The house is paid off, so let’s say it was bought 30 years ago
Average house price in 1980 (30 years ago) was $68,700
Average downpayment was 20%, or $13,740
$13,740 invested in stock market index fund in 1980 would be worth $1.3 million today.
Now, I’m not saying that your parents would have $1.3 million in stocks if they’d rented, in fact given their circumstances they’re probably the best possible case for owning over renting. I’m just throwing out numbers for people who think that renting is always worse than buying.
Thank goodness I’m not afflicted with an HOI. Seems to me to significantly reduce the value of home-owning, which lies at least in part in that sort of freedom, to have what amounts to a set of rules telling you what you can and cannot do by way of decoration.
The main economic advantage of a mortgage over (say) wise investing in stocks is somewhat non-rational, but nonetheless real: a mortgage acts as a forced savings.
It is true that a person could invest the money (don’t forget to subtract monthly rent) every month that they would have put into a mortgage, and depending on how the numbers crunch (ad the markets munch), come out even or ahead.
But the fact remains that, without a bank breathing down your neck to pay each and every month, most people simply do not have the inclination to put investing first, and insure that they invest, each and every month, on the dot. It takes a lot more self-discipline to rent-and-invest and come out in the same place, retirement-wise.
[That goes hand-in-hand with my favorite bit of saving advice: set up an automatic withdrawal, and simply live like that money you save and invest doesn’t exist - get used to living below your means.]
The upside is that it also limits what your neighbors can do by way of decoration. Your neighbors’ outdoor decorating choices can impact your property value. A homeowners’ association can do something about a neighbor who chooses to decorate their yard with non-running vehicles, for example.
Dealing with neighbors can be another downside to home ownership. If you’re renting, and your neighbors neglect their house and yard, it’s your problem only as much as it directly affects you. If it really bothers you, you can move. It’s not that easy for a homeowner, since being next door to an eyesore makes the house less attractive to potential buyers.
I’m glad there’s no homeowner’s association in my neighborhood. Older neighborhoods may be a good bet, if you want to own a home but don’t want to deal with a homeowners’ association.
And leave things that you wish they hadn’t. When I asked my friend, our real estate agent, whether she thought it made sense for us to look at foreclosed houses, she regaled me with stories about ones she’d viewed with other clients. Including the one where the previous owners had left seven decomposing dog caracasses.
I understand that in America, you guys get a tax deduction on the interest portion of your mortgage cost. On a $300,000 home, @ 5% interest rate, that represents $15,0000 deductable income and at a say 25% tax rate should represent a saving of $3750 per annum or $300 per month for anyone considering making the jump.
In general that’s right, though there are a couple of caveats:
First, You have the choice of a standard deduction or an itemized deduction. If you choose to deduct your mortgage interest you must give up the standard deduction of $11,400 (assuming a married couple). So, the tax benefit would only be 25% of $3,600, and because your interest payments decline over time it would eventually become worthless (big simplifications here re: itemizing that I don’t want to go into).
Second, treating a reduced cost as income is like treating a sale as income: “Honey, I just made $100 by buying these shoes at half off!” Remember, you’re reducing an interest expense.
Third, to the extent that this benefits homeowners, it’s a transfer of money from the generally poorer (renters) to the generally richer (homeowners) and is morally indefensible.
Besides which, she knows me and our parameters very well, and we were not in a position to deal with any huge maintenance surprises, etc. It was a thoroughly considered decision.
Yeah, they require a good bit of searching, and the ability to move quickly. I’ve seen a bunch of stuff in move-in condition, but wasn’t able to get an offer in quickly enough. The patience has paid off for me, but most people don’t have time to search properties full-time.
I show that for 13,740 to turn into 1,300,000 in 30 years you are looking at an interest rate of 16.3%. At a more realistic figure of 9 percent I show that the investment to be worth about 182,279.
I found the statistics online for home rental costs 1980-2001. 1980’s average rental was about 3600 a year. The payment on a house with the stats you listed with an 8% mortgage would be about 4760 a year.
The first year that it would be cheaper to own the house would be 1988 with an average rental cost of 5040 vs. the fixed cost of 4760.
Setting any possible investment income aside the first year you would make back your 13000 initial down payment would be 1999.
By 2010 you would be up by about 44,400 of savings vs renting, not counting investment income from the initial down payment. I could not find the rent figures for the year 2002-2007 so this is not correct to the dollar.
If you invested your yearly savings from 1988 until 2010 at a 9% interest rate you would have 167,425 in your index fund.
This is a vary crude and rough outline. I did not enter costs on the homeowner side such as repairs, taxes and insurance. I also did not include the interest expense tax break or the property tax credit’s you could get from the feds and state. On the renters side I did not include the security deposit and the various fees that would occur from time to time moving.
It appears from these very rough numbers that renting as a whole would net you around an extra 15k or so of more liquid assets. However I suspect that your house value would have climbed enough to bridge that 15k gap.
EDIT:
BTW I saved my spreadsheets. If anyone wants to look over my work I will gladly email it to them.
There’s no law of nature that says houses always have to go up in value, or have to go up in value faster than inflation. Don’t buy a house assuming that there is such a law.
Assuming you can use your house’s rising value as an ATM is also a bad idea these days (well, it probably always was, but now it’s obvious why it’s a bad idea).
I have been nagged and positively harassed all of my life about owning, too. Right now I rent a single family home in uptown Albany, in a very nice neighborhood, five or less minutes from major shopping centers, but when I get home it’s quiet as pie, for $800 + utilities. It’s just me and my SO and a gecko and a turtle, so we don’t use a lot of utilities. We are happy. When my thermostat was broken, the landlord fixed it. We do all of the minor repairs and they do anything major. I don’t pay taxes or anything like that.
I want to buy a house…maybe. In ten years, perhaps. I’m 34, I’m young yet, and don’t feel I am in a financial position to own one. I think if you want to buy a house, more power to you, but too many people just follow the formula: grow up-go to college-get married-have a kid-buy a house-have another kid-buy a dog without thinking about any of it, really, and deciding whether any of it is necessary.
I’m in a similar situation – inherited my mother’s house. It’s paid off. I’m responsible for everything else. However, the property tax in this keeping-up-with-the-Joneses town is killing me. I simply don’t make enough money to cover it PLUS the general upkeep PLUS, god forbid, if something needs repairing.
Every time I mention selling and either renting or moving to a less expensive area, I get the refrain, “You’ll never live as cheaply as you do now because you have no mortgage!” And, yeah, I also get the “Your monthly rent in this area would equal a mortgage payment – why would you want to throw that away?”
I’m almost 50 years old. I don’t have children. I’m the only one left in my immediate family. Nobody is going to inherit this house after I go. If I stay here I can kiss my life savings goodbye paying the (*#@^@&^ property tax, never mind upkeep. Then once that runs out, what then?
Owning a house costs more than the monthly mortgage payment. There are taxes, utilities (which may cost more as you get a bigger house), highly variable maintenance costs, and upkeep such as mowing the lawn or paying someone else to do it. Plus, you have to worry about the value of the house. That includes stuff like the quality of the schools in the area, even if you don’t have any kids and don’t plan to have any. Renters don’t have those issues (some of them do pay utilities, though).
You can get stuck in a house, and be unable to move without losing a lot of money or taking a hit on your credit report. If your house’s value declines (as they sometimes do), you can find yourself unable to get enough money to pay off the mortgage by selling the house. If you walk away, you get a hit on your credit report. Even if you don’t have a mortgage, you can be in a situation where you can’t sell your house for enough to buy another house you’d be willing to live in. You can’t just wait until your lease runs out and then move if you find you’re in a lemon of a house. You have to find someone else who will take that house off your hands (or rent it from you) before you can leave. A renter who wants to move doesn’t have to care who will be there after they’re gone.
