Home ownership is still mostly renting • Hacker News Board

Re: Home ownership is still mostly renting

#21

Post by sayonaraman » Wed, Sep 22, 2021, 3:30 PM UTC

PaulDavisThe1st wrote: post #13

MB 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 “what else you could do with the money” argument is standard in finance/economics , in fact it’s the cornerstone of the famous Black-Scholes formula for pricing options which takes into account "risk-free" interest rate.

Re: Home ownership is still mostly renting

#22

Post by sumtechguy » Wed, Sep 22, 2021, 3:32 PM UTC

niij wrote: post #14

hellisothers wrote: post #10

Earlier quoted context omitted.

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...

The std deduction is fairly large now. You have a tough time getting past it for most people. There is also a cap on how much you can deduct. When I had a mortgage I calculated that about half way through the loan I would no longer be able to deduct the interest because the std one was bigger. One guy I worked with said this 'i love using the standard deduction it means I am not paying money to get my money back I am getting a lower tax rate'.

Re: Home ownership is still mostly renting

#23

Post by dahfizz » Wed, Sep 22, 2021, 3:33 PM UTC

AshleyGrant wrote: post #16

joshstrange wrote: post #4

I'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…

> 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.

Yeah, he made a 7% return on the real estate itself. BUT, he was also collecting rent on the house the 10 years you were living there. That's a lot more than what he would have gotten from the S&P.

Re: Home ownership is still mostly renting

#24

Post by encoderer » Wed, Sep 22, 2021, 3:33 PM UTC

> Betting on home value appreciation has paid off on average over time, but it’s definitely not a risk-free bet for any given property or over any given time period.

Ok, but the same applies to the stocks you might buy as well.

But with housing you also have real property ownership benefits. Nobody can evict you! That’s a wonderful feeling.

Re: Home ownership is still mostly renting

#25

Post by WkndTriathlete » Wed, Sep 22, 2021, 3:34 PM UTC

AshleyGrant wrote: post #16

joshstrange wrote: post #4

I'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…

The article's analysis missed one big thing in the comparison: rent (necessarily) includes a profit margin for the owners. In a mortgage this is the interest payment on the loan, but in a mortgage the owner gradually shifts from lender to buyer. (In fact, one way of looking at paying down a mortgage early is that the buyer is earning higher returns at the expense of the lender.)

It wouldn't surprise me at all that a mortgage, after accounting for all factors, is still cheaper than renting.

Re: Home ownership is still mostly renting

#26

Post by eropple » Wed, Sep 22, 2021, 3:34 PM UTC

AshleyGrant wrote: post #16

joshstrange wrote: post #4

I'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…

Market value doesn't describe returns on a house. Rental income (and thus defraying of the mortgage, and thus effective defraying of the cost of goods sold) significantly tilts that number.

Re: Home ownership is still mostly renting

#27

Post by Enginerrrd » Wed, Sep 22, 2021, 3:35 PM UTC

sayonaraman wrote: post #21

PaulDavisThe1st wrote: post #13

MB 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 “what else you could do with the money” argument is standard in finance/economics , in fact it’s the cornerstone of the famous Black-Scholes formula for pricing options which takes into account "risk-free" interest rate.

Alternative investment is of course a thing.

However, you're missing the point. People MUST live somewhere.

Their only alternative investment is with regard to their down payment for money saved, or the amount of money that is (mortgage - equivalent rent), which is usually negative!

The BULK (or entirety) of the money they spend on their mortgage is not money that would otherwise be available for alternative investment.

Re: Home ownership is still mostly renting

#28

Post by FreezeInTheDark » Wed, Sep 22, 2021, 3:35 PM UTC

PaulDavisThe1st wrote: post #13

MB 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.…

His central point is that the "rent" you pay via the costs of homeownership are often approximately equal to the costs of actually paying rent. Since principal payments are on top of those costs, that is money you _can_ do something else with if you were renting, in this analysis.

Of course, that part of the analysis ignores the potential capital gain of the property value, which is often one of the appealing financial factors of homeownership. But the article also addresses that.

Re: Home ownership is still mostly renting

#29

Post by trey-jones » Wed, Sep 22, 2021, 3:36 PM UTC

I guess it's a good thing for homeowners that there are other considerations than financial ones in their favor. I think the decision to build or buy a house rather than renting has a lot in common with starting your own business rather than working for someone else:

The risk is higher, and the reward may or may not be any good, but at the end of the day you get to make the decisions. I think that has more value than most of HN tends to acknowledge.

Re: Home ownership is still mostly renting

#30

Post by hash872 » Wed, Sep 22, 2021, 3:36 PM UTC

joshstrange wrote: post #4

I'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…

I'm a little confused. If you owned the home or condo, you'd have to handle getting anything fixed yourself, including your water seeping example. So you have to pay out of pocket for it, plus handle dealing with the contractor, etc. Why do you think that's a case against renting?

If you have an unresponsive landlord, you can simply hire the handyman yourself, subtract the cost from your rent while emailing them an invoice, and dare the landlord to do something about it. You could even pay yourself a small fee for the time you invested in dealing with the handyman, time off work, etc. The landlord can't realistically sue you for such a small amount of money, they'd have zero case in court, and anyways the court system in blue states is very pro-tenant