Why do Bogleheads buy houses?

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swaption
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
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.
Alright, I’m a sucker. Here is your real world example. Let’s compare 20 Year TIPS to owning a house. The TIPS are easy. As I sit here and type, the real yield on 20 year Tips is 2.30%. My Bloomberg screen does not show 20 year treasuries, so I’ll calculate the implied inflation expectations by taking the average of the 10 year and 30 year, which gets you to about 2.15%, resulting in a total expected TIPS yield of 4.45%. Since we only care about the 2.30% of real yield, why did we have to calculate the total expected yield? The answer is taxes, which are paid on the entire yield. Obviously tax rates vary, but based on 28%, this reduces the 2.30% yield by 1.25%, resulting in an after tax real yield to TIPS of 1.05%.

Now let’s take a house. I have some pretty good proxies for this in terms of rent for value stats as I was recently looking for a temporary rental (during my own home improvements, ultimately decided to tough it out in the basement). Let’s take a house worth $500K. In my area, one could assume a rent of roughly $2.5K, and that’s likely conservative on the low side. I live in a high property tax area, so one could assume about $10K per annum (but at least you get good schools). The property tax is federal tax deductible, so the net expense would be $7.2K (based on the above 28% rate). Maintenance would likely run you about $5K per year.

So a purchaser of the $500k house would then have an annual housing expense of $7.2K for taxes and $5K for maintenance, resulting in a total expense of $12.2K. But you would not be paying rent payment of $30K per year, so the net return on the house would be the difference of $17.8K per year. Based on the $500K purchase price, this is a net real return of 3.56%. This return is generally tax free and it exceeds the similar calculation for TIPS by 2.51% per annum. That's a big advantage for an unlevered asset.
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Post by VictoriaF »

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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote: So a purchaser of the $500k house would then have an annual housing expense of $7.2K for taxes and $5K for maintenance, resulting in a total expense of $12.2K. But you would not be paying rent payment of $30K per year, so the net return on the house would be the difference of $17.8K per year. Based on the $500K purchase price, this is a net real return of 3.56%. This return is generally tax free and it exceeds the similar calculation for TIPS by 2.51% per annum. That's a big advantage for an unlevered asset.
The analogy is not complete because you do not account for the returns earned by the renter on the $500K he invested in positive real return assets. The homebuyer has to invest this (because it was an unleveraged purchase) in an asset that returns 0% real rate (per the conditions you yourself agreed to).
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Post by VictoriaF »

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swaption
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
swaption wrote: So a purchaser of the $500k house would then have an annual housing expense of $7.2K for taxes and $5K for maintenance, resulting in a total expense of $12.2K. But you would not be paying rent payment of $30K per year, so the net return on the house would be the difference of $17.8K per year. Based on the $500K purchase price, this is a net real return of 3.56%. This return is generally tax free and it exceeds the similar calculation for TIPS by 2.51% per annum. That's a big advantage for an unlevered asset.
The analogy is not complete because you do not account for the returns earned by the renter on the $500K he invested in positive real return assets. The homebuyer has to invest this (because it was an unleveraged purchase) in an asset that returns 0% real rate (per the conditions you yourself agreed to).
Alright, perhaps I thought it was clear. The $500K is invested in 20 year TIPS. The choices are the following:

(1) Invest $500K in TIPS and pay $30K per year in rent
(2) Buy a $500K house and pay maintenance and property tax expenses of $12.2K per year

The after tax real return on TIPS is 1.05% per annum. The $30K money not spent on rent is included as part of the real return in (2), which is reduced by the $12.2K (basically your rental expense is reduced by $17.8K per year). The result is an after tax real return of 3.56%.
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Post by swaption »

VictoriaF wrote:
swaption wrote:
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.
Linuxizer's comment was valid but not "extremely valid", because he left out important parts of my original statement, i.e.,
VictoriaF earlier wrote: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.
Furthermore, I consider home ownership a consumption and life-style choice, and so I am not concerned about the residual value of my residence after my death; for me it is $0. This is also the reason why I am not using TIPS in my comparison.

Regards,
Victoria
No, I’m sticking with “extremely valid”. The fact of the matter is that in one scenario you are burning principal and in the other you are not. In comparing from an investment/financial perspective, if you’re not going to do it on an apple to apples basis, then the entire analysis is invalid. You may not care about the house after you die, but it is still a valuable asset. If 10 years before death, one needs long term care in a home, they can sell the house.

Which leaves us with the lifestyle, flexibility, and travel to India considerations. You are right, that these may be benefits to renting, but this comes at a cost to the renter. Perhaps the current housing cycle has now emboldened the universe renters to proudly proclaim that they get all of this and it happens to end up being an attractive financial move as well. Unfortunately, that’s just not the case.
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Post by steadyeddy »

diasurfer wrote:
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.
Wow! This topic has taken off in a way I never expected! Thanks to all for broadening my horizons on the issue.

I think perhaps my greatest downfall was in failing to realize how unique my geographical location is. I live in an area with high home prices compared to rental rates and numerous available rentals, so none of the intangible benefits of ownership could close the pricing gap for me. I extrapolated this scenario to the wide world, and this was clearly a significant miscalculation.

Blame it on youthful ignorance and call it a day. :lol:
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Re: Why do Bogleheads buy houses?

Post by steadyeddy »

swaption wrote:
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.
If there is anything my time poking around this forum and archives have taught me, it is that we all have little concept, both academically and behaviorally, of what will prove to be a good investment over the long time horizon of our lifetimes. I don't believe the landlords near me are generous, nor losing money in the very long run. Even so, they may or may not make more money with an alternative asset allocation; that was the thrust of my original posting.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

swaption wrote: Alright, perhaps I thought it was clear. The $500K is invested in 20 year TIPS. The choices are the following:

(1) Invest $500K in TIPS and pay $30K per year in rent
(2) Buy a $500K house and pay maintenance and property tax expenses of $12.2K per year

The after tax real return on TIPS is 1.05% per annum. The $30K money not spent on rent is included as part of the real return in (2), which is reduced by the $12.2K (basically your rental expense is reduced by $17.8K per year). The result is an after tax real return of 3.56%.
You have stacked the decks completely in a way that makes the analogy irrelevant. First of all, the appropriate benchmark is not TIPS because surely you would agree with me that a home value has more risk than TIPS.

Second if the investor was investing in a taxable account they would not use TIPS. They would invest in a mix of equity funds and bond funds with an expected return greater than TIPS. Note that even if we restrict ourselves to bonds and avoid equities, the Vanguard Intermediate Muni fund is yielding 3.3%.

Also you are not counting all the costs of home ownership such as home owners insurance, security systems etc. Even utility bills tend to larger than in comparable rentals.
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Re: Why do Bogleheads buy houses?

Post by diasurfer »

swaption wrote:
Alright, perhaps I thought it was clear. The $500K is invested in 20 year TIPS. The choices are the following:

(1) Invest $500K in TIPS and pay $30K per year in rent
(2) Buy a $500K house and pay maintenance and property tax expenses of $12.2K per year
Using the NYT rent vs buy calculator with numbers I used above, except your rent, purchase price, home expenses, and a 1% real return, the cost of renting over 30 years is $2,020,985, while the cost of buying is $2,028,183 and you own a $675K home after that 30 years (to express the results as you prefer).


But your example is clearly concocted to prove your point. Why you would think this proves some sort of rule?

I offered myself as an example of a person who can max out his and his wife's 401k through savings realized because our rent that is half of what our mortgage would be. So the return is tax-deferred. And it is invested just like the rest of our retirement portfolio.
swaption wrote: In comparing from an investment/financial perspective, if you’re not going to do it on an apple to apples basis, then the entire analysis is invalid.
You fool yourself if you think you have made an apples-to-apples comparison. The financial issues are far more complicated than your simplistic example. I noticed you haven't once responded to the real world example I present above - a demonstration that the rent vs buy issue from a financial perspective is largely dependent upon purchase price.
giacolet wrote: 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.
I'm sure those home buyers circa 2006 in Phoenix, Vegas, Miami, etc who are a 100K upside down on their mortgage right now nevertheless rest easy at night knowing in their heart that they are true patriots making the world safe for democracy.

At least the OP seems to get it! Living in an area that is still in a bubble tends to focus the mind on these issues.
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Re: Why do Bogleheads buy houses?

Post by 3CT_Paddler »

Who knew that something so seemingly uncontroversial would spark so much debate? :? I think another poster hit on it pretty well that all real estate is local. Some areas may be good buying opportunities and others not so much. It is ingrained into most of us to want some semblance of the life our parents had, and in most of the US that is growing up in a house with your own patch of land. In larger cities that have limited space such as a NYC it may be so expensive to buy that it seems pointless to wrap so much of your net worth in a house. I like having my own space and piece of land that I can manage (even if the work is not always fun), and it is affordable where I live so I chose to buy after renting for a couple years.
saurabhec wrote:[Also you are not counting all the costs of home ownership such as home owners insurance, security systems etc. Even utility bills tend to larger than in comparable rentals.
I would agree that there are a lot of "costs" of home ownership that are not taken into account, but a lot of that is what I would call discretionary home makeover. I would venture to say that most homes don't have security systems (other than a pet :) ) I would think the utility bills would be exactly the same for a house that you could rent or buy. All this to say is that there are examples where buying a home is a good financial decision and more than that a stable place to raise a family.
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Post by 3CT_Paddler »

preserve wrote:
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.
Renters definitely have more of an incentive to not take care of a place they live in. If it breaks the landlord fixes it... if the home owner's house breaks he fixes it. A good comparison is rental cars. People feel free to drive them much rougher than if it was their own cars. It is just reality. I would not put the time I put into my house and yard to keep it up if I was renting. I am not saying renting is a bad option, but when you work on your house you are in a sense working for yourself... which is rewarding to me.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

3CT_Paddler wrote: I would venture to say that most homes don't have security systems (other than a pet :) ) I would think the utility bills would be exactly the same for a house that you could rent or buy. All this to say is that there are examples where buying a home is a good financial decision and more than that a stable place to raise a family.
I agree, it is all in numbers. For example Sunny posted an example where the price/rent ratio was very favorable.
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Post by MossySF »

There is a lot of emotion in these discussions because those who buy and those who rent have vested interest in having the other side (and the undecided) see things their way. The housing market is very prone to human psychology and momentum swings -- the more people homeowners can get to buy into "owning = American dream", the higher the demand for their homes when/if they have to sell. Likewise, renters have an incentive to get people to consider renting because that means less competition bidding up prices when/if they decide the numbers favor buying.
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Post by saurabhec »

MossySF wrote:There is a lot of emotion in these discussions because those who buy and those who rent have vested interest in having the other side (and the undecided) see things their way. The housing market is very prone to human psychology and momentum swings -- the more people homeowners can get to buy into "owning = American dream", the higher the demand for their homes when/if they have to sell. Likewise, renters have an incentive to get people to consider renting because that means less competition bidding up prices when/if they decide the numbers favor buying.
Agreed, but in general the renters buck the conventional wisdom which is that home ownership is a can't-lose proposition. There is a far greater and more voluble lobby touting the virtues home ownership rather then renting. Renting when one can afford to buy is far more likely to incur peer pressure from family and friends in favor of buying a home than vice-versa.
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Post by traineeinvestor »

There is a lot of emotion in these discussions because those who buy and those who rent have vested interest in having the other side (and the undecided) see things their way. The housing market is very prone to human psychology and momentum swings -- the more people homeowners can get to buy into "owning = American dream", the higher the demand for their homes when/if they have to sell. Likewise, renters have an incentive to get people to consider renting because that means less competition bidding up prices when/if they decide the numbers favor buying.
While I agree that there is a lot of emotion in "rent v buy" discussions (and "is your home an investment" threads), and the market being prone to human psycology, as a landlord I respectfully disagree with the rest of the statement:

1. fewer buyers means lower prices = better yields and less competition to find good investment properties (also less new home construction); and

2. more renters = more demand for properties to rent = higher rents and reduced risk of vacancy.
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Re: Why do Bogleheads buy houses?

Post by swaption »

saurabhec wrote:
swaption wrote: Alright, perhaps I thought it was clear. The $500K is invested in 20 year TIPS. The choices are the following:

(1) Invest $500K in TIPS and pay $30K per year in rent
(2) Buy a $500K house and pay maintenance and property tax expenses of $12.2K per year

The after tax real return on TIPS is 1.05% per annum. The $30K money not spent on rent is included as part of the real return in (2), which is reduced by the $12.2K (basically your rental expense is reduced by $17.8K per year). The result is an after tax real return of 3.56%.
You have stacked the decks completely in a way that makes the analogy irrelevant. First of all, the appropriate benchmark is not TIPS because surely you would agree with me that a home value has more risk than TIPS.

Second if the investor was investing in a taxable account they would not use TIPS. They would invest in a mix of equity funds and bond funds with an expected return greater than TIPS. Note that even if we restrict ourselves to bonds and avoid equities, the Vanguard Intermediate Muni fund is yielding 3.3%.

Also you are not counting all the costs of home ownership such as home owners insurance, security systems etc. Even utility bills tend to larger than in comparable rentals.
I would hardly call it stacking the decks. You can use whatever instrument you want as a comparison, including risk free investments and then simply decide if the 2.51% premium is appropriate for the risk. I would say that an unlevered house is relatively low risk in the long term.

I'll give you the nod on home owners insurance, but none of the other items. I don't see any reason why utilities should be more expensive for an owner. Take the example above and perhaps allocate $1K per year for insurance, which should be about right, particular since a renter would also want renters insurance. The return goes from 3.56% to 3.36%.
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Re: Why do Bogleheads buy houses?

Post by swaption »

diasurfer wrote:
swaption wrote:
Alright, perhaps I thought it was clear. The $500K is invested in 20 year TIPS. The choices are the following:

(1) Invest $500K in TIPS and pay $30K per year in rent
(2) Buy a $500K house and pay maintenance and property tax expenses of $12.2K per year
Using the NYT rent vs buy calculator with numbers I used above, except your rent, purchase price, home expenses, and a 1% real return, the cost of renting over 30 years is $2,020,985, while the cost of buying is $2,028,183 and you own a $675K home after that 30 years (to express the results as you prefer).


But your example is clearly concocted to prove your point. Why you would think this proves some sort of rule?

I offered myself as an example of a person who can max out his and his wife's 401k through savings realized because our rent that is half of what our mortgage would be. So the return is tax-deferred. And it is invested just like the rest of our retirement portfolio.
swaption wrote: In comparing from an investment/financial perspective, if you’re not going to do it on an apple to apples basis, then the entire analysis is invalid.
You fool yourself if you think you have made an apples-to-apples comparison. The financial issues are far more complicated than your simplistic example. I noticed you haven't once responded to the real world example I present above - a demonstration that the rent vs buy issue from a financial perspective is largely dependent upon purchase price.
I haven't concocted anything! The guy asked for a numerical example and I gave one. My example does not deal with a mortgage at all. I think it's great that you can now max out on your 401K, but I think that is a variable that is likely a unique circumstance.

Is your comment regarding rent vs buy being largely dependent upon purchase pric supposed to be some great revelation. Kind of like it would be silly for me to pay $150K for a Honda Accord, right? I simply took real world examples from my market, which still might be regarded as a little frothy, so this hadly represents some fire sale price.

I guess I get a little animated in these discussions. The case for renting seems akin to a large crowd nodding in agreement at the wisdom of Solomon's spliting the baby. In the current environment, those with some level of stability and financial resources would be foolish to not give ample consideration to the purchase of a home.
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Post by VictoriaF »

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Post by preserve »

I didn't realize the boglehead philosophy of not timing the market only applied to 401k accounts.
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Post by MossySF »

preserve wrote:I didn't realize the boglehead philosophy of not timing the market only applied to 401k accounts.
Can you dollar cost average into a home?
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Re: Why do Bogleheads buy houses?

Post by diasurfer »

swaption wrote: Is your comment regarding rent vs buy being largely dependent upon purchase pric supposed to be some great revelation. Kind of like it would be silly for me to pay $150K for a Honda Accord, right?
No, I think anyone who's been somewhat paying attention would realize that this country recently had a real estate bubble. I think this would only be a "great revelation" only to someone who would write something like ...
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.
BTW, your analogy is bad - do you know of anyone who would pay $150K for a Honda Accord? On the other hand, there are plenty of examples of people who bought 3 BR houses for $500K that are now worth 60% of that. One the reasons they bought in a bubble (I can only guess) is successful marketing by the real estate industry and the conventional wisdom that says some version of "The idea that home ownership is in some way uneconomic is nonsense."
swaption wrote: I guess I get a little animated in these discussions. The case for renting seems akin to a large crowd nodding in agreement at the wisdom of Solomon's spliting the baby. In the current environment, those with some level of stability and financial resources would be foolish to not give ample consideration to the purchase of a home.
Please, the idea that in the multitude of threads on this topic the last couple of years, the posters arguing for renting making sense in some cases are somehow the "large crowd" is nonsense. Look at this thread again - the pro-renting group in every case has argued "it depends". The loud majority on this board has always argued some version of buying is better, period.

BTW, I have a level of stability with a good job, a new family, and a lot of savings, and I am giving ample consideration to the purchase of a new home. And from where I sit, as my post above shows, it is still not even close to making financial sense. If the market drops another 20-40%, it will.
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Post by Sunny Sarkar »

MossySF wrote:
preserve wrote:I didn't realize the boglehead philosophy of not timing the market only applied to 401k accounts.
Can you dollar cost average into a home?
In a way, the 30 year mortgage is just that - especially if you think of it this way: a scheduled payment 5 years from now is going to be made for a home whose then value is unknown (appre/depreciation) and is going to be made with dollars whose then value is unknown too (inflation).
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Re: Why do Bogleheads buy houses?

Post by Ron »

steadyeddy wrote:Why do Bogleheads, so concerned with minimizing expenses and building wealth, buy and (generally) recommend buying homes?
In our case, it was an effort to reduce expenses in preperation for retirement, in addition to living the lifestyle we wanted in retirement.

We "own" our own home - our 4th since we've been married, 40 years ago.

We are retired (well, at least I am; my wife still continues to "toil", but that's her decision, since she is not "emotionally ready" to retire, even though able to draw SS in less than a year).

Our goal was to enter retirement debt free. Sure, we have taxes and upkeep, but even if we rented, those expenses would be part of the monthly rental cost.

Most importantly? It's a lifestyle we enjoy during this stage of our lives. We've lived in rentals, attached, and single homes. Our current home (built/contracted for us 15 years ago), gives us enough room to "kick around" in (4 BR's, for the two of us), yet offers us a "park like" property (1+ acre) that allows "frisbee room" for our two dogs.

I guess if we were pressed, we would say that it isn't an "investment" (our remainder estate is going to charity), but rather it is a "lifestyle" that we were able to achieve, and enjoy at this time of our lives.

Our retirement income does not depend on the value of our home/property, but our "retirement lifestyle" does 8) ...

- Ron
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Re: Why do Bogleheads buy houses?

Post by Sunny Sarkar »

saurabhec wrote:If you can setup a small, realistic example of how home buying is superior to renting...
It is quite complex to present own versus rent numbers, partly because of the number of variables involved (including whether it's primary residence or investment property) and partly because of the usual unknowns (which will reveal themselves only in the future), so let me try a different method instead - logic.

(1) When you rent, you pay for all of the owners expenses, plus owners ROI (anything less, the renting market would disappear). When you own, you save/keep the ROI.

(2) Consider a time span of 45 years during which you have to live somewhere. You buy today with a 30 year mortgage - your total PITI is higher than your rent last month, but over time the rent keeps increasing while the PITI remains mostly the same - etc. No one knows how the numbers will work out exactly, but let's assume (very defensively) that the total ownership costs over 30 years minus home equity equals total rent over 30 years, i.e. it's a wash. Now, think about the next 15 years. Ummm... yummy!
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Post by MossySF »

Sunny wrote:
MossySF wrote:
preserve wrote:I didn't realize the boglehead philosophy of not timing the market only applied to 401k accounts.
Can you dollar cost average into a home?
In a way, the 30 year mortgage is just that - especially if you think of it this way: a scheduled payment 5 years from now is going to be made for a home whose then value is unknown (appre/depreciation) and is going to be made with dollars whose then value is unknown too (inflation).
So you would take a 30 year loan to buy 1M worth of TSM on 2007? After all, you're buying an asset where the future value is unknown and the dollars you will be using to pay off the loan is also unknown.

This does not sound like dollar cost averaging to me.
Sunny wrote:(2) Consider a time span of 45 years during which you have to live somewhere. You buy today with a 30 year mortgage - your total PITI is higher than your rent last month, but over time the rent keeps increasing while the PITI remains mostly the same - etc. No one knows how the numbers will work out exactly, but let's assume (very defensively) that the total ownership costs over 30 years minus home equity equals total rent over 30 years, i.e. it's a wash. Now, think about the next 15 years. Ummm... yummy!
Less yummy than you think. Think about the numbers as you've laid them out. If they both equal over 30 years and rent goes up with inflation, that means the owner has front-loaded the housing expenses big time. And you should know that with compounding interest, the early money is worth much more. For example, the schedule might look something like:

Year 1: Buy $100K DP + $1000, Rent $750
...
...
...
Year 10: Buy $1100, Rent $1000
...
...
...
Year 20: Buy $1200, Rent $1500
...
...
...
Year 30: Buy $1300, Rent $2000

How much is the $100K plus the first 10 years invested worth? Depends on the return rate of course. At some return rate, the initial amount can grow fast enough where the owner cannot catch up even with no mortgage after 30 years. If you're looking over a 45 year span, it's doubtful you'd pick 100% bonds considering few of us do 100% bonds for our retirement plans over a similar timespan.
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Re: Why do Bogleheads buy houses?

Post by saurabhec »

Sunny wrote:It is quite complex to present own versus rent numbers, partly because of the number of variables involved (including whether it's primary residence or investment property) and partly because of the usual unknowns (which will reveal themselves only in the future), so let me try a different method instead - logic.
Sunny,

I agree with the above, but the poster to which I was having a discussion was arguing a different point, that an unleveraged home purchase with home price appreciation of 0% after inflation would somehow become a positive real return transaction.

You seem to live in a place where housing prices are cheap (based on the monthly rent vs home price you posted). While that might be true for many parts of the US, it is often not true for some metro areas, especially the one I live in.
(1) When you rent, you pay for all of the owners expenses, plus owners ROI (anything less, the renting market would disappear). When you own, you save/keep the ROI.
If you rent a single-family home vs buy a single family home I agree, but for many the choice is to live in a smaller apartment vs buying a larger home. I live in a smaller apartment than I would relative to buying. In a large apartment building there might potentially be economies of scale that a landlord can pass on - plus dividing up a property is one of the ways to create vaue and the landlord needs to make less profit on each renter. Also living in an apartment I don't need to invest in a security system, landscaping maintenance etc and my utility bills will be smaller.

(2) Consider a time span of 45 years during which you have to live somewhere. You buy today with a 30 year mortgage - your total PITI is higher than your rent last month, but over time the rent keeps increasing while the PITI remains mostly the same - etc. No one knows how the numbers will work out exactly, but let's assume (very defensively) that the total ownership costs over 30 years minus home equity equals total rent over 30 years, i.e. it's a wash. Now, think about the next 15 years. Ummm... yummy!
There is almost zero chance I will live in the same property for 45 years. Even if by chance I end up living in the same city for 45 years, it is unlikely that the same place will continue to meet my needs for five decades. Also, transaction costs on purchasing a home are huge, and even larger when you sell. If you can't guarantee living in a home for decades, those transaction costs really hurt your NPV of owning vs renting. I think the average homeowner remains in their home for 7 years. In this globalized economy with decreased job security, it is hard to imagine that anyone can be confident of staying in the same home for such long time frames.

That said, I will be home buyer at some point in the next year or two, but that will be driven by potential expansions in family unit size, and need to access good school districts. Since I would be buying after the housing bubble has burst, I suppose I will be able to send it for a profit after 4-5 years if I have to, but that only underscores that valuations matter.
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Post by sommerfeld »

steadyeddy wrote:I think perhaps my greatest downfall was in failing to realize how unique my geographical location is. I live in an area with high home prices compared to rental rates and numerous available rentals, so none of the intangible benefits of ownership could close the pricing gap for me. I extrapolated this scenario to the wide world, and this was clearly a significant miscalculation.
Yup, you're in an anomaly if it's so obviously better to rent. If you choose to exploit this anomaly by renting you will help the market correct in the long run (more renters, fewer buyers should raise rents and drop sale prices). Think of it as arbitrage.
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Post by Dagwood »

This has been pretty much beat to death, but fwiw, my take is less numbers oriented.

First, we bought a house because we want to own the place where we live. It's a personal choice. I don't want to have to depend on a landlord to do things, and I don't want his or her permission for my dog. Other similar types of considerations are important to my wife and I.

Second, my experience is that once you have kids, it is easier to have a house. Renting for us made more sense when we didn't have kids. Once you have a dog and kids, renting a place that will be big enough, in the cities where we've lived, is very expensive. The monthly rents are significantly higher than the money we'd spend on a mortage. Now of course I know that a comparison of monthly payments is not the whole picture, but as I said, houses have practical value when you have more stuff -- basements for the kids' toys, sheds for lawn equipment, garages for cars and bicyles and things of that ilk.

This is just my "take" on things -- different strokes for different folks is really an appropriate observation in this realm.

To the original poster, I would sum it up this way: thinking about the financial aspects of decisions is certainly smart, and important. But at the end of the day, at least for me, it doesn't drive me to make a decision, it merely informs it. So, if financial analysis informs us that a choice is really stupid, it will be something we consider but it won't dictate what we do if the thing in question is something we really want. Applied here, we bought a house because we wanted a house.
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Post by VictoriaF »

Victoria
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Post by saurabhec »

Victoria,

Regarding the fallacy you point out, in simplified terms, the assumption that people make is that cap rates for a landlord buying a multi-unit income property are identical to a homeowner buying the same property, when it more likely that the landlord uses a higher cap rate in valuing his purchases, i.e. has paid much less on a per unit basis than a homeowner would for a condo in the same building.

Excellent point about how in renting one can focus on just what one values in terms of features, but in purchasing a home one has to value what other buyers will be willing to pay for down the line, which usually means a more expensive home than one might really need.

I completely understand non-financial reasons for purchasing a home - everyone can appreciate the rationale of having a yard for kids, access to great public schools. However I don't see why that lifestyle necessity has to be turned into a financial virtue.

It is also strange that while many Bogleheads will rightly focus on purchase and sales loads when buying and selling mutual funds, they don't seem to appreciate the huge transaction costs of buying and selling a home. In my neck of the woods, transaction costs for buying a home are ~3-5% of home value, and for selling are about ~8-9% of home value.
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Post by Ted Valentine »

nisiprius wrote: Not unless you're a Chicago School theorist who's ready to monetize babies, the moon, and hebben' the whole day long.
:lol:

Great post nisprius.

John C. Bogle is not going to judge our whole lives at the Pearly Gates of Valley Forge. I would hope that people live their lives to enjoy it, not to play some Game of Life where you amass as much coin as possible by choosing the correct philosophy.
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.
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Post by preserve »

MossySF wrote:
preserve wrote:I didn't realize the boglehead philosophy of not timing the market only applied to 401k accounts.
Can you dollar cost average into a home?
No you can't. You can't dollar cost average your university degree either. Doesn't mean you shouldn't go to a university.

Dollar cost averaging isn't the end all of non-market timing strategies.
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Post by curly lambeau »

saurabhec wrote: It is also strange that while many Bogleheads will rightly focus on purchase and sales loads when buying and selling mutual funds, they don't seem to appreciate the huge transaction costs of buying and selling a home. In my neck of the woods, transaction costs for buying a home are ~3-5% of home value, and for selling are about ~8-9% of home value.
I focus on it, and no brokers/realtors/agents/middlemen/MLS monopolists profited from my purchase.
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Post by VictoriaF »

Victoria
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Post by saurabhec »

curly lambeau wrote:
saurabhec wrote: It is also strange that while many Bogleheads will rightly focus on purchase and sales loads when buying and selling mutual funds, they don't seem to appreciate the huge transaction costs of buying and selling a home. In my neck of the woods, transaction costs for buying a home are ~3-5% of home value, and for selling are about ~8-9% of home value.
I focus on it, and no brokers/realtors/agents/middlemen/MLS monopolists profited from my purchase.
In New York, closing costs for buyer can still run to 2-3% of home value even if no brokers were involved. At some pont you will presumably need to sell your home, and most people will need to hire a broker who will charge 6% of your home value (and a much bigger % of your equity) and on top of it there are another 2-3% in closing costs for the seller depending upon value of property. type of property etc.
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Post by Betelgeuse »

curly lambeau wrote:I focus on it, and no brokers/realtors/agents/middlemen/MLS monopolists profited from my purchase.
Explain... I'm in the market and want to know how you did that.
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Post by DWD »

Haven't read all the posts here but a search didn't come up with Forbes which had an article on Buying vs. Renting. They argue that you should look at what you could turn around and rent the house for as a guide to renting or buying. If the net rent (annual rent you could get minus property taxes, insurance, maintenance costs, property manager fees) is greater than 4% of the homes value you should buy and if less than 3% you should rent.

http://www.forbes.com/forbes/2009/0525/ ... -rent.html
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Post by saurabhec »

DWD wrote:Haven't read all the posts here but a search didn't come up with Forbes which had an article on Buying vs. Renting. They argue that you should look at what you could turn around and rent the house for as a guide to renting or buying. If the net rent (annual rent you could get minus property taxes, insurance, maintenance costs, property manager fees) is greater than 4% of the homes value you should buy and if less than 3% you should rent.

http://www.forbes.com/forbes/2009/0525/ ... -rent.html
EDIT: The article actually meant 4% real after-tax, not 4% nominal, so the post below isn't really relevant.

So as I understand it, the article recommends buying when cap rates for a home purchase are as low as 4%. Just as a comparision, even during the height of the commercial real estate bubble, cap rates for the REIT index were around 6%. This is yet another example of why it is a fallacy to believe you are earning your landlords profit if you buy vs. rent (I am implicitly assuming you rent in a multi-unit building).
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Post by saurabhec »

DWD wrote:Haven't read all the posts here but a search didn't come up with Forbes which had an article on Buying vs. Renting. They argue that you should look at what you could turn around and rent the house for as a guide to renting or buying. If the net rent (annual rent you could get minus property taxes, insurance, maintenance costs, property manager fees) is greater than 4% of the homes value you should buy and if less than 3% you should rent.

http://www.forbes.com/forbes/2009/0525/ ... -rent.html
Do clarify, the article did not mention nominal yields, but real after-tax yields. They are comparing long-term muni yields to inflation. I would say the 4% is inflated because of low CPI and high muni spreads right now. 2-3% real is probably a fairer comparision.
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Post by junior »

DWD wrote:Haven't read all the posts here but a search didn't come up with Forbes which had an article on Buying vs. Renting. They argue that you should look at what you could turn around and rent the house for as a guide to renting or buying. If the net rent (annual rent you could get minus property taxes, insurance, maintenance costs, property manager fees) is greater than 4% of the homes value you should buy and if less than 3% you should rent.

http://www.forbes.com/forbes/2009/0525/ ... -rent.html
Although the substance of the article is above my head, I'll point out that a real estate developer told me that "the math doesn't work for renting out a home", which is why developers do not rent out homes the way they rent out apartment complexes.
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Post by saurabhec »

Great article with real numbers:
Seaman, 40, has put her 1920s Spanish-style bungalow up for sale at an asking price of $999,000. After Realtor fees and closing costs, she'll clear little or nothing beyond the $922,000 she paid for the property four years ago--and that assumes, optimistically, that she will get something close to the asking price.

Even more sobering, Seaman did some math showing that the $60,000 in yearly mortgage payments, insurance and property taxes she's been shelling out exceeded what she would have spent renting a similar home at $36,000 annually. The tax deductions she got for mortgage interest and property taxes don't come close to making up the $96,000 difference in cost over the four years, she says
So essentially, assume 20% downpayment she paid $185K for an investment that failed to keep place with inflation (negative real return) over a 4 year holding period. While living in this home, she paid ~$2K per month more than she would have had she rented (maybe ~$1.5K after tax deductions). So relative to renting and putting the $185K in downpayment and $2K in avoided costs in relatively low-risk investments, she lost much more.
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Post by MossySF »

saurabhec wrote:
Seaman, 40, has put her 1920s Spanish-style bungalow up for sale at an asking price of $999,000. After Realtor fees and closing costs, she'll clear little or nothing beyond the $922,000 she paid for the property four years ago--and that assumes, optimistically, that she will get something close to the asking price.
I wonder how many pro-homebuyers in this thread live in areas where you can buy houses for $150K compared to "housing market timers" who live in places where freaking houses cost $1M?

If you buy a $150K house, so what if it drops 25%. A few years of frugal living and you've made that up with no problem. But if you buy a $1M house and it drops 25%, you will be house poor for decades. Forget about sending your kids to a nice college or having a nice retirement.
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Post by bombcar »

Moral of the story: don't buy a $1M house unless you can afford it! ;)
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Post by saurabhec »

MossySF wrote: I wonder how many pro-homebuyers in this thread live in areas where you can buy houses for $150K compared to "housing market timers" who live in places where freaking houses cost $1M?

If you buy a $150K house, so what if it drops 25%. A few years of frugal living and you've made that up with no problem. But if you buy a $1M house and it drops 25%, you will be house poor for decades. Forget about sending your kids to a nice college or having a nice retirement.
The sticker price of the home has little to do with the economics of the situation. Cut prices in half if you want, the same economics would apply.
Unlike a portfolio where you at least have a chance of practicing buy and hold, odds are stacked against being able to buy and hold for a house due to an economy in which job security is simply not as high as it was in the 1950s and 1960s. She lived in the house for 4 years, hardly a flipper. Not only that, she actually expects to sell the house for more than she bought, even then the economics suck.
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Post by diasurfer »

Our Treasury Secretary needs to read this thread so he can figure out how to make money as a landlord. Apparently he is letting the market sent his rental rate, rather than setting it at a price to guarantee himself a Return on Investment. :roll: With this guy in charge, it's no wonder this bailout has been such a boondoggle!

"Records show the couple paid $1.602 million for the home in 2004. There were no takers even when he dropped the price to $1.575 million. So he rented the pad to an unidentified family for $7,500 a month in May. Real estate experts told the Associated Press that he’s probably losing on the deal, since he has two mortgages worth $1.25 million plus $27,000 in annual property taxes."

http://njrereport.com/
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Post by linuxizer »

saurabhec wrote:The sticker price of the home has little to do with the economics of the situation. Cut prices in half if you want, the same economics would apply.
I will point out again that I am firmly in the camp of "homebuying makes sense in some situations but not in others, on both the investment and consumption fronts." That said, the quality of evidence in this thread is well below that of the typical Bogleheads discussion of the stock market.

surabhec- I'm sorry, but you're taking a single data point, on a very expensive house, over a very short period of time and trotting it out as proof.
And yes, the price certainly matters. In Philadelphia, the high-end market has been flagging somewhat (although nothing like elsewhere), but the 150-250k market never stopped being competitive. I imagine that in most of the country a similar phenomenon has occurred, where $1m houses are far more impacted than $500k houses, which are far more impacted than $150k houses.
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Post by stratton »

junior wrote:Although the substance of the article is above my head, I'll point out that a real estate developer told me that "the math doesn't work for renting out a home", which is why developers do not rent out homes the way they rent out apartment complexes.
You should add the following provisio: In the rental markets where this real estate developer has knowledge or experience.

With our current distressed real estate market an investor may find single family homes suitable as a rental investment. There is certainly a better chance now than four yeara ago.

Paul
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Post by saurabhec »

junior wrote: Although the substance of the article is above my head, I'll point out that a real estate developer told me that "the math doesn't work for renting out a home", which is why developers do not rent out homes the way they rent out apartment complexes.
If it is more profitable for a developer to sell a home than rent it, it obviously means it is a worse deal for the home buyer.
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Wiki page

Post by Dan Kohn »

I've created a wiki page that tries to provide a neutral overview between the costs and benefits of renting and owning a home. I have owned 3 homes and currently rent, but my pro-rental biases may have shown through.

I created a new thread so as not to imply that readers had to wade through all 4 pages of this thread. I did read every post, however, and tried to incorporate all of the unique arguments I read into the wiki page.

Please see Owning vs Renting on the Bogleheads Wiki.

If you have any suggested changes, please post them on the new thread, or become a wiki editor and make them yourself. Thanks.
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