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Comment by PaulDavisThe1st | Hacker News Reader

MB seems to make a simple error a couple of times here:

> So, the financial case for homeownership is much weaker than I think most realize, especially when compared to alternative ways of investing the same money.

> So these principal payments are generating a net return of 1.795 percent (2.295 – 0.5). These same dollars, if placed in a diversified stock/bond portfolio, would generate a much higher return than that.

The problem with this angle is that people in general have to have housing, and so they're going to pay a substantial part of their income either on rent on on a mortgage. There's rarely an option to invest "the same money" in anything else.

Overall this seems like a solid analysis, but the contrast with "what else you could do with the money" seems a little weird when that's not really a choice (unless you live somewhere with a huge difference between the cost of renting vs owning).

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But the point is that renting is significantly cheaper than owning a home- so you take the difference and put it in the market every month. That's the key point- that the monies invested in the market over time will beat however much your house appreciated (minus the costs of owning a home in that timeframe, minus the costs of selling, which are usually very significant). If you're in a market where renting is more expensive than owning a home, of course it makes more sense to own.

There are calculators out there for comparing rent vs. buy options in various metro areas. That's one mistake Bruenig made, what's true for his area might not necessarily be true in a different city

Depends on the location. In the UK IIRC mortgage payments are typically lower than rent payments, assuming you can find the initial deposit.

Yup. In the UK the benefits of owning are clear, but the entrance requirements can be very high.

People greatly mis understand this point. Renting really is cheaper in the short term than buyng, especially if you can get a multi year lease. I’ve rented many single family houses in my life, and always, without fail, the rent was less than what the current mortgage (with minimal downpayment) + upkeep. This delta also tends to grow as the value of the house goes up.

So a very valid strategy is to rent, and take that delta and put it in an index fund. This won’t outperform a mortgage in a very hot market, but you will still likely be able to live “rent free” after 30 years of this strategy with a 4% drawdown on just that account.

The main argument I like for home ownership is that it really helps force this savings, since many have a hard time not spending money on frivolous things.

That said, I finally bought the house I was renting 6 years ago. Mostly it was a hedge against raising rents. My area was seeing 10%+ yearly rent increases. So far it turned out to be a smart play, but interest rates could have gone up a couple points, and I might uave been underwater for several years.

Add to that the added benefit of "as long as I make my payments, this place is mine forever" - which is certainly not the case with renting.

There's a whole slew of intangibles that come with "owning" your home that I think have made my quality of life significantly better (and certainly worth every penny): being able to make whatever changes I want, knowing that what I do to the property could outlive me (in the sense of taking care of the planet), and having a sense of accomplishment when I fix or upgrade odds and ends.

His central point is that the "rent" you pay via the costs of homeownership are often approximately equal to the costs of actually paying rent. Since principal payments are on top of those costs, that is money you _can_ do something else with if you were renting, in this analysis.

Of course, that part of the analysis ignores the potential capital gain of the property value, which is often one of the appealing financial factors of homeownership. But the article also addresses that.

Except that in many places renting is even more expensive than monthly mortgage payments.

I can't speak to all markets, but in my experience in a HCOL city in the U.S., this is not true, at least anymore. Buying a place never broke even with renting an equivalently sized one, even in the long run. Yes, there are lifestyle advantages to homeownership, but at my current place and time, not financial advantages.

I live in a low-mid CoL city, so I guess this is all super YMMV, but even with a 5% down payment, a decent home would run me around $1.5k/mo in mortgage payments (including interest, principal, PMI, and an escrow payment for taxes and insurance), whereas an equivalent rental would run well over $2k/mo, possibly closer to $2.5k/mo.

Sure, I can (and do) rent an apartment for less than a house, but that means rent increases whenever the owner feels like it - my rent has been steadily increasing to the tune of about 5%/yr, and this year it was all the way up to a 7% increase.

I was in a similar boat years ago. The company I rented from wanted to increase my rent 12% year over year. I told them I didn't make 12% more money, spent a lot of time pleading, and talked them down to merely 9%. Rents were all over the place, and there was little I could do about, except move to a new apartment every year.

His analysis is that roughly 75% of his ownership costs are equivalent to a rent. To be able to invest the other 25% of his cost of ownership into something else, he would have to be able to find an equivalent property that he could rent for 75% of his total cost of ownership (or accept a reduction in the size and/or quality of his home).

I don't know how realistic that is across many different areas, but it's certainly not possible in many locations.

> Since principal payments are on top of those costs

I was under the impression that in most cases, the principal payments aren't on top of those costs. At least not all of it.

The “what else you could do with the money” argument is standard in finance/economics , in fact it’s the cornerstone of the famous Black-Scholes formula for pricing options which takes into account "risk-free" interest rate.

Alternative investment is of course a thing.

However, you're missing the point. People MUST live somewhere.

Their only alternative investment is with regard to their down payment for money saved, or the amount of money that is (mortgage - equivalent rent), which is usually negative!

The BULK (or entirety) of the money they spend on their mortgage is not money that would otherwise be available for alternative investment.

In my experience in the recent market (in a HCOL city in the U.S.), rentals (even only compared to the costs in homeownership, i.e. ignoring principal payments) are much cheaper than mortgages for an equivalently sized house/unit. That's the assertion of the article, and it rings true.

You're right that the bulk of the mortgage payments, especially towards the beginning, do not go towards building any capital, which makes the investment even less appealing.

In my experience in the recent market (in a HCOL city in the U.K.) rent is only marginally less than the interest on the equivalent mortgage.

All the cost calculations should be based off interest only. The principle repayment is a cashflow issue - and a signifcant one at that.

can confirm, monthly mortgage payment + taxes is about twice the monthly rent on similar property in HCOL US cities

The problem is that, in this case, "what else you could do with the money" is limited to one thing - a recurring subscription cost with no asset value acquired. It's a faulty argument that shows a lack of critical thinking on the author's part.

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