Renting Is Cheaper Than Buying, Almost Everywhere | Hacker News Reader

Renting Is Cheaper Than Buying, Almost Everywhere

nytimes.com

17 pointspseudolus17 comments

I would like to see the dataset the NYT article is using because if they're comparing a HOUSE versus say an apartment that's an apples to oranges comparison. If they did a head to head with renting a house versus buying a house then this would be more fair.

It appears the methodology is extremely blunt - there's no mention of adjustments for square footage, rooms, income, or any other variable, just the median household spend on renting vs house gross costs.

Since most houses are larger than most apartments, the results are going to skew towards apartments being cheaper.

https://www.lendingtree.com/home/mortgage/comparing-rent-vs-...

Renting is not cheaper than buying, when the cost is calculated long term, in non-investment realty markets. Houses in cities like NYC, Toronto, San Francisco are being bought by asset management firms as investments, turned into condos or Single Family Rentals (SFRs).

Consider this second home scenario. A 2000 square foot home in one area in Maryland (outside Baltimore and Annapolis) costs $3000 per month to rent. Median home price in the same area for roughly same size is $450k. Figure you have $90k down (most don't - which is another way people are forced into renting), and you get 3.5% interest with a 30yr fixed mortgage. You are looking at paying $360k principal and $222k interest over those 30 years, with a payment of ~$1600. Both families live 30 years in the their houses (also not realistic, but makes it easier).

After 30 years the SFR family has spent $1,080,000 and has nothing to show for it. After 30 years the owner family has spent $582,000 (~54% of the SFR money). Not only that, they also own the house. At the U.S. national average home appreciation of 3.85%, that home is now worth $1,397,679. That means that while the SFR family is in the red $1.08 million, the owning family has money if they sell the house, to the tune of $815,000.

Don't ever let someone tell you renting is cheaper in the long term than owning. Renting may be all someone can afford at the time, but it is always a con in the long run.

You've completely ignored risk. Any financial action (like taking out a $450k loan) comes with risks, otherwise everybody would always do it. In the past 30 years we've had 3 major economic downfalls (.com, 08, Covid-19) - each of which could very easily cause someone to lose their job and subsequently their home/mortgage.

Your argument is how many people look at the stock market as well. It always goes up! - if you entered the stock market correctly, exited it correctly, invested correctly, had a long enough time horizon, and could stomach risk/declines.

Renting is not a long con and its absurd to claim that.

You are 100% right, I did not factor in risk. The SFR has a 100% guarantee of losing all the money they spend on rent. The national average for home appreciation over many years is 3.85%. There is a reason real estate is the investment of choice for many asset managers. Yes, if you sell the house during a downturn you could lose money. If you buy on the edge of a flood plain, or in a bad neighborhood, you could lose money. Individual stocks are high risk, but the DJIA has gone up consistently if you look at it across multiple years.

Renting being a con might have been too strong - it might not be an intentional act to steal money. However, renting is almost never in your best interests, if you are not doing it for the flexibility (don't have enough money at the moment to buy a house, don't want to be tied down, etc.)

Of course if you look at it over 30 years it looks like a no brainer but what percentage of renters ever live in a place 30 years? It's simply unrealistic and completely changes the math if you were to look at it on a more realistic scale.

It makes the math less, but it's still a significant advantage to the home owner, even if the family only stays there 5 years.

In general, the monthly expense for a home is ~.5% of the home price. Comparing that to the rent is a decent starting point.

In your example, monthly expense of ownership is ~2250, which is lower than the rent of 3000.

Of course, this doesn’t take into account the down payment and risk associated with home price fluctuations.

The NYTimes has a good rent-vs-buy calculator that can help you figure out the cost (not cash flow) of owning vs renting.

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

You have completely neglected:

  - maintenance (1%/yr)
  - property taxes (1-2%/yr)
  - utilities included in rent
  - opportunity cost (8% return on alternativee investments)
  - transaction costs (4% to buy, 6% to sell)
  - rent growth (=home price growth IMO)
  - inflation (should =rent and home price growth IMO)
  - mortgage interest deduction

Etc etc. The NYTimes calculator includes all of these. That said $3k/mo for a $450k home is heavily in favor of renting. The approximate cost to own the home is only ~$1500/mo.

In SF a property that costs $3k/mo to rent might cost closer to $800k. That comes out to about the same cost either way, according to the assumptions I stated above.

The other factor here is how much rent goes up on an annual basis.

In many places in California, I understand rent has gone up, on average, over 20% — each and every year for the past couple of decades.

How many investments in this world can effectively guarantee a > 20% APY?

That’s way better performance than the stock market.

Shouldn't renting always be cheaper on principle? Why pay to rent when you could pay an equivalent mortgage?

And if you can't afford your own home, logically you could only afford renting if it was cheaper.

I don't really understand housing economics, but this seems like it makes sense.

Isn’t it the opposite? If a person who owns the property has a mortgage, wouldn’t rent always have to be higher?

Renting is often more expensive in monthly recurring costs for various reasons. The really big one is that the landlord probably has a mortgage and wants to make a profit. This ignores some properties being under rent controls and government-assisted rent.

A mortgage does generally require a down payment, but if you're willing to pay private mortgage insurance (PMI) monthly you can get as low as 3% down payments in a conventional mortgage and sometimes no down payment in government lending programs. Interest rates vary over time. In the late 1970s even a well-qualified couple was paying double digits in APR. My most recent refi is around 3% over 20 years. Bigger loans can go lower. Shorter loans can (but don't necessarily) go lower. When your balance is small enough, lenders will sometimes charge more interest on shorter terms to dissuade you from taking those. Buying a new home is usually at a bit lower interest than refinancing an existing loan, but market conditions vary enough that's not always the case either.

Then there are taxes, tax exemptions, insurances of varying types, and home maintenance. I didn't dig deeply into the article's methods or data, but if they are comparing rent to only a mortgage they're doing it wrong. Owning property in the US means city and/or county property taxes, school district taxes, sometimes special district taxes (water supply/levee/fire protection/park districts as just some examples), maintaining the property, insuring the property against fire, wind, sometimes earthquake, sometimes mine subsidence or other sinkhole issues, sometimes floods (which by law go through a single government agency), medical for people hurt on the property, contents of the home, and general liability. When renting a property out, often the landlord insures their interests in the property but covers no contents. The renter then assumes responsibility to insure their own contents of the proper and often are required (but it's always a good idea) to insure the property against damage they might cause. Waterbeds often involve an extra policy rider, as might other things.

Of course prices differ based on structure type and location. Unless they controlled for some neighborhoods being majority owner occupied and others being mostly rental property, there's another blind spot in their analysis. Especially in areas with very dense inner cities and lots of single-family homes on private lots in the out rim of the city or in the suburbs, there are some really complicated comparisons. If you're in a 20-story apartment building in Manhattan the land is worth a lot, but you're vertically stacked and probably have decent maintenance crews shared across the whole building. If you've got a 4 BR 3 bath house of your own on a 10,000 square foot lot outside of Houston, the taxes are lower per square foot and so is the cost of the land, but you're responsible for the whole thing. The Manhattanite probably uses mass transit a lot and may not even own a car. If you're outside of Houston, your household has at least one car or your lifestyle gets very expensive in time and/or money very quickly. Your home insurance also suddenly has to cover hurricanes, and car insurance rates are some of the highest in the country.

It's difficult with much certainty to do an apples to apples cost comparison across one whole metro compared to another whole one if you're looking to keep lifestyles the same. The typical Manhattan household is not the typical Atlanta one, but maybe parts of Queens are a lot like parts of Chicago.

Means are means and medians are medians. Those can be useful and make interesting comparisons on the large scale. If you were actually looking to move or to make a rent vs buy decision of your own, then your housing style, home size, commute, tax rates, insurance rates, and mortgage offers are what will matter to you. Even within one metro area people make a tradeoff between a shorter commute and a bigger house or between lower school taxes and better public schools.

> Why pay to rent when you could pay an equivalent mortgage?

I was always under the impression that a lot of people can't scrape together the 3.5% downpayment or don't have good enough credit.

Plus, I think most landlords who rent out houses are looking for a profit. So it would theoretically always be their expenses (mortgage + taxes/insurance + some repairs) + profit, making rent the more expensive option by nature I figured.

I think in a true efficient market there would be no arbitrage between renting and buying. There would just be oscillations around an equilibrium.

I would suspect permits/zoning and whatnot that cause inefficiency to the markets cause the oscillations to be wider than they should be and harder to get back to equilibrium.

What about the cost/sqft? I would assume that the 'house' would have more space for the dollar.

cost/room is far more interesting than cost/sqft. Both are less interesting than location.

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