Why do Bogleheads buy houses?

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linuxizer
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Post by linuxizer »

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.
There's a staggering amount of sampling bias here. Simple averages prove zilch--and I say this as someone who believes that, given reasonable parity between mortgage payments and rent, homebuying makes a lot of sense. This study doesn't make the case, however.
bluto
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Post by bluto »

VictoriaF wrote:Advantages of home ownership:
1. subsidized by the government (tax breaks on mortgage interest and sale profit).
2. forced savings (for those who need to be forced).
3. better place to raise children.
4. community roots.
5. freedom to remodel.
6. more space for holding social functions (parties, sleep-overs).

Disadvantages of home ownership:
1. difficult to relocate after losing a job or for a better job.
2. being stuck in suburbs with a long commute.
3. being stuck in suburbs with difficult access to culture.
4. time and money for the house upkeep.
5. time and money for house improvements.
6. buying too much "stuff"
7. difficulty maintaining when one becomes very old.
8. susceptibility to Black Swans (earthquakes, hurricanes, dirty bombs).
9. economic risks (Detroit).
I wonder how much of advantage #2 is eaten by disadvantage #6.

My friends tend to compliment their new homes with new furniture, kitchen appliances, etc. This is appropriate, if you think your home is a status symbol. Of course you'll want to keep up with the neighbors too.

I want to own a home some day, but feel fortunate that my situation has enabled me to hold off on the home, and all the accessories for the a while.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote: 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.
Unleveraged purchase of a home is an even worse financial investment relative to almost anything else that offers a positive real return: TIPS, nominal bonds, equities. Where I live, buying a home would cost me 20 years of rent in an unleveraged purchase. If I allow for the costs of the homeowner such as property taxes, maintenance, and insurance it would be even worse.
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stratton
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Post by stratton »

bluto wrote:
VictoriaF wrote:Advantages of home ownership:
1. subsidized by the government (tax breaks on mortgage interest and sale profit).
2. forced savings (for those who need to be forced).
3. better place to raise children.
4. community roots.
5. freedom to remodel.
6. more space for holding social functions (parties, sleep-overs).

Disadvantages of home ownership:
1. difficult to relocate after losing a job or for a better job.
2. being stuck in suburbs with a long commute.
3. being stuck in suburbs with difficult access to culture.
4. time and money for the house upkeep.
5. time and money for house improvements.
6. buying too much "stuff"
7. difficulty maintaining when one becomes very old.
8. susceptibility to Black Swans (earthquakes, hurricanes, dirty bombs).
9. economic risks (Detroit).
I wonder how much of advantage #2 is eaten by disadvantage #6.
If you have one, or more, storage units for stuff over a long period of time you really need to think about dumping the "stuff" because its not being used and is eating money. Buying a home and using the storage budget as part of the mortgage & property tax or rent expenses is a better use of funds.

If you haven't used the "stuff" for a couple of years you should probably sell it, give it a way or toss it.

Paul
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Post by diasurfer »

LH wrote: 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.
I simply offered myself as a example of how saving the difference between renting and buying doesn't have to be difficult. I wasn't implying this was right for you. As investors who can afford to max-out tax-deferred retirement accounts, neither of us are typical.
LH wrote: 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.
A mortgage payment equal to my current rent would buy a 2BR condo or a junk house in a sketchy neighborhood. I am renting a 3BR home in a good neighborhood with a beautiful view of the city and ocean.
swaption wrote: 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.
Your certainty is totally unfounded. I don't recall any posts claiming renting is always better. There are posts claiming it depends on circumstances. I will provide an example.

The owner's/landlords of my home are a group of siblings who inherited the home, which was probably paid-off sometime in the 80's, when their parents died. They have chosen to rent and split the income stream rather than sell the house. I pay slightly below market rate for rent - slightly below probably because they value quality tenants such as myself and want to keep us. My rent is $1850 and they could probably get $2100 or so. The world is not filled with these landlords. There are good and bad landlords just like there are good and bad tenants. [BTW there are landlords who bought at the top and are now renting their places at a loss. They are not generous, they are idiots.] I don't know why my landlords didn't sell during the bubble. Maybe they want to pass the house on to one of their kids to live in after college, and I'll have to move out in a few years. It's a chance I'm willing to take. Here's why:

The house across the street, which is somewhat larger, sold for $850K a year ago. Zillow.com puts a value of about $671k on our house today and it was well into the 700's near the peak as I recall.

Using the NYT rent vs buy calculator, the following assumptions were made. Default values: 1% annual home appreciation, 2% inflation, and 3% annual rent increase. 5% return from investments. Choices: 25% tax bracket, 0.35% property taxes (Hawaii's are low), 20% down payment, 30 year mortgage (edit: at 5.5%).

Results:
for $671K (current Zillow estimate) purchase price
Total Buying Costs: $2,452,375(includes selling home after 30 years)
Total Renting Costs: $1,904,481
I come out $500K ahead after 30 years by renting. Note if you want to say "but you have to find a place to live" then under "Total Buying Costs" you need assume you haven't sold your house, which is now worth $850K, add that to the cost of buying, and now I have an extra $1,350,000 by renting to apply toward finding some place to rest my weary head.

for $516750 purchase price
Total Buying Costs: $1,909,080 (includes selling home after 30 years)
Total Renting Costs: $1,904,481
The financial break even point will occur if price drops another 23%.

for $400K purchase price
Total Buying Costs: $1,497,986 (includes selling home after 30 years)
Total Renting Costs: $1,904,481
I come out $400K ahead after 30 years by buying. This is where I get interested, because no value has been placed on the amount of time I saved by not mowing the lawn, changing the water heater, freedom to quickly leave the islands, etc. This is probably what the price of the home was circa 2003. I need prices to fall another 40% for this to happen.

A couple of months ago, I considered taking a job at the same salary in Raleigh, NC where I could buy a fat house for $250K and a $1300 mortgage payment. Compare that to my current renting situation and buying becomes a no-brainer. It's going to cost me roughly $1 million over the next 30 years to live in Honolulu relative to someplace like NC on housing alone. I choose to live in a place with high housing costs because money isn't everything in life.

Blanket statements about rent vs buy are nonsense.
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Post by mlebuf »

linuxizer wrote:
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.
There's a staggering amount of sampling bias here. Simple averages prove zilch--and I say this as someone who believes that, given reasonable parity between mortgage payments and rent, homebuying makes a lot of sense. This study doesn't make the case, however.
First, the stats quoted are not of average net worths but median net worths (half have less, half have more.) The average net worth of homeowners in the '07 Survey is $778,200 while renters have an average net worth of $70,600. No doubt, the drastically lower numbers for renters are partially due to many renters being young people who have been gainfully employed for a relatively short time.

Second, no implications can be drawn from the statistics about accumulating net worth. Certainly, lifelong renters can accumulate large net worths and financial independence by investing in things other than their homes. Investing in stocks, bonds, rental property and their own business are all examples of ways one can build wealth other without becoming a homeowner. From what I've read, it's my guess that homeownership is little more than a forced saving at best for most people.

I just reported the stats.
Best wishes, | Michael | | Invest your time actively and your money passively.
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mlebuf
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Post by mlebuf »

linuxizer wrote:
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.
There's a staggering amount of sampling bias here. Simple averages prove zilch--and I say this as someone who believes that, given reasonable parity between mortgage payments and rent, homebuying makes a lot of sense. This study doesn't make the case, however.
First, the stats quoted are not of average net worths but median net worths (half have less, half have more.) The average net worth of homeowners in the '07 Survey is $778,200 while renters have an average net worth of $70,600. No doubt, the drastically lower numbers for renters are partially due to many renters being young people who have been gainfully employed for a relatively short time.

Second, no implications can be drawn from the statistics about accumulating net worth. Certainly, lifelong renters can accumulate large net worths and financial independence by investing in things other than their homes. Investing in stocks, bonds, rental property and their own business are all examples of ways one can build wealth other without becoming a homeowner. From what I've read, it's my guess that homeownership is little more than a forced saving at best for most people.

I just reported the stats.
Best wishes, | Michael | | Invest your time actively and your money passively.
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Post by Sunny Sarkar »

diasurfer wrote:A mortgage payment equal to my current rent would buy a 2BR condo or a junk house in a sketchy neighborhood. I am renting a 3BR home in a good neighborhood with a beautiful view of the city and ocean
Depends on where you live and when in the real estate price cycle you're looking at it. In Dallas-Fort Worth last year, I was paying $850/month rent for a home that ultimately sold for $95k. I'd be better off owning the place if I wanted to own it. The rent:own ratio favors owning in this area.
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Post by diasurfer »

Sunny wrote: Depends on where you live and when in the real estate price cycle you're looking at it.
Yes! Yes! Thank you!
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Post by linuxizer »

mlebuf wrote:First, the stats quoted are not of average net worths but median net worths (half have less, half have more.) The average net worth of homeowners in the '07 Survey is $778,200 while renters have an average net worth of $70,600. No doubt, the drastically lower numbers for renters are partially due to many renters being young people who have been gainfully employed for a relatively short time.
Median is a form of "average" as well. This becomes particularly apparent when there are an even number of observations--you take the mean of the middle two numbers.
mlebuf wrote:Second, no implications can be drawn from the statistics about accumulating net worth. Certainly, lifelong renters can accumulate large net worths and financial independence by investing in things other than their homes. Investing in stocks, bonds, rental property and their own business are all examples of ways one can build wealth other without becoming a homeowner. From what I've read, it's my guess that homeownership is little more than a forced saving at best for most people.
If no inferences can be drawn, then why point them out?

Aside from simply stating that homeowners obviously are going to be different in their saving and income patterns than renters, on average, there is another piece of evidence. In the 1998 study you presented, homeowners have on average 177-80=$97k in non-home equity assets, whereas renters have only $55k. Therefore there is something going on besides your statement that homeownership is simply forced savings.
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Post by tarnation »

I think it is noteworthy that the Foreclsoure investing thread go no responses and I don't remember a rental real estate investing thread with this much activity. That seems to imply that owning real estate rentals is less controversial than owning your own residence. :)

The consumption part of home ownership will be very difficult value and justify based solely on finances.
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Post by giacolet »

In my area, there is not, has not been in 50 years, a shortage of affordable homes to buy.

Except for persons who can't commit to a five or more year stay in the community, renters are economically marginals who don't have income to qualify for a mortgage or have poor credit history.

Except for this recent downturn, there has never been a reason not to buy as homes in good condition in attractive neighborhoods sell quickly.
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mlebuf
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Post by mlebuf »

linuxizer wrote:If no inferences can be drawn, then why point them out?
Because I thought some people may find them to be of interest. Go argue with someone else.
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Post by avalpert »

mlebuf wrote:
linuxizer wrote:If no inferences can be drawn, then why point them out?
Because I thought some people may find them to be of interest. Go argue with someone else.
Maybe some do but I hope they don't think it is a causal relation. I mean I'm sure I can show similar data comparing people who buy bentley's versus those who buy Kias but nobody would think that buying bentley's is a way to get to higher wealth.
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Post by Valuethinker »

avalpert wrote:
mlebuf wrote:
linuxizer wrote:If no inferences can be drawn, then why point them out?
Because I thought some people may find them to be of interest. Go argue with someone else.
Maybe some do but I hope they don't think it is a causal relation. I mean I'm sure I can show similar data comparing people who buy bentley's versus those who buy Kias but nobody would think that buying bentley's is a way to get to higher wealth.
Which is precisely the problem in 'The Millionaire Next Door'== because it is not a tracking study, we don't know if there are other people, who followed those practices, who are not rich.
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Post by Valuethinker »

VictoriaF wrote:
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...
Housing and politics are different:
1. Housing costs are quantifiable, and politics are not.
2. In some cases, housing ownership does make sense and in other cases it does not. With politics, the other party never makes sense. :wink:

In fact, I think this is an important topic that needs to be brought up regularly. People have a tendency to treat certain facts of life as axioms, and wake up to the possibility that an assumption does not always hold.

House ownership is one of those things that do not have universal applicability. Having a TV set is another. Eating deserts is still another ;)

Victoria
I don't know where to insert this in this thread BUT I would opine:

- big difference between a condominium and a house, in terms of the ownership decision.

A house sits on land, which you own, and in many places (perhaps most places) that tends to appreciate in price (but there is risk the neighbourhood will deteriorate).

Even gentrification can be bad news. My parents live in an area that has systematically gone uphill for 5 decades (it must be them... ;-)). However the latest addition to the neighbourhood of low rise apartment buildings and single family homes is a 51 storey condo tower.

You get the picture. Success has attracted inflows which may, long run, not be a good thing for the neighbourhood.

- condos have an ongoing capacity to inflict you with bills beyond your control (so do houses, but you have more flexibility). And the real estate value is more difficult.

- I think for many people, having a repayment mortgage is a form of forced savings. Since it is highly tax sheltered savings (no capital gains tax) this is pretty good forced savings.

But it may be that your average Bogglehead does not need that security blanket.

My own view is if you buy a home, either buy in a condo building that you know a lot about due to research (talking to existing residents etc.), or buy a house.

And only do so if you plan to stay at least 5 years, and preferrably 10.
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Post by traineeinvestor »

Given that:

(i) all the key variables in determining whether it makes sense to own or rent have a history of fluctuating over time (property values, interest rates, returns on alternative investments and rental levels); and

(ii) personal circumstances differ (tax rates, job security, age, intended period of ooccupancy, savings discipline); and

(iii) there is considerable variation between properties (location, condition),

I would be more than a little bit surprised if many people (outside the real estate industry) had entrenched views of general application one way or the other.

This is one area where I am prepared to be banded a Boglehead apostate and indulge in some market timing (buying when the market is weak, possibly selling out when it looks overpriced), stock picking (choosing one house rather than buying the market) as well as choosing active management (changing the lightbulbs myself) and failing to properly diversify (only living in one property at a time).

At various times, I have been a renter and at times I have been an owner and have been happy with both.
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
swaption wrote: 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.
Unleveraged purchase of a home is an even worse financial investment relative to almost anything else that offers a positive real return: TIPS, nominal bonds, equities. Where I live, buying a home would cost me 20 years of rent in an unleveraged purchase. If I allow for the costs of the homeowner such as property taxes, maintenance, and insurance it would be even worse.
Did you miss the part in my post about living rent free or just chose to conveniently ignore it? Obviously I need to make this simple. Assume you invest in a voucher that enables you to eat free for the next 20 years. At the end of 20 years you can sell the voucher with a 0% real return. What was the return on your investment (in comparison to TIPS if you wish)?

A house is no different. Instead of food, it meets that other basic need of shelter.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote: Did you miss the part in my post about living rent free or just chose to conveniently ignore it? Obviously I need to make this simple. Assume you invest in a voucher that enables you to eat free for the next 20 years. At the end of 20 years you can sell the voucher with a 0% real return. What was the return on your investment (in comparison to TIPS if you wish)?
There is mathematically no way to turn a 0% unleveraged rate of return into a positive NPV or positive IRR transaction. You seem to be confused about your own analogy. It is not as if you did not have a huge outlay of cash at the beginning of the process, so the sale at the end of 20 years is simply getting exactly the same money back (in real terms) that you invested 20 years ago (actually, much less due to tremendous transaction costs). In the meantime, you also had to incur monthly payments of maintenance, property taxes, and insurance. So in your own analogy, the financial return on your unleveraged purchase is negative.

You might argue that the financial return is less negative than renting, but that is a not a slam dunk at all. For one thing, paying rent allows you to invest in positive real return investments, so if the return makes up for the incremental cost of renting (relative to an unleveraged home purchase) you wll be ahead.

Why don't you post some example numbers and show us how with 0% real return buying a home is always better to renting?
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Post by VictoriaF »

Victoria
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Post by giacolet »

Renting is sliding into a non-commited relationship. There is not the same sense of citizenship or sense of community and mutual group responsibility that an owner has.

It's about a sense of tribal identity, a sense of place. The ability to state: this is my place, welcome.
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 preserve »

giacolet wrote:Renting is sliding into a non-commited relationship. There is not the same sense of citizenship or sense of community and mutual group responsibility that an owner has.

It's about a sense of tribal identity, a sense of place. The ability to state: this is my place, welcome.
The ideology that people can actually own land does not promote responsibility at all. Its just like a parent that can't trust their child with their possessions.

If people couldn't own land, there wouldn't be renters that trash it.
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Post by saurabhec »

Valuethinker wrote: A house sits on land, which you own, and in many places (perhaps most places) that tends to appreciate in price (but there is risk the neighbourhood will deteriorate).
I think this is a common fallacy. The land is ultimately valuable only for the rental income it can generate (or save). So it is rising rents that increase property values and not the other way round.

It is true that in many places condos do worse than single family homes, but that reason has more to do with supply and demand patterns of housing stock rather than ownership of land. In a city like Houston, condos will tend to lag single family homes. In a city like New York (esp Manhattan and Brooklyn), there is no such distinction.
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Post by giacolet »

I don't know how "universal" restrictions are throughout the country but there are many circumstances where candidates for elections have to reside in and own property in the district in which they wish to serve.

Similarly, owning property is a requirement for jury duty is some locals.

The restrictions have been lessened in the last 50 years. At one time tenants were 2nd class citizens who couldn't even vote.

Owning property ... it's an American institution.
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 stratton »

VictoriaF wrote:Right, we are in agreement - house (condo) may be a really good purchase. Or it may not be. It all depends. I am just surprised by the aggressive, uncompromising defense of home ownership by some posters in this thread.
I don't understand that attitude either. If a renter can find a place with a good landlord then they can get a pretty good deal. A happy medium can be reached where a good landlord keeps up the property and the renter doesn't break things and pays the rent on time. At that point the renter has a good chance getting smaller rent increases because the landlord wants to keep them. A good deal all around.

There are good things to be said for having someone else repair a broken "whatever" on their dime when you report it. :)

New condominiums can be a financial nightmare because if all the units aren't sold the monthly fees will be raised to cover the portion of homes not sold and you have no idea about building defects. Building defects can take years to show up such as the artificial stucco which attracted water and caused huge amounts of rot. I'm not saying they're all bad, but do your homework.

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Post by anemone »

VictoriaF wrote:Advantages of home ownership:
1. subsidized by the government (tax breaks on mortgage interest and sale profit).
I would argue to new buyers that these subsidies have a hidden cost, in that housing prices are now higher than they would have been without the subsidies. How much would a house costing X be worth if the mortgage interest deduction were suddenly disallowed? Less than X, I guarantee. The new tax break on sale profit was terrific for existing holders of real estate, but essentially raised prices for all future buyers.
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Post by VictoriaF »

Victoria
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Post by Valuethinker »

anemone wrote:
VictoriaF wrote:Advantages of home ownership:
1. subsidized by the government (tax breaks on mortgage interest and sale profit).
I would argue to new buyers that these subsidies have a hidden cost, in that housing prices are now higher than they would have been without the subsidies. How much would a house costing X be worth if the mortgage interest deduction were suddenly disallowed? Less than X, I guarantee. The new tax break on sale profit was terrific for existing holders of real estate, but essentially raised prices for all future buyers.
Economists have gathered evidence on this.

I believe that it is estimated that 50-100% of the affordability increase afforded by government tax incentives to own homes, are gobbled up in higher home prices. This is particularly true in what economist Paul Krugman dubbed in one of his columns as 'Zoneland' (vs. 'Flatland') ie along the coasts where zoning codes tend to restrict the construction of new housing (as opposed to say, Dallas, or Pheonix, where prices don't tend to rise faster than real incomes, long run, because new suburbs are always being opened up).

If we were to include the subsidy inherent in the Fannie Mae and Freddie Mac effective credit guarantees by the US government, we might get an even higher level of capitalization of tax benefits in home prices.
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Post by Valuethinker »

VictoriaF wrote:[
Right, we are in agreement - house (condo) may be a really good purchase. Or it may not be. It all depends. I am just surprised by the aggressive, uncompromising defense of home ownership by some posters in this thread.

Ok, here is an example. Let's assume that I have $500k in cash. I can spend this money in two ways:
1) 20-year old 2-bd condominium in my neighborhood.
2) SPIA paying inflation-indexed $1,500 per month that would cover my rent for as long as I live.

With option (1) I would additionally have to pay every month $400 in fees and $400 in taxes. There will be special assessments and other expenses.

With option (2) I can live wherever I please. If I want to go traveling in India for a year, my annuity will be accumulating in a savings account.

In my case, buying in the area I live -- and want to live -- is not justified. Not now, not at current prices. Others perhaps made prudent buying decisions, but they should not forcefully promote home ownership as an undeniable fact of life.

And the reason it concerns me is that the society (the culture, the media, friends-and-family) propagates some questionable rules, and people do not realize that they can and should challenge these "rules." Here are some examples of assumptions that frequently go unchallenged:
- Everybody has TV and cable.
- Universal meals are a toast and orange juice for breakfast, pizza and a soft drink for lunch, peanut butter-and-jelly sandwich for a child.
- Cars are used even for very short distances.
- Smart money invests in funds that had the greatest last-year gains.
- ...
- Renting is for losers.

And people who would ridicule some of these common behaviors are still dead-set on home ownership.

Victoria
The common behaviours are easy to ridicule, because we visit Japan or Western Europe (or Toronto or Montreal) where people do not live that way.

On home ownership, the one thing to watch is that, over time, rents tend to rise faster than inflation. This is a function of market created shortages (in the Soviet Union, the government created the shortages, in the United States, zoning laws prevent entrepreneurs from addressing shortages in rental housing, and rent controls make it worse). And also because real incomes rise faster than inflation, so non-necessities (like living in more than a rented bedroom in someone's house) also tend to suck up more of our personal expenditure.

It's hard to construct a financial market protection against rental inflation. A portfolio of rented REITs perhaps.

The economist Robert Shiller has suggested that we create futures markets in things like unemployment, housing prices, to reduce the risk to individuals of these events.

A house is a tie, there is no doubt about it. And a ticket to endless expense and hassle. I suggest to people that they only buy a house, if they plan to live in an area for at least 5 (and maybe 10) years, to be sure to be able to ride the housing cycle.

FWIW most places in the US, even now, I don't think anyone should be in any hurry to buy a home. But if you have a greater than 10 year view, it's probably a time to consider it (maybe wait until 2010-- houses are very unlikely to recover quickly, and things could yet get worse).
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Sonoran
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Post by Sonoran »

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

I know why I do and it's pretty simple -

Peace of mind. Once it's paid off (it is), it's mine, I own it and no matter what happens, I have a place to live.

Of course, I have to pay taxes, insurance and upkeep, but those costs are minimal and affordable even with a lower income level.
Beware of little expenses. A small leak will sink a great ship - Benjamin Franklin
linuxizer
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Post by linuxizer »

VictoriaF wrote:Ok, here is an example. Let's assume that I have $500k in cash. I can spend this money in two ways:
1) 20-year old 2-bd condominium in my neighborhood.
2) SPIA paying inflation-indexed $1,500 per month that would cover my rent for as long as I live.
The SPIA seems like an unfair comparison because the only reason the payments get as high as they do is that you are left with no assets to pass on when you die. The proper comparison would I suppose be with a reverse mortgaged house. That said, in many jurisdictions it obviously makes bad financial sense to buy, as numerous examples given here attest (i.e. Hawaii). In other places also previously noted by others, it makes bad financial sense to rent (i.e. Florida). Like VictoriaF, I don't quite understand why everyone wants a bright-line rule.

In Pennsylvania, you "own" the land--just not the rights to any coal found below it. These concepts are not as rigid as they seem sometimes.
Last edited by linuxizer on Sun May 31, 2009 1:18 pm, edited 1 time in total.
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giacolet
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Post by giacolet »

VictoriaF wrote:
I would not want to be a defendant in front of such a jury.
Of course you wouldn't. They would not be a jury of your peers. They would be owners and you're a tenant.

If you rent a condominium you can't even vote on Association matters, so you have a problem if your dog is too fat or your Management Association is lax on maintenance issues.

If you have too many non-owner occupied units that exceed conventional lender's guidelines, mortgage money for resales is restricted. FNMA and FredMac do not want to invest where there are too many renters because the overall facts prove renters to be unreliable in making payments and maintaining the property, all of which leads to a high turnover in occupancy and a deterioration in property values.
May your heart always be joyful. | May your song always be sung. | May you stay forever young. | ----Bob Dylan
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VictoriaF
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Post by VictoriaF »

Victoria
Last edited by VictoriaF on Wed Feb 23, 2011 2:24 pm, edited 1 time in total.
chaz
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Post by chaz »

VictoriaF wrote:
giacolet wrote:VictoriaF wrote:
I would not want to be a defendant in front of such a jury.
Of course you wouldn't. They would not be a jury of your peers. They would be owners and you're a tenant.

If you rent a condominium you can't even vote on Association matters, so you have a problem if your dog is too fat or your Management Association is lax on maintenance issues.
I see a fundamental difference between voting on the condominium association bylaws -- that I accept when I move in or can ignore by moving to another place -- and being on trial in the American court of law where the jury is selected based on home-ownership.

Victoria

Victoria, You are safe. I predict you will never be a defendant in a criminal case.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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VictoriaF
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Post by VictoriaF »

Victoria
Last edited by VictoriaF on Wed Feb 23, 2011 2:24 pm, edited 1 time in total.
chaz
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Post by chaz »

VictoriaF wrote:
chaz wrote:
VictoriaF wrote:
giacolet wrote:VictoriaF wrote:
I would not want to be a defendant in front of such a jury.
Of course you wouldn't. They would not be a jury of your peers. They would be owners and you're a tenant.

If you rent a condominium you can't even vote on Association matters, so you have a problem if your dog is too fat or your Management Association is lax on maintenance issues.
I see a fundamental difference between voting on the condominium association bylaws -- that I accept when I move in or can ignore by moving to another place -- and being on trial in the American court of law where the jury is selected based on home-ownership.

Victoria

Victoria, You are safe. I predict you will never be a defendant in a criminal case.
Chaz, You missed my point.
Sorry, I didn't miss your point, I was just injecting a little humor.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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Post by chaz »

P.S. Our jury system is based on English common law - land owners were held in high regard, and that has trickled down to us.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Ouremblemdear
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Post by Ouremblemdear »

Great discussion.

I've heard landlords complain about the damage that tenants do to their apartments; does anyone know if there has been any research that documents that renters cause more damage than owners?

If renters tend to damage their homes to a greater extent than do owners, how come rents don't include a more significant premium to offset these damages? (Perhaps a premium is already included, but it isn't glaringly obvious because it is modest in size. Or perhaps the value of maintenance conducted by landlords is discounted because many landlords do maintenance themselves and inwardly discount the value of their time.)

It makes me wonder why rental agreements aren't set up to benefit tenants who demonstrate over an extended period that they do not damage their unit (ie. for every 6 months without a maintenance issue, the tenant pays $10 less per month in rent (perhaps inspections every 6 months would also need to be conducted to verfiy that no damage has occured)).
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Post by Ouremblemdear »

Last night I was checking our state sex offender registry and was surprised to find that a sex offender has moved in two doors down from our place. When I paid to pull his police file I learned that he has multiple significant convictions and received/served close to the maximum allowable sentence.

I'm not sure what steps I'm going to take (if any), but I appreciate that my status as a renter allows me to move my family quite easily if that's what I decide to do.
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giacolet
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Post by giacolet »

VictoriaF I object and protest. You are misrepresentating what I stated and I am offended.

Giacolet wrote:
I don't know how "universal" restrictions are throughout the country but there are many circumstances where candidates for elections have to reside in and own property in the district in which they wish to serve.

Similarly, owning property is a requirement for jury duty is some locals.
There is a world of difference between my carefully qualified statement where I state "many circumstances where candidates for elections have to reside ... and "similarly, owning propety is a requirement for jury duty in some locals."

You have overgeneralized my statement to "American," which is not what I said, wrote or meant:
I see a fundamental difference between voting on the condominium association bylaws -- that I accept when I move in or can ignore by moving to another place -- and being on trial in the American court of law where the jury is selected based on home-ownership.
Nowhere did I state or even suggest that all American courts of law select a jury based on home-ownership.

From the days of land grants to Revolutionary War Service Men to current Veterans Administration Mortgages to FHA low downpayment mortgages, a foundation of democracy in the USA is home ownership and not a rental.
May your heart always be joyful. | May your song always be sung. | May you stay forever young. | ----Bob Dylan
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VictoriaF
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Post by VictoriaF »

Victoria
Last edited by VictoriaF on Wed Feb 23, 2011 2:24 pm, edited 1 time in total.
Forty2
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Post by Forty2 »

traineeinvestor wrote:The first (whcih I suspect if of limited relevance to people on this forum) is that paying down a mortgage is a form of forced savings. For those who lack the discipline to save money, home equity often represents a significant part of their wealth.
This assumes that the value of the property at the end of the loan term is worth as much, or more, than the principal and all interest, points, nuisance fees, etc. paid over the term of the mortgage. As we have recently seen, this is not a guaranteed outcome.
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giacolet
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Post by giacolet »

I've been selected to jury duty twice, both for capital murder trials, and they were both emotionally draining cases. I know from the use of my middle name on the summons that my name was selected from the property owner's tax roll.

The following requirements for jury duty are for California and they don't even mention property ownership. The requirements differ from one state to another and have changed with time.
Any U.S. citizen who is:
¥ At least 18 years old.
¥ Able to understand English.
1
1
2
¥ A resident within the courtÕs jurisdiction.
¥ Not a convicted felon.
There are no educational or skill requirements.
Juries are made up of people from all walks of life;
they are supposed to reflect the community. Jurors
are asked to remain impartial during the trial,
weigh the evidence presented to them, apply the
applicable law and attempt to reach a verdict.
How are potential jurors picked?
They are randomly selected from voter registration
lists, Department of Motor Vehicles lists,
telephone directories and utility company lists.
Once summoned to court, prospective jurors make
up the panels from which trial juries are chosen.

Jack Bogle owns his home. Some Bogleheads deviate from his leadership example. There's always that element :lol:

North America by the way includes Canada, Mexico and the United States. America is even larger and includes all the countries of Central and South America. I imagine the West Indies are also part of America named for the Italian geographer Amerigo Vespuci.
May your heart always be joyful. | May your song always be sung. | May you stay forever young. | ----Bob Dylan
swaption
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
swaption wrote: Did you miss the part in my post about living rent free or just chose to conveniently ignore it? Obviously I need to make this simple. Assume you invest in a voucher that enables you to eat free for the next 20 years. At the end of 20 years you can sell the voucher with a 0% real return. What was the return on your investment (in comparison to TIPS if you wish)?
There is mathematically no way to turn a 0% unleveraged rate of return into a positive NPV or positive IRR transaction. You seem to be confused about your own analogy. It is not as if you did not have a huge outlay of cash at the beginning of the process, so the sale at the end of 20 years is simply getting exactly the same money back (in real terms) that you invested 20 years ago (actually, much less due to tremendous transaction costs). In the meantime, you also had to incur monthly payments of maintenance, property taxes, and insurance. So in your own analogy, the financial return on your unleveraged purchase is negative.

You might argue that the financial return is less negative than renting, but that is a not a slam dunk at all. For one thing, paying rent allows you to invest in positive real return investments, so if the return makes up for the incremental cost of renting (relative to an unleveraged home purchase) you wll be ahead.

Why don't you post some example numbers and show us how with 0% real return buying a home is always better to renting?
I have come to the conclusion at this point that there is nothing I can say that will lead you to understand or concede my position. You are going to believe what you clearly want to believe.
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Post by swaption »

linuxizer wrote:
VictoriaF wrote:Ok, here is an example. Let's assume that I have $500k in cash. I can spend this money in two ways:
1) 20-year old 2-bd condominium in my neighborhood.
2) SPIA paying inflation-indexed $1,500 per month that would cover my rent for as long as I live.
The SPIA seems like an unfair comparison because the only reason the payments get as high as they do is that you are left with no assets to pass on when you die. The proper comparison would I suppose be with a reverse mortgaged house.
Of course this extremely valid comment goes flying by without even the hint of a reply. In additional more valid comparison would be just the real component of the return on TIPS, which currently is in the range of 1.75% to 2.25%, depending on maturity. This would give about $833/month to spend on rent. Oh and by the way, you will be taxed on the inflation component of TIPS return, while the inflation return on a house is generally tax free.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote: I have come to the conclusion at this point that there is nothing I can say that will lead you to understand or concede my position. You are going to believe what you clearly want to believe.
It is going to be hard to be convinced merely on the basis of hand-waving or qualitative arguments. If you can setup a small, realistic example of how home buying is superior to renting, or even how an unleveraged home purchase can be a positive real return transaction (if assuming home prices track inflation), it will be much easier to follow your chain of thought.
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Post by tms »

It all has to do with rent expense versus the cost to carry the mortgage. If they are similar, then yes, owning is better.

The dividend of an owner-occupied house is the "rent not paid".
Last edited by tms on Mon Jun 01, 2009 8:49 am, edited 1 time in total.
junior
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Post by junior »

Anybody ever try those renting v. buying calculators on the internet?


There's a complicated looking one over here:

http://www.fhaoutreach.gov/lender/calc/ ... vsBuy.html


They usually say something like "If you keep your house for 7 years, you should buy".

I'm wondering if anyone has a thought on if they are worthwhile.
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Post by saurabhec »

junior wrote:Anybody ever try those renting v. buying calculators on the internet?
I like the NYT calculator. For the inputs I put in that best describe my situation the lowest I could get it to say that buying was better than renting was 20 years. For normal, unbiased inputs, buying for me is never better. That said, I will end up buying a home in the next year or two because of non-financial reasons. I just don't expect to make any great amount of money on it, unless I sell in a real estate bull market.
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curly lambeau
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Post by curly lambeau »

In my neighborhood, in one of the biggest US cities, you can't just compare costs in a straightforward way. The condos are qualitatively different from the apartments.

You can get condos in low-rise buildings with central air, washer/dryer, dishwasher, etc.

Most of the apartments do not have these. If you want them you must live in a high rise. The majority of the small building apartments have not been rehabbed as recently as the condos and do not have the amenities, though the units are larger on average.

So here there are no apples-to-apples comparisons there are simply three totally different options.
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