Is this a good reason to buy a home? and; what is a good reason to buy a home?

[Frylock]

Literally the only thing that makes me think about maybe buying a home is the prospect of paying rent even past retirement.

Yet: I presently have no particular intention ever to retire. Moreover, there are a lot of costs tied into having a home which, when added up, may make the rent/owning differential not that great of a factor in the long run.*

So even the one reason that makes me wonder if I should buy a home isn't that strong of a reason.

Is it a reason at all? Is it a legitimate worry, or does it not actually turn out to be something to worry about for some reason?

Aside from that reason, what are other reasons people have for buying homes?

To me it seems like a way, basically, to ask for trouble.

*What I mean by this is, maybe paying rent forever costs a million dollars in the end, while buying a home ends up costing, not merely the $200,000 you pay for it, but more like $750,000 once you factor in maintenance, taxes, commuting costs, and various other more or less tangible costs. I don't know, I haven't done the math, because I don't know exactly what math to do. But for all I know right now, the real difference in costs could turn out to be small enough to be worth the advantages of renting.

[Sam Lowry]

I think that's one of the big reasons that people buy houses, because they think they'll stay put for a while and don't want to waste money on rent. But it depends on where you live. I can't find one at the moment, but I've seen maps that compare house prices and rental costs and show where it's a better decision financially to buy and where it's better to rent.

[Voyager]

As far as maintenance goes, do you think your landlord is giving you this free? It is factored into the rent. Sure you don't get surprised, but if you live in a place for five years and nothing breaks, your are paying for the landlord to fix it for the next guy.
Owning means your have capped your monthly payments, with the opportunity of decreasing them by refinancing. When is the last time your rent went down? Our mortgage has gone down twice in the last couple of years.

While it is obviously not guaranteed, you can still make money on a house. Ours is still worth about twice what we paid for it.
We needed too much room for an apartment. When we bought our house, we were here. If we had rented one, we might well have gotten kicked out if the landlord chose to sell it. I do not like to move.
Commuting costs may or may not be a factor. My commute has varied greatly as jobs moved. My wife commutes down the hall.

Other things - not needing to consult someone to get things fixed. Dog ownership - and a yard to let the dog out in. A vegetable garden. Room for a workbench. More storage than an apartment would have. The tax deduction. The ability to redo the lights the way we wanted. And there are plenty more things I like about owning.

[Cheesesteak]

Owning a home gets more difficult the older you get. Harder to do your own maintenance, harder to shovel the snow, harder to mow the lawn, and weed the garden, and you still have to pay taxes and utilities. I think the elderly are generally better off getting rid of their homes and moving to a location that handles those things for them.

I own a home because I wanted to own the place I lived. Nobody can kick me out of the house*, or prevent me from digging up the lawn to put in a garden**, or tell me what color I can paint the bathroom, or what kind of counter goes in the kitchen.

* Assuming I keep up my payments. Landlords can refuse to renew a lease even if you pay in full.
** In accordance with applicable zoning regulations.

[florez]

I purchased a home after many years of saving for the down payment.
The monthly payments were about the same as rent, except that after I finished paying it off,
I had something to show for all the trouble and sacrifice.
Even when the cost of maintaining the house becomes expensive, I get pleasure in knowing
that it goes into something that belongs to me, and that ideally, I can leave to my daughter when I die.
I will never regret buying the house, and the original reason I prioritized doing it, was because
my pets always seemed to be a problem for my landlords.

[SmellMyWort]

In addition to everything mentioned you build equity in a house that you can borrow against if some kind of emergency or change in circumstances comes up.

[Giraffe]

I don't think there's a one-size-fits-all answer to this question. In some areas, buying a home is much less expensive than renting. In others, the opposite is true. However, from the financial side, I think you can solve it pretty conclusively if you define your assumptions:

1. How old are you now and how old would you expect to be when taking care of a house becomes too much for you, i.e. over what length of time are we talking here? Call that t.

2. Compute the total cost of home ownership over that period. If t is great than 30 years, just calculate it assuming a 30 year fixed mortgage. Interest, property taxes, utilities, maintenance. There are online calculators that do this for you.

3. Make some assumptions about the average appreciation in home prices over that time (in today's dollars, for simplicity) and guess the value of the house at time t. Subtract #3 from #2: that's your cost to live in a house.

4. Now add up your rent over the same time period, factoring in regular increases (again ignoring inflation to keep things simple). That's your cost to live in an apartment.

Depending on the area, these numbers can be wildly different or about the same. When I first started thinking about buying a house back in ~2004, the Bay Area was in the midst of the housing boom while rents were at record lows. Simple math showed that we made money every year we didn't buy just due to the difference in interest costs and property tax vs. rent. If that discrepancy had held, buying a house would have made sense only from the intangible side -- financially, it would have been foolish. Now, things are swinging the other way as rents climb and property values fall. You basically have to try to predict the future.

[Anne Neville]

Originally Posted by Cheesesteak

Owning a home gets more difficult the older you get. Harder to do your own maintenance, harder to shovel the snow, harder to mow the lawn, and weed the garden

You can pay people to do most of this stuff for you. Some people call it "using the checkbook tool". We own a house, but we don't shovel our own snow or mow our own lawn. You can own a single-family house and not do those things, you just have to find someone you can pay to do them. Finding someone good is not always trivial, but don't think that not being able or willing to do yard work means you can't or shouldn't own a home.

Originally Posted by SmellMyWort

In addition to everything mentioned you build equity in a house that you can borrow against if some kind of emergency or change in circumstances comes up.

But there's a temptation here. It's a bad idea to borrow against home equity for a lot of things. Like, if your salary goes down, but you still want to take that vacation you were planning. Homes are not not not guaranteed to always go up in value, and your home is not a magic ATM that you can always withdraw money out of. A lot of people have learned this the hard way in the past five years. If you owe more money on your house than it is worth in the current market (home equity loans are one way this could happen), and you can't make the mortgage payments on it, you're not in a good situation.

If you don't think you can resist that temptation, you might be better off staying in a situation where it won't come up. Kind of like how I know I won't be able to resist the temptation of eating too much at a buffet restaurant, so I generally don't eat at them.

[LionelHutz405]

If you have the discipline to save and invest the extra money you have by renting instead of buying, by the time you retire it should be a substantial amount. The income your investments produce could be enough to cover the rent when you retire.

[Cheesesteak]

Originally Posted by Anne Neville

You can pay people to do most of this stuff for you. Some people call it "using the checkbook tool". We own a house, but we don't shovel our own snow or mow our own lawn. You can own a single-family house and not do those things, you just have to find someone you can pay to do them. Finding someone good is not always trivial, but don't think that not being able or willing to do yard work means you can't or shouldn't own a home.

True, I only commented about that because the OP mentioned not wanting a rent payment when he retired, and owning a home doesn't get cheaper when you get old, it gets more expensive because you have to hire helpers.

[Voyager]

Originally Posted by Cheesesteak

Owning a home gets more difficult the older you get. Harder to do your own maintenance, harder to shovel the snow, harder to mow the lawn, and weed the garden, and you still have to pay taxes and utilities. I think the elderly are generally better off getting rid of their homes and moving to a location that handles those things for them.

And their are tons of condos which you own but which have all the landscaping and stuff done for you. Plus, when you are older you need less space. When we finally get out of here (before the Big One I hope) we can buy a nice condo with our equity with money to spare.

[Hari Seldon]

I have two important reasons for owning a house, only one of which has been mentioned above. The first is that I have made improvements in the house (porch, totally renovated bath, a half bath on the ground floor) that I could never have had in a rental. But the most generally overlooked reason is that the return on the investment in my house is utterly tax free. What return? Why the fair value of all the rent I don't pay. This means that renters are subsidizing home owners, one of the many ways that the poor subsidize the rich.

Someone told me that in Switzerland (at least in the Canton of Zurich), the fair rental value of your house is added to your income for tax purposes. Utterly fair. And of course, mortgage interest is not deductible. In Canada it never was and, in any case, I paid off my mortgage over 21 years ago.

[Martin Hyde]

Originally Posted by LionelHutz405

If you have the discipline to save and invest the extra money you have by renting instead of buying, by the time you retire it should be a substantial amount. The income your investments produce could be enough to cover the rent when you retire.

In some places. In most places I've lived in my life renting was significantly more expensive than owning an equal sq. ft. residence in terms of monthly payments.

Now, I'm actually someone who is pseudo-anti homebuying for most people. I personally own a home, but my financial situation is a lot different from a lot of people's financial situation.

I think most Americans, even if their rent payment was close to an equivalent mortgage payment would be better off if, instead of saving for a downpayment and buying a house, they just kept saving and investing in a personal investment account. Don't speculate like some damn fool Tulip futures investor, but put it in solid equities, MLPs, trusts, some bonds and etc and over the course of your working life I think you could easily have $1m+ in that investment account. That's in addition to what you might have in a 401k.

With a house, you may get a smaller monthly payment. You also may make money on a potential sale of the house. But that's basically putting a lot of your capital in place, a lot of eggs in one basket so to speak. A house is probably the most undiversified investment you could make. The other issue with a house is the costs to own a house can vary wildly year to year and can, over the lifetime of your ownership, represent a significant portion of any value increase in the house itself.

Then again, some people buy a home, cut their monthly housing payments down by 20% (because in many places home ownership is cheaper month to month than renting in terms of mortgage payments versus rent), own it for 10 years during which they have no major maintenance issues and resell the house after a decade for a 50% increase in its purchased value. Sure, that happens. It isn't even the rarest thing in the world. But in the aggregate, that is going to happen to some people while some people get hosed. With a diversified investment nest egg instead of a large capital investment in a home you are much more insulated from potential swings in valuation.

When Warren Buffet left New York as a young man and moved back to Omaha he had something like $150,000 to his name. He actually thought he would play the market a little bit, things of that nature, but that his working life was basically over. He knew that properly invested that $150,000 would give him a comfortable income for the rest of his life and that's what he planned to do. Many of his friends and family wondered why he didn't want to buy a home--his reason was that as an investor capital was his single biggest weapon and asset, to sink that into a single investment seemed like the height of folly. (Of course later on, his hobby investing started to generate really nice returns, friends wanted in, then their friends heard about what he was doing and they wanted in, fast forward 50 years and he's a multibillionaire and of course a home is a minor purchase for someone like that.) I'm not saying if you eschew homebuying you'll be the next Buffet--you won't be, but his general idea is correct--by sinking a large amount of capital into a home you essentially are sinking a lot of money in one place and are limiting future opportunity.

[Martin Hyde]

Originally Posted by Hari Seldon

I have two important reasons for owning a house, only one of which has been mentioned above. The first is that I have made improvements in the house (porch, totally renovated bath, a half bath on the ground floor) that I could never have had in a rental. But the most generally overlooked reason is that the return on the investment in my house is utterly tax free. What return? Why the fair value of all the rent I don't pay. This means that renters are subsidizing home owners, one of the many ways that the poor subsidize the rich.

Someone told me that in Switzerland (at least in the Canton of Zurich), the fair rental value of your house is added to your income for tax purposes. Utterly fair. And of course, mortgage interest is not deductible. In Canada it never was and, in any case, I paid off my mortgage over 21 years ago.

But there isn't always going to be a net return on a home. It can depreciate in value, it could require costly maintenance. As someone who is a real estate developer (not very much in the residential world, though) I have seen maintenance jobs on single residences that cost as much as a year's rent. A few of those and you're talking about years of potential returns wiped out.

In most places I've lived a monthly rent payment is modestly higher than a monthly mortgage for a roughly equivalent residence. A few major maintenance events can wipe out the value of that monthly difference for many years.

[TriPolar]

Well you can always try being a homeowner for a while. Buy a house in good condition in a good location and resell after a few years if home ownership isn't for you.

Are you considering all the reasons people buy homes?

Freedom, it's your property to do what you want (there's always some restriction for places most people want to live, but there's way more freedom than just renting a property).

Financial investment. It isn't difficult to avoid a loss, although it can be difficult to gain a significant profit.

Security for your family. Should something happen to you, they'll have a place to live. And after the more desirable version where you live a long and happy life you have something to leave your children.

Emotional attachment. Maybe it doesn't strike you as important, but maybe your wife and kids would like something permanent they can call home.

It is a pretty big commitment, so at least you're thinking it through before buying.

[brickbacon]

Originally Posted by Martin Hyde

Now, I'm actually someone who is pseudo-anti homebuying for most people. I personally own a home, but my financial situation is a lot different from a lot of people's financial situation.

Why is your situation so different?

Originally Posted by Martin Hyde

With a house, you may get a smaller monthly payment. You also may make money on a potential sale of the house. But that's basically putting a lot of your capital in place, a lot of eggs in one basket so to speak. A house is probably the most undiversified investment you could make. The other issue with a house is the costs to own a house can vary wildly year to year and can, over the lifetime of your ownership, represent a significant portion of any value increase in the house itself.

Yeah, all that is true, but I think you are really underestimating the upside of buying as an investment. First, buying a house gives you a lot more leverage on your capital than you could otherwise get. So even if you could take that 100k and get a 5% return, that 100k would buy you a 500k house that would only have to appreciate 1% to have an equivalent return dollar wise. Over 30 years, an annual return of 5% would be matched by an annual housing appreciation of 1.7% (assuming my math was correct). If your investments netted a return of 10%/year, your house would only need to increase by 5%/year. I think those are pretty good odds all things considered. Especially if you live in the city.

Second, you can live in your investment if it's a house, you can't live in a 401k contribution. There is a certain freedom to ownership that is hard to put a monetary value on.

Third, the average yearly rent increase is 3%. In many cities, it's more. For example, in the DC-area where I live, it's 7.4%. We just increased the rent on our condo by about that much. Every year, the cost of living in a rented place increases by a good amount of money, whereas most houses don't. So imagine that your investment budget gets a 7.4% compounded chunk taken out EVERY YEAR. There is no way housing expenses and maintenance cost that much. Now of course, you may get a lemon of a house that needs substantial work, but the chances of that are probably about as high a stock you buy tanking for some reason.

Fourth, the costs of borrowing are subsidized by the interest deduction. So the risk on speculating on housing is subsidized by the government. You can also forgo escrowing your taxes with an appropriate down payment. That means you can remain more liquid, mitigating the illiquidity tax you pay when you invest in a home.

The only reason it doesn't make sense to own a home is if you need to move around a lot, lack career and financial stability, or don't have the resources to put down a decent sized down payment. Otherwise, it almost always works out better cost-wise to buy a place assuming you are prudent in selecting a home.

[StGermain]

House payment, taxes, insurance - $$$

Not having to listen to your neighbors argue - Priceless

Actually, in my case, not only could I not rent for the cost of my mortgage (with taxes and insurance), I'd have to pay horse board of probably $200/mo extra. For one horse. I wouldn't be able to have the 4 I have now. Nor the 6 dogs and 4 cats. My mortgage will be paid off when I'm 57, if not before (6 ore years). I don't mind the upkeep on the farm, and hire a helper once or twice a year for heavy work.

StG

[brickbacon]

Let's use a scenario of a guy paying $2100/month in rent with 100k in savings accumulated over a 50 month period . He can either buy a house now, or invest. In DC, $2100/month gets you something like this. Using Zillow, we can see the housing would likely sell for $454,700. Just as an FYI, it last sold in 1999 for $49k, which is a return of 54% yearly return (I assume they renovated though)

So let's say the person decides to use that whole 100k as a down payment leaving a mortgage of $354,700. At today's rates, assuming good credit, that would result in a monthly payment of $1780. Taxes on this home were $2,220 in 2010, or $185/month. That brings the total cost of ownership (not including interest deduction) to $1965, a full $135/month less in the first year. Assuming a modest 5%/year rent increase, in year 5, the renter would be paying $2680 whereas the owner of the same house is still paying $1965. In year 1-5, the total savings just in terms of rent would be, $1612, $2880, $4203, $7051, and $8582 respectively (not accounting for property tax increases). The total over 5 years is $24,328. If he had invested that instead, he would need a return of 4.5%. That is definitely doable, but that doesn't factor in the house appreciating. Houses in DC appreciated 1.98% on average last year. That rate will likely go up. Once you factor in the house appreciating in value, your investment profits need to be $46,833.55 greater over those 5 years. That means you need 11.3% returns every year. Much less likely to happen. That's not even considering that that 2k/month savings the person once had has dwindled to $1285 in year 5. So there is a interminable drain on resources every month.

Furthermore, in the real world, That person would not pay increased rent every year. They would have to move to a cheaper, smaller, less convenient places again and again. So you keep getting pushed farther and further from what you desire. Even if that puts more investment money in your pocket, it means you have to move every few years. As I said, I don't think the math works out for everyone, but there is a reason the VAST majority of rich people own 1 or more homes. It's not that they're all too stupid to get the math. Between the interest deduction, crazy low interest rates, and the relative ease of most home repairs, there are plenty of good reasons to buy nowadays.

[Martin Hyde]

I can pick any 500 stocks you wish and show numbers just as favorable. No one is debating you can make good money owning a home, but it requires a set of criteria that will not be true everywhere.

That increase in housing prices in D.C.? You won't see that in every housing market. Housing markets that have extremely high increases in asset value are typical of any place with a booming population and increasing wealth of said population, but they are also highly susceptible to economic downturns that can leave the population much poorer and a glut of unwanted and overpriced homes on the market whose sale prices tumble down, down, down until people are selling for less than they owe on the home.

You're also making some unreasonable assumptions about rent increases. I actually am in real estate development for a living, and many land lords will not increase an average of 7% a year for current tenants, most land lords I know (and I know a ton, they are my competitors and colleagues) keep rent increases for current tenants modest and some even keep them locked in to rates for years at a time. The reason is there is a cost to lower occupancy rates and a cost to finding new tenants.

Those property taxes are also very, very low. I know places where a person owning a house with a market value of $350,000 ($100,000 less than the one in your scenario) pay over $700/mo in property taxes.

Many persons who have mortgages actually do not itemize their deductions, a statistic recently came out in the WSJ that a large portion of homeowners do not actually realize the mortgage income tax benefit because it is only available if you itemize.

11.3% returns every year aren't really that unlikely over long periods of time. The Windsor Index fund has returned roughly that on average, since 1958. In fact total stock returns since 1929 are a little over 10%--and investing in the whole market through an index fund is much more likely to return that over a lifetime than is a single house picked at random. When owning a home you don't have the option of investing in the whole market all at once, with equities and mutual funds that is actually possible. No single home will ever match that security and that return. Not unless you have advanced knowledge you're buying a house that lies directly in the path of some major company who wants to buy and develop the land into expensive commercial real estate--but that sort of knowledge is outside the bounds of normal investment.

[Chessic Sense]

I feel like this thread has severely neglected inflation. Sure, $450,000 sounds like a lot for a house over the term of the mortgage, but it's over 30 years, so most of that is in '20s and '30 dollars, not 2012 dollars. If your principal and interest today is $1500/mo, then it'll still be $1500/mo in 20 years when your salary has doubled. Not to mention that housing prices generally pace inflation in the long run, so you'll get all that money back in the end.

Rent, though, goes up with inflation. In 20 years, when your salary is doubled, so will your rent. Rent goes up, mortgages go down.

Originally Posted by Anne Neville

You can pay people to do most of this stuff for you. Some people call it "using the checkbook tool". We own a house, but we don't shovel our own snow or mow our own lawn.

Yeah, well, we don't all have homes like yours, do we?

[TriPolar]

I think Martin has made the kind of point that Fry should be considering. You can invest money in other ways that will provide the same kind of return as long term home ownership. My impression of the OP is that he is the coldly logical sort, and isn't going to buy a house on impulse or for emotional satisfaction. I'd tell most people buying a house is an excellent idea for many reasons, but seeing someone carefully analyzing their needs and expectations is kind of refreshing. Had more people done that 10 years ago we may have avoided some serious economic implications.

Whatever decision you make Fry, best of luck in the results.

[perfectparanoia]

In our neck of the woods, it is actually impossible to rent a house. There are a few here and there geared toward students (in other words, in bad neighbourhoods and in bad shape) but otherwise if you want to rent, you will be renting an apartment.

So, for us, it wasn't about a financial decision, it was about having a home where our kids could have their own bedrooms (since they are opposite sex, I think this is reasonable) and where they can actually have bikes (since most apartment complexes don't have storage for such).

We bought the cheapest house we could that met our minimum standards and went from there. We are actually paying about 100 dollars more for our property tax/mortgage/condo fees than we were in rent. However, that was rent for a 1-br apartment as opposed to a 3-br townhouse.

We have also put about 15,000 dollars into the house over 7 years. It is certainly more expensive but we wanted to have kids.

[perfectparanoia]

Aside: our house has gone up in value by about $50,000 in that time but I don't really consider that since it really doesn't matter how much it is worth. We will live here anyway.

[brickbacon]

Originally Posted by Martin Hyde

I can pick any 500 stocks you wish and show numbers just as favorable. No one is debating you can make good money owning a home, but it requires a set of criteria that will not be true everywhere.

Of course it's not true everywhere at every time. But generally, it is. So, I suppose I could have thrown in a few more caveats about geography and credit worthiness, but the point obtains. More importantly, with historically low interest rates, and fairly low housing prices, it makes the math skew a good amount towards home ownership. Even now, Fannie is selling houses with as little as 3% down with no points. There are lots of programs out there to make buying a home even more advantageous.

Originally Posted by Martin Hyde

That increase in housing prices in D.C.? You won't see that in every housing market. Housing markets that have extremely high increases in asset value are typical of any place with a booming population and increasing wealth of said population, but they are also highly susceptible to economic downturns that can leave the population much poorer and a glut of unwanted and overpriced homes on the market whose sale prices tumble down, down, down until people are selling for less than they owe on the home.

And when that happens, what makes you think stocks and funds will be immune to those fluctuations?

Originally Posted by Martin Hyde

You're also making some unreasonable assumptions about rent increases. I actually am in real estate development for a living, and many land lords will not increase an average of 7% a year for current tenants, most land lords I know (and I know a ton, they are my competitors and colleagues) keep rent increases for current tenants modest and some even keep them locked in to rates for years at a time. The reason is there is a cost to lower occupancy rates and a cost to finding new tenants.

That true. That's one reason my scenario had a 5% yearly increase, not 7%. Even so, using an average is a perfectly valid way of doing the math. While you may not get hit year after year, only a stupid landlord would not raise rent on a 2-3 year basis. On condos, rent increases are generally expected on a year to year basis as the condo fees typically go up.

Originally Posted by Martin Hyde

Those property taxes are also very, very low. I know places where a person owning a house with a market value of $350,000 ($100,000 less than the one in your scenario) pay over $700/mo in property taxes.

Those are the ACTUAL taxes. Doesn't matter what you think of them, or what they are relative to other places. Second, where would a home that sells for 350k have $8,400 in property taxes? What was it assessed at? I suppose that is possible in NJ or some place like that, but even if that is true, it doesn't really matter as taxes are inevitably passed on to renters.

Originally Posted by Martin Hyde

Many persons who have mortgages actually do not itemize their deductions, a statistic recently came out in the WSJ that a large portion of homeowners do not actually realize the mortgage income tax benefit because it is only available if you itemize.

Fair point, but please notice that benefit wasn't included in the numbers.

Originally Posted by Martin Hyde

11.3% returns every year aren't really that unlikely over long periods of time. The Windsor Index fund has returned roughly that on average, since 1958. In fact total stock returns since 1929 are a little over 10%--and investing in the whole market through an index fund is much more likely to return that over a lifetime than is a single house picked at random.

It's not picked at random. Most smart people pick houses that are likely to have more upside, they get them inspected, etc. It's not as if one is ever forced to buy a house at random. As I said, 11% or so is not unheard of, but it's not a easy task either. Madoff was generally promising returns of 10-15%. Many people took that deal because those are great returns with seemingly little risk.

The real harm is that by renting, your standard of living will inevitably go down as rents go up, and your future disposable income will then go towards rent increases instead of investing. If you are renting a 2bd condo now, 15 years from now, you likely will not be able to afford a similar place at anywhere near that price. Look at the scenario I outline above. If your income remains fairly static, we can assume you will have 2k/month savings. Rent increases reduce your future invest-able income. So even if you lose out slightly in the short run, in the long run, you will have more money to invest, and more predictable outlays. I can tell you what my mortgage will be in 2020 with about 100% certainty. Can a guy renting tell me what his rent will at that time with such clarity?

Originally Posted by Martin Hyde

When owning a home you don't have the option of investing in the whole market all at once, with equities and mutual funds that is actually possible. No single home will ever match that security and that return. Not unless you have advanced knowledge you're buying a house that lies directly in the path of some major company who wants to buy and develop the land into expensive commercial real estate--but that sort of knowledge is outside the bounds of normal investment.

Yes, you have said this. I value diversification as much as the next guy, but diversification will not protect you against the broad-based financial downturn that we just had. In short, most events that will dramatically reduce or stall home price growth will affect stocks and bonds as well without much regard to the diversity of one's portfolio. Diversity, in our current environment, doesn't beat out having increased leverage (in addition the other things listed).

Second, in many cases single homes have done far better than the market. There are entire regions that have seen such growth. The house I randomly picked above had a 54% annual return since 1999. That is not an accident. Home prices in that area, and many others are doing great over the long run.

Third, you ignored my question about what make your specific situation so different? It seems kinda for a home owner to be telling people not to buy a house even though it makes sense for him to do it. Plus, why do you think most rich people buy one or more houses? These are often people who can invest in a far more lucrative ways than most can. Why would they buy houses if the math doesn't work out?

Lastly, there are several intangible benefits of home ownership like increased credit worthiness, stability, predictability, increased home choice, etc. All those thing matter as well.

[Voyager]

Originally Posted by Martin Hyde

11.3% returns every year aren't really that unlikely over long periods of time. The Windsor Index fund has returned roughly that on average, since 1958. In fact total stock returns since 1929 are a little over 10%--and investing in the whole market through an index fund is much more likely to return that over a lifetime than is a single house picked at random. When owning a home you don't have the option of investing in the whole market all at once, with equities and mutual funds that is actually possible. No single home will ever match that security and that return. Not unless you have advanced knowledge you're buying a house that lies directly in the path of some major company who wants to buy and develop the land into expensive commercial real estate--but that sort of knowledge is outside the bounds of normal investment.

Perhaps because you work in commercial real estate you are forgetting the power of leveraging. In 15 years my house value went from $350 K to $700K, even after the downturn. But we put $150K down on it, so my actual gains are a lot bigger. This being California, my property taxes are just over $400 a month, and with refinancing we pay about $1,000 a month (a bit less, actually) in interest and principal for a 2300 sq ft house with a reasonably big yard in an excellent neighborhood. You are not going to be able to rent for anywhere near that.

But if someone plans to move reasonably frequently, then renting is probably a good option, since you don't get most of the benefits I mentioned.

Sure you can lose, but you can lose with just about any investment. The upside is pretty good, so long as you don't buy at the top of a bubble and don't over-leverage by taking money out of unrealized gains never thinking about cash flow.

[Gatopescado]

Originally Posted by TriPolar

I think Martin has made the kind of point that Fry should be considering. You can invest money in other ways that will provide the same kind of return as long term home ownership.

But you can't live in them.

If you pay the rent on the first, come the last day of the month, you have nothing. When the time is gone, the money is gone. Pay up again, or hit the streets.

I was able to pay my house off. Even if I had to sell it for a 1/4 of what it is worth (or what I've put into it, for that matter), I'd still be ahead, because I would have had to pay the same to live somewhere during all the time I was paying a mortgage.

It's a "no-brainer" in my book. But I do loves me some renters! Thems how I makes my livin'!

[suranyi]

Originally Posted by Gatopescado

But you can't live in them.

If you pay the rent on the first, come the last day of the month, you have nothing. When the time is gone, the money is gone. Pay up again, or hit the streets.

I was able to pay my house off. Even if I had to sell it for a 1/4 of what it is worth (or what I've put into it, for that matter), I'd still be ahead, because I would have had to pay the same to live somewhere during all the time I was paying a mortgage.

It's a "no-brainer" in my book. But I do loves me some renters! Thems how I makes my livin'!

That's essentially how I feel. When I bought my house years ago, I paid more monthly in mortgage than I previously did in rent.

Within a few years, rents in the area had increased to the point where I was now paying less every month in mortgage than I would have if I had continued to rent. So I was saving money every single month.

A few years later I managed to pay off my mortgage entirely, so I have no monthly payment at all. The savings are enormous, and I could never have been able to do that if I was still paying rent.

[brickbacon]

Good article that backs up why buying is such a good deal now.

[Martin Hyde]

Originally Posted by brickbacon

Of course it's not true everywhere at every time. But generally, it is. So, I suppose I could have thrown in a few more caveats about geography and credit worthiness, but the point obtains. More importantly, with historically low interest rates, and fairly low housing prices, it makes the math skew a good amount towards home ownership. Even now, Fannie is selling houses with as little as 3% down with no points. There are lots of programs out there to make buying a home even more advantageous.

Most definitely, I don't debate that.

And when that happens, what makes you think stocks and funds will be immune to those fluctuations?

Obviously they aren't, of course that is why you convert a retirement nest egg into extremely stable bond funds and such near retirement age. But keep in mind my alternative to home ownership isn't a big 401k, but rather a separate taxable brokerage account that you build up over a life time.

That true. That's one reason my scenario had a 5% yearly increase, not 7%. Even so, using an average is a perfectly valid way of doing the math. While you may not get hit year after year, only a stupid landlord would not raise rent on a 2-3 year basis. On condos, rent increases are generally expected on a year to year basis as the condo fees typically go up.

Right...7% is the actual average as per an earlier post of yours, but the reality is most land lords I know are lenient on current residential tenants. With commercial tenants things are very different (as a commercial land lord our business actually gets a portion of our tenants sales over a certain amount, so it almost self-adjusts for inflation.)

Those are the ACTUAL taxes. Doesn't matter what you think of them, or what they are relative to other places. Second, where would a home that sells for 350k have $8,400 in property taxes? What was it assessed at? I suppose that is possible in NJ or some place like that, but even if that is true, it doesn't really matter as taxes are inevitably passed on to renters.

Dublin, OH, is actually where I personally know someone who lives in a ~$350k house who pays $700/mo in property taxes. The house may be more like $380k, I don't want to link to the Franklin County Assessor's page for his particular house, but I suspect you could browse that page to find similar listings.

I was not debating those were the actual taxes, just saying...most of the world doesn't live in DC, and some of those other places have very high property taxes.

It's not picked at random. Most smart people pick houses that are likely to have more upside, they get them inspected, etc. It's not as if one is ever forced to buy a house at random. As I said, 11% or so is not unheard of, but it's not a easy task either. Madoff was generally promising returns of 10-15%. Many people took that deal because those are great returns with seemingly little risk.

I don't know about this. I'm not saying it isn't true because I don't know, but you're making a presumption that most people are smart when buying a house. That does sort of go against my personal experience with individuals when buying things.

The real harm is that by renting, your standard of living will inevitably go down as rents go up, and your future disposable income will then go towards rent increases instead of investing. If you are renting a 2bd condo now, 15 years from now, you likely will not be able to afford a similar place at anywhere near that price. Look at the scenario I outline above. If your income remains fairly static, we can assume you will have 2k/month savings. Rent increases reduce your future invest-able income. So even if you lose out slightly in the short run, in the long run, you will have more money to invest, and more predictable outlays. I can tell you what my mortgage will be in 2020 with about 100% certainty. Can a guy renting tell me what his rent will at that time with such clarity?

Maybe so...I had a long career in the Army, a brief career in State government and then I entered business myself. With my two government jobs we had regular cost of living increases that kept pace with inflation. I retired as an O-6 from the Army with over 20 years of service and went in before 1980 (meaning I had the benefit of the "Final Pay" calculation for pension), so even my Army pension gets adjusted for inflation continuously. So if I was renting it wouldn't necessarily be a consistent decrease in my standard of living. How common are COLA increases in private industry?

Yes, you have said this. I value diversification as much as the next guy, but diversification will not protect you against the broad-based financial downturn that we just had. In short, most events that will dramatically reduce or stall home price growth will affect stocks and bonds as well without much regard to the diversity of one's portfolio. Diversity, in our current environment, doesn't beat out having increased leverage (in addition the other things listed).

Debatable, the stock market never stays down.

Second, in many cases single homes have done far better than the market. There are entire regions that have seen such growth. The house I randomly picked above had a 54% annual return since 1999. That is not an accident. Home prices in that area, and many others are doing great over the long run.

Certainly. If I had bought $100,000 in Google stock in 1999 I'd be on the Forbes rich list right now too, though.

Third, you ignored my question about what make your specific situation so different? It seems kinda for a home owner to be telling people not to buy a house even though it makes sense for him to do it. Plus, why do you think most rich people buy one or more houses? These are often people who can invest in a far more lucrative ways than most can. Why would they buy houses if the math doesn't work out?

To be honest because 1) I'm not middle class right now (I'm in the top tax bracket from my business earnings and I have a very decent pension from being retired from the Army), 2) I was able to retire as an O-6 with over 20 years of service...that essentially guarantees me a life long middle class income, I never have to move, and I never have to worry about getting trapped in a house. My absolute worst case scenario is I lose 100% of my business investments (that was a risk early on but I've moved some of my gains to annuities and such thus locking in a certain income) and end up with a guaranteed middle class income that will never go away. How many Americans in their 50s can say this?

Lastly, there are several intangible benefits of home ownership like increased credit worthiness, stability, predictability, increased home choice, etc. All those thing matter as well.

Sure, there are intangible negatives, too.

I'm not against home ownership. And to be honest I don't think me and you actually materially agree on both things. I just think it's worth mentioning home ownership has its downsides, and I think for some people they'd be better off renting.