I'd point out that the data for homes is averaged nationally. Historically, there have been Good Places and Bad Places to buy a home. Home price growth in in-demand coastal areas is very different than in rural areas. In the US, "Flyover states" I'm sure skew this number heavily.
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
I'd point out that while an asset, yes, it is a liability. Not in the typical financial sense, either!
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
I bought recently. Mortgage lenders seem to be much more willing to work with people who can't make their mortgage than landlords are. Deferred plans, interest only payments, and more. In Texas, landlords can evict you within three days of missing a rent payment. THREE. DAYS! I got hit with this letter when auto pay screwed up. It's pretty scary.
The ugly thing is that you're most likely to get laid off when the market is down. I've argued this with people so many times and I think some of them are finally starting to see what I was saying.
btw I don't think getting rid of at will employment will change that. These cycles are so long they'll certainly find a way to get rid of you during a down cycle if they want to.
Well if you have to move to take a new job then you can always sell your home or rent it out. You'll take a hit on transaction costs or property management fees but you're unlikely to lose all of your equity.
The mortgage interest deduction is incredibly over rated. For most people the last few years of high standard deduction + salt cap mean few people really get much benefit from it. At lower tax brackets it's a pretty minor discount on your interest to begin with.
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
> If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE.
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
People underappreciate how valuable access to leverage can be in terms of boosting returns from a home. Putting 5% down, claiming the interest on taxes, and keeping 100% of the price appreciation is a solid deal.
Furthermore, since they're a hard asset, homes generally scale with inflation and thus serve as a hedge.
I had the double whammy of property taxes AND insurance increases on my last house. Budget was a bit tight, but that almost sent me over the edge. I learned my lesson on my next house purchase, and made sure there was a ton of leg room in the budget, along with things I could very quickly drop from the budget if needed.
I've done the math on this many times, and it still puzzles me how anybody would choose to buy a house in the Bay Area today versus renting an equivalent one. When mortgages are over 2x rent, the calculation skews tremendously in favor of renting and investing the difference in an index fund. This considers all possible factors and even chooses favorable conditions for homeowners (high appreciation, low stock market returns, high rent increases y/y). The permanent costs of owning a home (property tax, insurance, HOA, maintenance) are typically around 40% of rent, but can be even higher for certain types of property.
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
This is my conclusion (and the path I've taken - basically max our index and retirement accounts).
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
If you're in a place with good tenant protections (rent control), then yes. And it's true that large swaths of the Bay Area fall in this category. But otherwise, the threat of arbitrary rent increases and/or eviction can be overwhelming if you're looking for long-term stability.
I would need to make $550k/year to afford to buy a home where I grew up in San Jose.
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
One very important thing to keep in mind with these kinds of comparisons: are you actually going to be investing the money you save by renting? I think for most people the answer is no, and that money will just be spent on stuff. In that sense, homeownership is more of a "life hack" that forces you to save rather than a superior investment.
I was always a little puzzled by this concept and I think it gets more silly every decade. How can someone routinely spend money on goods given how insanely cheap goods have become?
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
Maybe I should have used a word other than stuff, but it's easy to spend a lot of money on travel, pets, entertainment, etc. Some of these categories have infinite sinks - e.g. gambling or gatcha games for entertainment.
This whole argument assumes that the 1977-2024 period is a good basis for predicting the future, but that period is the height of globalization, a long stretch of stocks (almost) always beating commodities and land. Looking at much longer timescales however, the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
> the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
I think the downside of your analysis is you don’t consider the impact of leverage on rate of return. The amount of equity you actually put in is very small so even though the overall return is low, the actual return on investment is much higher than your analysis shows. Or put simply no one would buy stocks with a very small down payment and an enormous amount of leverage the way that they buy real estate and that’s what you’re missing
> crucially selling the appreciated home after XX years
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
They both also default to much lower increases in rent than the US average, so it's off on both ends of the equation. Over the last few decades, inflation-adjusted rent has increased by several percent per year: https://nowbam.com/rent-prices-vs-inflation-and-income-growt....
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
> most investors don't rent property out at a loss
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
That's usually called a negative cash flow, but it's not considered a loss. It's much riskier than owning a property with positive cash flow, so in areas where a mortgage payment would be larger than rent, it's much more common for investors to pay with cash, instead of borrowing against the property.
In theory it wouldn't have an effect on the rental market, but in practice cash buyers are much more likely to be corporate land owners, who tend to have higher margins than the casual investment property owner.
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
Central NJ was a great place to buy, at least until Covid. A great way to build wealth here has been: start at a young-ish age at a low end. Over time, sell / rent that out and keep moving up slowly using a mortgage for your primary residence. Over the decades one can own their own residence and have one or more rental properties. Those bring in steady retirement income, which does not depend on daily stock market gyrations.
These rent vs. buy calculators all end up in paralysis by analysis. Everything depends on assumptions. Yes, in the Bay area the calculations may work one way. But there are so many ways around that. A remote job. Starting with a rental property 100 miles away.
Readit News
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
btw I don't think getting rid of at will employment will change that. These cycles are so long they'll certainly find a way to get rid of you during a down cycle if they want to.
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
TL;DR: Location matters. A LOT.
People underappreciate how valuable access to leverage can be in terms of boosting returns from a home. Putting 5% down, claiming the interest on taxes, and keeping 100% of the price appreciation is a solid deal.
Furthermore, since they're a hard asset, homes generally scale with inflation and thus serve as a hedge.
What percentage of houses triples in value over 10 years? And home much are you spending in maintaining, insuring, and paying taxes in 10 years?
I think your point still stands but its not nearly as fabulous an investment as you are suggesting
Where I live, the highest source of inflation for me has been property taxes. It's almost as if my landlord wants me to sell.
Sell and let someone who can make better use of it (i.e. more readily stomach the property tax) take possession.
Calcified landed gentry just sitting on dirt that appreciates due to the efforts and investments of everyone around them is Bad, Actually.
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
Also some goods are not at all cheap. Cars, clothes, shoes, hardware - you can spend as much as you like on these.
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
In theory it wouldn't have an effect on the rental market, but in practice cash buyers are much more likely to be corporate land owners, who tend to have higher margins than the casual investment property owner.
https://fred.stlouisfed.org/graph/?g=1Kion
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
These rent vs. buy calculators all end up in paralysis by analysis. Everything depends on assumptions. Yes, in the Bay area the calculations may work one way. But there are so many ways around that. A remote job. Starting with a rental property 100 miles away.