The point was probably that coming up with the money for a down payment is significantly more difficult (or less likely) today than it was in the past. Given how many graduates are burdened with loan debt.
It is much easier in the US than other countries. 3-5% down for FHA loans is not uncommon. I own 2 houses (one that's probably worth 400k) and I definitely didn't put 20% down.
Those numbers assume you're planning on keeping it for 30 years, which skews the numbers well in favor of buying.
I have coworkers in their early 30's who are already on their second house in the last 5 years. I haven't asked if they timed the market well and came out ahead, or if they regret the first house.
Impossible to say for sure without seeing the exact methodology and the data, but there are probably many other issues with this "study".
* taking data for the past year (or for a few recent years) and extrapolating it to 30 years, instead of actually getting the data for the last 30 years
* hindsight bias: 30 years ago you didn't know whether it would be better to buy a house in San Francisco or Detroit.
* comparing returns on a risky, leveraged investment (buying a house) with returns on a low risk investment ("interest earned on any money renters saved").
Renters tend to pay less per month than owners so if you can take that monthly difference and invest it wisely you might be able to beat the owners while keeping your freedom of location.
That depends on where you live. The house a few doors down rents for $1100/month. My mortgage, insurance, and utilities for a similar home is under $850/month.
Of course, I'm in Kentucky where property is dirt cheap.
This is only true when price-to-rent ratios are abnormally low. It shouldn't be true most of the time: why would anyone own?
On a per-month basis, renting should be more expensive than owning, especially when taking into account tax deductions that favor owning. The upside of renting is that you didn't have to unload a down payment and can in turn invest that money in something that gives higher rate of returns than property.
Generally, renters pay more per month before opportunity costs are taken into account and less so (possibly even strictly less) when opportunity costs are taken into account.
Basic premise of owning vs renting is enough alone really. Unless you plan to move around often it should be blindingly obvious that buying is cheaper. Someone else owns a home and is renting it to you with a profit margin.
Not necessarily. Landlords can only charge what the market will bear. If you happen to live in a not in-demand rental market, the landlord will be renting it for whatever they can get.
From what I have observed it seems that in less desirable areas renting could be more expensive than buying as everyone has _some_ money for rent (especially if there is some social security that helps) but no one wants to buy in a bad area.
On the other hand there is an upper limit on rent as wages only go so high, and landlords often enjoy the high income and don't see a need to sell. People who have plenty of money and really want a nice place are willing to pay extra, so for high quality real estate buying can be more expensive than renting.
Most importantly though there are ways to buy real estate cheap, and if you "buy retail" or believe the numbers you read in listings you may be the sucker in the biggest deal of your life. Chances are everyone you're dealing with in a real estate deal is super professional and extremely experienced. Price is "var", not "CONST".
You're right about professionals and suckers. A successful (i.e. he's done it for many decades) real estate investor I know says that he makes all his profit on the day he buys. In other words, a professional will only buy a property for much less than the normally-quoted "price".
In Philadelphia - mentioned in the article - there is a 2% transfer tax, paid by both parties. Add 6% realtor fees, and you typical need to make 10% profit on a house/condo/apartment just to break even - this, of course, not counting the cost of insurance, home maintenance, taxes, etc. Add those costs in, and it typically needs to be 15-20% appreciation (adjusted for inflation, of course, so add a few more points) to see any profit at all.
This makes buying worth while only if you're planning to hang around for at least a decade or more.
We bought a 900sq ft 1br condo 7 years ago. Between mortgage, taxes, parking, condo fees, etc., our out of pocket was ~$2600. Seven years later, renting a 2br 1200 sq ft. condo in a more desirable neighborhood with garaged parking is ~$350 less per month.
The article is so overly simplistic it's ridiculous. Buying is not by default cheaper, even over the long term. Over 25 years it can be forced savings, but even that privilege is paid for with interest. At the same time I could be investing our savings and it will compound in to a nice chunk of change, that I bet might be around the profit margins of buyers, minus all the expense.
This article is idiotic. If I miss out by 65K a year that means prices are advancing insanely. How can that be sustainable? We've seen what happens when banks printing money through land runs ahead of productivity. You get a huge crash and the govt bailout begins.
We badly need a change in the way land wealth is taxed and in the way we issue money. Without this land prices will always rise to soak up all productivity gains.
Today is the anniversary of the peasants' revolt in the UK, by the way.
Everyone else isn't taking a step forward though, though this article would like to convince us of that. And even if they were, if the step forward means less job and location mobility, then I don't mind a step "back."
If your goal is truly to profit, buying a single property is far from ideal. You don't need to buy a house to profit from these markets. You can buy any number of REITs that own single and multi-family properties, mortgage REITs, homebuilder stocks, closed-end funds with exposure to real estate, leveraged products like ETFs and ETNs, etc. Most of these securities produce income.
As an extreme example, there's a UBS ETN with the ticker MORL that tracks a global mortgage REIT index. It offers 2x leverage. It currently has a 20%+ yield and distributions are paid monthly. Is there risk? Sure. But unlike a house, you can exit your position with a few keystrokes.
The great thing about investing in real estate through securities like this is that when the market slows or changes trend, you can sit on the sidelines or go short.
The downside of real estate ETFs is you don't see the mortgage interest deduction which can decrease the house payments by ~20% (depending on tax bracket).
If you are self-employed, you can set up a solo 401(k). The $18,000 you refer to is the limit for elective employee deferrals. You can contribute 25% of your self-employment compensation (20% if you're a sole proprietor or have a single-member LLC) as an employer profit sharing contribution. In total, between employee and employer contributions, you can contribute a maximum of $53,000/year.
The great thing about a self-directed solo 401(k) is that you can purchase physical real estate in the retirement (speak to qualified counsel about the rules). Also, if you want to buy a home, you can borrow up to half of your 401(k) balance (to use as a down payment) and, if your plan allows, the repayment term for a loan used to purchase a primary residence can typically be extended beyond five years (the typical term).
The mortgage interest deduction is for most people overrated. I believe only about half of homeowners actually claim it, and I recall that the average deduction was around $2,000/year.
Again, if your interest is in profit, real estate-related investments are hard to beat for the average person, especially if you hold them in tax advantaged retirement accounts. Also, consider that with a leveraged product like MORL, which has total annual fees of .80%, you're leveraging at an effective cost of capital you could never get as an individual.
I agree for the average person it's not too significant, but the average person on this site earns well above the average person.
As an example, for a programmer in a ~37% tax bracket owning a million dollar home in the Silicon Valley, you could be talking about a tax-deduction on the order of $12k annually.
With that said, MORL looks like a very interesting product -- and probably a better investment than a house for most people.
If you're in the Seattle area the gold rush for real estate is definitely back on. The only thing different between now and 2007 is that I don't see as many sign twirlers on corners. Tower cranes and new constructions are everywhere.
> To compile those numbers, realtor.com compared median home prices and the cost of renting a three-bedroom home in 382 local markets, then factored in estimates for transaction costs, price appreciation, future mortgage rates, and interest earned on any money renters saved when it was cheaper to rent.
But those aren't the only costs. When you rent you are generally shielded from paying for various things, like fixing damage to the apartment or other serious maintenance. Also, renting saves you from the risk of the house losing value because of some local event like a neighborhood becoming less attractive due to a new source of noise or crime. Finally, these estimates assume home prices will rise according to "historical norms", which is a gamble.
Renting also lets you move around to pursue another job in another city, without needing to worry yourself with renting out your current location. The worry might deter you from moving and getting a higher salary, or it might make you spend the time, effort and risk to rent out the place you own, which brings its own costs.
It's hard to quantify those things. Some are unlikely events, some affect the variance instead of the mean, and some depend on the individual (how likely you are to find a job in another city - probably fairly high for people reading HN compared to other industries). But I never see them taken into account in articles like this.
Exactly, this is just an article by realtors to stress out people to buy homes, even if they cannot afford it or doesn't match their life situation. There are lots of cost associated with owning home that people usually ignore. They just see the mortgage, which sometime is less than their current rent. However, in my experience mortgage payment is just around 60% percent of the cost. You have taxes, more expensive insurance, and depending on your house. HOA, landscaping. large maintenance like furnace, water heater, roof, crawl space, and if you want to sell it in 10 years from now, you have to spend around 10-20k at the time to update appliance.
I don't want to say it is always a bad investment. My point is it is a lot more complex investment and needs research, and not buying can also be a good option for some people.
Here in Barcelona, Spain, we normally have to do a deposit of normally 2 to 5 months and depending on your contract and share some communal costs such as garbage collection etc (might be included in price already). There could be 1 month more if it was contracted using an agency.
Those fees, by comparison to home purchases, are very minimal. The doc fees to buy a house in the US alone runs well over $1300, that doesn't even include paying for points or inspections. You have the same type of fees to rent in the US as well, credit checks, deposits, pet fees, and move in fees for certain buildings depending upon access and parking.
I can't tell other people what they should do, but I'm very happy I own my home.
I have a 3% interest rate and got a great deal because of the recession. I also own pets and don't have to stress about what some landlord thinks about that. My rent isn't going to go up. People in SF are signing 2 year leases just to get into an apartment. Do they really have more freedom to move?
I'm free to do things like build raised bed gardens and rainwater irrigation systems. We just made our house way more energy efficient because we are environmentalists. If a landlord would even allow me to do those things, it would still be pointless because I'd just be making his house nicer, not mine.
I'm sure not all states have them, but here in Ontario, we do. If you own a home, you must pay tax on that home every year. This is a form of rent and goes up with changing regimes and adjustments in the value of your home.
If you are going to go the home ownership route, by all means avoid the 30-year fixed mortgage -- even with lower interest rates.
So lets say you buy a $200K house on a 30-year, 20% down. If you take the monthly payments, plus property tax and insurance, you could pay down a 90 - 100K condo within 5 years. Then sell it and use that as a down payment on a $160k house (so again borrowing only 60K) and pay that off in anther 5 years. By years 11-15 you could live in a $200 house and have it payed off in 5 years, instead of starting off with that house and having only half the mortgage payed down by then.
The best part of this, is you are protected from the market going up or down. So say the market tanks, and your initial house loses value after 5 years. The worst thing is that you are living in a paid off house. The best part -- the next house you wanted to move up to is probably cheaper as well, so it balances out. And if the market goes up, well that means that you can sell your initial house for much more, increasing the down payment on the next bigger house.
Having a roof over your head costs money! The basic premise of this article is rising cost of real estate in perpetuity. If that were not true there would be no difference to ownership just different timing of cash flows due to different financing! It is atrocious that Bloomberg of all places published such low quality writing simply using appeal to authority and not going deeper into the assumptions!!! In the long run it makes no difference if you factor all costs! There is also a major lifestyle issue besides the costs.
58 comments
[ 3.3 ms ] story [ 128 ms ] threadAn unbiased source for this article I'm sure.
Also boo market timing.
And there truly is a XKCD for everything.
I have coworkers in their early 30's who are already on their second house in the last 5 years. I haven't asked if they timed the market well and came out ahead, or if they regret the first house.
Edit: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
* taking data for the past year (or for a few recent years) and extrapolating it to 30 years, instead of actually getting the data for the last 30 years
* hindsight bias: 30 years ago you didn't know whether it would be better to buy a house in San Francisco or Detroit.
* comparing returns on a risky, leveraged investment (buying a house) with returns on a low risk investment ("interest earned on any money renters saved").
Rent = Mortgage payment + HOA + Property Tax + Maintenance + Land lord's profit
Of course, I'm in Kentucky where property is dirt cheap.
On a per-month basis, renting should be more expensive than owning, especially when taking into account tax deductions that favor owning. The upside of renting is that you didn't have to unload a down payment and can in turn invest that money in something that gives higher rate of returns than property.
Generally, renters pay more per month before opportunity costs are taken into account and less so (possibly even strictly less) when opportunity costs are taken into account.
Basic premise of owning vs renting is enough alone really. Unless you plan to move around often it should be blindingly obvious that buying is cheaper. Someone else owns a home and is renting it to you with a profit margin.
Not necessarily. Landlords can only charge what the market will bear. If you happen to live in a not in-demand rental market, the landlord will be renting it for whatever they can get.
On the other hand there is an upper limit on rent as wages only go so high, and landlords often enjoy the high income and don't see a need to sell. People who have plenty of money and really want a nice place are willing to pay extra, so for high quality real estate buying can be more expensive than renting.
Most importantly though there are ways to buy real estate cheap, and if you "buy retail" or believe the numbers you read in listings you may be the sucker in the biggest deal of your life. Chances are everyone you're dealing with in a real estate deal is super professional and extremely experienced. Price is "var", not "CONST".
This makes buying worth while only if you're planning to hang around for at least a decade or more.
We bought a 900sq ft 1br condo 7 years ago. Between mortgage, taxes, parking, condo fees, etc., our out of pocket was ~$2600. Seven years later, renting a 2br 1200 sq ft. condo in a more desirable neighborhood with garaged parking is ~$350 less per month.
The article is so overly simplistic it's ridiculous. Buying is not by default cheaper, even over the long term. Over 25 years it can be forced savings, but even that privilege is paid for with interest. At the same time I could be investing our savings and it will compound in to a nice chunk of change, that I bet might be around the profit margins of buyers, minus all the expense.
We badly need a change in the way land wealth is taxed and in the way we issue money. Without this land prices will always rise to soak up all productivity gains.
Today is the anniversary of the peasants' revolt in the UK, by the way.
If everyone else takes a step forward, it's as if you took a step back.
As an extreme example, there's a UBS ETN with the ticker MORL that tracks a global mortgage REIT index. It offers 2x leverage. It currently has a 20%+ yield and distributions are paid monthly. Is there risk? Sure. But unlike a house, you can exit your position with a few keystrokes.
The great thing about investing in real estate through securities like this is that when the market slows or changes trend, you can sit on the sidelines or go short.
The great thing about a self-directed solo 401(k) is that you can purchase physical real estate in the retirement (speak to qualified counsel about the rules). Also, if you want to buy a home, you can borrow up to half of your 401(k) balance (to use as a down payment) and, if your plan allows, the repayment term for a loan used to purchase a primary residence can typically be extended beyond five years (the typical term).
Again, if your interest is in profit, real estate-related investments are hard to beat for the average person, especially if you hold them in tax advantaged retirement accounts. Also, consider that with a leveraged product like MORL, which has total annual fees of .80%, you're leveraging at an effective cost of capital you could never get as an individual.
As an example, for a programmer in a ~37% tax bracket owning a million dollar home in the Silicon Valley, you could be talking about a tax-deduction on the order of $12k annually.
With that said, MORL looks like a very interesting product -- and probably a better investment than a house for most people.
- They don't make any more land.
- Real estate only goes up.
- Stop paying the mortgage of your landlord, pay your own!
- Buy now, or be priced out forever!
- (Seattle-only) Californians are moving in and buying up all the real estate.
The real news here is that the stars are aligning to start priming the pump for a new real estate bubble. This time it will be different!
That would work as a scare tactic anywhere in the West. Sometimes it seems like Denver is populated mostly by Californians.
But those aren't the only costs. When you rent you are generally shielded from paying for various things, like fixing damage to the apartment or other serious maintenance. Also, renting saves you from the risk of the house losing value because of some local event like a neighborhood becoming less attractive due to a new source of noise or crime. Finally, these estimates assume home prices will rise according to "historical norms", which is a gamble.
Renting also lets you move around to pursue another job in another city, without needing to worry yourself with renting out your current location. The worry might deter you from moving and getting a higher salary, or it might make you spend the time, effort and risk to rent out the place you own, which brings its own costs.
It's hard to quantify those things. Some are unlikely events, some affect the variance instead of the mean, and some depend on the individual (how likely you are to find a job in another city - probably fairly high for people reading HN compared to other industries). But I never see them taken into account in articles like this.
Especially as "historical norms" have been running on a massive Ponzi scheme for decades.
I don't want to say it is always a bad investment. My point is it is a lot more complex investment and needs research, and not buying can also be a good option for some people.
Tenancy Fee £360 Admin Fee £90 Referencing Fee £60 Checkin Fee £90 Guaentor Fee £90 Deed of Guarantee £120 Sat Checkin £72
I have a 3% interest rate and got a great deal because of the recession. I also own pets and don't have to stress about what some landlord thinks about that. My rent isn't going to go up. People in SF are signing 2 year leases just to get into an apartment. Do they really have more freedom to move?
I'm free to do things like build raised bed gardens and rainwater irrigation systems. We just made our house way more energy efficient because we are environmentalists. If a landlord would even allow me to do those things, it would still be pointless because I'd just be making his house nicer, not mine.
Do you have to pay property taxes?
I'm sure not all states have them, but here in Ontario, we do. If you own a home, you must pay tax on that home every year. This is a form of rent and goes up with changing regimes and adjustments in the value of your home.
http://www.mah.gov.on.ca/Page10240.aspx
So lets say you buy a $200K house on a 30-year, 20% down. If you take the monthly payments, plus property tax and insurance, you could pay down a 90 - 100K condo within 5 years. Then sell it and use that as a down payment on a $160k house (so again borrowing only 60K) and pay that off in anther 5 years. By years 11-15 you could live in a $200 house and have it payed off in 5 years, instead of starting off with that house and having only half the mortgage payed down by then.
The best part of this, is you are protected from the market going up or down. So say the market tanks, and your initial house loses value after 5 years. The worst thing is that you are living in a paid off house. The best part -- the next house you wanted to move up to is probably cheaper as well, so it balances out. And if the market goes up, well that means that you can sell your initial house for much more, increasing the down payment on the next bigger house.