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Home ownership is still mostly renting

mattbruenig.com

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Re: Home ownership is still mostly renting

#31

Post by joshstrange »

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…

I'm including everything other than maintenance in those numbers. I had a 18 year old HVAC system I replaced earlier this year but I had been saving for it and knew it was coming. I had a new system installed within 3 days of calling out the company which I can almost promise would not have happened if I was renting. Can you get a good landlord? Sure, I know they must exist but I've not (nor have my close friends) ever found one. Heck, even if somehow (it's simply not possible in reality after staying for 5+ years from what I can see) you come out even on renting or buying a house I'd taking buying just so I didn't have to interact with and beg another party to uphold their end of the contract. I won't bore you or anyone else with stories of renting and waiting on things to be fixed or contracts to be upheld but suffice to say, I have no interest in renting again after the experiences I've had. On paper a lot of the places I rented were a good deal (especially for someone like me who doesn't want do most of the work themselves) but in practice it always sucked.

Re: Home ownership is still mostly renting

#32

Post by everdrive »

FreezeInTheDark wrote: post #28
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 financi…

Except that in many places renting is even more expensive than monthly mortgage payments.

Re: Home ownership is still mostly renting

#33

Post by hash872 »

dahfizz wrote: post #23
AshleyGrant wrote: post #16

Earlier quoted context omitted.

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.

But then you have to subtract all of the costs of owning the physical property over a long time span- everything that broke. Plus the taxes, insurance, water & sewer etc., as Bruenig notes.

I previously worked in a commercial real estate brokerage for apartment buildings, got to know a lot of landlords, and saw the finances of their properties personally. Over a long enough time span, 90+% of the building has to be replaced- everything from the roof down to the basement is essentially on a clock to obsolence from the moment you sign the deed.

Plus the landlord was paying income tax on the rent while your market gains are untaxed till you sell, etc.

Re: Home ownership is still mostly renting

#34

Post by niij »

sumtechguy wrote: post #22
niij wrote: post #14

Earlier quoted context omitted.

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…

That person has a good point. It's definitely a lot simpler.

Re: Home ownership is still mostly renting

#35

Post by joshstrange »

hash872 wrote: post #30
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 i…

> 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?

In that case I would have actually had it fixed instead of having to wear shoes in my kitchen for months. Also I budget monthly for things like this that might come up. I'd much rather manage that extra money (difference between mortgage and renting) than trust a landlord.

> 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.

That's a nice story but it rarely play out well in practice. Time and energy are not free and I have better things to do with my time than try to claw back what I'm owed from a scummy landlord in small claims court or similar.

> 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

They can make your life hell in other ways or just refuse to renew the lease when your year is up. I'm not interested in moving every year until I find a competent landlord and I live in a red state.

Re: Home ownership is still mostly renting

#36

Post by shadowoflight »

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.

The problem is that, in this case, "what else you could do with the money" is limited to one thing - a recurring subscription cost with no asset value acquired. It's a faulty argument that shows a lack of critical thinking on the author's part.

Re: Home ownership is still mostly renting

#37

Post by FreezeInTheDark »

Enginerrrd wrote: post #27
sayonaraman wrote: post #21

Earlier quoted context omitted.

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 investme…

In my experience in the recent market (in a HCOL city in the U.S.), rentals (even only compared to the costs in homeownership, i.e. ignoring principal payments) are much cheaper than mortgages for an equivalently sized house/unit. That's the assertion of the article, and it rings true.

You're right that the bulk of the mortgage payments, especially towards the beginning, do not go towards building any capital, which makes the investment even less appealing.

Re: Home ownership is still mostly renting

#38

Post by simonh »

The sleight of hand here is presenting the breakdown in the first years of a mortgage, when the interest payment is at it's highest, as though it's representative of the mortgage as a whole.

Suppose I presented the analysis based on the last year of a mortgage. The interest payment would be almost nothing, with most of that swinging over into the payment on the principal. Presenting that as being representative of mortgage economics would be grossly misleading, and so is this.

The other thing to bear in mind is that mortgage payments, including interest, can be half as much as the rent on a similar property. That's certainly the case in my area. Even factoring in tax and insurance it's often significantly cheaper to pay a mortgage than to pay rent, quite apart from the wealth building argument.

Re: Home ownership is still mostly renting

#39

Post by hash872 »

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.…

But the point is that renting is significantly cheaper than owning a home- so you take the difference and put it in the market every month. That's the key point- that the monies invested in the market over time will beat however much your house appreciated (minus the costs of owning a home in that timeframe, minus the costs of selling, which are usually very significant). If you're in a market where renting is more expensive than owning a home, of course it makes more sense to own.

There are calculators out there for comparing rent vs. buy options in various metro areas. That's one mistake Bruenig made, what's true for his area might not necessarily be true in a different city

Re: Home ownership is still mostly renting

#40

Post by shapefrog »

gruez wrote: post #5
kindle-dev wrote: post #3

This 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.

Except it is 1x risk for example in the US - see jingle mail. The debt is against the property not the person thus 20x return 1x risk (plus your destroyed credit).

For other countries in the world there is bankrupcy.

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