Should I Buy a House?

The problem with comparing housing prices to the stock market is that if I were not putting $2500/mo into a mortgage, I'd be putting it into rent, not the stock market. So the comparison might work for a second home purchased strictly as an investment, but it's not really on point for a primary home that you will be living in.

This argument isn’t as solid as it sounds, mainly because you have to live somewhere. So you’re going to need to pay rent and you need to subtract that off the profits from S&P investments.

You also generally can’t borrow 5x your income and invest it, but you can do that on a house, so if you think house prices will rise, even a tiny bit, then you’re missing out on a chance for major leverage you won’t get elsewhere. Hint: house prices don’t really go down much, because everyone is leveraged and literally can’t afford to sell below a certain point.

Finally there’s something to be said for the security and ability to make a house your own. Not being dependent on a landlord’s whims and decisions can be of huge value.

No one should buy a home they intend to make their primary residence purely for investment reasons. But if you are settling down with kids, and don’t intend to move for 5 or more years, then having a stable home with a mortgage payment you can afford is a completely rational decision. There are significant tax benefits to owning a home, and after 5 years you don’t have to pay capital gains taxes on your first $200K (?) in gains from a sale, which is pretty huge.

If your primary goal is just to realize some ROI there’s plenty of other asset classes that are much more liquid than residential real estate.

> It's almost impossible to go out with friends nowadays without having a conversation about buying a home.

Posted December 10th. 2020?

However you read this (callous about a worldwide pandemic or meaningless, spammy marketing speech), that is effortlessly the one opening sentence after which to disregard any opinion of the author's.

While I agree with the overall thesis that housing prices are currently overvalued in many areas, there is a lot to this analysis that I don't like because it paints with too broad a brush. E.g. it kicks off with:

"Housing market returns are very bad. Between 1948 and 2004 the real increase in value in the U.S real estate market was less than 1% a year."

While that may be true nationally, as they say in real estate: location, location, location. There is huge variation in real estate prices, and that 1% average masks giant gains in some areas and enormous losses in others.

The thing about real estate is that a desirable, greatly supply-restricted asset is always priced at whatever the top earners in an economy make. That's why real estate with unique, constrained features (e.g. waterfront, city center, etc.) has appreciated unstoppably, while there is a cap on price appreciation for easily-replicated homes (can always build another suburb further out in Phoenix).

Thus, blanket statements of "don't buy a home" are ridiculous without more context of exactly which home it is you plan to buy.

I bought a house 5 years ago for a couple of reasons.

1. I have to live somewhere. 2. I was tired of living in an apartment, and my mortgage is less than what rent on a comparable house would be.

A lot times I see people mention that you are better off putting the money into an S&P 500 fund. However what they don't account for, is that you have to live somewhere. So you either pay rent or pay a mortgage.

Also you don't have to put down 20%. With an FHA loan you can do as little as 3%. You will have to pay PMI, but if you in a market with decent appreciation you can get rid of that in a few years.

I agree that buying a home is not for everyone. If you like to move around or don't think you'll be saying in an area for 5 to 10 years, you are better off renting. Also if your financial position is not where you can afford to deal with unexpected repairs, you are probably better off renting. I also don't think you should buy a house as an investment. That just leads to over extending yourself. Instead you should buy a house because you want to live there.

My wife and I bought our home for a simple reason: we wanted to own our home and not be beholden to a landlord. We placed the value of that higher than "but you'll make more money by renting", etc.

When we decided we hated the look of the kitchen, we tore it out and replaced it. We'll get to keep any increased equity (questionable, sure) that we made for doing so. My wife is giving the bathrooms a similar look lately, so I suspect she has plans to gut them as well.

Nobody can tell us "no" (to an extent). That's a kind of freedom I'm willing to pay for.

I bought a house in Q3 2012 because I thought I was settling down in the area, and then ended up moving away 18 months later after unexpectedly getting a Google job offer that was too good to pass up then and in hindsight now after promotions and raises was unbelievably too good to have passed up. I still own that house and rent it out through a rental agency, but that's definitely not the best return on investment on that money (it's not the kind of property you would've bought if your goal was to maximize return on investment).

I would own a home again some day just because there's things you can do with a property you own that you can't do when you rent, but I definitely wouldn't be approaching it as if it were an investment like I did in 2012. I'd be financially better off (admittedly to an insignificant degree) had I not bought that house, and I certainly put a lot more of my time and effort into it in those 18 months than I would have if I'd continued renting.

I agree with most of the analysis. But for the average person the biggest advantage of a mortgage is that it's a form of forced disciplined investment.

A mortgage requires you to make an upfront downpayment and then recurring monthly payments into a durable asset. You could put them same amount into equities, but 90% of people won't have the financial discipline. And even of those who do, the average equity investor gets skittish and tends to panic-sell at the bottom, missing out on huge accumulated gains over time.

For one thing selling your home is a lot harder process than pressing a button. For another you don't get a constant stream of updated marked-to-market prices. If you're a perfectly rational, even-tempered homo economicus, then low-fee index fund is a much better better deal than real estate. But there's a reason why historically home ownership has created much more middle-class wealth than stocks.

The worst time to buy anything is when other people are rushing to buy the same thing.

The NYT calculator for this is pretty great and is a more substantive way to evaluate the decision than this article for your specific circumstances.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

I do think the cliche about "throwing away money" on rent is wrong and ignores how much of what you pay for a house is for things like interest, insurance, repairs, maintence, property taxes, etc -- but for me home ownership made sense, mostly due to expected length of stay in the home. There are also benefits, of course, that aren't dollars, to either renting or buying. For example, a homeowner may like additional freedom to change the flooring.

If homes appreciate by 1%, the market averages 8% (taking the article as given), but rent's going up 10% yearly, I'm not sure the numbers still work out in the writer's favor. The market doesn't just have to beat real estate, it has to beat Cost of Living.

This argument falls into the trap of comparing the average home to the stock market. If I was primarily concerned with returns, I would never buy the average home. That would be a home in the middle of nowhere. I would only buy in major metro areas with diverse, heavily entrenched industries and a strong desire among people all over the world to live there (places like NYC). If you look at the numbers in those places, the story is very different. On home value alone, you see appreciation of 8-12% per year on average since 1990 (despite at least three recessions during that time). Covid will impact the desire to live in major metro areas but not enough to seriously impact these returns.

If I wasn't concerned primarily with returns and instead on just saving money over renting, the math is still way better in any of the top metros in the United States so long as you plan to reside there for 5+ years. And if you aren't living in a major metro, you still need to find a place to live, so you might as well make 1% annually on that money as opposed to just giving it away in the form of rent.

In my experience, renting makes sense when you need to pay for flexibility, because you aren't sure if you will stay rooted in one place for 5+ years. Otherwise, buying for many people is a win financially and has been for decades.

One thing that's often left out of these cost/benefit exercises is that owning your home is a good hedge against being priced out of the area in which you want to live. If housing prices surge and you're renting, then you might not be afford to continue to live in your rented home, and so you might need to move; insurance against this sort of disruption is worth more than $0 to pretty much everyone and so it should be included in the cost/benefit consideration.

Put more generally, your model should consider not just the possibility that growth in your real estate market is 1% YoY for the next 30 years, but also 10% YoY and -10% YoY. The advantage of renting of course is that if housing prices collapse, then you either pay less or can pay the same and upgrade.

> Between 1948 and 2004 the real increase in value in the U.S real estate market was less than 1% a year.

True but not the whole picture; buying a house doesn't give you exposure to "the US real estate market" in aggregate, you get exposure to a hyper-localized slice of the market, i.e. the neighborhood in which you buy your house. For example in the Bay Area you're looking at something like 5-10% YoY increases over the last few decades, and in the same period I imagine that prices have gone down in Flint, MI. This would be like saying "the stock market increases by 8% YoY on average" in an article about "should I buy AAPL"; you can see that it's relevant information that should be considered but it's not sufficiently specific to stand as an argument on its own.

If everyone is talking about buying a home, sure sign it's time to sell one.

I have to say...I'm not sure about the content but highlighting 3-4 things every paragraph is pretty off-putting. It's almost like ALL CAPS.

I don't know what to believe. I feel like it isn't hard to cherry pick some examples.

I'll a townhouse I know about.

1994: $76.5k

2020: $239.5k

$76.5k in 1994 is $134.3k inflation adjusted in 2020. 75.5% increase in 26 years. 2.9%/year

S&P500 opened 465.44 in 1994. With inflation it should be 817.28. It's 3737 right now. lol

I dunno how rational this is, but I've always felt that when I pay my mortgage, I get equity in return, whereas when I pay rent, that money disappears into a hole, gone forever. Further, all the carrying costs of owning (mortgage, taxes, utilities, maintenance, etc), come out to less than renting something similar.

Maybe my down payment would have done better if I had bought an index fund, but now I have all this equity on top, too, whereas the return on all my rent paid is zero.

Yet people smarter than me when it comes to finance publish articles like this one. So what am I missing?

I think the comparison of a house vs other investments is a bad comparison - you need to live somewhere. You need to compare buying a house to renting a house or apartment or whatever. People do view houses as investments, sure, but I think that's fundamentally misleading. Compare the basic cash flow of the different options available. Figure out how much you're willing to pay for being close to work, close to friends, having more or less space, being in a walkable neighbourhood or whatever else matters. As much as I enjoy the illusory dollar value gains of home ownership, ultimately I had to work within the confines of my budget.

Also I think this line of thought is also misleading: "For most people, their home investment represents a large part of their net worth."

That's true but it's because of inflated house prices and reflects the fact that Americans don't save that much. Again, just treat a house as a liability and not an asset and suddenly this is meaningless and we can get back to managing cash flows and thinking about increasing savings. (Although as a side note, being very aggressive savers isn't necessarily great for a country as a whole, Germany is very conflicted about it's very high savings rates - for example, https://www.dw.com/en/why-cant-germans-stop-saving-money/a-4...)

> That is to say that if you have bought a $1m home in 1948, it will be worth, in average today, taking inflation into account, $1 745 809,82. The same investment in the S&P500 will be worth $74,426,964.60.

Yes, but does this account for the fact that you need to be leveraged at $1 million at margin rates for that period of time? Or is it just looking at the upside of putting a million in the S&P500?

It reminds me of the ole “there are lies, damn lies, and statistics” saying. Without context I’m not sure how much to trust this.

Well you have to live somewhere, right? Either buying or renting - unless you can find free room and board (in that case, invest in the stock market instead).

I found the NYT rent vs by calculator to be pretty helpful when making this decision on my own https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

Strange way of comparing your main residence with an investment. Why not buy a cheap home and/or invest regularly?

If you're strictly thinking "I have X$ and should I invest it in stocks, crypto or real-estate[1]?", then sure, your arguments make sense. Otherwise, it's apples vs oranges.

[1] I did not use the word "house" in here, because that implies your main residence, for which, if not buying, you pay rent anyway.

I've always thought these conversations about home ownership are missing the reality for many people: rental agreements/legislation can be overly restrictive for many people's situations.

I had friends growing up who lived with extended family all in one house. They'd convert any space they could into rooms and house as many people as they could. That's not a situation that'd be allowed under rental agreements or housing laws but is totally fine as long as you own the house you're living in. Not to mention the nightmare of communicating with your landlord every single time someone moved in or out.

Similar for me: Before I got into tech, I bought a house on a fast food salary w/ a lot of help from housing programs. 15k of my 65k mortgage was subsidized! This allowed me to jump from a $650/month 2 bedroom apartment to a $550/month mortgage and house 4 children. An equivalent apartment would've eaten my meager salary alive and would have been untenable. Anything equivalent to the apartment I had would've not been allowed legally

Weird article. People do not lose their shirts when leveraged real estate purchases go wrong, because it's the bank holding the bag and they can't come after the rest of your assets, only the securing property. Also, in certain jurisdictions, the property tax risk doesn't exist.

That said, I am also not buying a house, but my reasons are very different from these.

Interesting this post is about making money, but doesn’t mention home owners net worth is around 40x renters net worth

https://www.keepingcurrentmatters.com/2020/10/07/a-homeowner...

If the only thing you see in a house is the investment profit, you are already part of the bubble problem of the past and future. During ownership, a house offers you benefits that a stock investment cannot provide. Thinking strictly in terms like the stock market profiteers that fucked it up for the general population is not the solution. Part two, one of the biggest benefits to home ownership compared to rent is control. You get much more say over your living space and customization. Theres give and take with decisions across multiple factors. Just the investment potential makes for a boring ass life.

Yes. With interest rates being as low as they are, and if you’re a citizen, the federal make a ministration cosign your loan, there’s really no reason not to buy a house. Just look at the way the market has changed over the past 10 to 15 years, and how people are moving to where they want to live instead of where they have to live. Prices are only going to go up in the situation, and I think for stability, and security, it’s never too soon to buy a house. If all else fails, you can always rent it out and move somewhere else.

Excellent article.

I'm always arguing with my parents on this topic and i have hard time explaining them the concepts that are clearly described in this article.

One point that worth analyzing further is to take into account that if you don't buy your house, you have to pay a monthly rent for your home. And, so depending on the situations there might be cases where ownership is still financially more interesting.

This calculator shows when renting > buying. Rent if renting is cheaper and/or if you're planning to move. https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...

Well you have to live somewhere. So you're either renting or buying.

Well you have to live somewhere. So you're either renting or buying.

Well you have to live somewhere. So you're either renting or buying.

Well you have to live somewhere. So you're either renting or buying.

Well you have to--zzzt \electrical noise\

Circuit fault. Real estate propaganda bot 23372 requests maintenance.

Since this article didn't link to this prior work, I feel like I should: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...

On other thing forgotten is that once you mortgage is payed off that outgoing is gone forever, but you'll rent until you die. I gave up a long time ago with the discussion about buying V renting. Renters who think it's better to do so will never be convinced. Their loss.

I feel like this comparison doesn't really make sense without adding in a few more factors. People who buy houses as investments aren't doing it just for capital gains, theyre doing it so they can get passive(ish) income from renting the place out

My favorite analysis on this:

https://earlyretirementnow.com/2018/03/21/best-investment-ev...

The question is housing as a investment mechanism, rather then housing as .. housing - or - housing as a revenue generation mechanism. I would point out that that.

1) One, if it's as housing, then you are actually living there. The alternative is not dumping money into the S&P 500. It's paying rent. Where I live, rent prices match pretty closely to mortgage prices, So what you are really saving by renting is the down payment. For owner-occupied, that number can be remarkably small (and should be for your first house). The current interest rates mean that outside of expensive areas (see SF, London, Tokyo) - if the rent and the mortgage are near equal, you are going to hold it for some period of time and the down payment cost is reasonable, you should try and build equity.

1a) If there is a way to swing it, it almost always makes more sense to hold on to a property once you have purchased it. Selling a house in the USA is crazy expensive. 6% commission is not that short of 10% down on property. The real investment (versus housing scenario) comes if you can find a way to rent out old properties for amounts that cover your mortgage on that property. Buying a house opens up the opportunity to take a house you might have previously lived in, and treat that as a investment.

2) In the stock crazy world we live in, people forget that stocks used to be about buying dividends, as much as speculation. This article focuses on investment as speculation, but I think the revenue generation side is much more important here.

As mentioned above, at least in my state rent and mortgage run pretty close together. So it's not that hard to get to the point that the rent covers the price of the mortgage + taxes. The difference is the down payment that you put up versus a renting (renters don't have to put the money away for that). The upside is that I am basically purchasing the rent by putting the money down for the house.. Paid back when renters rent the house.

Any appreciation is just gravy, and while deprecation over time is a concern, a severe enough running decline is likely smaller then the same decline that has hit stocks. Also, as a secured asset, there is a floor to the value of the investment, unlike stocks. Given how overheated the market is right now - this seems much saner to me.

So would I theoretically make more money taking every cent I own, and plow it into Tesla? Maybe, but the risk that this gets completely wiped out is much higher.

Combine this with something like a 401k or a IRA, and I think it's a pretty reasonable investment strategy.

I regret not entering the housing market in Toronto sooner. There was a brief period of time my earnings meant rent was cheap, but so too were houses. The average detached home goes for $1.2mm, whereas it was roughly $500k in 2010.

As someone with rental properties, I love articles like these. Keep on renting!

Better title for the article would be: "Should I buy a house in the US as an investment?"

For an actual answer whether to buy a house I'd consider one of the many region specific rent vs. buy calculators instead.

If you plan on living in one place for more than 3 years; buy one. If your investment horizon is shorter than 3 years; don’t.

There are options in between buying and renting.

One is co-living, co-housing, or whatever is the official term.

Check out https://www.ic.org/ to see if there is a community near you.

I'll second the author's point. I wish that I'd have rented and put the extra $800/month into the stock market. I'd now have millions more.

If you have a family and your significant other is adamant on it, yes. If you treat it exactly as renting and don't treat it as a private slush fund to refinance every 5-10 years, yes. If you wish to become a landlord one day, yes. If you intend on staying in the area long term and have a good feeling you will be staying long term, yes.

Otherwise, don't do it. Cheaper homes are money pits. Newer homes are occasionally farther out from the city and may not have the best service coverage such as internet. Mowing lawn/blowing snow/raking leaves? What about HOA's? Property taxes? Hey your neighbor reported some random one off violation you had no idea existed and now you've got something the city wants corrected and it'll cost $5k. In a flood zone? Want to sell? Hey remember you're in a "seller pays for buyer & seller realtors fees!

The list goes on and on. Homeownership is a monumental chore. It's only for people literally do not want to be apartment vagabonds anymore. Homes are for people who would much rather waste their time than their money living. Sure you don't get a "return" on renting, but you also have one bill: rent. Obviously I'm being a bit dramatic about the whole issues with homeownership, but the more people you talk to about owning a home, the more than have that minor minutia thing that eats up your time.

At the end of the day, you have to ask: "Do I value my time or my money more?" The former, rent; The latter, buy a house.

> For most people, their home investment represents a large part of their net worth. From a diversification perspective, it's a catastrophe. It's not even a diversified investment in different real estate assets, it's one asset in one location. This means it is also a bad move in terms of optionality. If crime rises in your neighborhood, the school closes, or if you have a good job opportunity elsewhere, it's very hard to move. If a crisis happens at this location, an investor can lose a lot of their net worth and can wait up to 15 years for the recovery.

Full stop. Housing is not supposed to be an investment. You buy a house because you need a place to live, not to turn a profit. If you treat housing as an investment, good for you. But I couldn't care less about the fact that housing isn't as good as an investment as the stock market. If crime rises or whatever, then you sell, and you take a loss. I certainly don't expect to sell my old clothes for a net profit when they wear out. Or my car, or any of the things I own out of necessity.

Stop thinking about money.

I'm considering purchasing a home, not as an investment; but because my return rate on rent is 0%.

I just need a home and have a flexible ~2-year time window to buy, and just need advice on when to buy.

Does this article apply to my decision making?

Why does everyone have to look at everything as an "investment"? I bought a house because I wanted my family to grow up in a house that suits us. We all need a place to live. Really tired of everything being looked at from an investment sort of view... people are OBSESSED with maximizing everything and enjoying nothing.