The riskiness of home ownership

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KlangFool
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Re: The riskiness of home ownership

Post by KlangFool » Wed Oct 19, 2016 5:40 pm

orca91 wrote:The reality is most people would NEVER own a home, if they followed the net worth rule presented. Most Bogleheads wouldn't, let alone the average person out there. Then there's young folks, young families, student loans....

Or, live in a box under a bridge while saving up a large net worth, so they could afford a house/home/shelter...

It sounds like a wonderful rule... but, then there's reality.
orca91,

The REALITY is most people should not buy a house and OVERSPEND on housing. And, most people are "House Poor" and they are one job loss from losing it all. We had seen plenty of that in 2008/2009 and it will repeat itself again in future.

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orca91
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Re: The riskiness of home ownership

Post by orca91 » Wed Oct 19, 2016 5:49 pm

I would be willing to bet MOST people kept their house in 2008/09. Just because a crisis arose doesn't mean MOST people did it wrong.

I agree that some did it wrong. But, MOST are much more capable than you think they are, Klang.

orca91
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Re: The riskiness of home ownership

Post by orca91 » Wed Oct 19, 2016 5:51 pm

Most shouldn't overspend on blue jeans either. But, not all like Wranglers. :happy

Live and let live.

surfstar
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Re: The riskiness of home ownership

Post by surfstar » Wed Oct 19, 2016 6:33 pm

The median home value in Santa Barbara is $1,077,600 per Zillow

median family income of $77,100


Anyone wanna do the affordability math for us? :oops:

We're looking at condos priced up to $750k, at anywhere from $350-685/sq ft, depending on neighborhoods. And these are "low-end" type places, not fancy, not large, just live-able.

I've literally run the NYT rent vs buy numbers dozens of times, all kinds of scenarios. And it actually makes sense to buy, as we don't plan on moving. The rental market has been crazier than the buying market, of late, with vacancy rates of 0.5%.

KlangFool
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Re: The riskiness of home ownership

Post by KlangFool » Wed Oct 19, 2016 6:49 pm

Folks,

The RISK of house ownership is dependent on whether the mortgage is a recourse or a non-recourse loan. I lived in a recourse loan state.

Let's take an example of 600K house with 500K mortgage. In a non-recourse loan state, a person could just walk away from the house if the house is worth nothing. The person will only lose 100K. In a recourse loan state, the person's potential loss is 600K.

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orca91
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Re: The riskiness of home ownership

Post by orca91 » Wed Oct 19, 2016 7:18 pm

I don't buy that either. The walking away from a house deal can be an issue of morals for many. Some would never do that, so how does that risk factor in?

liberty53
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Re: The riskiness of home ownership

Post by liberty53 » Wed Oct 19, 2016 7:58 pm

DaftInvestor wrote: The NYT calculator does a fairly good job covering the tangible aspects of buying versus renting. The article and calculator also treats it as an expense versus an investments (E.g. no "net-worth" questions; opportunity cost questions; etc.) which is the right approach.

The NYT calculator does include opportunity costs - it includes the foregone gains from the house down payment, initial purchase costs, and rent deposit in the case of renting.

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jainn
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Re: The riskiness of home ownership

Post by jainn » Wed Oct 19, 2016 8:00 pm

One annoying risk...listing your house at competitive dollar per square foot rates (realtor cma completed) and it sits for 4-6+ months. Illiquidity sucks.

Caduceus
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Re: The riskiness of home ownership

Post by Caduceus » Wed Oct 19, 2016 8:30 pm

dbr wrote:
I've never understood not recognizing a home as an asset that can change in value, imposes costs, provides a value (place to live) and can be exchanged for money -- ie is an investment for all practical purposes.
I think whether homes are investments or consumption items lies on a continuum. The less house you buy, the more of an investment it is. Conversely, the more house you buy, the less of an investment it is. Say you decide you will be perfectly happy living in a $250,000 home. Your nominal returns on that home can be decomposed into two factors - the imputed rent (meaning, the rent that you would otherwise have paid to the landlord who owned this house, which in this case is you), and any capital appreciation/depreciation over your defined holding period. Over the medium/long-run, the vast majority of your real returns from housing will come from imputed rent. In some cases, like New York, a significant chunk of your returns will come from capital appreciation, but that's not typical. So, on that $250,000 house, you can expect maybe in the region of 5% net return (after depreciation) from rents, and 3% from nominal price appreciation that tracks inflation.

Is the above house an investment? I'd say it behaves quite like one. All humans need basic shelter, and a basic standard of living, after all.

Now, the next day, you experience a mid-life crisis, and decide you want to live in a swanky million dollar penthouse, so you go buy one in the same area. You still expect 5% net return from rents and 3% nominal price appreciation, but now, you are consuming the entirety of your rents since you're living in the space instead of being a landlord renting it out to a tenant. The equivalent scenario is that you've gone from paying $12,500 in annual rent to $50,000 in annual rent. Were you a landlord, it would definitely be an investment. But consuming a bigger, better house by living in it? No, not an investment.

Think about it like a landlord would. If you had a portfolio of properties generating income, they would be investments. If you decided to loan some of your real estate to a school for charitable purposes and they consequently earned no income, they wouldn't be investments any more. (Unless you are banking only on capital appreciation, in which case they would be highly speculative investments.) I think that's what people mean by houses not being investments - consuming the entirety of imputed rents through buying a bigger house, and then deluding yourself into thinking you are going to enjoy significant cap gains beyond inflation does not make sense.

emoore
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Re: The riskiness of home ownership

Post by emoore » Wed Oct 19, 2016 10:07 pm

KlangFool wrote:
orca91 wrote:The reality is most people would NEVER own a home, if they followed the net worth rule presented. Most Bogleheads wouldn't, let alone the average person out there. Then there's young folks, young families, student loans....

Or, live in a box under a bridge while saving up a large net worth, so they could afford a house/home/shelter...

It sounds like a wonderful rule... but, then there's reality.
orca91,

The REALITY is most people should not buy a house and OVERSPEND on housing. And, most people are "House Poor" and they are one job loss from losing it all. We had seen plenty of that in 2008/2009 and it will repeat itself again in future.
KlangFool
So most people lost their jobs in 2008/2009? Interesting.

corpgator
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Re: The riskiness of home ownership

Post by corpgator » Wed Oct 19, 2016 11:02 pm

Everyone;s situation is unique of course, but for me, there was no reason not to buy in 2012 when I got my first job after moving back to the US. Rent was in the $800-$900 range and my $100 mortgage is only costing me $650 PITI. Since I'm a vet, my only downside risk was a hit to my credit score for 7 years if I couldn't make my payments since I put $0 down.

The upside has been huge. I've plowed every dollar I saved by not renting into my roth or 401k, and now 5 years on, I'll be selling the house at a profit of $50k or more when I move in a couple months unless the housing market suddenly crashes at which point I'll just rent it out for the $1200 going rate in my neighborhood and clear the profit that way.

Some may say I could have gotten a better return for that $100k on the stock market during that time, and that's true, but I wouldn't have been able to borrow the $100k to make that investment - buying a house was the only way for me to get pretty low risk leverage. So, I moved here to make my wife happy and to lower our rent cost and came out ahead on the purchase. There's defintely risk (no major repairs needed during this time), but as long as you keep it reasonable ($650 was never more than 20% of our income and is only 7.5% now), you can mitigate it.

liberty53
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Re: The riskiness of home ownership

Post by liberty53 » Thu Oct 20, 2016 9:37 am

rbaldini wrote:Y'all,

I'll likely be buying a house some time in the next year, in the Boulder, CO area. I've been thinking more about the financial aspects of home ownership. It recently struck me that buying a house on a loan is relatively risky decision, in the sense that the range of outcomes is greater than renting + investing that money in the market - i.e. you can make a lot, but you can also lose a lot. I think there are two main reasons for this:
(1) Since you can buy a house with only 20% down, you can leverage to potentially realize very large returns or losses. For example, with only $100,000 you can buy a $500,000 house, and therefore realize the returns or losses of whatever happens to that house (minus interest on loan, commission to realtor, etc.).
(2) The lack of a capital gains tax on your residential property (well, on the first $500k for a married couple) swings both ways: you don't pay taxes if you win, but you can't write it off if you lose... right?

To investigate this, I made a stochastic simulation of the costs of renting vs. buying. I modeled it off of the NYTimes website (http://www.nytimes.com/interactive/2014 ... lator.html), except that rather than having the user input the market and house returns, I simulated 1000's of possible future time series based on some historical data for both stock returns and Boulder house prices. Long story short, it is indeed the case that the range of costs is usually greater for home ownership than for renting: you can make a lot or lose a lot. On average, buying is the better decision for the price range of houses I'm looking at, but the potential downside is a bit daunting. Reinforces my inclination to buy something cheap.

I don't have any particular questions here - just wondering if y'all have any input, or think that I'm going about this the wrong way. Would be happy to talk about the model a bit more.

One relatively new aspect of the rent vs buy argument involves the income cliffs arising from the ACA.

As an early retiree that now rents in a HCOL area, I am toying with the idea of purchasing another house with the idea that using some of my nest egg for the house will shelter income/capital gains from inclusion in MAGI which is used to calculate ACA subsidies and plan types. The subsidy amounts can be significant, and there a large jumps in deductibles between types of plans. I wonder if you have thought about including that in your model?

adamthesmythe
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Re: The riskiness of home ownership

Post by adamthesmythe » Thu Oct 20, 2016 10:37 am

KlangFool wrote:
orca91 wrote:The reality is most people would NEVER own a home, if they followed the net worth rule presented. Most Bogleheads wouldn't, let alone the average person out there. Then there's young folks, young families, student loans....

Or, live in a box under a bridge while saving up a large net worth, so they could afford a house/home/shelter...

It sounds like a wonderful rule... but, then there's reality.
orca91,

The REALITY is most people should not buy a house and OVERSPEND on housing. And, most people are "House Poor" and they are one job loss from losing it all. We had seen plenty of that in 2008/2009 and it will repeat itself again in future.

KlangFool
I do not believe it is possible to make general statements or cite generally applicable rules. What makes sense depends on WHERE you are and WHEN you are.

(WHERE) n an HCOL area you need to balance the risk of a very large mortgage payment and potential job loss against likely increases in rent- possibly very large increases in rent.

(WHEN) When young one may be able to anticipate steady salary increases that will make a large mortgage payment manageable or even easy. And you have few if any assets to lose.

Engineer250
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Re: The riskiness of home ownership

Post by Engineer250 » Thu Oct 20, 2016 11:05 am

orca91 wrote:I would be willing to bet MOST people kept their house in 2008/09. Just because a crisis arose doesn't mean MOST people did it wrong.

I agree that some did it wrong. But, MOST are much more capable than you think they are, Klang.
If you are not living your life in accordance with KF's budget rules than you FAIL.

I think many retirees with paid off of houses who are now able to live on very modest incomes are okay with being in that category.
Where the tides of fortune take us, no man can know.

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Johnnie
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Re: The riskiness of home ownership

Post by Johnnie » Thu Oct 20, 2016 11:29 am

I might have missed but don't think this distinction has been made: Investable assets vs. net worth.

Your paid-off home is part of your net worth but is not an 'investable asset." Your heirs will be glad if it's worth a lot but - except for that imputed cost of what it saves you on rent - all it does is provide a place to live before you assume room temperature.

(I'm ignoring reverse mortgages, which I regard as evidence you probably messed up somewhere along the line.)
"I know nothing."

rbaldini
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Re: The riskiness of home ownership

Post by rbaldini » Thu Oct 20, 2016 12:05 pm

Johnnie wrote:I might have missed but don't think this distinction has been made: Investable assets vs. net worth.

Your paid-off home is part of your net worth but is not an 'investable asset." Your heirs will be glad if it's worth a lot but - except for that imputed cost of what it saves you on rent - all it does is provide a place to live before you assume room temperature.
To some extent, yes. But there is no doubt in my mind that the house I buy will not be a forever home - I strongly doubt will stay even 20 years. So I will personally realize whatever gain or loss the house provides. Therefore the effect of the house on my long-term net worth is of interest.

cusetownusa
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Re: The riskiness of home ownership

Post by cusetownusa » Thu Oct 20, 2016 12:19 pm

rbaldini wrote:
Johnnie wrote:I might have missed but don't think this distinction has been made: Investable assets vs. net worth.

Your paid-off home is part of your net worth but is not an 'investable asset." Your heirs will be glad if it's worth a lot but - except for that imputed cost of what it saves you on rent - all it does is provide a place to live before you assume room temperature.
To some extent, yes. But there is no doubt in my mind that the house I buy will not be a forever home - I strongly doubt will stay even 20 years. So I will personally realize whatever gain or loss the house provides. Therefore the effect of the house on my long-term net worth is of interest.
Yeah, I plan on selling our house when the kids move out and possibly renting a place with minimal maintenance downtown or some other walk-able community. Whatever I sell our house for should be enough to cover rent at least 15+ years.

dbr
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Re: The riskiness of home ownership

Post by dbr » Thu Oct 20, 2016 12:28 pm

rbaldini wrote:
Johnnie wrote:I might have missed but don't think this distinction has been made: Investable assets vs. net worth.

Your paid-off home is part of your net worth but is not an 'investable asset." Your heirs will be glad if it's worth a lot but - except for that imputed cost of what it saves you on rent - all it does is provide a place to live before you assume room temperature.
To some extent, yes. But there is no doubt in my mind that the house I buy will not be a forever home - I strongly doubt will stay even 20 years. So I will personally realize whatever gain or loss the house provides. Therefore the effect of the house on my long-term net worth is of interest.
I am not sure drawing distinctions between an asset and an investment is of practical help. As soon as the asset is liquidated and the proceeds become an "investment" it is apparent that its value was of importance all along. Liquidation of the asset is always a contingency that exists. For some people that contingency is an explicit part of a plan. It is more problematic how to include the risk and return of a concentrated holding in real estate on a commensurate basis in a portfolio of stocks and bonds. This thread is touching on that.

BW1985
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Re: The riskiness of home ownership

Post by BW1985 » Thu Oct 20, 2016 3:11 pm

Caduceus wrote:
dbr wrote:
I've never understood not recognizing a home as an asset that can change in value, imposes costs, provides a value (place to live) and can be exchanged for money -- ie is an investment for all practical purposes.
I think whether homes are investments or consumption items lies on a continuum. The less house you buy, the more of an investment it is. Conversely, the more house you buy, the less of an investment it is. Say you decide you will be perfectly happy living in a $250,000 home. Your nominal returns on that home can be decomposed into two factors - the imputed rent (meaning, the rent that you would otherwise have paid to the landlord who owned this house, which in this case is you), and any capital appreciation/depreciation over your defined holding period. Over the medium/long-run, the vast majority of your real returns from housing will come from imputed rent. In some cases, like New York, a significant chunk of your returns will come from capital appreciation, but that's not typical. So, on that $250,000 house, you can expect maybe in the region of 5% net return (after depreciation) from rents, and 3% from nominal price appreciation that tracks inflation.

Is the above house an investment? I'd say it behaves quite like one. All humans need basic shelter, and a basic standard of living, after all.

Now, the next day, you experience a mid-life crisis, and decide you want to live in a swanky million dollar penthouse, so you go buy one in the same area. You still expect 5% net return from rents and 3% nominal price appreciation, but now, you are consuming the entirety of your rents since you're living in the space instead of being a landlord renting it out to a tenant. The equivalent scenario is that you've gone from paying $12,500 in annual rent to $50,000 in annual rent. Were you a landlord, it would definitely be an investment. But consuming a bigger, better house by living in it? No, not an investment.

Think about it like a landlord would. If you had a portfolio of properties generating income, they would be investments. If you decided to loan some of your real estate to a school for charitable purposes and they consequently earned no income, they wouldn't be investments any more. (Unless you are banking only on capital appreciation, in which case they would be highly speculative investments.) I think that's what people mean by houses not being investments - consuming the entirety of imputed rents through buying a bigger house, and then deluding yourself into thinking you are going to enjoy significant cap gains beyond inflation does not make sense.
This is a great post, I completely agree with your logic.
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KlangFool
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Re: The riskiness of home ownership

Post by KlangFool » Thu Oct 20, 2016 3:38 pm

adamthesmythe wrote:
KlangFool wrote:
orca91 wrote:The reality is most people would NEVER own a home, if they followed the net worth rule presented. Most Bogleheads wouldn't, let alone the average person out there. Then there's young folks, young families, student loans....

Or, live in a box under a bridge while saving up a large net worth, so they could afford a house/home/shelter...

It sounds like a wonderful rule... but, then there's reality.
orca91,

The REALITY is most people should not buy a house and OVERSPEND on housing. And, most people are "House Poor" and they are one job loss from losing it all. We had seen plenty of that in 2008/2009 and it will repeat itself again in future.

KlangFool
I do not believe it is possible to make general statements or cite generally applicable rules. What makes sense depends on WHERE you are and WHEN you are.

(WHERE) n an HCOL area you need to balance the risk of a very large mortgage payment and potential job loss against likely increases in rent- possibly very large increases in rent.

(WHEN) When young one may be able to anticipate steady salary increases that will make a large mortgage payment manageable or even easy. And you have few if any assets to lose.
adamthesmythe,

<<(WHERE) n an HCOL area you need to balance the risk of a very large mortgage payment and potential job loss against likely increases in rent- possibly very large increases in rent. >>

A) How does this make any sense? It is very simple. Either a person can make enough to survive and thrive in an HCOL area or they don't. If they don't, being tied down in that area with a huge mortgage is a bad idea.

B) If the rent increases and the person do not earn enough to justify living in that area, the person should move out of that area.

<< (WHEN) When young one may be able to anticipate steady salary increases that will make a large mortgage payment manageable or even easy. >>

C) I was young once. I have not come across any young people that anticipate otherwise. We all hope that it will come true and we will be at the top of the pyramid. The problem with pyramid is that there are fewer people at the top. And, many of us will not make it there.

KlangFool
Last edited by KlangFool on Thu Oct 20, 2016 3:42 pm, edited 1 time in total.

KlangFool
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Re: The riskiness of home ownership

Post by KlangFool » Thu Oct 20, 2016 3:41 pm

BW1985 wrote:
Caduceus wrote:
dbr wrote:
I've never understood not recognizing a home as an asset that can change in value, imposes costs, provides a value (place to live) and can be exchanged for money -- ie is an investment for all practical purposes.
I think whether homes are investments or consumption items lies on a continuum. The less house you buy, the more of an investment it is. Conversely, the more house you buy, the less of an investment it is. Say you decide you will be perfectly happy living in a $250,000 home. Your nominal returns on that home can be decomposed into two factors - the imputed rent (meaning, the rent that you would otherwise have paid to the landlord who owned this house, which in this case is you), and any capital appreciation/depreciation over your defined holding period. Over the medium/long-run, the vast majority of your real returns from housing will come from imputed rent. In some cases, like New York, a significant chunk of your returns will come from capital appreciation, but that's not typical. So, on that $250,000 house, you can expect maybe in the region of 5% net return (after depreciation) from rents, and 3% from nominal price appreciation that tracks inflation.

Is the above house an investment? I'd say it behaves quite like one. All humans need basic shelter, and a basic standard of living, after all.

Now, the next day, you experience a mid-life crisis, and decide you want to live in a swanky million dollar penthouse, so you go buy one in the same area. You still expect 5% net return from rents and 3% nominal price appreciation, but now, you are consuming the entirety of your rents since you're living in the space instead of being a landlord renting it out to a tenant. The equivalent scenario is that you've gone from paying $12,500 in annual rent to $50,000 in annual rent. Were you a landlord, it would definitely be an investment. But consuming a bigger, better house by living in it? No, not an investment.

Think about it like a landlord would. If you had a portfolio of properties generating income, they would be investments. If you decided to loan some of your real estate to a school for charitable purposes and they consequently earned no income, they wouldn't be investments any more. (Unless you are banking only on capital appreciation, in which case they would be highly speculative investments.) I think that's what people mean by houses not being investments - consuming the entirety of imputed rents through buying a bigger house, and then deluding yourself into thinking you are going to enjoy significant cap gains beyond inflation does not make sense.
This is a great post, I completely agree with your logic.
+1.

The irony of his post is that

A) For people that treat housing as an expense, it would be a good investment since they only buy enough house to meet their need.

B) For people that treat housing as an investment, it would most likely be an expense since they buy more house than they need.

KlangFool

orca91
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Re: The riskiness of home ownership

Post by orca91 » Thu Oct 20, 2016 4:55 pm

Engineer250 wrote:
orca91 wrote:I would be willing to bet MOST people kept their house in 2008/09. Just because a crisis arose doesn't mean MOST people did it wrong.

I agree that some did it wrong. But, MOST are much more capable than you think they are, Klang.
If you are not living your life in accordance with KF's budget rules than you FAIL.

I think many retirees with paid off of houses who are now able to live on very modest incomes are okay with being in that category.
Were they there when they bought the home??

Nice try... but, you fail with that attempt. The thread isn't about retirees and paid off homes.

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Re: The riskiness of home ownership

Post by Hatch Batten » Mon Oct 24, 2016 12:43 pm

The published net worth outcomes for renters vs homeowners are so stark that I've always assumed that there isn't really a whole lot to discuss regarding the differences. Renting might make sense as a lifestyle choice, or for people in certain types of job situations, but ownership appears to lead to vastly better outcomes.

I suppose there's some survivorship bias baked in, since some who've been through foreclosure or had to sell at a loss become renters. And a bit of selection bias as well, since homeowners are people who could accumulate significant cash for a down payment while many rent because they can't afford to buy. And it's a big chunk of net worth that's relatively illiquid. Still, if typical net worth outcomes are 20x-40x better for homeowners, as widely reported, those concerns are easier to set aside than if the typical outcomes were on the same order of magnitude.

From my brief review, academic literature on the subject from studies controlling for bias supports the thesis that homeownership tends to lead to better net worth outcomes, when the mortgage type is well chosen. This paper (PDF) includes a good literature review.

The net worth effect of homeownership has been attributed to it being a 'forced savings plan'. Yes, and it's a forced savings plan with a number of distinct advantages such as the tax deduction, and the potential for lower and more predictable expenses in retirement.

I've never owned a home, but getting oneself into position to make a sensible home purchase seems among the best financial planning move -- or series of moves -- a person can make. If anything, as an investment it's much closer to a 401k full of mutual funds than to an individual stock purchase. The real-world data supports it, there are significant tax advantages, and it represents a turning point that can change a person's thinking from short-term consumption to long-term planning.

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Re: The riskiness of home ownership

Post by KlangFool » Mon Oct 24, 2016 12:59 pm

Hatch Batten wrote:
From my brief review, academic literature on the subject from studies controlling for bias supports the thesis that homeownership tends to lead to better net worth outcomes, when the mortgage type is well chosen. This paper (PDF) includes a good literature review.

The net worth effect of homeownership has been attributed to it being a 'forced savings plan'. Yes, and it's a forced savings plan with a number of distinct advantages such as the tax deduction, and the potential for lower and more predictable expenses in retirement.
Hatch Batten,

It is a well know fact that

A) Most people do not max up their Trad. 401K contribution.

B) Most people pay more in their mortgage versus rent.

Combinations of (A) and (B) means that most people pay more tax when they buy a house. So, how could this be better?

<<Yes, and it's a forced savings plan with a number of distinct advantages such as the tax deduction,>>

IMHO, it is a forced taxing plan with significant disadvantage.

KlangFool

mcraepat9
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Re: The riskiness of home ownership

Post by mcraepat9 » Mon Oct 24, 2016 2:19 pm

KlangFool wrote:
Hatch Batten wrote:
From my brief review, academic literature on the subject from studies controlling for bias supports the thesis that homeownership tends to lead to better net worth outcomes, when the mortgage type is well chosen. This paper (PDF) includes a good literature review.

The net worth effect of homeownership has been attributed to it being a 'forced savings plan'. Yes, and it's a forced savings plan with a number of distinct advantages such as the tax deduction, and the potential for lower and more predictable expenses in retirement.
Hatch Batten,

It is a well know fact that

A) Most people do not max up their Trad. 401K contribution.

B) Most people pay more in their mortgage versus rent.

Combinations of (A) and (B) means that most people pay more tax when they buy a house. So, how could this be better?

<<Yes, and it's a forced savings plan with a number of distinct advantages such as the tax deduction,>>

IMHO, it is a forced taxing plan with significant disadvantage.

KlangFool
Bogleheads are a different breed than the average person owning or renting a house. A forced savings plan makes sense if the cost savings from renting vs. buying was going to be wasted. If a Boglehead is saying he or she is currently diligently investing their excess savings in a solid, low cost, diversified index portfolio and will continue to do so in the future, that is a different animal entirely. I have not read the literature, but my guess is it probably doesn't necessarily square with the practical realities of the readers of this site.
Amateur investors are not cool-headed logicians.

soboggled
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Re: The riskiness of home ownership

Post by soboggled » Mon Oct 24, 2016 2:35 pm

Junk "science". Buried in the report is this disclaimer:
"The use of a conventional covariance control approach with this study's quasi experimental design, selection bias and endogeneity makes it difficult to confidently identify causal effects. For example, in this study, we do not know if the changes in wealth result from home ownership or from the respondent's social, economic, and demographic factors that likely increase both home ownership and wealth."
This study is at best extremely limited. It admits that forced savings may be a part of the difference. And it does not address the real risk of long-term calamity, such as foreclosure, in the case of ownership in exchange for the purported wealth gain over three years that the study is limited to.

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bligh
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Re: The riskiness of home ownership

Post by bligh » Mon Oct 24, 2016 2:43 pm

Discipline is needed regardless of whether you are a renter or an owner.

As a renter, you need to be disciplined about saving and investing downpayment and the the difference between your rent and the PITI payment.

As an owner, you need to be disciplined about not "nesting" and sinking additional money into your home to make your accommodations fancier. Specifically upgrades that you would have been okay without while renting. (Think Stainless steel appliances, granite counter tops, landscaping, crown moulding, etc.) It is absolutely fine if you want to get these (I love em!) but these are expenses, not investments. Lifestyle creep associated with homeownership.

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Re: The riskiness of home ownership

Post by BW1985 » Tue Oct 25, 2016 9:40 am

bligh wrote:Discipline is needed regardless of whether you are a renter or an owner.

As a renter, you need to be disciplined about saving and investing downpayment and the the difference between your rent and the PITI payment.

As an owner, you need to be disciplined about not "nesting" and sinking additional money into your home to make your accommodations fancier. Specifically upgrades that you would have been okay without while renting. (Think Stainless steel appliances, granite counter tops, landscaping, crown moulding, etc.) It is absolutely fine if you want to get these (I love em!) but these are expenses, not investments. Lifestyle creep associated with homeownership.
The things you mention are very likely to increase the value of your home, especially in the kitchen. I would not call them investments but I would not call them expenses either, it's not like you're fixing the furnace. The trick is to chose the right upgrades and not spend frivolously. For example you can get a nice granite for $40/sq ft or you can choose top of the line granite/quartz for $90/sq ft.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 10:16 am

BW1985 wrote:
bligh wrote:Discipline is needed regardless of whether you are a renter or an owner.

As a renter, you need to be disciplined about saving and investing downpayment and the the difference between your rent and the PITI payment.

As an owner, you need to be disciplined about not "nesting" and sinking additional money into your home to make your accommodations fancier. Specifically upgrades that you would have been okay without while renting. (Think Stainless steel appliances, granite counter tops, landscaping, crown moulding, etc.) It is absolutely fine if you want to get these (I love em!) but these are expenses, not investments. Lifestyle creep associated with homeownership.
The things you mention are very likely to increase the value of your home, especially in the kitchen. I would not call them investments but I would not call them expenses either, it's not like you're fixing the furnace. The trick is to chose the right upgrades and not spend frivolously. For example you can get a nice granite for $40/sq ft or you can choose top of the line granite/quartz for $90/sq ft.
BW1985,

Or not. It is safer to assume that it is worth nothing. For example, you think the nice granite is good enough. But, the buyer may think that it is ugly and want to replace that with something else. Ditto on the top of the line granite too. We will have no idea how somebody else will think about our improvement to the house. And,

In summary, improve your house for your own enjoyment / consumption. Treat it as an expense. Do not assume that it will increase your house value and you will get something from that. Then, you will not be disappointed.

KlangFool

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Re: The riskiness of home ownership

Post by Admiral » Tue Oct 25, 2016 11:50 am

One (or maybe it's two) things seem lost in the discussion.

1) A house (with or without a mortgage) is a HUGE inflation hedge and
2) A mortgage is a fixed cost in a market (housing) that is highly variable.

Point 1). Your mortgage P+I payment stays exactly the same over 10, 15, 20, 30 years. When renters in my neighborhood who pay $2,000/month now are paying $4,000/mo in 15 years, my mortgage is the same...and my income will be greater.

Point 2). Why on earth would anyone want (what one would assume is) their most expensive monthly cost to be subject to the vagaries of the market/economy/shady landlord, if one did not HAVE to make this choice?

Especially when you have a family, having predictable expenses is very important (not to mention a predictable address).

Personally, I would never trade my house for a rental, even though it's 50% owned by the bank.

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Re: The riskiness of home ownership

Post by rbaldini » Tue Oct 25, 2016 11:54 am

Admiral wrote:One (or maybe it's two) things seem lost in the discussion.

1) A house (with or without a mortgage) is a HUGE inflation hedge and
2) A mortgage is a fixed cost in a market (housing) that is highly variable.

Point 1). Your mortgage P+I payment stays exactly the same over 10, 15, 20, 30 years. When renters in my neighborhood who pay $2,000/month now are paying $4,000/mo in 15 years, my mortgage is the same...and my income will be greater.

Point 2). Why on earth would anyone want (what one would assume is) their most expensive monthly cost to be subject to the vagaries of the market/economy/shady landlord, if one did not HAVE to make this choice?

Especially when you have a family, having predictable expenses is very important (not to mention a predictable address).

Personally, I would never trade my house for a rental, even though it's 50% owned by the bank.
Fair points, although it swings both ways, of course. Suppose rent gets cheaper. Suppose your house value drops 10%. You're still paying the same amount with your mortgage.

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Re: The riskiness of home ownership

Post by Admiral » Tue Oct 25, 2016 11:58 am

rbaldini wrote:
Admiral wrote:One (or maybe it's two) things seem lost in the discussion.

1) A house (with or without a mortgage) is a HUGE inflation hedge and
2) A mortgage is a fixed cost in a market (housing) that is highly variable.

Point 1). Your mortgage P+I payment stays exactly the same over 10, 15, 20, 30 years. When renters in my neighborhood who pay $2,000/month now are paying $4,000/mo in 15 years, my mortgage is the same...and my income will be greater.

Point 2). Why on earth would anyone want (what one would assume is) their most expensive monthly cost to be subject to the vagaries of the market/economy/shady landlord, if one did not HAVE to make this choice?

Especially when you have a family, having predictable expenses is very important (not to mention a predictable address).

Personally, I would never trade my house for a rental, even though it's 50% owned by the bank.
Fair points, although it swings both ways, of course. Suppose rent gets cheaper. Suppose your house value drops 10%. You're still paying the same amount with your mortgage.
Over the long haul I believe prices will go up...if only due to inflation and nothing else. And I have a lot of equity so I'm not concerned about fluctuations (up or down) on a monthly or even yearly basis. If I had a house that I did not intend to keep--or a job that did not have reasonable security--then I might feel otherwise.

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 11:58 am

Admiral wrote:One (or maybe it's two) things seem lost in the discussion.

1) A house (with or without a mortgage) is a HUGE inflation hedge and
2) A mortgage is a fixed cost in a market (housing) that is highly variable.

Point 1). Your mortgage P+I payment stays exactly the same over 10, 15, 20, 30 years. When renters in my neighborhood who pay $2,000/month now are paying $4,000/mo in 15 years, my mortgage is the same...and my income will be greater.

Point 2). Why on earth would anyone want (what one would assume is) their most expensive monthly cost to be subject to the vagaries of the market/economy/shady landlord, if one did not HAVE to make this choice?

Especially when you have a family, having predictable expenses is very important (not to mention a predictable address).

Personally, I would never trade my house for a rental, even though it's 50% owned by the bank.
Admiral,

You are correct if and only if people do not OVERSPEND on housing. Bur, since most people OVERSPEND on housing, it does not work out.

<<my mortgage is the same...and my income will be greater.>.

1) Who says so? The correct answer for most people is that their income will rise to a point and stay stagnant for a long period of time. You are assuming that your income will rise continuously for 15 years. You may get lucky. But, that is not normal for average people.

2) Even if the mortgage stays the same, your property tax may go up. Hence, your housing cost is not fixed.

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 12:01 pm

Admiral wrote: Over the long haul I believe prices will go up...if only due to inflation and nothing else. And I have a lot of equity so I'm not concerned about fluctuations (up or down) on a monthly or even yearly basis. If I had a house that I did not intend to keep--or a job that did not have reasonable security--then I might feel otherwise.
Admiral,

The world may not turn as you believed. There are houses that do not keep up with inflation. Houses in my area had not recovered from the 2004/2005 level. Much less keeping with the inflation.

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Re: The riskiness of home ownership

Post by Admiral » Tue Oct 25, 2016 12:10 pm

KlangFool wrote:
Admiral wrote: Over the long haul I believe prices will go up...if only due to inflation and nothing else. And I have a lot of equity so I'm not concerned about fluctuations (up or down) on a monthly or even yearly basis. If I had a house that I did not intend to keep--or a job that did not have reasonable security--then I might feel otherwise.
Admiral,

The world may not turn as you believed. There are houses that do not keep up with inflation. Houses in my area had not recovered from the 2004/2005 level. Much less keeping with the inflation.

KlangFool
KF, this is a general discussion. Obv all housing markets are local, and one has to make a choice (which is essentially a prediction). I get a 3% raise each year. I am lucky; others may be less lucky, or much, much more lucky.

In GENERAL, I believe that OVER THE LONG HAUL, housing prices will GO UP NATIONALLY. How's that?

Of course taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 12:30 pm

Admiral wrote:
KlangFool wrote:
Admiral wrote: Over the long haul I believe prices will go up...if only due to inflation and nothing else. And I have a lot of equity so I'm not concerned about fluctuations (up or down) on a monthly or even yearly basis. If I had a house that I did not intend to keep--or a job that did not have reasonable security--then I might feel otherwise.
Admiral,

The world may not turn as you believed. There are houses that do not keep up with inflation. Houses in my area had not recovered from the 2004/2005 level. Much less keeping with the inflation.

KlangFool
KF, this is a general discussion. Obv all housing markets are local, and one has to make a choice (which is essentially a prediction). I get a 3% raise each year. I am lucky; others may be less lucky, or much, much more lucky.

In GENERAL, I believe that OVER THE LONG HAUL, housing prices will GO UP NATIONALLY. How's that?

Of course taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?
Admiral,

<< In GENERAL, I believe that OVER THE LONG HAUL, housing prices will GO UP NATIONALLY. How's that?>>

Which won't matters since a person only buys a HOUSE? What happened to the general housing market does not matter.

<<, Of course, taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?>>

Of course. Instead of paying extra for the house, the renter maxes up their Trad, 401K account and save a lot of tax NOW. And, the investment portfolio will keep up with the inflation.

No liquidity risk and do not need to count on job security. No need to put all the eggs in one basket.

Money is fungible.

Who is in a SAFER position? The renter or the house owner?

KlangFool

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Re: The riskiness of home ownership

Post by Bungo » Tue Oct 25, 2016 12:39 pm

Admiral wrote: Of course taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?
On the other hand, the renter doesn't have to pay for maintenance and repairs, which in my experience thus far as a homeowner have made ownership just as costly as renting would have been, even though local rents have soared since I bought my house. House prices have also soared, but that won't benefit me until retirement (assuming they don't crash again before then).

I prefer owning at this stage of my life, but I am very glad that I chose to rent until I was in a financial position to genuinely afford ownership, not just the fixed monthly cost but also the variable big-ticket expenses such as roof replacement (which, unlike a mortgage payment, do get more expensive over time).

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Re: The riskiness of home ownership

Post by SouthernCPA » Tue Oct 25, 2016 12:46 pm

Admiral wrote:
KF, this is a general discussion. Obv all housing markets are local, and one has to make a choice (which is essentially a prediction). I get a 3% raise each year. I am lucky; others may be less lucky, or much, much more lucky.

In GENERAL, I believe that OVER THE LONG HAUL, housing prices will GO UP NATIONALLY. How's that?

Of course taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?

Admiral, I agree with you. KF is notorious for posting his anti house buying "rules" and I lean more your way. Rent will go up and adjust with inflation, while you - as a buyer - can strike now and buy a property at a fixed price with a fixed rate mortgage that will stay the same over time. As inflation goes up year after year, your fixed rate mortgage becomes cheaper and cheaper in comparison. Property Taxes and insurance do go up overtime, but what KF forgets to consider is that these costs (although they are on the landlord as a renter) would also be reflected in increasing rent costs. The landlord isn't going to just "eat them" for you. So in a comparison, insurance and property taxes are essentially the same in each scenario.

Sure, we can always lose our incomes, sure housing prices can dip. But, if you buy a house with some basic common sense about emergency funds, sufficient downpayment, etc you are mitigating the risk.

I'll take the risk and borrow on a fixed rate mortgage to buy a house at the price today, rather than pay inflation adjusted rent over the next 20 years while I save up to buy per KF's "rules." In his scenario, extreme risk adversion to a risk that can very easily be mitigated by buying what you can afford and planning emergency funds, if you played by KF's rules, you would no doubt lose a ton of money in rent over the 20 years. Then when you are ready to buy based on his net worth criteria, you would be buying the same house at a much higher price (assuming a long term housing price increase).

I"m not a huge fan of debt, but housing is one of those instances where you have to live somewhere and if you are reasonable with your purchase, it may be unwise to rent. KF has one set of blinders on with this topic and will not consider another perspective. Save your breath. Everyone has to evaluate this for themselves. I, personally, chose to buy a house. The rent is cheaper than the mortgage would be. The house is only 1x our annual income. If my spouse or I lost our jobs, we could pay all the bills/mortgage on one of our salaries without touching savings. If we both somehow lost our jobs in the same month, we'd have up to 1.5 years to figure out our next move. Renting in our scenario would be foolish.

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Re: The riskiness of home ownership

Post by Engineer250 » Tue Oct 25, 2016 12:49 pm

Admiral wrote:
KlangFool wrote:
Admiral wrote: Over the long haul I believe prices will go up...if only due to inflation and nothing else. And I have a lot of equity so I'm not concerned about fluctuations (up or down) on a monthly or even yearly basis. If I had a house that I did not intend to keep--or a job that did not have reasonable security--then I might feel otherwise.
Admiral,

The world may not turn as you believed. There are houses that do not keep up with inflation. Houses in my area had not recovered from the 2004/2005 level. Much less keeping with the inflation.

KlangFool
KF, this is a general discussion. Obv all housing markets are local, and one has to make a choice (which is essentially a prediction). I get a 3% raise each year. I am lucky; others may be less lucky, or much, much more lucky.

In GENERAL, I believe that OVER THE LONG HAUL, housing prices will GO UP NATIONALLY. How's that?

Of course taxes and insurance go up over time. But I feel OVER TIME rents will increase much by more than my R.E. taxes will. If I plan well, in 15 years or less I am VERY CONFIDENT that I will own, outright, a valuable asset that I can live in with a very low monthly payment of taxes and interestinsurance--which not coincidentally makes for a much easier calculation of retirement expenses.

Can the renter say the same?
Absolutely agree. Plus in my state, they value homeowners over schools and while they can increase your property tax amount, they can't reassess your home value even if it keeps going up. So another inflation hedge.

I know what KF is saying that people buy too much...but sometimes that can still pay off. I paid 20% more in mortgage than I was paying to rent when I first bought. My mortgage is now 30% cheaper than equivalent rent in the area. This is a combination of home prices going up and therefore rents going up, as well as refinancing to lower rates for me. I haven't been in the house that long, so this savings amount is only going to get better.
KlangFool wrote:
Of course. Instead of paying extra for the house, the renter maxes up their Trad, 401K account and save a lot of tax NOW. And, the investment portfolio will keep up with the inflation.

No liquidity risk and do not need to count on job security. No need to put all the eggs in one basket.

Money is fungible.

Who is in a SAFER position? The renter or the house owner?

KlangFool
Okay I ran some numbers, so let's look at this objectively (if you can).

I bought 8 years ago, about a $350 a month increase between my rent at the time and my new mortgage. So let's pretend I kept renting and invested that $350 a month instead. Annualized returns for S&P 500 including reinvestment of dividends are (according to something I found on the 'net), 6.8%. So doing a PV calc in excel I'd have $46,731 extra now.

Except, now my rent would be $450 a month more than it was 8 years ago, based on going rates in my neighborhood. And I have $130k in equity approximately. I recognize home equity is a nebulous value bound to change, but so are stock market investments, and this is a hypothetical only.

And in real unadjusted for inflation dollars, my mortgage today is $200 cheaper than my rent was 8 years ago. I am including property taxes and homeowner's insurance in all my numbers.

And taxes? That $46k might have saved me 15% in taxes today, but I'm going to have to pay them some day. On the other hand, there's an exemption on home value taxes, so if I move I can sink my equity into a new place to live without paying taxes on how much my home has appreciated since I bought it.

A very diligent saver might be better off renting. I still say the 'average' person (and I am decidedly average) would not be an idiot to buy if they can afford it.
Where the tides of fortune take us, no man can know.

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 12:57 pm

Engineer250 wrote:
Okay I ran some numbers, so let's look at this objectively (if you can).

I bought 8 years ago, about a $350 a month increase between my rent at the time and my new mortgage. So let's pretend I kept renting and invested that $350 a month instead. Annualized returns for S&P 500 including reinvestment of dividends are (according to something I found on the 'net), 6.8%. So doing a PV calc in excel I'd have $46,731 extra now.
Engineer250,

1) The $350 was after tax. So, what was your marginal tax rate? How much was your state income tax? You have to use pre-tax amount to do the calculation.

2) How much was your down payment? You have to do the PV calculation on the down payment too.

<< And taxes? That $46k might have saved me 15% in taxes today, but I'm going to have to pay them some day. On the other hand, there's an exemption on home value taxes,>>

3) Ditto. We have ways to prevent paying tax on those 46K too.

KlangFool

P.S.: I bought a house. My house PITI was 30% lower than rent. And, I could max up my Trad. 401K contribution while paying the mortgage.

Engineer250
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Re: The riskiness of home ownership

Post by Engineer250 » Tue Oct 25, 2016 1:21 pm

KlangFool wrote:
Engineer250 wrote:
Okay I ran some numbers, so let's look at this objectively (if you can).

I bought 8 years ago, about a $350 a month increase between my rent at the time and my new mortgage. So let's pretend I kept renting and invested that $350 a month instead. Annualized returns for S&P 500 including reinvestment of dividends are (according to something I found on the 'net), 6.8%. So doing a PV calc in excel I'd have $46,731 extra now.
Engineer250,

1) The $350 was after tax. So, what was your marginal tax rate? How much was your state income tax? You have to use pre-tax amount to do the calculation.
Wow you're right, what a HUGE mistake on my part. If I had invested an extra 15% of that $350 I would have...$53k not $46k. My fault.

KlangFool wrote: 2) How much was your down payment? You have to do the PV calculation on the down payment too.
Yup I put $15k down. 8 years at 6.8% annualized returns that's an additional $26k. So $80k total.
KlangFool wrote: << And taxes? That $46k might have saved me 15% in taxes today, but I'm going to have to pay them some day. On the other hand, there's an exemption on home value taxes,>>

3) Ditto. We have ways to prevent paying tax on those 46K too.

KlangFool

P.S.: I bought a house. My house PITI was 30% lower than rent. And, I could max up my Trad. 401K contribution while paying the mortgage.
There are a lot of ways of preventing paying taxes. That's not what the math here is about. Neither is you maxing 401k while paying the mortgage. The numbers here are whether it makes sense to pay a higher mortgage or pay a lower rent. A lot of people rent and can't afford 401k. A lot of people own and can.

$80k in an account that probably will be taxable versus $130k in tax free home equity. Plus an additional $650 a month saved in living expenses since I locked in my mortgage price and rents are more expensive now. The difference is even greater when you consider deducting mortgage interest and property taxes. I'd rather have eaten the $350 extra for the first five years or so so that I could now have $650 at a minimum for the next 30. But I suppose you don't care about numbers that don't support your point of view.
Where the tides of fortune take us, no man can know.

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Re: The riskiness of home ownership

Post by EnjoyIt » Tue Oct 25, 2016 1:31 pm

It is really simple:

1) Most people buy a bigger house than they would rent which means they are spending more on mortgage, property tax and maintenance as compared to renting a much smaller apartment or home.

2) People save a downpayment to keep interest rates low and avoid PMI. That downpayment is not invested and has no opportunity to grow.

3) People will sell their home and buy a new home after "X" years. They will lose at least 6% in the transaction costs.

4) When you rent, you don't waste money on upgrading the home and making it more your own. You also spend less on decorations.

5) When you rent, the place is smaller and you spend less money on outfitting the rental

When you add all of the above, a person will do far better to rent and invest the rest as compared to purchasing a home. Some people will get lucky and their home will go higher than inflation and they may win the "purchasing a home as an investment game."

I fully agree that a home is not an investment but a consumption. I am much happier understanding that. It allows me to make upgrades to the house that I enjoy and want irrespective of some future sales price. Hopefully my home will keep up with inflation so that I do not lose to much in my transaction costs if I ever plan on selling it.

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 1:37 pm

Engineer250 wrote:
There are a lot of ways of preventing paying taxes. That's not what the math here is about. Neither is you maxing 401k while paying the mortgage. The numbers here are whether it makes sense to pay a higher mortgage or pay a lower rent. A lot of people rent and can't afford 401k. A lot of people own and can.

$80k in an account that probably will be taxable versus $130k in tax free home equity. Plus an additional $650 a month saved in living expenses since I locked in my mortgage price and rents are more expensive now. The difference is even greater when you consider deducting mortgage interest and property taxes. I'd rather have eaten the $350 extra for the first five years or so so that I could now have $650 at a minimum for the next 30. But I suppose you don't care about numbers that don't support your point of view.
Engineer250,

<<A lot of people rent and can't afford 401k. A lot of people own and can.>>

Given that most people that own like you pay more than renting. So, the tradeoff is between

A) Rent and contribute to Trad. 401K

versus

B) Buying a house

<<$80k in an account that probably will be taxable versus $130k in tax free home equity.>>

Let's called it a wash in term of tax at this moment. Your home equity only matters when you sell.

<<Plus an additional $650 a month saved in living expenses >>

Versus the 80K that generating annual return 6.8% = $5,440 per year = $453 per month. At best, your savings is only $650 - $453 = $110 per month.

Let's say I give you every benefit of the doubts. It is 80K versus 130K. You are taking LIQUIDITY RISK. You got lucky that you do not have to sell in this 8 years and move somewhere. And, it is still no guarantee that you will make any money. Your house price could go down when you sales the house.

KlangFool

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Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 1:43 pm

EnjoyIt wrote:It is really simple:

1) Most people buy a bigger house than they would rent which means they are spending more on mortgage, property tax and maintenance as compared to renting a much smaller apartment or home.

2) People save a downpayment to keep interest rates low and avoid PMI. That downpayment is not invested and has no opportunity to grow.

3) People will sell their home and buy a new home after "X" years. They will lose at least 6% in the transaction costs.

4) When you rent, you don't waste money on upgrading the home and making it more your own. You also spend less on decorations.

5) When you rent, the place is smaller and you spend less money on outfitting the rental

When you add all of the above, a person will do far better to rent and invest the rest as compared to purchasing a home. Some people will get lucky and their home will go higher than inflation and they may win the "purchasing a home as an investment game."

I fully agree that a home is not an investment but a consumption. I am much happier understanding that. It allows me to make upgrades to the house that I enjoy and want irrespective of some future sales price. Hopefully my home will keep up with inflation so that I do not lose to much in my transaction costs if I ever plan on selling it.
+1.

I treat the house that I buy as an expense. I do not count the house that I lived in as an asset.

<< Hopefully my home will keep up with inflation so that I do not lose to much in my transaction costs if I ever plan on selling it.>>

In my case, the PITI is 30% lower than rent. I do not care about my house price at all. I had recovered the cost via imputed rent. The house only needs to worth more than the down payment for me to break even.

If a person wants to spend more on housing, go right ahead. But, please do not justify your expenditure as an investment.

KlangFool

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: The riskiness of home ownership

Post by soboggled » Tue Oct 25, 2016 1:46 pm

Interesting fact: According to wikipedia, the US is 39th in the world in home ownership rate (64.5%).
#1 is Romania (96.4%), #2 is Cuba (90%).
Some advanced countries like Denmark, Germany, Japan, France, Austria, Hong Kong and Switzerland are even lower than the US.

Admiral
Posts: 1460
Joined: Mon Oct 27, 2014 12:35 pm

Re: The riskiness of home ownership

Post by Admiral » Tue Oct 25, 2016 2:07 pm

KlangFool wrote:
Engineer250 wrote:
There are a lot of ways of preventing paying taxes. That's not what the math here is about. Neither is you maxing 401k while paying the mortgage. The numbers here are whether it makes sense to pay a higher mortgage or pay a lower rent. A lot of people rent and can't afford 401k. A lot of people own and can.

$80k in an account that probably will be taxable versus $130k in tax free home equity. Plus an additional $650 a month saved in living expenses since I locked in my mortgage price and rents are more expensive now. The difference is even greater when you consider deducting mortgage interest and property taxes. I'd rather have eaten the $350 extra for the first five years or so so that I could now have $650 at a minimum for the next 30. But I suppose you don't care about numbers that don't support your point of view.
Engineer250,

<<A lot of people rent and can't afford 401k. A lot of people own and can.>>

Given that most people that own like you pay more than renting. So, the tradeoff is between

A) Rent and contribute to Trad. 401K

versus

B) Buying a house

<<$80k in an account that probably will be taxable versus $130k in tax free home equity.>>

Let's called it a wash in term of tax at this moment. Your home equity only matters when you sell.

<<Plus an additional $650 a month saved in living expenses >>

Versus the 80K that generating annual return 6.8% = $5,440 per year = $453 per month. At best, your savings is only $650 - $453 = $110 per month.

Let's say I give you every benefit of the doubts. It is 80K versus 130K. You are taking LIQUIDITY RISK. You got lucky that you do not have to sell in this 8 years and move somewhere. And, it is still no guarantee that you will make any money. Your house price could go down when you sales the house.

KlangFool
There are just so many generalizations here. I will try to address a few:
"Given that most people that own like you pay more than renting"

Says you. According to Zillow it would cost me nearly double to rent my house (which is 1900 sq feet, by no means huge for a family of four) than it costs me per month for PITI. Of my $2600/ month payment at 2.25% interest (fixed for 15 years) $1450 goes to principal. Just one example of course but I don't feel your statement has a basis in fact. Again, markets are local, and much depends on how much you've borrowed. But when you own, you get to choose how and went to make improvements. When you rent, you don't...but you do pay for them via rent increases.

"So, the tradeoff is between A) Rent and contribute to Trad. 401K versus B) Buying a house"

Says you. We max out our retirement accounts, save 10k in taxable, and don't rent. Our housing costs are around 23% of after tax income (that is, after all pre-tax contributions are made).

Each person's situation is different. You seem to often take a negative outlook about things ("what if this happens...then what??"). That's fine for you. I guess I am an optimist. I assume things will be ok, overall, with the various ups and downs of life. Yes, there are people who lost their jobs in 2008, and there are homes that lost value (mine included, on paper). There are also dips in the stock market. But I believe, overall, that things will be better/higher/more valuable tomorrow than they are today. That doesn't mean I don't plan for eventualities, but it does mean I choose to be positive about where I will end up.

Even if, in the end, when it's all said and done, and after doing 30 years of math I've determined that ok, yes, I paid more for my house then I would have paid renting...then....so what? I have a place to live that is paid for. The renter does not. "Wait!" you might say. "But the renter has x amount of money more than you because they paid so much less over 30 years and invested the difference!"

To which my response is: "So what? Now they can buy a vastly price-inflated house that costs triple what it did 30 years ago?" Or continue to pay rent when they are on a fixed income until they can't afford the rent payments and have to move? Who needs that?

KlangFool
Posts: 10681
Joined: Sat Oct 11, 2008 12:35 pm

Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 2:10 pm

Admiral wrote:
KlangFool wrote:
Engineer250 wrote:
There are a lot of ways of preventing paying taxes. That's not what the math here is about. Neither is you maxing 401k while paying the mortgage. The numbers here are whether it makes sense to pay a higher mortgage or pay a lower rent. A lot of people rent and can't afford 401k. A lot of people own and can.

$80k in an account that probably will be taxable versus $130k in tax free home equity. Plus an additional $650 a month saved in living expenses since I locked in my mortgage price and rents are more expensive now. The difference is even greater when you consider deducting mortgage interest and property taxes. I'd rather have eaten the $350 extra for the first five years or so so that I could now have $650 at a minimum for the next 30. But I suppose you don't care about numbers that don't support your point of view.
Engineer250,

<<A lot of people rent and can't afford 401k. A lot of people own and can.>>

Given that most people that own like you pay more than renting. So, the tradeoff is between

A) Rent and contribute to Trad. 401K

versus

B) Buying a house

<<$80k in an account that probably will be taxable versus $130k in tax free home equity.>>

Let's called it a wash in term of tax at this moment. Your home equity only matters when you sell.

<<Plus an additional $650 a month saved in living expenses >>

Versus the 80K that generating annual return 6.8% = $5,440 per year = $453 per month. At best, your savings is only $650 - $453 = $110 per month.

Let's say I give you every benefit of the doubts. It is 80K versus 130K. You are taking LIQUIDITY RISK. You got lucky that you do not have to sell in this 8 years and move somewhere. And, it is still no guarantee that you will make any money. Your house price could go down when you sales the house.

KlangFool
There are just so many generalizations here. I will try to address a few:
"Given that most people that own like you pay more than renting"
Admiral,

My post was a reply to Engineer250's post. He did pay than renting in order to own a house. He admitted that.

KlangFool

halfnine
Posts: 856
Joined: Tue Dec 21, 2010 1:48 pm

Re: The riskiness of home ownership

Post by halfnine » Tue Oct 25, 2016 2:15 pm

EnjoyIt wrote:....
When you add all of the above, a person will do far better to rent and invest the rest as compared to purchasing a home. Some people will get lucky and their home will go higher than inflation and they may win the "purchasing a home as an investment game."
Actually, whether renting or owning comes out ahead is unknown. And the only way to mitigate that risk is to own enough house to make a difference but not enough house to have concentration risk. I am partial to what KF proposes, however I believe his criteria is a bit more conservative than required. Still in a HCOL area that may mean owning a two bedroom apartment or otherwise small place.

KlangFool
Posts: 10681
Joined: Sat Oct 11, 2008 12:35 pm

Re: The riskiness of home ownership

Post by KlangFool » Tue Oct 25, 2016 2:21 pm

Admiral wrote:
There are just so many generalizations here. I will try to address a few:
"Given that most people that own like you pay more than renting"

Says you. According to Zillow it would cost me nearly double to rent my house (which is 1900 sq feet, by no means huge for a family of four) than it costs me per month for PITI. Of my $2600/ month payment at 2.25% interest (fixed for 15 years) $1450 goes to principal. Just one example of course but I don't feel your statement has a basis in fact. Again, markets are local, and much depends on how much you've borrowed. But when you own, you get to choose how and went to make improvements. When you rent, you don't...but you do pay for them via rent increases.

"So, the tradeoff is between A) Rent and contribute to Trad. 401K versus B) Buying a house"

Says you. We max out our retirement accounts, save 10k in taxable, and don't rent. Our housing costs are around 23% of after tax income (that is, after all pre-tax contributions are made).

Each person's situation is different. You seem to often take a negative outlook about things ("what if this happens...then what??"). That's fine for you. I guess I am an optimist. I assume things will be ok, overall, with the various ups and downs of life. Yes, there are people who lost their jobs in 2008, and there are homes that lost value (mine included, on paper). There are also dips in the stock market. But I believe, overall, that things will be better/higher/more valuable tomorrow than they are today. That doesn't mean I don't plan for eventualities, but it does mean I choose to be positive about where I will end up.

Even if, in the end, when it's all said and done, and after doing 30 years of math I've determined that ok, yes, I paid more for my house then I would have paid renting...then....so what? I have a place to live that is paid for. The renter does not. "Wait!" you might say. "But the renter has x amount of money more than you because they paid so much less over 30 years and invested the difference!"

To which my response is: "So what? Now they can buy a vastly price-inflated house that costs triple what it did 30 years ago?" Or continue to pay rent when they are on a fixed income until they can't afford the rent payments and have to move? Who needs that?
Admiral,

<<Each person's situation is different. >>

That is THE POINT!

<< Says you. We max out our retirement accounts, save 10k in taxable, and don't rent. Our housing costs are around 23% of after tax income (that is, after all pre-tax contributions are made).>>

You can AFFORD to max your tax-advantaged accounts even after OVERSPENDING on housing.

<<To which my response is: "So what? Now they can buy a vastly price-inflated house that costs triple what it did 30 years ago?">>

So, unless a person can AFFORD to do the same thing as you are, how could your decision / advice be RELEVANT to them?

<< Even if, in the end, when it's all said and done, and after doing 30 years of math I've determined that ok, yes, I paid more for my house then I would have paid renting...then....so what? >>

It is a "so what" to you. You can afford to be optimistic.

KlangFool

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: The riskiness of home ownership

Post by soboggled » Tue Oct 25, 2016 2:32 pm

This entire thread is silly. The real estate industry has managed to convince people that buying a house is a substitute for saving and investing. The fact is that houses historically on average have returned only 1% or less in real terms. As an investment, it is a bad though likely not catastrophic bet.
For many people, the benefits of ownership are intangible but very real. So if you can afford it, there is no need to justify buying a house, if you have a good emergency fund and have met your employer's 401K match.

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