Renting or speculation, pick your poison. property taxes participate in the rent, and 30yr mortgages backed by the fed drive speculation.
Home ownership is still mostly renting
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Re: Home ownership is still mostly renting
#12This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.
20x leverage = 20x return, but also 20x risk.
Don't forget that the only reason housing works is because the margin calls take years, in contrast to instant (forex, crypto) or days (equities).
Re: Home ownership is still mostly renting
#13MB seems to make a simple error a couple of times here:
> So, the financial case for homeownership is much weaker than I think most realize, especially when compared to alternative ways of investing the same money.
> So these principal payments are generating a net return of 1.795 percent (2.295 – 0.5). These same dollars, if placed in a diversified stock/bond portfolio, would generate a much higher return than that.
The problem with this angle is that people in general have to have housing, and so they're going to pay a substantial part of their income either on rent on on a mortgage. There's rarely an option to invest "the same money" in anything else.
Overall this seems like a solid analysis, but the contrast with "what else you could do with the money" seems a little weird when that's not really a choice (unless you live somewhere with a huge difference between the cost of renting vs owning).
Re: Home ownership is still mostly renting
#14In the first year of a 30y mortgage, yes interest is a big component... But even in year 5 or especially in year 10+ interest is much smaller and the principal impact greater. The long term impacts of ownership are the benefit, of course a large purchase will not stack up against renting in the short term!
Also that interest is largely (if not totally) tax deductible.
Almost 90% of Americans file the standard deduction which precludes you from deducting mortgage interest.
https://taxfoundation.org/90-percent-taxpayers-projected-tcj...
Re: Home ownership is still mostly renting
#15Not a great argument, really. In much of the country ownership is a much better deal both financially (cost for equivalent housing per month) and in terms of stability. Once you buy, unless you're foolish enough to get an ARM, your costs are fixed -- but rent is subject to capricious shifts upward annually.
ARMs are not bad. You can re-lock in the rates at the time when it comes up. It's no different than a commercial balloon payment.
Also homeownership is only a "better deal" when things work out perfectly. In reality, you spend far more time with maintenance, cleaning, and are required to stay exactly where you are for a minimum of 7-10 years before you start putting a real dent in equity. Not to mention is an illiquid asset on top of significant closing fees on both ends (my state in particular is a "seller pays both realtor fees" state, regardless if you got a realtor).
Homeownership is egregiously expensive in time and money. The only nicety it gives to lower income people is an asset then can refinance and get loan money out to put them further in debt bondage. Homeownership should only be considered if you've got a ridiculously stable job/market as well as the time and money to maintain the property (assuming you can't just construct a new home or buy one made within the last 10 years).
Re: Home ownership is still mostly renting
#16I'll conceded that I might be missing something but houses in my area cost significantly more to rent ($1.5K+/mo) than my mortgage ($1.2K) and have a ton more restrictions (pets, modifications, etc). Every house or apartment I've rented I've had to fight tooth and nail with the owner/manager to get anytime fixed (I once had water seeping out of my kitchen floor for over 2 months in an apartment, it just finally stopp…
Are you including taxes, insurance, and maintenance (both minor and major) in your comparison? That $1,500 rent wraps all of those costs up, while only part of those costs are in a mortgage payment. Over time, it's easy to see how the $3,600 per year difference can be eaten up by maintenance on things like broken/dead appliances/general & major home repairs. A new roof may only be necessary every 20 years or so, but it's very expensive when it happens.
That being said, I just spent 10 years renting the same house. My rent did not go up during that time, and my landlord had fairly average maintenance costs during that time including: * replaced broken fridge * paid to have dangerous trees removed * paid to upgrade flooring after a sewer backup flooded the house. Most of this cost was borne by insurance.
My former landlord is now selling the house. The market value of the house is double what it was when I moved in. That sounds awesome, but that's about a 7% rate of return, which is quite a bit less than if he had simply put his money in an S&P 500 index fund.
Re: Home ownership is still mostly renting
#17This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.
Do you mean 5X? I believe 20% down is more common. If you do only put down 5% you'll also have PMI on top of interest.
That said, your point stands that it's easy to get low interest leverage.
Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).
Re: Home ownership is still mostly renting
#18This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.
Using leverage to buy something not expected to increase in value more than inflation is not necessarily a savvy move.
Maybe you'd take issue with my "not expected to increase in value more than inflation" statement, but ultimately you are certainly in no way guaranteed to "make a lot of money putting 5% down on a house".
Everyone thinks they are a financial genius after a 10 year bull market.
Re: Home ownership is still mostly renting
#19Renting or speculation, pick your poison. property taxes participate in the rent, and 30yr mortgages backed by the fed drive speculation.
The reason why everybody could afford a house back in the day was cause the government didn't guarantee anybody a home and banks only lent money out to the best of credit because they had a cap they could only lend. Once that cap was met, no more mortgages for the year.
Re: Home ownership is still mostly renting
#20I'll conceded that I might be missing something but houses in my area cost significantly more to rent ($1.5K+/mo) than my mortgage ($1.2K) and have a ton more restrictions (pets, modifications, etc). Every house or apartment I've rented I've had to fight tooth and nail with the owner/manager to get anytime fixed (I once had water seeping out of my kitchen floor for over 2 months in an apartment, it just finally stopp…
TFA mentions the other costs that you're (potentially) not including: property taxes, maintainance, building insurance (depending on your escrow situation).
I think MB's point is that there's a lot of talk about how "investing" in home ownership is a smart financial move, and that a more careful consideration of this suggests that it's not so clear that this is true.
There are definitely other reasons to own, if you're of the right inclination (I certainly am).