Why does everyone want to tie significant amounts of their lifetime earnings into physical property that historically has had very low appreciation in value?
I've tied a significant amount of my lifetime earnings into dining out and purchasing music and I can assure you that neither of those has much of a resale value, especially the former.
I've never understood this crazy, if not outright insane obsession with maximizing appreciation value. It's like people have forgotten that we make money so that we can spend it making ourselves happy.
As someone who recently (this past year) went from being a renter to a homeowner, and had previously been a home owner for several years, it's not all rational... but here are some of the reasons.
I don't have to worry about the rent going up every year / six-months. If I plan to own the house for multiple years, a large chunk of my money goes to equity: I'm banking away value for later that you will get back when you sell the house. (Assuming the market doesn't go pear-shape: a big assumption.) In contrast, money you spend on rent is a pure cost, and irrevocably lost.
There are several "rent vs buy" calculators that can visualize (based on interest rates and rent vs mortgage costs) the crossover point where it's cheaper than it is to rent for X years, and what it does for your net worth. For me, it appears that about 2-3 years of owning will be a break-even point, and less if my rent would have increased.
In my case, the mortgage on a house (3 bedroom) + yard + garage, with a nice kitchen, was about $100 more per month than a cramped, 2 bedroom apartment with a miniscule (and poorly designed) kitchen, no space for the kids to run around, and not enough space to even unpack our stuff.
I OWN IT. Until you've owned one, it's possible you might not fully comprehend this double-edged sword.
I can paint the walls, break the walls, rip up the floor, put in a new mailbox, take out the trees I don't like. There's nearly nothing that keeps me from renting out a bedroom to a friend, or letting the in-laws stay for a week. If I want to mount a swamp cooler outside my window, I can, or turn my garage into an archery range.
There are downsides, too. As an owner, you risk that the market will fall out from under you. It's harder to move, as you have this limbo of not being able to buy a house until you've sold the previous one. (I haven't figured out how to make this not suck. Same goes from transitioning from a lease to ownership.) I have to mow the lawn, make sure the garden is watered. The utilities are a bit more expensive.
Also, as a homeowner, you tend to accumulate More Crap, since you have more space to fill.
All of this is worth it, though, as I do not worry about whether it's OK to paint my kids' rooms, or tear out a ceiling fan that I hate, or stain the deck a different color, or completely redo the landscaping. When someone (me, or the kids) busts a hole in a wall by accident, I think "Dangit, I have to fix that..." rather than "well, there goes my security deposit".
I'm sure that a big part of the appeal of home ownership is that our parents valued it, but I feel like there's a real intrinsic value to it as well. Consider surveying your friends who have owned + also rented, and ask them about the things they like or dislike about it.
>>If I plan to own the house for multiple years, a large chunk of my money goes to equity: I'm banking away value for later that you will get back when you sell the house. (Assuming the market doesn't go pear-shape: a big assumption.) In contrast, money you spend on rent is a pure cost, and irrevocably lost.
This logic is fundamentally flawed. Contrary to the popular conventional wisdom (repeated by our Baby Boomer parents), renting is not "throwing away" money. You are getting something for that payment, which is a place to live.
Conventional wisdom says that with a mortgage, you are building equity instead of paying the money to someone else and that makes more sense financially. But this is not true. You should read this piece to understand why, specifically the Epilogue part: http://messymatters.com/buyrent/
Well, it's throwing away money compared to home ownership, which also gives you a place to live. I don't know about hypothetical ultra-liquid markets, but in practise rent is usually higher than interest+maintenance fees over a longer period of time. Real estate investors need to make a profit, and so do banks, but the banks tend to have slimmer margins.
Also, banks are often still making a profit with rental properties.
Which isn't to say you should buy a home blindly - you shouldn't do anything so major blindly. It seems to me the appropriate way to view it is: if your cost of owning a home sans payment of principle is less than renting, then you are "throwing away" money but the alternative is investing that piece you're throwing away plus quite probably more in the real estate market, with the corresponding potential upside and risk. In the extreme case where costs including principle are less than rent, then you should probably purchase. An additional thing to watch, though, is that people often under-estimate things like repairs.
All of which is to say, there is no obviously right answer.
> Well, it's throwing away money compared to home ownership
It's still not "throwing away money", there are just different things that people value. I value being able to move whenever I want, wherever I want. To me that is worth potentially paying more. The same way some people value being dropped at their exact location with a taxi vs a close location with a bus: just because the bus costs less does not mean you are throwing money away with a taxi.
The Harlem numbers make a good point, both renting and buying involve unrecoverable costs. But it's is a case by case question as to whether one set of costs is higher than the other.
Where I live, my rent and utilities are higher than the cost of property taxes, HMO fees, utilities AND mortgage payments for an equivalent townhome. My market's the other extreme from Harlem.
Paying less per month for the same thing seems like a good idea. Even if the market drops the value of my house to zero, buying is still the right decision.
Not sure why the market is crazy here. Maybe it's a city of transients, people just passing through, or people with no savings?
This is why rent vs. buy calculators exist, there's no obviously correct answer for every situation, it's highly contingent.
Also, if you buy, your cost of moving is WAY higher. unless you can know to a high degree of certainty you're staying put for 10+ years at least, renting keeps you mobile. Not everyone can telecommute. Many people should be more mobile to go where jobs are, and that's easier when you're renting.
> If you rent, the cost of staying may be completely out of your control. Indeed, it may not even be possible.
That's arguably a feature, not a bug. Rents generally don't skyrocket without cause, and they usually don't skyrocket in isolation. If you're living in an area where rents are increasing rapidly and your income isn't keeping pace with the cost of living (of which rent is typically a substantial component), you probably have very good reason to consider whether you're in the optimal location.
On the other hand, there are people fortunate enough to have purchased a home in an area that has done well since their purchase but who still struggle with an increased cost of living. You see this a lot with people who are on a fixed income, or who bought in an area that has experienced a boom. Yes, these individuals might be able to sell their homes at substantial profit, but they'll still have to move once they sell.
> My house is mine, and some of the things I have here just aren't available to rent.
Your house isn't yours unless and until it's paid off. This may not apply to you specifically, but a lot of people who call themselves homeowners are really homeowners-to-be in about a decade or two or three.
> Your house isn't yours unless and until it's paid off.
That depends what you mean. It's my understanding (as a non-homeowner of any stripe) that you can do more substantial remodelling projects without asking for your landlord's blessing in a home you have a mortgage on, which seems to have been the kind of thing the parent was talking about, and is a potentially substantial practical difference in whether a space is "mine" or "not mine" whatever the actual equity situation is.
> Yes, these individuals might be able to sell their homes at substantial profit, but they'll still have to move once they sell.
They have to move if they were renting, too, and would be have less money (if they didn't leave the very instant rent rose at all) instead of more. Of course, that's just saying that it's better to be long an asset when its price jumps.
Also, if your work doesn't tie you to a region and you've purchased a house, and rents are high, you can always rent out your house instead of selling it. I know several people who have done this, in one form or another, to generally positive outcome.
> Also, if your work doesn't tie you to a region and you've purchased a house, and rents are high, you can always rent out your house instead of selling it.
That's a couple of big ifs, but even so, unless you have purchased a house as an investment with the intention of renting it out, this is another one of the rationalizations that prospective home buyers use to convince themselves that they're making a smart decision.
As I noted in one of my other comments, many home buyers know very little about the local market they've bought in to. Professional investors and major institutions have purchased hundreds of thousands of homes across the country that they are planning/trying to stabilize and rent out. To my knowledge, Blackstone owns more than 26,000, American Homes 4 Rent owns around 14,000 and Silver Bay Realty Trust owns more than 5,000. These are just a few of the major players. There are countless other smaller players, some of them foreign, doing the same thing on a smaller scale.
It's quite sensible to question the impact this will have on rents in the areas where this activity is most prevalent as the homes are stabilized and rental inventory increases. And one should not ignore the impact these purchases have had on housing prices in these areas.
Net-net: assuming you're comfortable being a landlord, which can be a trying job with even a single property, market conditions and trends vary so significantly that it's simply not credible to state "you can always rent out your house instead of selling it." Heck, as a lot of people found out not too long ago, at times it can be impossible to do either.
I've done just that. My wife an I bought our house 4 years or so ago. House payments including all the interest and accompanying costs were lower if we wanted to rent a smaller crappier house in the same location at the time. Now we are moving countries and renting our place. Rent we are asking for is 50-60% higher than the costs we have and have so many people interested we may just up the rent a bit.
But I do have some experience renting places as my family has a few properties they rent and I used to manage a lot of the related work.
I would absolutely not state, free of context, "you can always rent out your house instead of selling it." The context was being priced out of the market, in addition to the the mobile employment caveat (which I agree is a big if, but if your job is tied to the region and you can't afford to live there you're boned regardless).
> you can always rent out your house instead of selling it
Even if you lose a little on the rent, somebody else is now paying for your mortgage and you can enjoy a cheaper apartment elsewhere. Or if you've earned enough, just buy a second house. Mortgages aren't so hard to come by even these days that it's outside the realm of the possible.
In my experience it's rarely worth appealing to logic when discussing home ownership. It's just such an emotional subject that rational debate is often hard to come by.
1. Many home buyers make purchases with relatively little knowledge of their local real estate markets. For instance, in some areas heavily hit by the crash, you can find buyers who don't know that a considerable amount of the local sales activity has been driven by individual speculators and institutional buyers who are attempting to rent out the homes they purchase. They might be on a block where a double-digit percentage of the houses are rentals and not even know it or recognize how this could affect them.
2. Many people don't actually run the numbers for themselves so they can't intelligently weigh the cost of renting versus the total cost of home ownership and the potential gain or loss if/when the house is sold, an event that could be a decade or more away. At best, they do back of the envelope math and where assumptions are required, use a single set of assumptions that is favorable to the decision they have already made.
3. Many people who buy a house are really buying an interest rate and mortgage payment. The recent rise in interest rates has actually provided a good opportunity to observe this: some buyers who are in the market today are willing and eager to purchase a good deal "less house" than they could have purchased even a year ago because they're simply targeting a mortgage payment. Many conversations with realtors are eerily similar to conversations with auto salesmen: the best auto salesmen focus on the monthly payment, not the price of the car and what you're getting for it, because they know that the average person will apply a completely different, and less rigorous, analysis to the purchase when it's done this way.
4. Owning the dwelling you call home is an emotional thing, so home ownership proponents often resort to weak arguments like "if you're renting you're throwing money away" to justify their decision. Of course, there's no shortage of things that people "throw money away" on and some of those people, of course, are homeowners. It's not hard, for instance, to find homeowners with a $400/month auto lease or a 48 or 60 month loan on a car that costs half of what they gross in a year. And plenty of new homeowners spend more on unnecessary upgrades and "stuff" (i.e. large televisions, expensive audio systems, etc.) shortly after they move in to their new houses. Yet many of these same people don't see the irony in bragging about how financially astute they were to purchase a home and start building "equity".
>>In my experience it's rarely worth appealing to logic when discussing home ownership. It's just such an emotional subject that rational debate is often hard to come by.
This is probably the most intelligent thing I have read in this thread so far. You are absolutely right. Sometimes I forget that purchases - especially big purchases - are emotional decisions, and people jump through all sorts of crazy mental loops to justify them. I think this "bug" in the human brain is one of the most powerful drivers of the housing market.
Funny, I always considered my emotions to be a feature, not a bug. Life would be pretty boring if nothing ever gave me joy, sadness, relief, anger, gratitude, anxiety, laughter, sorrow, or peace.
The article consistently fails to take into account inflation. For example, they don't want to bet on 2%/year appreciation--even though the long-term inflation rate is 3%.
They also cite the "myth" that costs go down over time as the principal is paid. In fact the real reason home ownership costs go down over time is that your income is subject to inflation but a fixed-rate mortgage payment is not. Having a fixed-rate mortgage is like getting a 3% cut in your rent every year.
The epilogue is using a pretty specific comparison, which is a little out of whack in my experience. Rent / Mortgage comparisons are usually a little closer.
That being said, I completely agree with this article. The most important point is that buying is often worthwhile due to government meddling... it's difficult for other investments to compete with a house ownership appreciation that's tax free.
I agree -- I'm really glad that enraged_camel linked that article. It makes some very good points, and mentions various tax benefits and the like that I had forgotten about.
I think the best lesson from the epilogue is that your mileage may vary. Whether it's financially better to rent or buy depends on the market where you want to live. I had implied this, but not nearly as well. It's critical to take that into account when weighing the additional value you get from owning (namely that you can do what you want TO the property). Sometimes that's worth paying extra for, sometimes it's not, and it's ultimately up to you.
I also liked the commentary about mobility that people made here. It's very true: selling a house and then actually buying one is a dance I still don't understand how to do smoothly.
> You are getting something for that payment, which is a place to live.
Interestingly, for about the same amount per month, you can pay off a mortgage, get a nicer place to live and build equity at the same time...and you don't have a super telling you to turn the music down at 3 in the morning.
Conventional wisdom is just that... a convention. Each region of the country has different real estate markets with different cost dynamics. This buy-rent article merely proves that you have to do the math yourself.
I currently live near the Twin Cities, Minneapolis-St. Paul, which has one of the costlier rental markets for low end apartments. The cheapest apartments you can rent cost more per month than my mortgage. Annual property taxes where I live are under one percent of the cost of my home. The author of the buy-rent piece makes assumptions that do not apply to my region of the country.
Each region of the country has different real estate markets with different cost dynamics.
RE is once again all about location. In my area taxes are very low for owner occupied housing (they give a discount to owner occupied and gouge 4-5x the second home/rental properties to make up the difference). Rents in similar areas are very expensive comparatively. Buying makes sense if you plan to stay in the area for more than a few years.
I also fully appreciate that this situation isn't true everywhere.
I also live in the twin cities and the rent to mortgage ratio for single family homes is heavily slanted toward high rents. So we just bought a place for 1200/mo that we are renting for 1500 a month, and we live elsewhere. It's a great market if you can buy right now.
The idea of home ownership is that you aren't even (really) paying rent. You are investing and the money should return at some point in your life.
It's reasonable to conclude that your house could lose money, BUT there is a reason real estate companies exist. If you purchase homes with a focus on investing (and perhaps living there for a time) you will come out ahead.
Building codes and home owners associations can cause havoc on plans you have for your own home. A lot of apartments I've rented have allowed me to repaint or install ceiling fans at least, but never anything more.
The problem with home ownership is that people don't know how to properly value risk the way financial institutions do.
One of the more eye-opening assignments I've had was working with portfolio theory for a bank. Portfolio is pretty much hoppycock used to explain for the customer why they bank lost money on your investment. Giving you nice charts for how much risk was taken and how they performed compared to some index. While portfolio theory in itself is BS it demonstrates well how risk is something that has a value, and protecting against that risk costs money (hedging)
Texas Hold'em is the same, what is the risk (odds of winning) and how much can I win determines how much I can bet (invest) in a hand (home).
With homes people have no proper sense of the risks they're taking. Cognitive dissonance together with a surprisingly short view of history and survivor bias makes investing a home seem like a no brainer.
Its often futile to even have a discussions of potential risks with a homeowner because they don't want to hear it. Sure the risk might greater or it mighty be less in the same way that you can play russian roulette with one bullet or five, but there's always some risk and often greater than you would think in these times.
Homeowners however vehemently will deny any risk and keep spouting about how homes have gone up in the last 5, 10, 20 or whatever years and some neighbour who made it rich. In any case they say if the price goes down I'll stay put until it goes up again since I have no plans of moving, like the bank won't take your home if it goes down enough that you can't cover your mortage.
I'm not saying you absolutely shouldn't by a home but at least one should be aware of the risks :)
The equity you build up also give you unbelievable borrowing power in the future. I'm a handful of years away from paying off my house. When that happens I'll be able to borrow, in one shot, more money than the last startup I worked for had to struggle to raise over several rounds and 5 years, and on better terms.
The key is to do everything possible to minimize how much interest you pay, usually by shorter mortgage terms and paying off the principle as fast as humanly possible.
I wish I had the money I spent on rent when I was young and put it into a mortgage instead. I would have lived in a nicer environment, had more space for stuff, and had rooms I could have rented out in turn (which I do off and on over the years, you can usually pay off the interest every month just by renting out a spare bedroom).
Two school friends finished school, maxed out about 5 credit cards to get a deposit and got a big old house and large mortgage. They worked 2x jobs each and had 5 flatmates. Both say it nearly killed them. However they both won out big time as the property went up heaps in value and this set them up very very nicely. It's easy to see the holes in this scenario as a plan, and both say they would never ever recommend it to anyone.
Sortof. You still have to worry about taxes/bills, which are not insignificant in places like SF... You also have to ask permission from the local hoa/local government if you want to paint your house a certain colour. You also have to pay dues to the hoa.
I and my bank also own a house (it's more theirs than mine at the moment, but they let me inhabit it for now), but I think financial benefits are not as lopsided for homeowners. You typically incur a host of new payments:
- property taxes (1.15% in Santa Clara county), adds up if you own for more than 5 years
- HOA fees if any, typically responsibility of a landlord in rent environment
- one needs to buy/install/maintain appliances
- overall maintenance cost that will vary widely depending on the age and location of the house
While I don't disagree with you, home ownership is not for everybody and definitely limits one's options as far as job location, etc.
Communities are built by people that are in for the long haul. How many renters show up at city council meetings? The age of renting is the age of "bowling alone".
I completely agree with your point, but that's not a problem of renters, per se.
If the city of San Francisco (where my wife and I live) made a committed effort to build a stable stock of rental property that allowed families of 3-5 to rent for less than $3k a month, I guarantee you'd see more families sticking around instead of fleeing to points north or east. Instead, you get mostly young, single (your "bowling alone" category, less likely to show up at those city council meetings) splitting 3 bedrooms four ways and paying $4k for the privilege of all sharing one kitchen and one bathroom.
I'm optimistic that all of the new housing being put up in SOMA will help alleviate this but there needs to be some complementary regulatory structure to help keep those community types (which are often what the young singles become in 5-10 years) around. Otherwise, SF is quickly on a path towards being a place where only the rich, the young, the single, and the poor (via subsidized housing) can afford to live. The middle gets squeezed.
"physical property that historically has had very low appreciation in value?"
Only over a longer scale. Over a short scale, say 1980-2010, interest rates have gone from 20% to practically zero. So Joe 6 Pack who is going to pay $1500 no matter what interest rate exists, has caused the previous owners selling price to explode. And once prices start exploding, the bubbly pile on begins.
Its also a fad. Post 1950 no $ should be spared on education. Post 1990-ish no $ should be spared on real estate. When the fickle public changes their mind, look out below!
>I've never understood this crazy, if not outright insane obsession with home ownership.
Where many people live you can buy a house that would cost well over a mil in SFO and have it paid off in 3-4 years. Imagine you could live in a very nice house and only pay 2-4k in property taxes a year-
Owning a home makes the post-work, part of your life much more economical too. I would argue that obsession with home ownership is only crazy if you live in many parts of CA, to apply that to the whole country is grossly wrong.
I think if you are going to work for most of your life for someone else, than it is probably safe to buy a home, and at least recuperate some of the monthly payments you've made when you leave.
If you make decent money, and most likely will for the remainder of your life (aka used car dealer), then it is probably a better option to not own because you can always pay for rent.
But again - why would you choose to rent if you can own? Rent is thousands of dollars thrown out the window each year. Mortgage (or buying with cash) is the same, with the exception that at the end 1) you own a property that you could, if need be, sell for roughly the same amount you threw out and 2) you stop paying for housing for the rest of your life (minus repairs, yes, but that's insignificatn compared to paying rent every month - or otherwise landlords wouldn't be profitable).
Maintaining a home can cost more than you might imagine. The reason it is profitable for landlords (at least for apartments) is due to the fact there many are paying rent within the same building (economy of scale).
Second, taxes are significant. Where I live (Fargo, ND) property taxes equal a rent payment alone. So it almost makes more sense (monetarily) to pay rent and invest the extra money into something more lucrative than a home.
Oh I am sure I do. That does not change the fact that for a $250k home I would pay ~400 a month in taxes (of course more or less depending on a variety of factors). Rent is currently $550 for a nice two bedroom apartment with balcony and heat included.
Let's not forget that I have to heat that house all winter, which is a couple hundred a month in and of itself. I could go on.
Probably because it's split between everyone renting in the building, and while the tax is higher, it's not so much higher that you end up effectively paying the same amount.
"Why does everyone want to tie significant amounts of their lifetime earnings into physical property that historically has had very low appreciation in value?"
Because for most, it's not an investment, it's a hedge. Your demand for housing will not be going down as you get older, but it will become increasingly harder to manage.
Good rental (i.e., well-maintained, good neighbors, long-term, non-crazy owner, etc.) may be harder to find than a comparable house to buy, and you still don't own it meaning there are many things that you can not do there.
>>>> It's like people have forgotten about the housing bubble popping just five years ago
Not everybody did. Some found it a pretty good opportunity to finally get into the market while it temporarily became a bit less insane than usual. Home ownership doesn't have to be with a goal to strike it rich on a bubble, it may be to minimize housing expenses too.
There are number of reasons why I would prefer a home over rented property most important reason being almost infinite scope to personalize my living space.
Some of us value permanence. I own my house, and I have zero intention of ever selling it. It's mine, mine, mine, mine.
There is an incredible feeling in owning a home that you love and plan to spend your life in. We get to plan the changes we'll make over the next decade. We can plant a tree and watch it grow. We can truly unpack our stuff AND our lives… which it's hard to ever do when you rent; most people I know move every 1 to 3 years. At that rate, a lot of things feel like they're never worth it. You don't hang curtains because you think "I won't be here that long" then you wake up and it's been 4 years and you never had curtains and you wasted all that time. (Actual curtains… and metaphorical curtains, too.)
Granted, you don't get that feeling if you just buy whatever's available. (And probably nigh impossible to manage in a place like SF.)
Our house is a special place. It's historic; we feel obliged to take good care of it, because it will outlast us. It's an indescribable source of joy. And yes, there's angst, too -- that always comes with loving anything, be they people, animals, organizations, or things. It's worth it.
Also, community. My wife was sick in bed for 3 months, our neighbors came and watched our kids every morning from 8:00am-12:00pm so I could work and continue to support my family. You only get that from a neighborhood of homeowners.
I've never understood this crazy, if not outright insane obsession with home ownership. Why does everyone want to tie significant amounts of their lifetime earnings into physical property that historically has had very low appreciation in value? It's like people have forgotten about the housing bubble popping just five years ago, causing large portions of the population to take big hits financially. (And what is the current real estate craziness in SF, if not another bubble that will inevitably pop?)
Even seemingly rational reasons for home ownership, such as being able to raise a family in good school districts, fail to stand up to critical scrutiny. There are many stable renter neighborhoods with great schools.