Your Home is Not a Good Investment

[Leesbro63]

I don't buy the "leverage makes it potentially a bettdr investment" argument in most cases. Because you have to make payments on the borrowed funds. And assume the risk on the downside that we've seen.

[FinancialDave]

There are many total losses that your insurance won't protect you from -- have you ever read your homeowners policy. If you don't have one, let me just say it takes more than just one sheet of paper just to list them nowdays.

fd

[madbrain]

What is a total loss? A fire? Isn't that what insurance if for?
Greg

An earthquake would also do, and very few can afford to insure against them.

[FinancialDave]

I don't buy the "leverage makes it potentially a bettdr investment" argument in most cases. Because you have to make payments on the borrowed funds. And assume the risk on the downside that we've seen.

Leverage is leverage, whether it be to buy stocks or to buy real estate it works the same way -- and yes you do need to pay it back eventually.

To work it out you need to compare the "lifecycle" cost of the funds to purchase the investment and this is where the power of compounding really kills you - while you are either building up the savings to pay cash for the house or while you are paying off the mortgage. Certainly once the house is paid off the cash flow changes a bit, but by then your compounded "opportunity lost" has taken its toll. I figured it out once a couple years ago and it wasn't pretty.

As many have said, the reason to buy a house is not for the investment, as they are a pretty lousy investment whose NAV grows at about 3-4%. Add in the fact that many do not just buy one house and live in it for 60 years, in most cases they have owned 3 or 4 along life's path, further adding to the cost with things like closing costs.

[Leesbro63]

Agreed that "the juice" of moving (commissions, closing costs, movers, and all the stuff that "doesn't go in the new house" are killers.

[stonerolled]

Its hard to put a price on the responsibility that home ownership teaches.
If the maintenance involved is done by the owner, and he gets better at it as time goes on, that adds value.
Some owners are now applying technology to save energy costs as a hobby.
Some owners grow vegetables which reduces the food bill.
If a renter spends his free time at a casino, what costs does that have associated with it.

[FinancialDave]

Of course, some renters will make millions with the extra time

I knew there was a reason there are some many "infomercials."

[Leesbro63]

And if I had rented instead of bought and invested in Vanguard Total Market, I'd be way ahead. But I only know that in hindsight. And the piece of mind in knowing that my housing situation was settled and permanent gave me the will and ability to invest everything else optimally.

[Kalo]

What I don't get about the idea of investing in the stock market instead of buying a house is:

Invested what? The monthly mortgage payments? Wouldn't those have gone to rent instead? The down payment? Ok, I can buy that, but that's often a small amount.

Kalo

[avalpert]

As I said on a related thread, owning a home is a very Bogleheadish, long term, buy and hold investment.

No it isn't, it is an undiversified investment that as a result comes with uncompensated risk. It is closer to buying and holding an individual stock than it is a bogleheadish investment.

Once a mortgage is purchased, it is a fixed expense. When renting, the amount tends to increase over time.

Taxes, insurance, maintenance, improvements, utilities all tend to increase over time. A mortgage is the least interesting comparison to the cost of renting because so long as their are landlords out there who don't need a mortgage the market price need not incorporate it into the cost.

Finally, as I stated in a previous thread, what is the difference in investing in a home, or a REIT? They are both Real Estate.

Diversification, for starters.

[wilked]

What I don't get about the idea of investing in the stock market instead of buying a house is:

Invested what? The monthly mortgage payments? Wouldn't those have gone to rent instead? The down payment? Ok, I can buy that, but that's often a small amount.

Kalo

I think you forgot a bunch of dough... Property taxes is one, PMI (on your 'small amount' of downpayment), maintenance, perhaps association fees, furniture to fill all those rooms, etc etc.

I kind of swing both ways on these discussions, but people often compare a mortgage note against a rental payment and forget about a ton of other stuff

[avalpert]

I would venture to say that on average, a home owner spends his time more wisely than someone who rents, on average.
Of course, some renters will make millions with the extra time.

I would venture to say that on average that is pure BS.

[avalpert]

And if I had rented instead of bought and invested in Vanguard Total Market, I'd be way ahead. But I only know that in hindsight.

But you could have known it ahead of time because your expected return on the Stock Market was higher than your expected return on real estate. Its not like when stocks outperform bonds we just shrug our shoulders and say if only I could have known ahead of time...

[FinancialDave]

What I don't get about the idea of investing in the stock market instead of buying a house is:

Invested what? The monthly mortgage payments? Wouldn't those have gone to rent instead? The down payment? Ok, I can buy that, but that's often a small amount.

Kalo

It's really not about comparing an investment that is leveraged say 10:1 (10% down payment) to one that is not (stock market). To make a valid comparison you would need to save up the money to pay cash for the house, just like you would for the stocks.

However, just to show the power of compounding lets look at just the money you would spend on the down payment and maybe the higher homeowners insurance, over a 30 year time frame on a S200,000 house with 10% down payment of $20k + $2k closing costs. Homeowners insurance differential $500 year vs renters insurance.
I will use 10% as the long term gains of a good total stock market index fund.

First 30 years of $22,000 closing cost @ 10% (without the insurance) = $383,887. Now let's add in the $500 year. That's $466,134 - both numbers are compounded yearly, would be more if compounded monthly.

What if you put 20% down like a lot suggest - this $42,000 would compound out to almost $733k.

This is just a simplistic example pulling out just one aspect of the home ownership and as many others have suggested there are a lot of aspects that you can't put an easy price on.

It is also hard to compare the risk assessment of home ownership with investing in the stock market - though I'm sure some will have an opinion on it. Also who knows if we will ever see 10% over 30 years again in the stock market, but since you asked these are a representative set of numbers as I see them.

Finally, sure after your mortgage is paid off in 30 years, you have free rent until your next move, but that $400k, or $700k in my retirement account can buy me a lot of free rent, if I so choose, which I don't, since there really is no price I can put on the freedom of home ownership.

The decision is not in the economics.


fd

[White Coat Investor]

I get the point, that buying a house isn't always the right thing to do. But any evaluation of housing as an investment has to include the dividends- the free rent. If the house value keeps up with inflation, AND kicks out dividends every month, that seems like a pretty good investment to me. In reality, the house depreciates and the land appreciates at something close to inflation. One interesting aspect is that housing value increases as calculated by realtors are biased- they just take the average of home sold. Demolished homes don't count. The Case Shiller Index is more accurate (and less impressive) in that it uses the same properties.

What study shows that a house's value depreciates at something close to inflation? Perhaps in some markets, but not in any of the markets I've ever lived (I've lived in several large metro areas). That would mean a house built before 1980 or so has a negative value. I grew up in a neighborhood built in the late 1940s and all the houses are still standing and have a positive value. My parents paid $16000 in 1967 ($112K in 2013 $s) - the house has appreciated far beyond inflation. Maintenance was done throughout the years, but most done by my parents & brothers, including re-roofing.

I look at my house as a savings account. Every payment on principle is a payment to me. Interest can be considered rent with a tax benefit. Any appreciation in my house's value is icing on the cake. A house like mine (or a much smaller 3 BR apt) would easily rent for the amount of my 15-year mortgage (including taxes & insurance) so it wouldn't make sense for me to rent such a house (and I'm not willing to live in a tiny 1 BR apt). I absolutely hate renting. I do most home maintenance on my own - if you hire someone, yes, your costs can quickly become astronomical. I enjoy most of it - it's like a creative outlet for me. Aside from re-roofing and major plumbing or electrical work, I will attempt to do it myself, as I know I can do it as well as all but the best (and I don't want to pay the price the best deserve).

I guess if you live in a high priced housing market, the calculation may be different. But I've made career decisions to not go after jobs in such markets - I think it's crazy to live in such markets. (If you rent & have pets, especially dogs, it can become almost impossible to find options, and those that are available are either in crummy neighborhoods or come with some sort of additional, often monthly, fee.)

Once the house is paid for, it's yours. If you rent, you will always have rent to pay.
Oh yes, avoid any property with association fees. You have little to no control over how high those get, and how much is wasted.

That wasn't clear the way I wrote it. The land keeps up with inflation. Period. Full stop. The house depreciates. If you don't believe houses depreciate, take a look around at all the homes built in 1850. How much are they worth now? Oh, there aren't any. How about that....why is that? Because it was so worthless someone bulldozed it after 80 years or so.

[Coyote22]

To quote William Bernstein from "The Investor's Manifesto:

"A house is most certainly not an investment, for one simple reason: You have to have a place to live somewhere, and you are going to have to pay for it or rent it. Always remember, investment is the deferral of present consumption for future consumption, and if anything qualifies as present consumption, it is a residence."

Generally a good quote. But not always. If you know for sure that you are going to be stable in an area for a long time and are willing to live in a "good enough" house that fits your needs but is not overkill, probably buying makes more sense. Esp if you have kids and can buy in an area with a good public school system.

I think the point is that housing is a need and depending upon your situation, the market within which you live and financial conditions it could make sense to meet that need either through buying or renting. But if you decide to buy that does not make your home an investment. Either way it is an expense. You probably need a car also. The car does not become an investment if you buy and an expense if you lease.

[BrandonBogle]

I know I am an outlier here, but I will share anyways. If you play smart, do not go overboard, and keep your costs in check, it can be beneficial to won. Now that I said CAN, not WILL.

In my case, I was renting a roommate in a townhome for (all inclusive) the same as my P&I on my mortgage. I could rent an apt by myself (non-inclusive of utilities) for what I pay in P&I, Property Taxes, and Insurance. I put 20% down and financed 30 years @ 2.75% with $1,000 closing costs ($500 were lender costs) and bought a family oriented house in a good/great neighborhood with the top schools.

I can afford, while still maxing my retirement accounts, my P&I, property taxes, insurance, utilities, maintenance on the house and other upkeep. But, thinking towards retiring early someday, I got the larger house fit for a family. I have a renter on the top floor and a renter on the bottom floor. One covers my P&I, the other covers my property taxes, insurance, and utilities. So I'm just out maintenance, repairs, upkeep, and any upgrades. Working out well so far and I can easily handle if I had no renters (and am ready for when we have kids). And my "price/rent ratio" puts me at 11.75.

Again, I know I'm an outlier.

[gks]

What is a total loss? A fire? Isn't that what insurance if for?
Greg

An earthquake would also do, and very few can afford to insure against them.

About 25 years ago, the New Madrid fault was supposed to slip again, and there were predictions that the Midwest was going to be destroyed. Our insurance agent suggested earthquake insurance at a reasonable amount, which indicated to me that the chance of an earthquake was fairly low. Your location obviously has a higher chance of a devastating earthquake compared to the Midwest.

Greg

[gks]

As I said on a related thread, owning a home is a very Bogleheadish, long term, buy and hold investment.

No it isn't, it is an undiversified investment that as a result comes with uncompensated risk. It is closer to buying and holding an individual stock than it is a bogleheadish investment.

Once a mortgage is purchased, it is a fixed expense. When renting, the amount tends to increase over time.

Taxes, insurance, maintenance, improvements, utilities all tend to increase over time. A mortgage is the least interesting comparison to the cost of renting because so long as their are landlords out there who don't need a mortgage the market price need not incorporate it into the cost.

Finally, as I stated in a previous thread, what is the difference in investing in a home, or a REIT? They are both Real Estate.

Diversification, for starters.

Avapert,

I'll give you the lack of diversification, but buying a home is still a long term, buy and hold investment.

Taxes and insurance did not increase that much for us, so by the time we sold, amount of the mortgage, taxes, and insurance was about 30% of the local rent for a duplex, or 20% for a comparable house. Just because a landlord does not need to increase the rent does not stop the landlord from increasing the rent anyhow.

Finally, when a person stops renting, all that is left are receipts. When a person stops owning, there is an asset that will provide a return.

Some people buy stocks, some people buy funds, some people buy both.

Greg

[swaption]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

[avalpert]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

Prepaid tuition plans are a 529 plan - they are an investment product whose return is tied to a narrowly construed inflation rate and it too will retain value in perpetuity if not spent (or until the state defaults on the product).

[swaption]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

Prepaid tuition plans are a 529 plan - they are an investment product whose return is tied to a narrowly construed inflation rate and it too will retain value in perpetuity if not spent (or until the state defaults on the product).

So how is a home any different than that?

But to be clear, a home maintains value in perpetuity even if consumed in the interim, which is obviously not the case for prepaid tuition plans.

[avalpert]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

Prepaid tuition plans are a 529 plan - they are an investment product whose return is tied to a narrowly construed inflation rate and it too will retain value in perpetuity if not spent (or until the state defaults on the product).

So how is a home any different than that?

But to be clear, a home maintains value in perpetuity even if consumed in the interim, which is obviously not the case for prepaid tuition plans.

A home is current consumption. And to be clear, the land may retain value in perpetuity - the home is a depreciating asset that requires maintenance and refreshes to make up for the effect of consuming it.

[Phineas J. Whoopee]

I think a previous poster (or perhaps on the other thread) nailed it with: not everybody uses the word "investment" the same way.

I remember another website, several years ago, was all a-twitter (no, it wasn't Twitter) about a gold shortage. You had to wait to get some. I never posted there, only lurked as part of a project to learn how people other than me think, but somebody sensible pointed out that besides the derivatives the website people complained about, there are also metals exchanges, where 400-ounce bars are immediately available to anybody with the readies.

There was a chorus of Bronx cheers, all centered around the idea (and word-for-word repetitions they may have been copying from somebody else) "We mean investment gold!"

Evidently investment meant small manufactured items.

I would say this thread is in danger of reaching that point.

PJW

[swaption]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

Prepaid tuition plans are a 529 plan - they are an investment product whose return is tied to a narrowly construed inflation rate and it too will retain value in perpetuity if not spent (or until the state defaults on the product).

So how is a home any different than that?

But to be clear, a home maintains value in perpetuity even if consumed in the interim, which is obviously not the case for prepaid tuition plans.

A home is current consumption. And to be clear, the land may retain value in perpetuity - the home is a depreciating asset that requires maintenance and refreshes to make up for the effect of consuming it.

No, the USE of the home is current consumption. So is the carrying cost, the maintenance, the taxes, etc. I have never claimed anything different. So I'll say it again, how is this any different than prepaid tuition (also the USE of which represents consumption)?

[555]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

You consume your house? I think you've been reading too many fairy tales.
http://en.wikipedia.org/wiki/Hansel_and_Gretel

[avalpert]

Its just so painful to see this nonsense go on with no apparent end. Simply put, a home is an investment.

But for those that disagree, I'll ask a question I referenced in another thread. I think most would agree that funds in a 529 plan are investments/savings. But what about a prepaid tuition plan? Is that consumption? How is it any different? I think that is an extremely valid comparison, and honestly a home has even more characteristics of an investment given that a significant portion can be expected to retain value in perpetuity.

See, I find it painful that the nonsense of people not accepting that your home is an asset you consume.

Prepaid tuition plans are a 529 plan - they are an investment product whose return is tied to a narrowly construed inflation rate and it too will retain value in perpetuity if not spent (or until the state defaults on the product).

So how is a home any different than that?

But to be clear, a home maintains value in perpetuity even if consumed in the interim, which is obviously not the case for prepaid tuition plans.

A home is current consumption. And to be clear, the land may retain value in perpetuity - the home is a depreciating asset that requires maintenance and refreshes to make up for the effect of consuming it.

No, the USE of the home is current consumption. So is the carrying cost, the maintenance, the taxes, etc. I have never claimed anything different. So I'll say it again, how is this any different than prepaid tuition (also the USE of which represents consumption)?

When you use the credits in the a prepaid tuition plan you are consuming it - when you purchase those credits you are purchasing an investment product that is guaranteeing (with caveats in mots cases so do read the terms carefully) a rate of return tied to a specific inflation rate. That is nothing like what is going on when you purchase a house.

[MindBogler]

That wasn't clear the way I wrote it. The land keeps up with inflation. Period. Full stop. The house depreciates. If you don't believe houses depreciate, take a look around at all the homes built in 1850. How much are they worth now? Oh, there aren't any. How about that....why is that? Because it was so worthless someone bulldozed it after 80 years or so.

How sure of that are you?

http://www.virginiaestates.com/historic ... 0-1800.asp

Homes depreciate without maintenance, agreed. Rental properties also depreciate without maintenance. Your landlord pays for that depreciation by raising rent.

Let's flip this around. Instead of looking at a home as a bad investment, why not run comps against the rental and see what the equivalent cost to own it would be? It just might be that in your market the price to buy is lower than to rent (or not). The only valid comparison, though, is deciding on the cost to rent or buy each property. One can't compare property A against property B if they are not in equivalent neighborhoods, size, age, etc. Comparing the cost to buy a 3500sqft home to a 1200sqft apartment and declaring superiority of renting (or owning) is a strawman.

[avalpert]

That wasn't clear the way I wrote it. The land keeps up with inflation. Period. Full stop. The house depreciates. If you don't believe houses depreciate, take a look around at all the homes built in 1850. How much are they worth now? Oh, there aren't any. How about that....why is that? Because it was so worthless someone bulldozed it after 80 years or so.

How sure of that are you?

http://www.virginiaestates.com/historic ... 0-1800.asp

Homes depreciate without maintenance, agreed. Rental properties also depreciate without maintenance. Your landlord pays for that depreciation by raising rent.

Let's flip this around. Instead of looking at a home as a bad investment, why not run comps against the rental and see what the equivalent cost to own it would be? It just might be that in your market the price to buy is lower than to rent (or not). The only valid comparison, though, is deciding on the cost to rent or buy each property. One can't compare property A against property B if they are not in equivalent neighborhoods, size, age, etc. Comparing the cost to buy a 3500sqft home to a 1200sqft apartment and declaring superiority of renting (or owning) is a strawman.

Only in the same way that comparing buying a Ferrari to leasing an Accord is a strawman.

[rec7]

I get the point, that buying a house isn't always the right thing to do. But any evaluation of housing as an investment has to include the dividends- the free rent. If the house value keeps up with inflation, AND kicks out dividends every month, that seems like a pretty good investment to me. In reality, the house depreciates and the land appreciates at something close to inflation. One interesting aspect is that housing value increases as calculated by realtors are biased- they just take the average of home sold. Demolished homes don't count. The Case Shiller Index is more accurate (and less impressive) in that it uses the same properties.

What study shows that a house's value depreciates at something close to inflation? Perhaps in some markets, but not in any of the markets I've ever lived (I've lived in several large metro areas). That would mean a house built before 1980 or so has a negative value. I grew up in a neighborhood built in the late 1940s and all the houses are still standing and have a positive value. My parents paid $16000 in 1967 ($112K in 2013 $s) - the house has appreciated far beyond inflation. Maintenance was done throughout the years, but most done by my parents & brothers, including re-roofing.

I look at my house as a savings account. Every payment on principle is a payment to me. Interest can be considered rent with a tax benefit. Any appreciation in my house's value is icing on the cake. A house like mine (or a much smaller 3 BR apt) would easily rent for the amount of my 15-year mortgage (including taxes & insurance) so it wouldn't make sense for me to rent such a house (and I'm not willing to live in a tiny 1 BR apt). I absolutely hate renting. I do most home maintenance on my own - if you hire someone, yes, your costs can quickly become astronomical. I enjoy most of it - it's like a creative outlet for me. Aside from re-roofing and major plumbing or electrical work, I will attempt to do it myself, as I know I can do it as well as all but the best (and I don't want to pay the price the best deserve).

I guess if you live in a high priced housing market, the calculation may be different. But I've made career decisions to not go after jobs in such markets - I think it's crazy to live in such markets. (If you rent & have pets, especially dogs, it can become almost impossible to find options, and those that are available are either in crummy neighborhoods or come with some sort of additional, often monthly, fee.)

Once the house is paid for, it's yours. If you rent, you will always have rent to pay.
Oh yes, avoid any property with association fees. You have little to no control over how high those get, and how much is wasted.

That wasn't clear the way I wrote it. The land keeps up with inflation. Period. Full stop. The house depreciates. If you don't believe houses depreciate, take a look around at all the homes built in 1850. How much are they worth now? Oh, there aren't any. How about that....why is that? Because it was so worthless someone bulldozed it after 80 years or so.

There is a lot of truth to that how many of us live in a 100 year old house as a percent? I would guess less than 20%

[MindBogler]

Only in the same way that comparing buying a Ferrari to leasing an Accord is a strawman.

Let's try a thought experiment: I have a family of 10. Is that house still a Ferrari? How much living space a family (or person) needs is highly variable. I'll say again, compare rent vs buy on the same property. That is the only comparison which matters. Would you think about buying a Toyota and then compare that to the cost of leasing a VW to determine which one was a better value? Of course you wouldn't, you'd compare cost to buy each vehicle to the other, or the cost cost to lease each. That is an analogous logical disconnect to the one which seems to be advocated freely here with regard to renting.

[avalpert]

Only in the same way that comparing buying a Ferrari to leasing an Accord is a strawman.

Let's try a thought experiment: I have a family of 10. Is that house still a Ferrari?

If the comparative car buyer is a race car driver it might be.

How much living space a family (or person) needs is highly variable.

Absolutely true.

I'll say again, compare rent vs buy on the same property. That is the only comparison which matters.

But this doesn't follow above - comparing rent vs. buy on potential substitutes matters as well. If all you need is a 1200 sq ft. apt. it would not be accurate to focus your decision on buying a 3500 sq ft. house only on the financial comparison to renting that house.

Would you think about buying a Toyota and then compare that to the cost of leasing a VW to determine which one was a better value? Of course you wouldn't, you'd compare cost to buy each vehicle to the other, or the cost cost to lease each. That is an analogous logical disconnect to the one which seems to be advocated freely here with regard to renting.

Not a disconnect at all. If I had decided (prices made up) that all I needed was a $10,000 VW which leased for $100/month but saw that $30,000 Toyota was currently selling for $20,000 even though it still leasing for $300/month it would not be prudent for me just compare the price to the lease for the Toyota.

[Leesbro63]

Let's flip this around. Instead of looking at a home as a bad investment, why not run comps against the rental and see what the equivalent cost to own it would be? It just might be that in your market the price to buy is lower than to rent (or not). The only valid comparison, though, is deciding on the cost to rent or buy each property. One can't compare property A against property B if they are not in equivalent neighborhoods, size, age, etc. Comparing the cost to buy a 3500sqft home to a 1200sqft apartment and declaring superiority of renting (or owning) is a strawman.

THIS is the issue. A house is PART consumption and PART investment. You have to live SOMEWHERE at SOME COST. So you need to compare those costs. Unlike stocks vs bonds which have no consumption component.

[MindBogler]

I'll say again, compare rent vs buy on the same property. That is the only comparison which matters.

But this doesn't follow above - comparing rent vs. buy on potential substitutes matters as well. If all you need is a 1200 sq ft. apt. it would not be accurate to focus your decision on buying a 3500 sq ft. house only on the financial comparison to renting that house.
You're repeating the straw man I'm trying to avoid. I'm arguing that you should compare cost to rent AND buy the same property whether it is for sale or not. Apples to apples.

Would you think about buying a Toyota and then compare that to the cost of leasing a VW to determine which one was a better value? Of course you wouldn't, you'd compare cost to buy each vehicle to the other, or the cost cost to lease each. That is an analogous logical disconnect to the one which seems to be advocated freely here with regard to renting.

Not a disconnect at all. If I had decided (prices made up) that all I needed was a $10,000 VW which leased for $100/month but saw that $30,000 Toyota was currently selling for $20,000 even though it still leasing for $300/month it would not be prudent for me just compare the price to the lease for the Toyota.
Once again, how about a direct comparison? You're using the same form of straw man argument. You would compare two vehicles with a value $10,000, not 10k to 30k. I'm arguing that unless you compare equal homes, you can't declare renting superior to buying (or vice versa).

[avalpert]

I'll say again, compare rent vs buy on the same property. That is the only comparison which matters.

But this doesn't follow above - comparing rent vs. buy on potential substitutes matters as well. If all you need is a 1200 sq ft. apt. it would not be accurate to focus your decision on buying a 3500 sq ft. house only on the financial comparison to renting that house.
You're repeating the straw man I'm trying to avoid. I'm arguing that you should compare cost to rent AND buy the same property whether it is for sale or not. Apples to apples.

Would you think about buying a Toyota and then compare that to the cost of leasing a VW to determine which one was a better value? Of course you wouldn't, you'd compare cost to buy each vehicle to the other, or the cost cost to lease each. That is an analogous logical disconnect to the one which seems to be advocated freely here with regard to renting.

Not a disconnect at all. If I had decided (prices made up) that all I needed was a $10,000 VW which leased for $100/month but saw that $30,000 Toyota was currently selling for $20,000 even though it still leasing for $300/month it would not be prudent for me just compare the price to the lease for the Toyota.
Once again, how about a direct comparison? You're using the same form of straw man argument. You would compare two vehicles with a value $10,000, not 10k to 30k. I'm arguing that unless you compare equal homes, you can't declare renting superior to buying (or vice versa).

If buying tends to drive people into over-purchasing then that certainly should be taken into account when deciding which is superior.

[MindBogler]

If buying tends to drive people into over-purchasing then that certainly should be taken into account when deciding which is superior.

Now a red herring. Even if that assertion were true, that doesn't refute anything I said previously. Can we at least concede that a direct comparison is the only valid one?

[MnD]

The home I purchased for $108K using money in an investment account and leverage (effectively margin) in 1991 will be sold in a few years for around $400K and the money will be deposited into an investment account. How is that not an investment? It is not consumed.

Pretty much everything else I buy is consumed, donated or sold for pennies on the dollar. I do have some collectibles that are worth much more than what I paid for them. I consider those to be investments also. Just because something is tangible doesn't mean it cannot be an investment. The financial product industry wants you to ignore tangible investments so you will feel poorer and thus save more and buy more stock/bond/fund products from them.

Homes have a high ER, but all those expenses are on average paid by renters in the form of higher rent.
Landlords aren't in the charity business.

[avalpert]

If buying tends to drive people into over-purchasing then that certainly should be taken into account when deciding which is superior.

Now a red herring. Even if that assertion were true, that doesn't refute anything I said previously. Can we at least concede that a direct comparison is the only valid one?

If the only thing being compared is whether it makes more sense to buy or lease this entity than a direct comparison of buying and leasing that entity is the only valid one. If the comparison is a broader investigation over whether someone will be financially better off owning a home or as a renter you will need a broader comparison.

[MnD]

If buying tends to drive people into over-purchasing then that certainly should be taken into account when deciding which is superior.

Some people over-rent because the observe (correctly) that they are not directly responsible for the large pool and sauna, gym, window-washing 10 stories up, extensive gardens and landscaping, water features etc. The don't mind paying for it and they do pay for it, but they wouldn't purchase those same amenities.

You see the same sort of thing in auto leasing. The large majority of luxury vehicles are leased in many major metro areas.

It can go either way, but your contention that buying promotes over-purchasing versus what one would rent doesn't hold up to common sense observation.

[avalpert]

The home I purchased for $108K using money in an investment account and leverage (effectively margin) in 1991 will be sold in a few years for around $400K and the money will be deposited into an investment account. How is that not an investment? It is not consumed.

You have been consuming it for over two decades and paying to repair the impact of that consumption.

. Just because something is tangible doesn't mean it cannot be an investment.

I don't think anyone here said that - in fact (though I didn't review every post) I don't think anyone here said real estate can't be an investment (say as a rental property).

The financial product industry wants you to ignore tangible investments so you will feel poorer and thus save more and buy more stock/bond/fund products from them.

And the real estate industry wants you to ignore the consumptive nature of your home so you will be more easily persuaded into buying a bigger one.

Homes have a high ER, but all those expenses are on average paid by renters in the form of higher rent.
Landlords aren't in the charity business.

But landlords can reduce the total costs by taking advantage of economies of scale, pooling cash flow risk associated with the one-off big costs associated with maintaining a home etc. such that they should be able to get costs lower than an individual landlord and thus pass it on to renters in the form of lower rent.

[georgewall42]

The dominating factor in renting vs. buying is typically based on lifestyle, as it should be.

Most first time buyers buy because they want more space, either for an existing family or potential future family members, a yard, a quiet street, or a sense of permanence that comes with owning a house. And most such buyers end up paying a premium over what they currently spend on rent, because they want that lifestyle, and are willing to pay more money for it.

Most folks that stay renters (or become renters) either don't want or need the space, hate doing yard work, want the freedom to move, don't want to deal with a Homeowners Association, or simply can't afford to buy without going deep into debt. Again, a lifestyle decision.

Because of these lifestyle factors (which are hugely important), the renting and owning markets are very different, and making accurate comparisons on which is a better investment are difficult, as the needs are different for each family. Quantifying the benefits of those lifestyle tradeoffs is impossible, but not every decision in life needs to be or should be quantifiable.

Comparing the cost to buy or rent a 3500 sq foot is an interesting exercise, but a much smaller percentage of renters than buyers go for 3500 sq foot houses.

Comparing the monthly ownership cost of renting vs. buying is actually quite complicated once you factor in the opportunity cost of the down payment; the inflation factors for rent, taxes, and maintenance, which do not necessarily track perfectly; and the possibility of refinancing mortgages or adding on to the house; or the amount a renter or homeowner may spend on ancillary items based solely on their decision.

Turns out most folks actually do OK on their homes as an investment. Why? Because an investment that historically keeps pace with inflation and provides you with a place to live at the same time is actually a pretty darn good investment. Many so-called investments do not keep pace with inflation, and none provide a place to live.

[MindBogler]

If the only thing being compared is whether it makes more sense to buy or lease this entity than a direct comparison of buying and leasing that entity is the only valid one. If the comparison is a broader investigation over whether someone will be financially better off owning a home or as a renter you will need a broader comparison.

We obviously agree on the first point. If we assume that a hypothetical person wants to decide if he/she should own or rent then the the only valid comparison is between equal, or substantially similar, situations (this is my argument). Your argument is a totally different one whose basic premise is: people who buy homes purchase more than they need, therefore renting is better than owning.

[Leesbro63]

One factor not yet discussed here is the issue of forced savings. That doesn't mean that buying is the least costly long term way to provide shelter. But for many non-Boglehead types paying on a mortgage versus renting and spending any savings makes buying the better choice. It forces saving that otherwise would not occur.

[avalpert]

One factor not yet discussed here is the issue of forced savings. That doesn't mean that buying is the least costly long term way to provide shelter. But for many non-Boglehead types paying on a mortgage versus renting and spending any savings makes buying the better choice. It forces saving that otherwise would not occur.

The experience of the last decade may suggest that the forced savings of a mortgage payment isn't very effective with those people for whom it would be most beneficial. Of course, a 401K is a better option for forced saving, setting up automatic deposits into a mutual fund account from checking takes almost no effort in the computer era, and maybe learning the discipline of not spending money just because it is there would provide the better long term payoff.

[swaption]

When you use the credits in the a prepaid tuition plan you are consuming it - when you purchase those credits you are purchasing an investment product that is guaranteeing (with caveats in mots cases so do read the terms carefully) a rate of return tied to a specific inflation rate. That is nothing like what is going on when you purchase a house.

You say one is nothing like the other, but you offer no rationale, which essentially means you are saying nothing. In both cases you allocating capital currently that can be expected to reduce necessary expenditures in connection with future consumption.

[LadyGeek]

Choosing between buying or renting a home is a source of constant debate on this forum. I don't see any added value to continue here, this thread has run its course and is locked. See: Forum Policy

Locked Topics

Moderators or site admins may lock a topic (set it so no more replies may be added) when a violation of posting policy has occurred. Occasionally, even if there are no overt violations of posting policy, a topic (or thread) will reach a point where the information content of the discussion has been essentially exhausted and further replies are much more likely to cause distress to the community than add anything of value.