I would argue in the current situation of 3.5% mortgage rate, the best scenario is to invest the cash in the stock market. If your returns are anything above 3.5% over the 30 year load amount, you're good.
Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance.
That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything.
So what those people are saying is to live in a rental and invest _the saved money_ in the market.
Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
My landlord has probably shelled out $10k in repairs ( the house is at that magic 20 year point where everything fails ) in five years.
I've done the "buy cheap and spend the rest at Home Depot" thing. It's not bad, but it's not ideal. Unless I'm categorically certain of living in the house at least five years, I'll continue to rent.
I've done the math - I'd have less equity in a house of the same value than I have in raw cash freed up just from renting. And that's really not counting fees and closing costs.
Vastly. Fancy parts of LA. SF. All of New York. Pretty much anywhere in the train-serviced urban/suburban Northeast.
It might not "make sense" but it is true. I'm also sure it's not the case in most markets in the USA, but in the large metropolitan markets, it is true, and that's the point people are making when they say "you know, it might make more sense to invest your investment money in a different asset class and rent rather than pay the ownership premium here in Santa Monica/Pacific Heights/Williamsburg"
The problem is, the equation has flipped. Mortgage payments are now, in many cases, cheaper than rent and there's such a high demand for rental units in some metro areas that landlords have no problems keeping tenants increasing rent 3-10% year over year. Ideally, you could do the same arbitrage buying a house (ideally an asset that nets 0 when you sell it worst case and you get your money back) and invest the rent-mortgage delta into other assets. The problem is "unlocking" the house option. If you don't have exemplary credit, and a certain pile of cash available, banks are leery to touch you and make financing available. Ergo, you get forced into the rental market and there's a huge incentive to turn properties into rentals.
Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases.
Are we hesitant to "settle down" or are we trapped in a death spiral of student debt, rising rents and underemployment?
Yes, it's possible all of those things are factors but I'm going to argue for most it's subconscious rather than explicit factors in a settle/not settle equation. I think a lot of millennials are buying into the "extended adolescence"/party phase/single life/no responsibility/free spirit/high mobility (pick your moniker) lifestyle choices and acting accordingly - based on my anecdotal experience.
Where are the accompanying income increases coming from? Clearly not W-2 income. What can't continue forever does tend to stop. Or at least what happens on an extremely small scale can't be the case over an extremely large scale. Can't squeeze blood from a stone...
Also never forget the cost of home ownership isn't the mortgage, at least when compared to renting. That's only about half, once the numerous additional expenses are considered. My bachelor pad rent included everything but the electrical bill. Mortgages do not pay the gas bill or for a roof or a new HVAC system or water bill or (generally) property taxes or ...
In essence, we're a victim of our own success. Back in the day, life revolved around the city center and much of what is the 'burbs now was farm land. Overtime, as more people moved to the area, the cheap real estate was always al little bit further out from the city so people would saddle up and buy a house (with a 20-30 commute as the penalty) for a reasonable price. Over time, companies started building offices in the 'burbs, more people kept moving to the area, and the creep has pushed "affordable" out almost 20-30miles from the city center (commute time >1hr). Factor in the road networks are terrible, and mass transit stations are rare enough that real estate near them commands a premium and you find people willing to fork over a chunk of change in rent to not have a terrible commute either to city center or their 'burb job. Houses for sale, in the neighborhoods closer to the city, with good schools, not terrible commute etc, are generally priced for 2-income families. (>$500k).
Yes, the tradeoff between renting and buying is you assume the risk and costs of maintenance in buying. Most of the rentals i know of (single family homes or townhouse) push the cost of utilities onto the renter so really, all we aren't paying for is standard house maintenance and taxes. I'd rather assume the costs and risks of maintenance and taxes (and budget for them accordingly) and live with a fixed housing cost rather than continue fighting variable costs and potentially cranky landlords. Nothing makes a good housing situation sour faster than a bad land lord.
You invest your excess money in the stock market (hopefully returning more than 3.5%) instead of paying off your mortgage early.
Say your mortgage loan amount is $300K at 3.5%, locked in for 30 years. Instead of paying it off in 6-10 years with extra payments, I say invest those extra payments in the stock market, and keep paying the mortgage for 30 years at a locked rate of 3.5%. If that money that you invested makes anything above 3.5% over 30 years, then that's free returns to you.
On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. Hope that helps.
That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?
So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone.
Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already.
That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
You're financing two assets, you home and your portfolio with some mixture of debt and equity. Without making assumptions about the expected return of the housing market, the return on your portfolio, the variance of those returns and the horizon, its not clear that you'd still be better off.
You say take advantage of the cheap (tax-favored too) leverage -- I'd be concerned medium term variance in returns. That ETF you pointed to is down over the past 10 years and underperformed the market -- and it looks like it missed a few dividend payments during the crisis.
https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&...
> That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
So yes, technically some people now could have loans with negative interest rates, but there is usually an extra clause for a minimum or 0% or 1% or somesuch.
For example, here in Oregon based on all of the factors I adjusted, the result was "If you can rent a similar home for less than $1,422 per month then renting is better.". I could probably break even by moving to a different location, but then (for me) the freedom factor pushes it back towards home ownership.
So you put your own assumptions in, and that can give you a good idea of where your own situation results.
Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere.
As a direct response to this, the calculator will actually show what the expected costs are assuming you invest any difference between the rent vs mortgage in a vehicle with the specified returns (and over the time period you specify)
[0] - http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...?
Let's say after 30 years you have a big bag of money. Well, now you have to invest it for the passive income to continue paying rent. But, per my recent comment[1], inflation-protected passive income will pay something like 2.1%. Oh, and you're taxed on the interest income. So, more like 1.7-8% (in addition to whatever hit it because you couldn't put it all in tax-deferred retirement accounts). I hope interest rates return to something sane, but we can't assume that.
In contrast, if that extra money paid off a house, it's implicitly "paying your rent" ... except that it's not an actual income flow, so it's not taxed at all! You just pay property tax, whose increases are capped because you're just an elderly person whose estate shot up in value.
Plus, factor in rentals being generally targeted a lower-income people (or high-income yuppie singles) and therefore less desirable neighborhoods and less optimal for your lifestyle and it's looking steadily worse -- definitely need more than 3.5% for the break-even point (which would have to be the real, not nominal return anyway).
That's a tiny bit racist.