This is true even in rural areas. I bought a house 2.5 years ago and have a monthly payment (including taxes and insurance) that is about 20% less than an equivalent monthly rental.
I didn't want to buy a house. I wanted to keep renting and retain the flexibility and freedom that renting gave me. It just no longer made sense financially.
What are the underlying reasons for the disparity between rental and home ownership costs? Obviously low interest rates are one and rented houses that were bought by their owners at higher interest rates reflect that in their price. But surely this would eventually normalize if rates stay low.
There must be something else since the relatively low cost of home ownership should be putting downward pressure on rental rates.
Even very cheap houses still require a mortgage. If mortgages are harder to get since the sub-prime crisis, more people will be forced to rent than to own. By the law of offer and demand, that would raise rents and lower housing costs.
It is always the case that the monthly cost to buy is lower than rent. It has to be, because the rent is covering the cost of repairs and depreciation which isn't included in your mortgage payment. And then there needs to be some left over to cover vacancies, and some profit for the landlord. Clearly in some markets buying is legitimately a better deal. But most people do a fairly cursory and incomplete analysis before coming to that conclusion.
20% is actually not a very large margin. Depending on how much your house cost, and how much your rent was, it may have actually been cheaper to rent.
That's a theory but in very dense markets it's sometimes the exact opposite, I suspect because people understand rent as "lost money" vs. loan repayments as "invested money".
Where I live, in Paris, if you take a mortgage today for 20 years, your repayments are going to be around x2/x2.5 the monthly rent of the place. The returns on real estate are notoriously very low. That's because speculation and foreign investment drive prices up while rents can't really increase because the people who live in the flats are already spending 40-45% of their income on rent.
I live in a one-bedroom for which the rent is 1200€, and it would cost around 480,000€ to acquire. With a good interest rate on 20 years, that's 2600€ monthly repayment.
Keep in mind that with a mortgage you're still renting -- you're just renting money instead of the house. I know this is a simplified view, but some of your points (e.g., profit for the landlord) have equivalents for a mortgage (profit for the bank, via interest). Also, you're going to be paying for maintenance in either case. In the case of owning it may not be literally baked into your mortgage payment, but that doesn't mean you're not going to be responsible for repairs on your own house.
Also, keep in mind that a landlord isn't entitled to profit just because they're attempting to make a profit. It is entirely possible (and it does happen in reality) that a certain rental market is such that the landlord will not be able to turn a profit or may in fact even lose money. Being a landlord is just like any other business -- it can fail.
Finally, rental markets are often just different. Here in Houston, I could not buy an apartment like the one I rent for the same price that I pay. There aren't many condo buildings for one thing, and the ones that do exist charge exorbitant monthly maintenance fees. These fees would bring the monthly cost of owning such a condo to about $500-$1000/month more than what I currently pay in rent. At the same time, any townhouse or SFH that I might buy which is larger than what I rent is naturally going to cost more -- often times significantly more. In other words, the rental market sometimes has options that don't exist in the for-sale market. (The opposite is of course true as well.)
Fair enough, I did not sufficiently qualify my statement. But my main point is that looking at just mortgage vs rent is leaving a lot of costs out of the equation.
If you can get rent for less than the monthly mortgage payment, then the landlord is basically subsidizing you to live there and it's a pretty great deal. Buying in those conditions is a sucker bet.
Before the housing crash being a landlord was a bad deal, practically anyone could go to the bank and get a new house. We are on the other side of the pendulum from the housing boom currently.
I don't know if I'd agree with you. For as far back as I can remember, renting has been cheaper than buying when I did the math. Only very recently, with skyrocketing rents and nearly-zero interest rates, has buying become cheaper month-to-month.
But by buying you are, you know, buying the actual house, and paying interest. While by renting you are just paying to use the house, and maintenance.
You are actually arguing that a house will fully depreciate in less time than it takes to pay for it. Well, it's not an extraordinary claim, but it's still not what I'd expect.
No, I'm arguing that just comparing mortgage payments to rent payments leaves out a lot of the expenses involved in owning the property, such as maintenance.
It is always the case that the monthly cost to buy is lower than rent. It has to be, because the rent is covering the cost of repairs and depreciation which isn't included in your mortgage payment.
That is demonstrably not true if you just look at monetary costs. Buying often does not outperform renting and investing the remainder. Of course people value home ownership for reasons other than its financial value.
I'm willing to put my money on credit, after the subprime mortgage bubble burst in '08 lenders are a lot tighter on who qualifies for a mortgage, even for FHA loans. Since there's a rather large number of people who have no choice but to rent right now due to credit it's very much a sellers market, especially in Boise where I live as it's been a hot target for people moving from more expensive areas to 'invest' in the rental market.
You used to be able to find a nice 3-bedroom house for around $800-900/mo here, now that's jumped to $1000-1300 unless you want to live in some really seedy areas of town. And a lot of this is because these 'investors' want to make a profit ASAP, rental housing used to be a long-term investment, which paid minimal returns until the property was paid off - now we have a bunch of people wanting to make their $600/mo right off the bat.
If the market clearing price for rental accommodations increases, why shouldn't landlords raise their rents in concert with that changed market dynamic?
>> What are the underlying reasons for the disparity between rental and home ownership costs?
Massive implicit and explicit government distortions in favor of home ownership. Starting with the type of mortgage available in the US and virtually nowhere else (i.e. 30 year fixed rate, no prepayment penalty, 10-20% down, and in some states no recourse -- all at less than 100 bps over the risk free rates), continuing with an even more comprehensive version of the infamous Greenspan put for equities, and big tax incentives.
>Massive implicit and explicit government distortions in favor of home ownership. Starting with the type of mortgage available in the US and virtually nowhere else
Which ones? The horrible interest-only ones, or the horrible variable interest with balloon payment ones, or the horrible fixed 5% interest ones?
Now look at Japan. I can get a home there with a 1-2% fixed mortgage rate and that comes with a 5% discount at the local mall/grocery (Aeon). I could actually make the 1% back just on my food spending.
4% may not sound like much, but it is huge over the course of a 30 year loan.
100,000=>115,000@30yr,1%
100,000=>193,000@30yr,5%
What a rip off... Nearly double the principal, just in interest. Mortgages here seem like legalized financial slavery to me.
I rent here in the USA. I haven't seen great changes in my rent in the past few of years. This story seems very suspicious to me. Is it an advertisement paid by the mortgage industry?
That is because the Japanese currency has been moribund for about 15 years. There have been many periods where you could actually make a profit by lending someone money at 0%. A 1% interest rate in the US would not even keep up with inflation; the lender would lose money on every loan.
There is a lot more to housing cost than monthly payment (for P&I), taxes and insurance. Landlords also must pay for repairs, hedge against costs to evict those who do not pay and or trash the place, pay for water, sewer, garbage disposal, lawn care, snow removal - unless the lease puts those responsibilities on the tenant. People often underestimate these other costs when buying a home and become what we used to call "house poor."
There are other good reasons to be cautious about homeownership. Typically, one must stay in a home for 5 years to break even on closing costs. Jobs typically are not that stable these days. It is often less expensive to sublet/get out of a lease than it is to find a willing, qualified buyer.
If you live in an area where a mortgage is 20% below rent, how are you losing any flexibility? You should be able to move and rent your place out at an 18% profit and have it filled almost immediately.
Good point, but it's not just about limiting one's ability to move. Tying up most or all your savings in a down-payment plus taking out a large credit line sometimes means not having the freedom to invest elsewhere, go back to school, start a company, or start a family.
Honestly, the "freedom to move" thing is a red herring in these discussions. There is a whole lot of friction to moving that is not tied up in how you pay for your residence. For most people, loss of social networks, loss of nearby family, and disruption to children are much bigger barriers to moving than owning their residence.
That said, the other features you mention are much better examples of limits that come from buying. It really depends on how stable real estate pricing is and what direction the market is trending.
I guess on paper that's true. But management and opportunity costs are certainly not insignificant in that case.
Property management services typically charge 5-7% off the top plus a new tenant/lease renewal fee that varies by market.
Unless the amount of capital I have invested in my home is small compared to my total assets (it's not) then having that much money tied up in a non-liquid asset is certainly not contributing to my personal flexibility.
Yep, PC86 didn't take in effect the 'risk' factor. Some renters are highly destructive to property and you will never recoup losses from them. A significant policy change by the government can change the metrics that home buying is a better choice for your renters. A significant change in local behavior makes that neighborhood worthless to rent from.
Multiple factors figure into why the rent is so high, but from a government policy standpoint, I'm interested in "the decision by consumers to rent over purchase" but what is more likely, that in spite of low mortgage rates, a number of buyers are not eligible for credit from private lenders.
The other policy piece that I think is interesting is the private housing market's ability to deliver housing choices-- what are developers producing, are they producing luxury units, are they producing affordable options in high enough quantity, and are developers inhibited by government regulation in delivering a diversity of housing choices.
I'm definitely in the "rent over purchase" group, even though I could get a mortgage with good terms. I think people are a bit nervous to purchase a home after seeing what happened in 2008.
I think it depends on where you're buying your house. The value of my house dipped slightly in 2008/2009 but is now about 12% higher than it was in 2007. Buying a home is still a good long-term investment but you have to be in a position to hold onto it (perhaps by renting it out after you vacate it).
Mostly the interest and upkeep that are keeping me away from purchasing.
If I bought a 200k house, in 5 years I would have paid 43k in interest and still owe 180k on the mortgage (according to some amortization table I found), and probably many thousand more fixing stuff that breaks.
After 30 years I will have paid $164,813 in interest, so even if the house doubles in value it doesn't seem like a great investment.
Am I missing something? Maybe I'm not understanding it correctly but it doesn't seem like that great of a deal.
in spite of low mortgage rates, a number of buyers are not eligible for credit from private lenders.
It could possibly have something to do with the largest group that traditionally bought houses in the past are now too busy paying off their student loans.
Understated in these discussions is the role of landlords. In Ithaca, NY, where I live, people's proportion of income going towards housing by some counts surpasses Manhattan and San Francisco. Yes, it's a college town with students already accepting the huge cost of tuition and throwing rent on the debt pile. Yes, the city is hemmed in by a lake to the north and hills to the rest. But there are like three landlords in the entire city. One in particular, Jason Fane, is notorious for jacking up prices on his Ithaca properties as collateral for his investments in China. Meanwhile, Collegetown is becoming increasingly split between obnoxiously priced condos and old houses that look more depressingly decrepit with each passing year.
My 9 roommates and I paid $60k a year for one of those decrepit old houses--and this was 10 years ago. At $500 per month each, it didn't seem that bad, but we really got ripped off. The density of college living (for instance I had to walk through a roommates room to get to mine) allows landlords in Ithaca to get a level of rent that they'd never get from families or older individuals.
I too live in a college town and have felt the same impact of landlords charging insane rates. Right now I am currently living in one where if say some part of the property is damaged or needs replacing all tenants will pay. Even though I don't use it or it is not my fault, the landlord divides the repair bill among all tenets as a "overage fee". So a laundry machine breaks, not your fault but you'll pay regardless.
It's simple ... Everyone got 'hip to the game' of extorting other people's productivity vs. being productive themselves (aka rent at elevated prices)
> The housing bubble that blew up was re-inflated to keep tax revenue alive and keep the economy afloat (High entry cost warranting high rents)
> Fed rates have been kept low attracting speculation
> Tons of investment firms got into property management/real-estate
> Money seeks easiest method of return.. My father once said "People will always need a roof over their head"
> The U.S is pumping immigrants in hand over fist to offset lowered U.S birth rates (to keep the hamster wheel turning)
> Housing is a need and, as such, there is a ton of room to exploit people... (Markets they call it)
The funny thing about people highlighting wealth inequality is that those in the middle exploiting the crap out of each other for their own gain don't get the huge role they are playing in the over-all outcome. Meanwhile, it's those at the top who are making the lion's share of the profit while the dummies below eat each other. Of course, this eventually ends in tears but myopia causes one to ignore that and get what you can while the good is still gettin'. Bay area landlord "I heard your salary went up.. Your rent has just went up too"
A true zoo.. and to think what American society would be like if we were trying to elevate each other as opposed to coming up with creative ways to exploit and keep others down. Instead of focusing on academic or economic interpretations, the biggest thing manifesting is : greed/selfishness/lack of comprehension of a greater whole
We also set up regulations to make building truly dense affordable housing impossible. Where it is possible, it offers lower returns than low density luxury housing.
> [affordable housing] offers lower returns than low density luxury housing.
Not true - as a RE investor you're always looking for around 1% of the property's value per month as rent ($1 in rent per month for every $100 the property is worth). Much below that and you're not going to have sustainable cash flow.
It is much, much easier to get $1k per month in rent from five $100k properties than it is to get $5k per month from a $500k property. Especially in areas with high property values (California), you're lucky to break 0.4-0.5%, which is not going to support any meaningful level of investment, only speculation. Which in turn helps drive a cyclical market, which helps pump up the higher end home values, which further hurts cash flow, etc etc.
Lower value housing may offer lower returns in an absolute sense but as a far as ROI it's much easier to make it on the lower end of the scale.
The 1% is based on those costs. If the costs to build affordable housing are greatly inflated due to permits, city fees, professional services, zoning waivers, subsidy to BMR, and additional construction costs, the ROI will be artificially lower than single family detached luxury homes.
It does make intuitive sense: build profitable luxury housing and the affluent will move in there, and while it ought to depress prices on cheaper places, a bunch of new condos does wonders for property values, which in turn drive up taxes, and therefore rents.
In addition to building, it is harder to buy. If I had bought a large SFH, I could have put 3% down (FHA loan). Instead I bought a smaller townhouse, and 95% of lenders would not accept any less than 25% down.
Agreed as far as stealing others productivity goes.
There's also another explanation: millenials prefer to live in cities, where there is a higher density of jobs and similar people. Millenials grew up in the suburbs in large numbers, and are migrating to the city as soon as they can afford it comfortably. Affording city rent comfortably means that there's room for the rent to rise, so it does, until they can't find someone to pay.
>millenials prefer to live in cities, where there is a higher density of jobs and similar people
lets focus on something else here too...
A millennial is very likely to be working in an job that high speed internet service or connectivity in some manner. It is much more expensive or impossible to get these in rural areas. For example 'digital media worker' > 'large files' > 'good internet service' > 'urban area'. If you've ever been out in the country and had 1.5Mbit down 768Kbit up DSL and tried to work on it, it's extremely frustrating. Even though the rents much cheaper, you'll go broke trying to live there.
The entire town I live in is single family homes owned by a few slumlords renting $400k-500k houses which they bought 5 years ago for $200k-300k. The rent has gone up 20-30% in the past year; however, the demand to rent is still high since no one can afford to actually buy anything.
Where $900/mo got you a 1BR apartment over someone's garage 20 years ago. Wonder what it gets you now? I forgot how bad Fairfield County was after I left.
I lived in LA for many years and I took the bus for a lot of them. I saw people commute for up to two hours across the city to get to work and the same amount home. I agree that is not ideal. But one option is to commute farther in order to pay less for housing.
But imagine that you have a family, youre established have kids - they have school you have you network of family and friends etc...
I think that the only people who actually ever make this argument are young singles with no kids that think "duh, its so easy to just commute farther!"
The rent difference in say Pittsburg CA to Oakland/SF is NOT that much different -- but the commute costs (time & money) are enormous.
What you may save in rent, you lose in every other aspect of daily life.
To make the argument of "just commute farther" is just too simplistic a view.
It reminds me of Bush saying how industrious and admirable it was for a single mother to have to work three jobs to support herself.
Actually I have two kids. As I suspect many of the people on the 534 bus in LA did.
"What you may save in rent, you lose in every other aspect of daily life."
What you're suggesting is that you might value the other aspects in life over the money saved on rent. I agree with you there. I love spending time with my kids. But know that other people are also trying to place that same value themselves. When a majority of the people are reaching the same conclusion then the housing prices will go in the direction demanded by the majority based on supply and demand.
If the majority of people decided that commuting farther was worth the trade off then housing prices would ease up. And then more people could afford them. Eventually a market price would be established.
I feel like bringing Bush into the conversation is a red herring as many people will have a strong reaction to that in one way or another and lose sight of the conversation we are having.
No, options are situations that which work with all factors weighed in.
Got kids and have them at daycare like the person I replied to (and me)? You MUST pick them up by a certain time, but lets add two hours to my commute, and even if I can pick them up later now they get dinner later, bed later, my after hours work or routine gets later.
The commute farther argument is naive for many many situations.
What you've just explained is that some options are very much preferable to others. What you haven't explained is how preferences means that less preferred options cease to be options at all.
By all means, call this a "simplistic lens", but please don't try to avoid that you have options.
> The U.S is pumping immigrants in hand over fist to offset lowered U.S birth rates (to keep the hamster wheel turning)
What is your evidence for your claim that the US is 'pumping immigrants'? Like immigrants are sludge? It strikes me as a particularly absurd conspiracy theory with debasing connotations.
So I guess HN has fully devolved to the quality level of a Reddit default sub if this is the top post.
Your post is full of stupidity but I'll start with this: a person buying a property does not increase the rental price.
Do you really think that if I sold you my house which has a market value of $100,000 for $2 million, suddenly I could find a tenant to rent it at 20x the previous rent?
Your thesis seems to be that landlords have massive pricing power that allows them to exploit people by raising prices. But in most (not all) places it seems like that shouldn't be the case...
- There are many landlords in an area, ranging from large to mom-and-pop's with one unit (ie, lots of competition)
- There's virtually no barrier to entry
- Information is freely available via Craigslist, Zillow, Padmapper, etc
- Switching costs are reasonably low (yeah, it's a pain to move, but it can usually be done for about a month's rent, or cheaper if you do more work yourself)
- There are substitutes readily available, such as renting in a nearby area, larger/smaller/better/worse units, buying a house/condo, moving in with friends/relatives, etc
About all landlords have going for them is that it's a moderately illiquid market (due to year leases), and units are not completely fungible. So this all looks to me like it should be a reasonably efficient market, with landlords having little ability to push prices away from the supply/demand balance. And indeed that what's I remember from renting, and what I've seen from being on the landlord side.
How exactly is it that you think landlords can ignore all of the above and charge unfair rents?
(Note, all of the above only applies for markets that are large enough. If you live in a market with only 3 landlords, then welcome to the oligopoly and prepare to get screwed.)
Wouldn't having the upfront capital to buy another house be the first barrier to entry? Buying a second house these days is much more difficult than say 10 years ago.
>How exactly is it that you think landlords can ignore all of the above and charge unfair rents?
Because if you don't have a down payment you can't get a loan to buy a house. So you rent, but you are also competing for a rent house from the other 1.2 million Americans that lost there in 2008 and are not likely to be able to buy a one since then. This pushes the balance of ownership to the rentor, they can now build up large down payments for second, third, or more houses that the people with higher rents can no longer save to reach. Renting farther away or worse units isn't necessarily a reduction in costs, for example driving farther is, in fact, not free in time or gas.
>Information is freely available via
To both parties. Which means, and has been happening that one landlord decided to go up in price and the others followed because that person was successful in doing so. Most renters will stay where they are even if prices go up because moving has large physical, monetary, and opportunity costs. Even if 50% of the rent is what would be considered cheap it will remain at 100% capacity and rarely show up on the market.
Buying a property does take some capital, but large amounts of financing are much more easily available for property than for nearly anything else. There's also lots of tricks like getting a near-zero-down FHA loan, live there for a couple years, then move and turn it into a rental. Anyway, all that is looking at the individual person. If landlords were actually getting outsized returns, you would see outfits with tons of money going into it. There has been some of that, but not a ton, and that has the effect of increasing supply and reducing returns.
>>but you are also competing for a rent house from the other 1.2 million Americans that lost there in 2008
You seem to be assuming that those houses they lost were bulldozed or something. The amount of vacant housing increased by the exact same amount. Those houses were available for other people to buy (perhaps instead of renting) or to increase the stock of rental housing.
>>one landlord decided to go up in price and the others followed because that person was successful in doing so.
If there's sufficient demand for everyone to raise prices, then it was underpriced before, or demand has increased, or supply has decreased. In any case, that's just how markets work - it's not the Evil Cabal of Price Fixing Landlords.
>>Most renters will stay where they are even if prices go up because moving has large physical, monetary, and opportunity costs.
There's some inertia there, certainly. But it's not at all difficult to shop around and see if your new rent is out of line, so it's hard for landlords to get too far beyond the market.
Also, contrary to what tenants seem to think, smart landlords don't casually kick tenants out. Turnovers are expensive (vacancy, repairs, cleaning), time consuming, and risky (the new tenant could be worse than the old one). Tenants that pay on time, don't wreck the house, and don't piss off the neighbors are like gold. Smart landlords only raise rents on good tenants when they're pretty far below market. Of course, bad tenants are a whole different story.
"Exceptions include the Silicon Valley area in California, where homeowners and renters each devote 42 percent of income to housing costs."
Single engineers and DINKs in the SF area should be buying if they're expecting to stay any real length of time. Price corrections when the housing market collapsed may not have helped SF like it did in other areas of the country but mortgage rates are dirt cheap and rent versus own pricing is at parity.
My family and I lived in Mountain view for 2 years. We knew we'd only be there for a year or two, and decided to rent, not buy.
After two years, we'd sunk $120K into our rental. Meanwhile, a friend bought a house at the same time for $1.3M and sold it just before we left for $1.6M. Even after real estate commissions, taxes, mortgage interest (which is tax deductible) and upkeep, I'm sure he came out well ahead of us.
The market doesn't always move in that direction. Your friend could have been in a much different position if he invested at a different point in time. If you take into account the real estate commission + recordation fees, your friend probably payed about 120k-130k. Also take into account the mortgage interest and the opportunity cost of the money he could have otherwise invested in this crazy bull market and your friend probably just barely broke even. This is in a great market, imagine what would have happened in a bad market to him...
I totally agree. I just moved my family of 4 to the Bay Area and we chose to just buy outright, despite the huge sticker shock and more limited availability.
To meet our needs (space + good schools + public transit commutes to SF) we were looking at upwards of $4K/month to rent a dilapidated shack where we'd likely have to give up our family dog to qualify as renters. And then be subject to 4-5% increases per year from the landlords.
Paying an extra $1K/month and getting both the mortgage interest deduction + property tax deduction made far more financial sense. And we actually got more choices in terms of better quality housing for our family.
> mortgage rates are dirt cheap and rent versus own pricing is at parity.
I think you're discounting the down payment factor. As a single engineer in SF, I could afford the monthly payment on a mortgage, but putting down 20% of a $1m house is beyond me and probably will be for a while (a few years).
The other trick is concern about this being the peak or close to the peak of the housing bubble in SF - so if I drop that kind of cash into a house, the market might collapse leaving me with property worth substantially less than what I'm paying.
I agree with you entirely. I read recently that the population growth of downtown Toronto has tripled in the past five years. Assuming that is a trend consistent with most major North American cities, the cost of housing has to compensate.
I don't read this site very often but did read this article about renting vs. buying using Toronto as an example. With his math you come out way ahead by renting in a new building downtown vs. buying a house in the suburbs.
It isn't. Toronto has been building new housing at a rate higher than any other North American city. The city is filled with cranes everywhere. The growth is just from people filling up the newly created space. Something that isn't happening elsewhere on such a scale.
Thanks to zipcar, uber, postmates etc it's becoming easier than ever to survive without a car. That's traditionally been a huge expense. Now those dollars can be redirected to housing instead.
To what end though? Housing prices are just a bidding war to allocate desirable real estate. More and more wealth becomes trapped in real estate.
It's an effective market-based method for allocating scarce resources- a classic tactic. But I'm beginning to wonder.
America's real estate is worth ~$25T. Suppose property was simply assigned. An unfair system, probably vulnerable to corruption and nepotism and such, but on the other hand that's $25T that can be invested in other pursuits. What might that additional liquid $25T do for us?
A gross oversimplification to be sure, and perhaps completely wrong-headed. But it seems like the key difference from many other bidding wars is the money doesn't leave the system. When I sell my house, I probably take the proceeds to buy another house. The seller of that house takes his proceeds, to buy another house, and so on. It seems rare that anyone downsizes houses, and takes the proceeds out of the market.
In my experience people will spend as much money as they can to get into desirable real estate. So if demand exceeds supply then prices rise to a high % of income. This is why I don't believe in minimum wage increases in HCOL urban areas. Real estate prices just rise to adjust. One way to hack the system is to have LCOL in a HCOL area, like living in a van in SF. But few people have the fortitude (or whatever) to do this.
not just in America, I think we are seeing the same in many major economies of the world - London, China, Australia, Brazil (house price vs income ratio being significantly higher than before)
Good for those of us who own property but not so great for the rest, and makes you wonder whether it's sustainable.
Of course it is not sustainable and will end in tears.
Governments around the world have been (re)-inflating asset prices by keeping interest rates artificially low (far below even the official inflation rates, never mind the real ones). This causes an ultimately speculative stampede into assets (stocks, real-estate, etc)
It wasn't explicitly mentioned, but I assume they are referring to a percentage of gross income, not net (after taxes) income? 50% of gross is gigantic, which would be a much higher percentage of your take-home pay. I remember as a student in NYC many years ago, some friends would spend about 70% of their take-home pay on rent, which on average would probably be half their gross, give or take. So I guess the numbers make sense, but that is still hard to imagine.
Artificially low interest rates (insofar as the fed rates are artifical)
Banks less willing to loan money to anyone that doesn't fit a narrow financial profile.
Individuals and business with access to existing capital can get money extremely cheaply (see points 1 and 2 above)
This creates a stratification that makes it difficult for one group of people to enter the real estate market and easy for another group to enter and speculate in it.
The group without access to loans obviously must rent even if they would like to buy. This inflates the demand for rentals thus raising their price.
The group with capital/access to loans can buy real estate with the express purpose of renting it taking homes off the market (decreasing supply, raising prices and further pushing up the bar for home ownership). This is even more attractive because of the increased demand and price for rental units. Of course by increasing the supply of rental units this should counteract rental prices but under the current circumstances I think there's a feedback loop that favors rising rental prices and entering/expanding the landlord business.
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I didn't want to buy a house. I wanted to keep renting and retain the flexibility and freedom that renting gave me. It just no longer made sense financially.
What are the underlying reasons for the disparity between rental and home ownership costs? Obviously low interest rates are one and rented houses that were bought by their owners at higher interest rates reflect that in their price. But surely this would eventually normalize if rates stay low.
There must be something else since the relatively low cost of home ownership should be putting downward pressure on rental rates.
20% is actually not a very large margin. Depending on how much your house cost, and how much your rent was, it may have actually been cheaper to rent.
Where I live, in Paris, if you take a mortgage today for 20 years, your repayments are going to be around x2/x2.5 the monthly rent of the place. The returns on real estate are notoriously very low. That's because speculation and foreign investment drive prices up while rents can't really increase because the people who live in the flats are already spending 40-45% of their income on rent.
I live in a one-bedroom for which the rent is 1200€, and it would cost around 480,000€ to acquire. With a good interest rate on 20 years, that's 2600€ monthly repayment.
Also, keep in mind that a landlord isn't entitled to profit just because they're attempting to make a profit. It is entirely possible (and it does happen in reality) that a certain rental market is such that the landlord will not be able to turn a profit or may in fact even lose money. Being a landlord is just like any other business -- it can fail.
Finally, rental markets are often just different. Here in Houston, I could not buy an apartment like the one I rent for the same price that I pay. There aren't many condo buildings for one thing, and the ones that do exist charge exorbitant monthly maintenance fees. These fees would bring the monthly cost of owning such a condo to about $500-$1000/month more than what I currently pay in rent. At the same time, any townhouse or SFH that I might buy which is larger than what I rent is naturally going to cost more -- often times significantly more. In other words, the rental market sometimes has options that don't exist in the for-sale market. (The opposite is of course true as well.)
If you can get rent for less than the monthly mortgage payment, then the landlord is basically subsidizing you to live there and it's a pretty great deal. Buying in those conditions is a sucker bet.
You are actually arguing that a house will fully depreciate in less time than it takes to pay for it. Well, it's not an extraordinary claim, but it's still not what I'd expect.
As I said, it's not an extraordinary claim.
I meant: maintenance is only more expensive than the acquisition if the good will completely depreciate during the time you are maintaining it.
That is demonstrably not true if you just look at monetary costs. Buying often does not outperform renting and investing the remainder. Of course people value home ownership for reasons other than its financial value.
You used to be able to find a nice 3-bedroom house for around $800-900/mo here, now that's jumped to $1000-1300 unless you want to live in some really seedy areas of town. And a lot of this is because these 'investors' want to make a profit ASAP, rental housing used to be a long-term investment, which paid minimal returns until the property was paid off - now we have a bunch of people wanting to make their $600/mo right off the bat.
If the market clearing price for rental accommodations increases, why shouldn't landlords raise their rents in concert with that changed market dynamic?
Massive implicit and explicit government distortions in favor of home ownership. Starting with the type of mortgage available in the US and virtually nowhere else (i.e. 30 year fixed rate, no prepayment penalty, 10-20% down, and in some states no recourse -- all at less than 100 bps over the risk free rates), continuing with an even more comprehensive version of the infamous Greenspan put for equities, and big tax incentives.
Which ones? The horrible interest-only ones, or the horrible variable interest with balloon payment ones, or the horrible fixed 5% interest ones?
Now look at Japan. I can get a home there with a 1-2% fixed mortgage rate and that comes with a 5% discount at the local mall/grocery (Aeon). I could actually make the 1% back just on my food spending.
http://www.bloomberg.com/news/articles/2015-01-07/record-low...
4% may not sound like much, but it is huge over the course of a 30 year loan.
100,000=>115,000@30yr,1% 100,000=>193,000@30yr,5%
What a rip off... Nearly double the principal, just in interest. Mortgages here seem like legalized financial slavery to me.
I rent here in the USA. I haven't seen great changes in my rent in the past few of years. This story seems very suspicious to me. Is it an advertisement paid by the mortgage industry?
There are other good reasons to be cautious about homeownership. Typically, one must stay in a home for 5 years to break even on closing costs. Jobs typically are not that stable these days. It is often less expensive to sublet/get out of a lease than it is to find a willing, qualified buyer.
That said, the other features you mention are much better examples of limits that come from buying. It really depends on how stable real estate pricing is and what direction the market is trending.
Property management services typically charge 5-7% off the top plus a new tenant/lease renewal fee that varies by market.
Unless the amount of capital I have invested in my home is small compared to my total assets (it's not) then having that much money tied up in a non-liquid asset is certainly not contributing to my personal flexibility.
The other policy piece that I think is interesting is the private housing market's ability to deliver housing choices-- what are developers producing, are they producing luxury units, are they producing affordable options in high enough quantity, and are developers inhibited by government regulation in delivering a diversity of housing choices.
If I bought a 200k house, in 5 years I would have paid 43k in interest and still owe 180k on the mortgage (according to some amortization table I found), and probably many thousand more fixing stuff that breaks.
After 30 years I will have paid $164,813 in interest, so even if the house doubles in value it doesn't seem like a great investment.
Am I missing something? Maybe I'm not understanding it correctly but it doesn't seem like that great of a deal.
It could possibly have something to do with the largest group that traditionally bought houses in the past are now too busy paying off their student loans.
> The housing bubble that blew up was re-inflated to keep tax revenue alive and keep the economy afloat (High entry cost warranting high rents)
> Fed rates have been kept low attracting speculation
> Tons of investment firms got into property management/real-estate
> Money seeks easiest method of return.. My father once said "People will always need a roof over their head"
> The U.S is pumping immigrants in hand over fist to offset lowered U.S birth rates (to keep the hamster wheel turning)
> Housing is a need and, as such, there is a ton of room to exploit people... (Markets they call it)
The funny thing about people highlighting wealth inequality is that those in the middle exploiting the crap out of each other for their own gain don't get the huge role they are playing in the over-all outcome. Meanwhile, it's those at the top who are making the lion's share of the profit while the dummies below eat each other. Of course, this eventually ends in tears but myopia causes one to ignore that and get what you can while the good is still gettin'. Bay area landlord "I heard your salary went up.. Your rent has just went up too"
A true zoo.. and to think what American society would be like if we were trying to elevate each other as opposed to coming up with creative ways to exploit and keep others down. Instead of focusing on academic or economic interpretations, the biggest thing manifesting is : greed/selfishness/lack of comprehension of a greater whole
Not true - as a RE investor you're always looking for around 1% of the property's value per month as rent ($1 in rent per month for every $100 the property is worth). Much below that and you're not going to have sustainable cash flow.
It is much, much easier to get $1k per month in rent from five $100k properties than it is to get $5k per month from a $500k property. Especially in areas with high property values (California), you're lucky to break 0.4-0.5%, which is not going to support any meaningful level of investment, only speculation. Which in turn helps drive a cyclical market, which helps pump up the higher end home values, which further hurts cash flow, etc etc.
Lower value housing may offer lower returns in an absolute sense but as a far as ROI it's much easier to make it on the lower end of the scale.
There's also another explanation: millenials prefer to live in cities, where there is a higher density of jobs and similar people. Millenials grew up in the suburbs in large numbers, and are migrating to the city as soon as they can afford it comfortably. Affording city rent comfortably means that there's room for the rent to rise, so it does, until they can't find someone to pay.
lets focus on something else here too...
A millennial is very likely to be working in an job that high speed internet service or connectivity in some manner. It is much more expensive or impossible to get these in rural areas. For example 'digital media worker' > 'large files' > 'good internet service' > 'urban area'. If you've ever been out in the country and had 1.5Mbit down 768Kbit up DSL and tried to work on it, it's extremely frustrating. Even though the rents much cheaper, you'll go broke trying to live there.
Where $900/mo got you a 1BR apartment over someone's garage 20 years ago. Wonder what it gets you now? I forgot how bad Fairfield County was after I left.
I lived in LA for many years and I took the bus for a lot of them. I saw people commute for up to two hours across the city to get to work and the same amount home. I agree that is not ideal. But one option is to commute farther in order to pay less for housing.
But imagine that you have a family, youre established have kids - they have school you have you network of family and friends etc...
I think that the only people who actually ever make this argument are young singles with no kids that think "duh, its so easy to just commute farther!"
The rent difference in say Pittsburg CA to Oakland/SF is NOT that much different -- but the commute costs (time & money) are enormous.
What you may save in rent, you lose in every other aspect of daily life.
To make the argument of "just commute farther" is just too simplistic a view.
It reminds me of Bush saying how industrious and admirable it was for a single mother to have to work three jobs to support herself.
"What you may save in rent, you lose in every other aspect of daily life."
What you're suggesting is that you might value the other aspects in life over the money saved on rent. I agree with you there. I love spending time with my kids. But know that other people are also trying to place that same value themselves. When a majority of the people are reaching the same conclusion then the housing prices will go in the direction demanded by the majority based on supply and demand.
If the majority of people decided that commuting farther was worth the trade off then housing prices would ease up. And then more people could afford them. Eventually a market price would be established.
I feel like bringing Bush into the conversation is a red herring as many people will have a strong reaction to that in one way or another and lose sight of the conversation we are having.
Got kids and have them at daycare like the person I replied to (and me)? You MUST pick them up by a certain time, but lets add two hours to my commute, and even if I can pick them up later now they get dinner later, bed later, my after hours work or routine gets later.
The commute farther argument is naive for many many situations.
You're only looking through a simplistic lens.
By all means, call this a "simplistic lens", but please don't try to avoid that you have options.
What is your evidence for your claim that the US is 'pumping immigrants'? Like immigrants are sludge? It strikes me as a particularly absurd conspiracy theory with debasing connotations.
Your post is full of stupidity but I'll start with this: a person buying a property does not increase the rental price.
Do you really think that if I sold you my house which has a market value of $100,000 for $2 million, suddenly I could find a tenant to rent it at 20x the previous rent?
- There are many landlords in an area, ranging from large to mom-and-pop's with one unit (ie, lots of competition) - There's virtually no barrier to entry - Information is freely available via Craigslist, Zillow, Padmapper, etc - Switching costs are reasonably low (yeah, it's a pain to move, but it can usually be done for about a month's rent, or cheaper if you do more work yourself) - There are substitutes readily available, such as renting in a nearby area, larger/smaller/better/worse units, buying a house/condo, moving in with friends/relatives, etc
About all landlords have going for them is that it's a moderately illiquid market (due to year leases), and units are not completely fungible. So this all looks to me like it should be a reasonably efficient market, with landlords having little ability to push prices away from the supply/demand balance. And indeed that what's I remember from renting, and what I've seen from being on the landlord side.
How exactly is it that you think landlords can ignore all of the above and charge unfair rents?
(Note, all of the above only applies for markets that are large enough. If you live in a market with only 3 landlords, then welcome to the oligopoly and prepare to get screwed.)
Wouldn't having the upfront capital to buy another house be the first barrier to entry? Buying a second house these days is much more difficult than say 10 years ago.
>How exactly is it that you think landlords can ignore all of the above and charge unfair rents?
Because if you don't have a down payment you can't get a loan to buy a house. So you rent, but you are also competing for a rent house from the other 1.2 million Americans that lost there in 2008 and are not likely to be able to buy a one since then. This pushes the balance of ownership to the rentor, they can now build up large down payments for second, third, or more houses that the people with higher rents can no longer save to reach. Renting farther away or worse units isn't necessarily a reduction in costs, for example driving farther is, in fact, not free in time or gas.
>Information is freely available via
To both parties. Which means, and has been happening that one landlord decided to go up in price and the others followed because that person was successful in doing so. Most renters will stay where they are even if prices go up because moving has large physical, monetary, and opportunity costs. Even if 50% of the rent is what would be considered cheap it will remain at 100% capacity and rarely show up on the market.
>>but you are also competing for a rent house from the other 1.2 million Americans that lost there in 2008
You seem to be assuming that those houses they lost were bulldozed or something. The amount of vacant housing increased by the exact same amount. Those houses were available for other people to buy (perhaps instead of renting) or to increase the stock of rental housing.
>>one landlord decided to go up in price and the others followed because that person was successful in doing so.
If there's sufficient demand for everyone to raise prices, then it was underpriced before, or demand has increased, or supply has decreased. In any case, that's just how markets work - it's not the Evil Cabal of Price Fixing Landlords.
>>Most renters will stay where they are even if prices go up because moving has large physical, monetary, and opportunity costs.
There's some inertia there, certainly. But it's not at all difficult to shop around and see if your new rent is out of line, so it's hard for landlords to get too far beyond the market.
Also, contrary to what tenants seem to think, smart landlords don't casually kick tenants out. Turnovers are expensive (vacancy, repairs, cleaning), time consuming, and risky (the new tenant could be worse than the old one). Tenants that pay on time, don't wreck the house, and don't piss off the neighbors are like gold. Smart landlords only raise rents on good tenants when they're pretty far below market. Of course, bad tenants are a whole different story.
Single engineers and DINKs in the SF area should be buying if they're expecting to stay any real length of time. Price corrections when the housing market collapsed may not have helped SF like it did in other areas of the country but mortgage rates are dirt cheap and rent versus own pricing is at parity.
After two years, we'd sunk $120K into our rental. Meanwhile, a friend bought a house at the same time for $1.3M and sold it just before we left for $1.6M. Even after real estate commissions, taxes, mortgage interest (which is tax deductible) and upkeep, I'm sure he came out well ahead of us.
To meet our needs (space + good schools + public transit commutes to SF) we were looking at upwards of $4K/month to rent a dilapidated shack where we'd likely have to give up our family dog to qualify as renters. And then be subject to 4-5% increases per year from the landlords.
Paying an extra $1K/month and getting both the mortgage interest deduction + property tax deduction made far more financial sense. And we actually got more choices in terms of better quality housing for our family.
I think you're discounting the down payment factor. As a single engineer in SF, I could afford the monthly payment on a mortgage, but putting down 20% of a $1m house is beyond me and probably will be for a while (a few years).
The other trick is concern about this being the peak or close to the peak of the housing bubble in SF - so if I drop that kind of cash into a house, the market might collapse leaving me with property worth substantially less than what I'm paying.
- Take a large population spread over a big area.
- Consider that they are used to 2,000sqft homes and not the 300sqft apartments of decades long past
- Squish them all into cities
Boom, you've got yourself runaway prices.
http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/
Of course, you might not agree with his math.
It's an effective market-based method for allocating scarce resources- a classic tactic. But I'm beginning to wonder.
America's real estate is worth ~$25T. Suppose property was simply assigned. An unfair system, probably vulnerable to corruption and nepotism and such, but on the other hand that's $25T that can be invested in other pursuits. What might that additional liquid $25T do for us?
A gross oversimplification to be sure, and perhaps completely wrong-headed. But it seems like the key difference from many other bidding wars is the money doesn't leave the system. When I sell my house, I probably take the proceeds to buy another house. The seller of that house takes his proceeds, to buy another house, and so on. It seems rare that anyone downsizes houses, and takes the proceeds out of the market.
Good for those of us who own property but not so great for the rest, and makes you wonder whether it's sustainable.
Governments around the world have been (re)-inflating asset prices by keeping interest rates artificially low (far below even the official inflation rates, never mind the real ones). This causes an ultimately speculative stampede into assets (stocks, real-estate, etc)
Artificially low interest rates (insofar as the fed rates are artifical)
Banks less willing to loan money to anyone that doesn't fit a narrow financial profile.
Individuals and business with access to existing capital can get money extremely cheaply (see points 1 and 2 above)
This creates a stratification that makes it difficult for one group of people to enter the real estate market and easy for another group to enter and speculate in it.
The group without access to loans obviously must rent even if they would like to buy. This inflates the demand for rentals thus raising their price.
The group with capital/access to loans can buy real estate with the express purpose of renting it taking homes off the market (decreasing supply, raising prices and further pushing up the bar for home ownership). This is even more attractive because of the increased demand and price for rental units. Of course by increasing the supply of rental units this should counteract rental prices but under the current circumstances I think there's a feedback loop that favors rising rental prices and entering/expanding the landlord business.