Why do Bogleheads buy houses?

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Triple digit golfer
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Post by Triple digit golfer »

alvinsch wrote:Did you really mean to call those people stupid or where you just trying to be a jerk by putting words in someone else's mouth who wasn't even replying to you?
I was just trying to be a jerk by putting words in someone else's mouth who wasn't even replying to me.
sport
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Post by sport »

When we bought our first home, the mortgage payment was about the same as an apartment rental payment. During the next 20 years, there was a LOT of inflation, but our payment stayed the same. After 20 years, the house was ours. The payment went to ZERO. Had we rented, we would still be making payments, and much larger ones at that. Buying was a "no-brainer". In addition, we had the benefit of the larger living space and better amenities than we would have had in an apartment. Renting an equivelent house would have been much more expensive, if we would have been able to find one.

During the time of ownership, we had additional expenses, such as taxes, maintenance, and repairs. However, we also built a lot of equity which would not have happened if we rented.

Jeff
dawgs
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Post by dawgs »

All things being equal- I believe buying is better than renting.

1. Building Equity.
2. Not being subject to Rent increases.
3. Also, aren't things like taxes/ maintenance built in to the rent you pay?
4. Freedom to make the changes you want.[/u]
thedude
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Post by thedude »

Say you're a young guy, about to get married, living and working in Boston. You plan on having a family, so you want to live in a place with decent schools, but very close to the city. You identify, say, 2 towns that fit those criteria. 3 bed 2 bath houses in the less expensive of those towns (Newton, MA) start at about 500K. Comparable rentals start at about 2K/month.

Run the numbers. Owning is less expensive if you plan on staying put for e.g. 15 years.

And if you own, you're in charge. You can install the very best appliances (fridge in my rental is probably less efficient than an ice box), rip out the rug or remodel the bathroom (tiles in my rental are disgusting), play musical instruments without disturbing neighbors (which I can't do right now), etc.

It is generally true that in my area, decent apartments in decent neighborhoods rent at exorbitant fees. You have to own if you want quality.
epilnk
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Post by epilnk »

DiscoBunny1979 wrote: Another reason to own a house in California is that if one believes that due to medical issues, they will have medical bills that could be covered under MediCal, the state run welfare medical system for those with low means, a person can own a house outright . . . it doesn't matter the value . . . and still qualify for Medical, providing all taxable financial holdings are limited.
Thank you for posting this. I have a son with a high probability of becoming disabled as an adult, and I have been worried about how to provide some small measure of security that won't need to be completely liquidated before he can get the treatment he needs.

Linda
epilnk
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Re: Why do Bogleheads buy houses?

Post by epilnk »

steadyeddy wrote:And don't get me wrong, I understand when so many of you say, "It's a lifestyle choice, not an investment." But you all make a great deal of significant lifestyle choices in the name of building wealth, and home ownership is a costly enough lifestyle choice, I can't understand why Bogleheads haven't made life-long renting a community ethic.
I don't think you do understand. At least, you don't understand well enough to see why we rate it highly enough to make this choice. As a parent of small children in a community where we want to settle, it's a no-brainer for me. I rented until I was 37, then bought. When we relocated we rented a nice house here while searching for something to buy. I've been happy with each home when it was the right choice.

Why on earth should life-long renting be a community ethic? Why save money and build wealth? Money accumulated without a purpose or goal is just greed. And if you are planning to use that money for something, is a house a less valid goal than a vacation, early retirement, or a $5000 watch?

We're gradually improving the landscaping. We just ripped out the breakfast bar in our dysfunctional kitchen and we are so much happier with the living space. Can't do that in a rental. New floors are next - that will cost us. We're gradually making our home our home.

Our investments are at vanguard, and are in good shape. Unless we hit a black swan, our kids will go to college and we will be able to retire. All priorities are on track.

Linda
AlohaJoe
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Post by AlohaJoe »

dawgs wrote:4. Freedom to make the changes you want.[/u]
People say this but it isn't even remotely true.

If you're one of the 50 million Americans living under CCRs then you definitely don't have these kinds of freedoms. In my friend's HOA he couldn't even repaint his house the same exact color without getting approval. When deer ate a sapling he had to get approval to replant a new one. He was limited to two cats as pets. His neighbors weren't allowed to keep a basketball hoop in their driveway.

And even if you don't have an HOA there are all kinds of restrictions that communities put in place.

Say I want to re-roof with non-fire resistent shingles. I want to install non-GFCI outlets into my kitchen and bathroom. Those are against code? I want to build an addition: I need to get permits and have an architect sign off on the plans?

I want to host a night club in my living room, start a factory out back, keep fifty junker cars that I (slowly) sell for scrap on ebay, and rent out extra rooms and stuff 10 impoverished immigrants into each room.

You mean there are zoning and ordinances and building codes that limit my freedom even when I own a house? Say it ain't so.
kcowan
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Post by kcowan »

We bought our first home before we got married. Upgraded 3 times (4 in total). When it was time to downsize, we could not find what we wanted at the right price. But we stumbled onto a fantastic rental penthouse (3300 sq.ft. with fabulous mountain and ocean views). Still renting it after 14 years.

By adding the home equity to our portfolio back then, it enabled us to retire early 6 years ago. Had we purchased a penthouse, we would have looked good on paper, but would have had to sell it in order to retire.

OTOH we purchased a condo in PV MX 2 years ago because the numbers made sense once we were able to use it for 6 months. (We sublet the penthouse for 6 months.)

Housing is a lifestyle expense (and generally a poor investment). Money can be made through market timing and trading just like other assets.
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LH
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Post by LH »

Buying versus renting:

When you buy, you end up owning. when you rent, you own nothing in the end.

When you buy, the mortgage is forced savings. Its forced savings even for most diehard bogleheads I posit. I posit renters on average, when all is said and done, do not save the differential, they spend it.

For your consideration I give forth the net saving rate was recently zero/negative briefly. Humans need all the forced saving help they can get.

Housing is an investment of sorts I posit. Its part of my net worth, when I want to retire, I can sell it, and use the money to fund things. Its one that does not have a real return expected per se, its a store of value like gold that tracks inflation. To say my home equity, currently 25 percent of my net worth, is not an investment at all, seems kinda bizzarre.

The points above are best shown by the fact that most peoples net worth is in thier home. For good reason, its just how humans work usually. We are human. We may consider ourselves "special" and not need to have the forced savings and such, behavoirally superior to the vast majority, but most likely, we would benefit from it.

You can live in your house and modify it, cant do much with a rental.

When you own the house completely, or have succeeded in driving down the mortgage payment to a really low level, you have a good measure of financial security........ This is not the case with renting. Renting, you always need the income stream to pay the quantity of home you want to live in. Bad times hit, a real depression, you lose your jobs, you and your kids and wife are moving out of the home. Johnny and Cindy do not get thier rooms anymore where you had painted thier names on the wall. Its good bye time. I mean, if you are transient, have no kids, do not care, its a different deal, but home loss is catastrophic often times in real life terms.

Now, you could say, ah, I will rent, and save/invest the difference, and will have the income stream available. I posit you, being human, will likely buy a boat, travel, more new cars, or whatever. Even if you invest it, all of it, it may get hammered down. If your house value gets hammerred down, and you own it, that sucks, but johnny and cindy get to keep their rooms : ) You dont have to sell it.

As opposed to other store of value assets, you do not get "inflation tax" like you would with gold when you sell it, up to what 500K? or something of "gain" is exempt from tax (expectedly near zero gain real long term, still means when you sell that object, you get taxed on the inflation "gain", not so with houses for most homeowners).

So, home ownership has lots of advantages if you think you will be in the same area for tens of years. The breakpoint is oft quoted as 3-5. But its area dependant of course.

Beware the fuzzy math people (perhaps rather beware ignoring the fact you are a fuzzy human, NYT financial expert mortgage blowup article is classic fuzzy human), thats how we got here in the first place. Owning a home is better than renting much more often than not longer term.

ARMS are great, here is the math.

Renting is great, here is the math.

Real world, real humans, home ownership = more net worth at retirement time on average.
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LH
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Post by LH »

AlohaJoe wrote:
alvinsch wrote:Quality of life. Nothing like apartment living where the upstairs neighbor is an early riser and the downstairs neighbor is a late partier.
What does this have to do with anything? The style of housing is orthogonal to how you pay for it.
Renting is not the same thing as Apartment Living.

My entire life growing up I lived in single family homes and we rented every single one of them. Now most of my friends "own" and they have upstairs and downstairs neighbors.
I would posit that the style of housing is not orthogonal to how you pay for it, if by paying for it, you mean the ability of finding someone willing to own the house and rent it to you, versus buying the home yourself via mortgage.

There is usually a limited renting market of a signficant portion of home types. Of the homes I wanted to live in, I did not see advertising for renters, I saw advertising for buyers. The people who were moving out, did not want to rent, they wanted the cash. In a lot of cases, they really needed the cash to buy the new home.

Renting is not the same thing as aparment living, thats true. But Orthogonal goes way beyond that. Even at the lower end, its probably much easier to find rentals, than to buy a unit..... I would think rather that renting versus buying is often dependant on housing style in the real world, its just how the market works.
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House Blend
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Post by House Blend »

LH wrote:When you own the house completely, or have succeeded in driving down the mortgage payment to a really low level, you have a good measure of financial security........ This is not the case with renting. Renting, you always need the income stream to pay the quantity of home you want to live in.
Umm, home ownership requires a permanent income stream as well. Property tax, insurance, and maintenance are nontrivial and forever.

I used a lump of cash to finish paying off my (fixed rate) mortgage in 2004, but according to my accounting, my housing related costs in 2008 were 70% of my old annual mortgage payments in nominal dollars. Roughly 60% of the 70% is property tax. (I include things like lawn and snow removal service and water bills in this accounting, but not gas or electricity.)
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Post by saurabhec »

LH wrote:Buying versus renting:

When you buy, you end up owning. when you rent, you own nothing in the end.
Not the whole story, always need to look at opportunity cost - what alternative use the home downpayment could have been put to. Yes, you own nothing when it comes to owned real estate, but you do own more financial investments (equities, bonds etc.) than you otherwise would. If those investments appreciate faster than your home, then your net worth might be much more.
To say my home equity, currently 25 percent of my net worth, is not an investment at all, seems kinda bizzarre.
I agree that home equity should always be counted as part of one's net worth. I do submit to you that if one could not a) leverage a home purchase b) have capital gains exempt from taxes, then home ownership would almost always end up being a losing bet. The existence of leverage and potential for tax-free gains do make it an attractive investment, but IMHO only if you buy at a fair price and hold on for a long period. The huge transaction costs (~10% on a round-trip) necessitate long term holding periods.
Nelly2013
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Post by Nelly2013 »

As someone has already pointed out, in Silicon Valley (where I live) it is still much more expensive to buy than rent the same property. I believe people bought in 2001 - 2006 because they thought the insane run up in housing prices around here would never stop.

It is also a huge status symbol.

It still makes no sense to me to buy anything around here. Maybe if prices continue to fall another 30% or so.
ziggy29
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Post by ziggy29 »

At some point I think we need to just agree to disagree on the "rent vs. buy" stuff and declare a moratorium on those discussions. It's the same rehash over and over again on both sides, and no one is ever swayed. Come to think about it, that applies to discussions about politics, too...
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Petrocelli
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Post by Petrocelli »

ziggy29 wrote:At some point I think we need to just agree to disagree on the "rent vs. buy" stuff and declare a moratorium on those discussions. It's the same rehash over and over again on both sides, and no one is ever swayed. Come to think about it, that applies to discussions about politics, too...
Actually, if "rehashing" were the stabndard for a moratorium, we cvould eliminate about 50% of the new topics, and be left with conversations about watches and bullets.
Petrocelli (not the real Rico, but just a fan)
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VictoriaF
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Post by VictoriaF »

Victoria
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gizzsdad
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Post by gizzsdad »

For me - it's pretty simple. If I am renting it - somebody is owning it, paying taxes on it, maintaining it, insuring it - and intending to make a profit.

Over the LONG term - rent has to equal the cost of ownership plus a profit.

In the short term market forces(over-building, undersupply) can cause temporary dislocations - making the opposite alternative more attractive. These dislocations can be carefully leveraged for advantage - but we chose to make the long term play 29 years ago - and haven't looked back.
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preserve
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Re: Why do Bogleheads buy houses?

Post by preserve »

steadyeddy wrote:I have read a lot of rent vs. buy threads in the archives, but haven't found a compelling answer:

Why do Bogleheads, so concerned with minimizing expenses and building wealth, buy and (generally) recommend buying homes?.
If you already have wealth, it is a good way to protect part of your assets.

I'm no legal expert, but I think homstead has more legal protection than any other asset someone can own.

Owning something you can legally and physically defend can be important.
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Post by diasurfer »

Opponent Process wrote:I think you're unintentionally requesting and getting a lot of survivorship biased stories here. it's pretty obvious that this topic cannot be generalized. each individual has to run their own rent vs. buy calculation in their area, and factor in other lifestyle concerns.
IMO, one of the few posts on this thread with "general value".

Prices in the market where I live need to fall at least another 40% for buying the house I'm living in to "pay off" vs. simply renting it for another thirty years, and all the "yes but you can't add a bathroom" arguments in the world aren't going to change that. I've never understood the folks making the "but I'll own the place in 30 years" argument - don't you realize a good rent vs. buy calculator accounts for this? BTW my neighbors are quiet and I'm glad I don't have to paint the place or mow the lawn.

Now of course, who knows how to account for black swans? Hyperinflation - probably wish I owned the place. Terrorist sets of a dirty nuke in Pearl Harbor? Probably be glad I'll be leaving my rental behind as I move back to the mainland.
Savergal
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Post by Savergal »

It has become more clear to me after retirement why buying house was a good thing to do. We live in a lovely, comfortable, paid for house for about the same money as it would cost to live in a one bedroom apartment! Yes, our taxes and insurance can go up some, but apartment rent can go up a lot. Also, we will have a home we can leave our child. Homeownership is just one part of a healthy financial life.
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Post by HornedToad »

Assuming reasonable assumptions and prices, houses protect and against inflation and generally are cheaper than renting after 7-15 years...
avalpert
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Post by avalpert »

dawgs wrote:All things being equal- I believe buying is better than renting.

1. Building Equity.
Tell that to people who bought in 2006 - lot of equity built there.
2. Not being subject to Rent increases.
But being subject to the same inflationary pressures in property taxes, utilities, maintenance cost...
4. Freedom to make the changes you want.[/u]
Except for the change of location which takes time and comes with a lot of transaction costs - and occasionally becomes nearly impossible.
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Post by avalpert »

Savergal wrote: Homeownership is just one part of a healthy financial life.
Hopefully the recent collapse will encourage our society to unteach this unhelpful myth.
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Petrocelli
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Post by Petrocelli »

avalpert wrote:
Savergal wrote: Homeownership is just one part of a healthy financial life.
Hopefully the recent collapse will encourage our society to unteach this unhelpful myth.
To people who bought long ago, and are staying put, this recent collapse is a non-event.

You could use the same reasoning to argue against investing in stocks.
Petrocelli (not the real Rico, but just a fan)
traineeinvestor
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Post by traineeinvestor »

This subject seems to bring out a lot of entrenched views whenever it is raised (not just on this forum). The fact that opinions are (i) divided and (ii) often based on personal experience and (iii) (arguably) subject to recency bias, should be enough to conclude that there is no universal answer to the question of whether or not home ownership makes sense.

From an investment perspective, buying into a depressed market and locking in relatively low interest rates on a long term mortgage with a view to staying put for a period of several years sounds an attractive proposition - especially for those who worry about inflation. Of course this begs the question of whether a leveraged piece of real estate with a fixed rate mortgage is a better or worse inflation hedge than TIPS (or similar)?
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Post by saurabhec »

traineeinvestor wrote:From an investment perspective, buying into a depressed market and locking in relatively low interest rates on a long term mortgage with a view to staying put for a period of several years sounds an attractive proposition - especially for those who worry about inflation. Of course this begs the question of whether a leveraged piece of real estate with a fixed rate mortgage is a better or worse inflation hedge than TIPS (or similar)?
I think a leveraged purchase of a home can probably be expected to be a better investment than an unleveraged purchase of TIPS. The fact that upto $500K of capital gains are free from taxes is also a huge advantage, that compensates for the large transactions costs in buying and selling a home.

I was someone who avoided purchasing a home for probably a decade due to valuation concerns and lack of a trigger in the form of extra space requirements due to family etc, but now that I am at the point where my wife and I are thinking of starting a family, the cheap leverage and capital gains exemption make it tempting. Once we feel more comfortable in terms of job security we will probably purchase a home.
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LH
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Post by LH »

saurabhec wrote:
LH wrote:Buying versus renting:

When you buy, you end up owning. when you rent, you own nothing in the end.
Not the whole story, always need to look at opportunity cost - what alternative use the home downpayment could have been put to. Yes, you own nothing when it comes to owned real estate, but you do own more financial investments (equities, bonds etc.) than you otherwise would. If those investments appreciate faster than your home, then your net worth might be much more.
To say my home equity, currently 25 percent of my net worth, is not an investment at all, seems kinda bizzarre.
I agree that home equity should always be counted as part of one's net worth. I do submit to you that if one could not a) leverage a home purchase b) have capital gains exempt from taxes, then home ownership would almost always end up being a losing bet. The existence of leverage and potential for tax-free gains do make it an attractive investment, but IMHO only if you buy at a fair price and hold on for a long period. The huge transaction costs (~10% on a round-trip) necessitate long term holding periods.
The bold part of that is the key, is this really true? Do people end up owning more alternative investments? Maybe. But you gotta figure out what percent people will end up putting in other investments, which they can at any time easily sell. You gotta figure out what you are going to do going forward. I really doubt you will make 100 percent. I would estimate most people would spend at least 50 percent instead of invest. I mean people had negative savings rates just recently. Personally, we hit periods where we are short on money (like when we vacation in europe, or fed tax bill, or whatever) things get tight for a while. You know what we do. -=We pay the mortgage=-, and spend less for a while, ....... If we had MORE free money, maybe we go to europe for an extra couple days, buy a boat, granite counter tops, more new cars, better cars, whatever. If we had free money, that was supposed to go toward stocks, and the wife wants to go buy groceries the last few days of the month, or I want to go ahead and go out to show and eat out, that money is going to buy food not stock. If its the mortgage, the mortgage gets paid.

There is opportunity cost, there is also human behavoiral cost of having "free" money lying around. The reason most humans have a large portion of thier net worth in thier homes at the end is that they are human, they do not hack the put the extra money one would have put into a mortgage into alternative investments that earn more. They hack buy a boat, more lattes every other day, more vacations, or whatever, and have a good time.

yeah, you can do the math and such, but where the pedal hits the medal behavorially, I would say the average human, and the average boglehead, would both benefit from enforced savings.
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Post by VictoriaF »

Victoria
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Post by diasurfer »

I enforce my savings as a renter by having the maximum allowable contribution to my 401k, and wife's TSP, automatically removed. If I had a mortgage (which would be about $1500 a month more than my rent if I bought this house) our contributions would be roughly half what they are today. Easy to enforce the savings through payroll if you just make the decision to do it.
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Post by MossySF »

LH wrote:The bold part of that is the key, is this really true? Do people end up owning more alternative investments? Maybe. But you gotta figure out what percent people will end up putting in other investments, which they can at any time easily sell.
Well if we're talking about the general population, being forced to save is good.

On the otherhand, this topic is in regards to Bogleheads. You'd figure Bogleheads would invest the difference if they could rent at a lower cost than owning.
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Post by giacolet »

I live in the most densely populated county in Florida. The county has traditionally been a retirement mecca featuring +55 communities. Desirable properties for rent are far and few between. In the past, purchasing a new home has been easy and inexpensive.

In this area, rental homes have substantial deferred maintenance. They are in shoddy neighborhoods. The property has title and/or estate problems that make it unsaleable. The landlord fails to maintain the property to code. The property can't pass an energy audit for heating and cooling (essential in Florida).

The termites swarm when it's time to mate. And the landlord won't pay to have the infestations treated. The carpenter ants are as large as armadillos. Palmetto bugs are what Floridians call roaches.

If you have your own place and sufficient pride of ownership, you take care of the problems and don't pass them on to a subsequent tenant.
May your heart always be joyful. | May your song always be sung. | May you stay forever young. | ----Bob Dylan
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Post by diasurfer »

giacolet wrote: The termites swarm when it's time to mate. And the landlord won't pay to have the infestations treated.
What you're saying is that a landlord is too cheap to have his own property protected from termites, so his investment is eaten out from under him. Termite problems are an advantage to owning? It's a worry I'm glad I don't have.

Having lived in both places, I'd say the termites in Hawaii are just as bad as in Florida. When we noticed them on our rental place, even though the house had been "tented" a couple of years ago before we moved in, they tented the place again. We spent the night in a hotel at landlord's expense. And they are thankful to have tenants who give them a heads up when the place needs service (at their expense of course), rather than letting it deteriorate. When you also consider we pay on time every month, then it is understandable that we continue to pay below market rate for rent. Landlords value good tenants.

These are, again, particular examples that prove no rule. Real estate is very local, markets and loan rates are dynamic, and individual financial situations are unique.
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Post by mattymcmatt »

One of the difficulties with these discussions is that everyone is in a different time of their life. I'm 27, single and with a tendency to move quite regularly so home ownership does not make the slightest bit of sense to me. Compare that with someone who is in their 30s or 40s with a family and has lived in the same city for 10 years and you will find that renting makes almost no sense to them.

It comes down to your current situation in life and what you think is best at the current time. That doesn't mean your stance won't change at some time in the future.
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Post by avalpert »

Petrocelli wrote:
avalpert wrote:
Savergal wrote: Homeownership is just one part of a healthy financial life.
Hopefully the recent collapse will encourage our society to unteach this unhelpful myth.
To people who bought long ago, and are staying put, this recent collapse is a non-event.

You could use the same reasoning to argue against investing in stocks.
Well, you can make a good argument that many people probably shouldn't invest in stocks and certainly not has highly as they do.

That and the long term expected return on a house is a lot less than stocks - so it is a rather weak store of net worth.
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Post by bluto »

traineeinvestor wrote: From an investment perspective, buying into a depressed market and locking in relatively low interest rates on a long term mortgage with a view to staying put for a period of several years sounds an attractive proposition - especially for those who worry about inflation. Of course this begs the question of whether a leveraged piece of real estate with a fixed rate mortgage is a better or worse inflation hedge than TIPS (or similar)?
I'm wondering the same thing - for a SFH. If someone had access to 100% financing, at a very low rate - lets say 4.5%, and can buy into a very depressed market, and could rent that property to pay for some of the mortgage - wouldn't they have a very good chance of earning a real return? (yes, 4.5% is difficult for an investment property, but for arguments sake).

Add to this strong demographic trends for SFHs, a good chance of inflation and if the renters don't stay long... a place to visit for the owner? Of course, the market could go much lower too.

In this case is RE an attractive investment, and a diversifier for someone who owns no property?
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Post by notPatience »

Why do Bogleheads buy houses?

This Boglehead buys houses to live in because:

1.) I prefer to be able to make the decisions, prioritize the repairs/improvements myself, rather than to be subject to someone else's choices and/or failure to act.

2.) I prefer to have the maximum say on who legally has access to my home.

3.) I prefer to make payments toward a point when I will no longer need to make those payments, rather than to make payments that have no chance of ever ceasing. (Yes, I know, I'll always pay property tax as a homeowner. As renters will always pay toward the owner's prop tax as a portion of their rent.)

4.) I prefer that my sweat equity is put into something that I own and thus I have a chance of reaping a reward.

I've rented and I've owned and either way I left the places a he** of a lot better than when I moved in. Only when I owned did that bring a benefit beyond a greater ease in living there. I enjoy spotting and tapping into the potential that others don't see. Probably the same reason I've adopted rescue dogs. (I'm not a flipper -- of houses or dogs.)

With three houses, once it came out about even, once I did extremely well (sold the house for six times what I'd paid for it) and this time who knows how it will turn out? In the meantime I'm enjoying the praise for what I've done so far, that the neighbors love me because I'm turning around the neighborhood eyesore :lol: and the satisfaction of doing it. Call it my contribution to recycling.
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greg24
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Post by greg24 »

notPatience, very well said.
epilnk
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Post by epilnk »

This is our third house in 10 years, all in CA. In each case we rolled the proceeds of the sale into the next house. The first house was a fixer and we did a lot of work on it - that one was probably a good investment, though we bought is as a home since a fixer was all we could afford. Our current house is modest and bland, but it has good windows and sits on a lovely piece of property in a good location, and we are gradually making the house less "meh".

Our total mortgage payments (not tax adjusted) are lower than we would spend to rent a comparably sized stucco box in a slightly less desirable neighborhood. If you consider the tax adjusted interest plus property taxes to be equivalent to our "rent", then the payment is slightly more than half of what we'd pay to rent elsewhere. Since we are paying down early our actual monthly payment is higher by choice. This house suits us, and we are adding sweat equity to turn it into something nicer.

We did not buy this house as an investment and we knew that a bubble pop was imminent (in fact the top had already been called in late 2005.) Since buying this house in early 2006 our regional market is down overall by about a third; this area, being desirable, is probably down at most 25% based on what I see around me. Since we have only ever bought what we can afford we are still in good shape - we're still way ahead net. It is hard to see any angle from which this was not a good decision, financially or in terms of lifestyle. But this was of course about lifestyle, which is our priority. This is a home for our family and I consider it consumption, not investment.

Linda
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LH
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Post by LH »

diasurfer wrote:I enforce my savings as a renter by having the maximum allowable contribution to my 401k, and wife's TSP, automatically removed. If I had a mortgage (which would be about $1500 a month more than my rent if I bought this house) our contributions would be roughly half what they are today. Easy to enforce the savings through payroll if you just make the decision to do it.
I already max out all that. Fully funded money purchase plan, fully funded nondeductible traditional ira for wife and myself, fully funded HSA nonspent.

The 15 year mortgage enforced savings is on top of that. Its more enforced savings.

The trick would be to still fund your savings as you do currently, AND get a mortgage on top of it. If its truly either or as you say, then yeah, go your route.

In reality, my choice of having a 15 year mortgage effectively means that I have lived a "lower" lifestyle than I otherwise would have....... I have effectively saved more, and at times, we ran out of money at the end of months. If I had a 30 year mortgage, or rented or whatever, maybe I would have had a boat, and granite counter tops, a new car, more trips, or whatever.

We can both be in agreement here:

If choice between mortgage and renting=fund 401k or not, fund 401k sounds reasonable, though still uncertain to me. Why not spend the same money that you rent with, and BUY a home, pay the same monthly bill, and end up owning it? I am unsure of the math there, my gestalt still says buy, though that may not work in your area. Maybe if you pay 1000 a month in rent, you just cant get the home you need for 1000 in mortgage payment over 30 years? Renting, you are going to be continually paying inflation, versus mortgage, inflation is your pal, mortgage "rent" is always the same. Interesting.
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LH
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Post by LH »

MossySF wrote:
LH wrote:The bold part of that is the key, is this really true? Do people end up owning more alternative investments? Maybe. But you gotta figure out what percent people will end up putting in other investments, which they can at any time easily sell.
Well if we're talking about the general population, being forced to save is good.

On the otherhand, this topic is in regards to Bogleheads. You'd figure Bogleheads would invest the difference if they could rent at a lower cost than owning.
I posit bogleheads are human. Look at the posts on swenson, ferris, swedroes, recent decreases in REIT allocation reccs for instance. Look NYT reporter(not boglehead, but astute in his area) blowing up his mortgage. There have been several capitulation posts. There whole tenor of the board has changed more towards bonds and such noticeably.

Nah, we are very human too. Hopefully better than average, but who knows. Knowleadge sometimes does not equal action.
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Post by MossySF »

LH wrote:If choice between mortgage and renting=fund 401k or not, fund 401k sounds reasonable, though still uncertain to me. Why not spend the same money that you rent with, and BUY a home, pay the same monthly bill, and end up owning it? I am unsure of the math there, my gestalt still says buy, though that may not work in your area. Maybe if you pay 1000 a month in rent, you just cant get the home you need for 1000 in mortgage payment over 30 years? Renting, you are going to be continually paying inflation, versus mortgage, inflation is your pal, mortgage "rent" is always the same. Interesting.
If you can get that deal and will own it for 7+ years to overcome the transaction costs (commissions, closing costs, etc) -- sounds like a good plan. I've done the detailed math and if you hold forever and never incur RE transaction costs other than the first closing, 85:100 rent-vs-own ratio is the general threshold. If you move up every 7 years, then the transaction costs bumps the threshold to roughly 1:1.

Some of us in bubbly locations though are looking at numbers that look more like 60:100. And this is a significant improvement over 2006 where the ratio was 35:100! (Similar units in the building I rented for $1500/mo were selling for $600K back in 2006 -- back down to about $400K today.) Basically in this area, rent/own ratios have been so far out of wack since 2003 that it has made zero sense to buy -- unless you were a flipper and got out before the declines.

So while owning makes sense over the "long term", there's no explicit definition of "long term". In my case, "short term" RE market distortions have lasted almost 7 years. Anybody who bought in 2004-2007 would have to hold for 1000 years before "long term" came around.
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Post by SamB »

I grew up in a two bedroom apartment in the middle of an old industrial city. I do not feel deprived and it is not the end of the world, if you have to grow up in something other than your own house. That said, the advantages to owning rather than renting outweigh the disadvantages for me. Of course you do pay a price and it never seems to end.

The government has pretty much made a house a financial asset because of the tax law, and housing policy. That said, I have never considered it an investment, and in terms of financial planning I do not consider it a means of creating wealth. It is a cost, and can be an extravagance if you are not careful. If I did not do most things myself in terms of maintenance and repair, and even some remodeling I probably would not have taken the plunge.

Sam
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Post by dbr »

As far as I am concerned buying a house is a lifestyle choice that also has financial management implications. The ins and outs will be all over the map relative to individual choices.

It is hard to imagine something like this coming down to a "cheaper to rent/cheaper to buy" decision, which is fairly far down the list of all the considerations that would/should apply for most people.

PS I sure don't know where the "Bogleheads buy houses" strawman comes from.
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Re: Why do Bogleheads buy houses?

Post by swaption »

steadyeddy wrote:I have read a lot of rent vs. buy threads in the archives, but haven't found a compelling answer:

Why do Bogleheads, so concerned with minimizing expenses and building wealth, buy and (generally) recommend buying homes?

I ask this because it seems to me that homes make a terrible long-term investment (unless, perhaps, they are highly leveraged, but that is simply silly). My conclusion is that I must be making a very gray issue into something black and white, but I need some help seeing why it is gray.

And don't get me wrong, I understand when so many of you say, "It's a lifestyle choice, not an investment." But you all make a great deal of significant lifestyle choices in the name of building wealth, and home ownership is a costly enough lifestyle choice, I can't understand why Bogleheads haven't made life-long renting a community ethic.
Yikes! This whole notion is just plain silly. What's even more disturbing is that I don't really see any overtly contradictory replies. Sure, lots of stuff is being written taking this position, but most of that is wrong. The idea that home ownership is in some way uneconomic is nonsense. It is likely the single most prudent economic decision that anyone can make.

The are any one of a number of ways to tackle the issue, but my experience in the past is that it just spirals down into some ridiculous banter. Let's put it simply, if home ownership does not make economic sense as compared to renting, then the world must be filled with with extremely generous landlords/owners, since they surely must be losing lots of money in the process. This is before any consideration of the landlord inefficiencies (i.e. vacancy) and the special tax incentives given to residnetial home owners.
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Post by mlebuf »

According to the 2007 Federal Reserve Survey of Consumer Finances, homeowners had a median net worth of $234,200 while the median net worth of renters was $5,100.

These next statistics are from 1998 but are nevertheless revealing about the net worths of those ages 55 and older. This is from a Harvard U. Center for Housing Studies study: Homeowners fifty-five and older had a median net worth of $177,400 and $80,000 in home equity. Renters 55 and older had a median net worth of $55,000 and zero home equity.
Best wishes, | Michael | | Invest your time actively and your money passively.
saurabhec
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Post by saurabhec »

mlebuf wrote:According to the 2007 Federal Reserve Survey of Consumer Finances, homeowners had a median net worth of $234,200 while the median net worth of renters was $5,100.

These next statistics are from 1998 but are nevertheless revealing about the net worths of those ages 55 and older. This is from a Harvard U. Center for Housing Studies study: Homeowners fifty-five and older had a median net worth of $177,400 and $80,000 in home equity. Renters 55 and older had a median net worth of $55,000 and zero home equity.
So lack of homeownership is the indpendent variable that explains the lower net worth of renters?
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote:The are any one of a number of ways to tackle the issue, but my experience in the past is that it just spirals down into some ridiculous banter. Let's put it simply, if home ownership does not make economic sense as compared to renting, then the world must be filled with with extremely generous landlords/owners, since they surely must be losing lots of money in the process. This is before any consideration of the landlord inefficiencies (i.e. vacancy) and the special tax incentives given to residnetial home owners.
It is not a zero sum game where the choice is either to invest in home ownership or not. From a financial point of view the choice is whether to invest in residential real estate or other financial investments. Of course most people as they raise children have a need for larger space, access to good public schools, so those considerations dominate financial considerations. We all decide to have children although their financial NPV is zero. Similarly we can all decide to own homes even though their financial NPV relative to investing in other assets might be zero. However, there is a large real estate lobby that has drilled into potential buyers that buying a home is a smart financial decision, not just a necessary lifestyle decision.

Expected real return of residential real estate is 0%, although by using leverage you can magnify this (although you pay staggering transaction costs as a % of your equity if you try to monetize this increase). I admit that shelter from capital gains tax shields a big part of this hit, *if* you have real appreciation of your home value, which might not always be the case.
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Post by VictoriaF »

Victoria
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saurabhec
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Post by saurabhec »

VictoriaF wrote: One can argue with me on any of these points and give me examples of how they own a house with a view of the Central Park and vacation in Nice, but the reality is that homeownership is not a no-brainer (I cannot find a good substitute for this double-negative), and it is prudent to question its applicability in one's situation.
Excellent summary. My view is that most home-owners make a virtue out of a neccessity by assiging a high financial value to home-ownership,when it is life-style necesseties that driving the purchase (need for larger space for a family, access to good public schools for kids). The financial investment story works well in real estate bull markets, but not otherwise.
swaption
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
swaption wrote:The are any one of a number of ways to tackle the issue, but my experience in the past is that it just spirals down into some ridiculous banter. Let's put it simply, if home ownership does not make economic sense as compared to renting, then the world must be filled with with extremely generous landlords/owners, since they surely must be losing lots of money in the process. This is before any consideration of the landlord inefficiencies (i.e. vacancy) and the special tax incentives given to residnetial home owners.
It is not a zero sum game where the choice is either to invest in home ownership or not. From a financial point of view the choice is whether to invest in residential real estate or other financial investments. Of course most people as they raise children have a need for larger space, access to good public schools, so those considerations dominate financial considerations. We all decide to have children although their financial NPV is zero. Similarly we can all decide to own homes even though their financial NPV relative to investing in other assets might be zero. However, there is a large real estate lobby that has drilled into potential buyers that buying a home is a smart financial decision, not just a necessary lifestyle decision.

Expected real return of residential real estate is 0%, although by using leverage you can magnify this (although you pay staggering transaction costs as a % of your equity if you try to monetize this increase). I admit that shelter from capital gains tax shields a big part of this hit, *if* you have real appreciation of your home value, which might not always be the case.
This is just so horribly wrong. No real need to get into great detail. Start with the low hanging fruit with the statement that "expected real return of residential real estate is 0%, although by using leverage you can magnify this". Alright, take an unlevered home. After 20 years let's say you get 0% real return. But how about the coupon that you clip every month in the form of living rent free (or extremely subsidized since you still have to pay taxes). And that coupon increases with inflation. Sounds an awful lot like 20 year TIPS, although I suspect the "imputed rent" coupon is higher with a house.
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