>>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.
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/