Three Million U.S. Households Making over $150k Are Still Renting
wsj.com
wsj.com
A) Not true
but also
B) 150k is not enough money to purchase homes in several major metro areas.
So, it was generally expected that most people would rent until they can afford to buy on their path to accumulating wealth. There are certainly reasons for people not to buy, but not being able to afford a home is more of a problem now than it has been historically (obviously). This has significant knock-on effects for individuals and the broader economy.
Edit: clearly one quote cannot capture the complexity of life. However, should I ever own a home, I'd be happy to let you guys pay for my mortgage.
Owning is a smart place to park money when you're sure you're settling down for a long while and can be a good investment at other times, but renting is "preferable" quite often too. People get very caught up in black and white thinking about this and it leads to a lot of counterproductive decisions and frustration.
« you’re either paying for your own plus more than a third in interests, plus strata, plus local taxes, plus maintenance or someone else’s mortgage which let you put your money elsewhere, live debt free, without the hassle of maintaining the place and the ability to move easily when new opportunities knock on your door »
I am not saying renting is better, but there is a different answer for everyone’s situation.
As someone who has been hit by a perfect storm of expensive repairs, I wish I were still renting.
Besides, repairs directly increase the value of your property, so there's that.
Everyone pays an average monthly cost to live in a “home”. Those who own their home still pay an average monthly cost in the form of maintenance, property taxes & assessments, insurance, and in most cases a mortgage. One should also factor in the opportunity cost of the money spent on loan origination, down payment, realtor fees, etc.
There are obvious benefits to owning too and thus we see the calculation is not an easy one. If one knows they will be able to pay off their mortgage then they can look forward to relatively cheap living expenses in retirement provided they did proper maintenance.
Being a landlord is profitable.
The rent you pay on a house covers all the costs of ownership (cost to buy the home, mortgage principal & interest, repairs, taxes, insurance) AND there is some left over as profit for the landlord.
If you owned the house instead of the landlord, you are still paying the same costs, but you don't have to pay the extra profit to the landlord. That is the amount of money you save by owning over renting.
There are edge cases, like people who want to move every year, but this is a useful heuristic. You can pay your landlord's salary or you can be your own landlord and keep that money for yourself.
1. You can maintain the property in question for less than the market rate.
2. You bought the property for less than the current market rate.
I looked into this in detail, talking with a realtor who very much wanted me to buy a second home to rent out, and determined that while the rental might be profitable a few years down the road--assuming I could keep it fully occupied and didn't end up with any "problem renters," even then it almost certainly would be more profitable to put the same capital outlay into the stock market, with the added advantages of liquidity and no renter headaches.
Most individual landlords are renting out houses they have already owned for a few years, so their mortgage is not based on today's price, and that is where their profit margin primarily comes from.
I actually have a spreadsheet that compares the total cost of ownership when buying and renting over a 10 year period. Believe me, it's really not as cut and dry as you and others are making it out to be. Quite honestly, for me a ton of it hinges on how much the house appreciates in value (since you're making a levered bet via a mortgage).
Another thing here is that you can be reasonably confident that the lot you buy will increase in value, so it also biases my point of view.
That's about where most people stop thinking. Clearly house values go up, I don't want to end up 30 years from now having paid rent and having nothing to show for it, I'm gonna buy a house. There's even one more factor, which is the US federal tax structure gives you a big break on any interest you pay on a home mortgage, so many people think: I get a tax break on my house payment, but not on rent.
Of course, most people don't put together a spreadsheet to consider how much money that old couple might have had if they had put that $100k into a stock market index fund the same year they bought the house.
Please understand, I'm not saying that buying a house is a bad investment. I'm just saying it's usually not the best investment. I don't think most people over-value buying a home, I think they under-value putting a home-sized chunk of money into an S&P index fund!
Thanks for the perspective, this is a question I've been thinking a lot recently and you (and others here) certainly have given me a lot to think about.
And tbh, it isn't the worst thing in the world. Regardless of what the spreadsheets say, my understanding is that buying a house forces a behavioral change on most people - the house becomes a forced savings account.
And repairs almost never increase the value of your property -- usually they just return it to expected value. When you sell a house, it's assumed that the plumbing and electrical work, and that's baked into the price. If they don't work, you have to make them work.
The only upside is that you get to keep the appreciation in the land value.
Check this out: https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Basically, in the most expensive markets, financially it almost always makes sense to rent instead of own, assuming you invest the money you save by renting. Owning makes sense for non-financial reasons, like having more control over your living environment and a sense of place.
However, when renting, you have to cover the same maintenance cost + interest that the actual owner is paying - why else would they rent the place out? (Ok, maybe you can time the market or have another kind of fluke, but can you really count on that?)
Thanks for the link! I need to give this a deeper look, as I'm currently considering my options.
If I buy a house in 2009 when the market is depressed, and by 2023 the value of that house has gone up immensely, but my mortgage is still based on my 2009 purchase, I can charge less to rent it out than it would cost someone to buy it. Or I can charge the going rate, and hope I find someone willing to pay it.
But if I'm on the other side of the table, it is usually cheaper and easier to rent a house from someone who bought it years ago than it is to buy a similar house myself.
Renting _this year_ may be cheaper than buying _this year_, but renting for a lifetime is always more expensive than buying unless you move constantly.
This also assumes that you aren't facing high maintenance costs. One popular rule of thumb suggests setting side 1% of the total value of the home for maintenance every year, and if the value of the home is rising, that set-aside is also rising. By more or less than rent? Depends on many factors.
That's not true at all. Most landlords are cash flow negative for the first 10 years.
What a landlord can charge is based on what the market will bear, not their expenses. And market is made of all landowners, including the ones who have no mortgage and can afford to charge less. Also, in California, the landlord who has owned for 30 years pays about 10x less in property taxes than a new buyer, so they can give a discount for that too.
In almost all cases, if you were to purchase the house you rent, you'd pay significantly more in mortgage+taxes+maintenance than when you were renting.
Landlords often don't rent out houses immediately after buying them. They must first either invest in repairs and upgrades to justify a higher rental price, or wait until the housing market itself justifies a higher rental price. For most landlords I've known, their first rental unit involved renting out their own paid-off or almost-paid-off house, and living in a new one they bought. Listing a new unit sometimes means being underwater for the first year or two, but they tell themselves that they're building equity and eventually rents will rise to more than cover their costs--which is eventually true.
Yes, but people wouldn't choose to be landlords if "what the market will bear" wasn't profitable. If renting didn't cover the landlord's costs (on average, over time), then nobody would be a landlord.
> but they tell themselves that they're building equity and eventually rents will rise to more than cover their costs--which is eventually true.
This is also true for you if you buy a house. Renters have their rent go up every year. Owners are always ahead after 30+ years.
A landlord is investing, and usually willing to consider returns over a long term. Landlords I have known are not profitable every year, and almost never from day one on any given property. I have known one landlord--and heard of others--who have seen multiple years of profit on a property get wiped out by a single bad tenant. But that's okay! Most landlords (not the big corporate landlords for which the economics are very different) console themselves in unprofitable times with the knowledge that at least they have the underlying asset, and it should increase in value over time.
> Renters have their rent go up every year. Owners are always ahead after 30+ years.
Look, if the only thing you care about is $X out every month, then sure, fine. Buy a house, don't look back, and whatever you do, don't every tote up every penny you've spent on everything related to your house and chart it against S&P Index returns over the same period of time if you'd rented a smaller apartment instead.
I wish there were more affordable housing solutions for people for who didn't want to own a home, but at least where I live that is not the case.
Technically it is. The house itself depreciates, it's just that the land underneath appreciates so much faster that it masks the depreciation of the structure.
B) No, 150k is not enough in most markets these days, but it's 150k/year income and that definitely is enough to finance a house.
My counter-argument would be that when you rent, 100% of expenses for repairs and maintenance are borne by someone else, but if you have a mortgage all of those expenses are your own.
Different cites have different ratios between rent and mortgage, with some similar, some higher rents, some higher mortgages. I don't know any cites in which rents require a 20% down payment, though.
Finally, when comparing potential returns, and remember that neither the stock market nor future home equity are guaranteed, don't forget that down payment! Many people focus on the month-to-month after closing, and forget that if they put that lump sum into an index fund rather than into a down payment, they'd be able to (after 12 months) sell shares over time and take income from the index fund in a way they wouldn't from the house without selling it or taking out a HELOC loan.
Regarding down payment, that is still something you could likely recoup, and putting it in an index fund isn't necessarily more stable (especially over a 12 month period).
Except for the very expensive markets like downtown NY or Silicon Valley, making 150k/year should be enough to finance a house (especially considering in those expensive markets rent is also very expensive). When you rent you're essentially paying someone else's mortgage with repairs priced in (mortgage is often less than renting).
Repair, relative local markets, and interest rates are all very relevant reasons that renting may be better.
I understand that. And it is most definitely not enough to finance a house in a lot of places. NYC, SF, LA, even Sea now...Following the 28% rule your monthly payment would need to be about $3,500 on a $150k income.
At a 6% interest rate with $50k down (just pulling a reasonable number here) you can't reasonably afford anything over $500k, and with the taxes in those locales what they are you're really looking to max out around 400-450k. You simply cannot purchase anything at that price point in those cities.
Someone making $150k+ in Atlanta should reasonably be expected to come up with $10,326 without much difficulty. Owning a home is a better investment, least of which is that the landlord won't double your rent because someone wants to pay more.
I think the renting is more of a desire to not be tied down to one location because of uncertainty in the job market, and social needs.
But the way of quantifying it is where it goes off. There are countless reasons to prefer renting than buying, even with a good income, and what are often personal reasons often grow to include financial one when the prices seems unsustainable. So the number of x-income household that are renting is not really illustrative of what's worth reading in the story. Presumably, the journalist or editor are themselves fixated on home ownership (we all know those people) and have sort of projected that out onto everyone else. But sometimes, you just don't want to own.
Is this accurate? Or is it more “well-paid professionals struggle to responsibly buy in select areas of a handful of metros”?
Are well paid NYC professionals struggling to buy in the Bronx? Or east Brooklyn? Or Staten Island?
I doubt well paid professionals are struggling in all of Chicago, Kansas City, Tampa, Dallas, Atlanta either. It might be that they are struggling to buy in the richer parts, but that is simply consequences of widening income/wealth gap.
And sure, when people say “struggle to buy” we’re talking about securing rough parity in their lifestyle as renters. Yes, they can likely go and start gentrifying a grossly unfamiliar neighborhood that needs housing for its own community, or maybe find a rough home that has a low list price and unknown high maintenance costs, but they can currently provide much better for themselves and their families by renting.
The market doesn’t always look like this. It has sometimes, it does now, and when it does it effects people. That’s the story. And that’s why its news.
You’re not obliged to care about it, but if you’re just going to dismiss it without bothering to understand it, you can just skip along and read other things.
>With the city’s median home price up more than $100,000 during the pandemic, Mr. Robbins said he needs a few more years to save for a down payment even though he now makes six-figures. “It’s not what I envisioned, to be in a two-bedroom apartment with my son,” Mr. Robbins said.
As opposed to someone earning $150k in SF/San Jose area or Manhattan or LA would not even be able to save up a down payment.
Even then, dual higher earning couples could save for 5 years and afford a down payment. Or they can spend less and commute 90min to work.
Definitely endemic of housing in the USA, where people want to live, there are restrictions on building adequate housing that even upper middle class folks are priced out of ownership (let alone reasonable rents)
I view this as a failure of housing policy and jurisdiction
For example, people might have been willing to raise kids while sleeping in a single bed in a single room apartment, possibly having to move multiple times.
Now, you only have kids if you can secure a single family detached house with multiple bedrooms located amongst other similar or higher socioeconomic class neighbors (good school district), and at least one parent has reliable employment with health insurance benefits, which might mean living in a metropolitan area with limited housing supply.
Sadly there is a bit of the reverse effect too, i.e. people want to live in places because there are restrictions on building.
This is a very strong claim that I would love to see even a smidgen of evidence for.
And I don’t mean “people complain about density at local planning meetings” — that a vocal minority of residents don’t want their own individual neighborhoods to change is not a surprise, but it’s also not the case that most of those people move when density increases are approved.
Which makes me realize how a my FAANG salary is not even keeping up with where my dad was in 1980 when he was contracting in nuclear plant construction :p (but that industry imploded in the mid 80s, so it didn't last).
I am renting for a reasonable rate. There is a similar house on my street for 1 mil. While I could buy it, I could also live off that 1 mil if it was in liquid investments for the rest of my life. The dividends would pay my rent, expenses and then some.
Why should I put such a massive investment on a single asset? It can be difficult to even insure a house in my state, the so called “insurance crisis.”
My financial plan is to work while I can bare it, then head off to a cheaper place once I can’t. I’ve never been too interested in accumulating great stores of things and don’t have champagne taste. I save a lot of what I make. I’m assuming that the economic good time will end during my lifetime, so live a simple and enjoyable life that I think I will be able to sustain even if my ability to work is destroyed.
I think that makes me a big picture pessimist but a small picture optimist.
The option is usually not paying $1M cash for the house or investing $1M cash into a dividend paying investment.
The option is usually paying $200k or less and then a stream of payments for a certain time period, and you could still invest at least some portion of the remaining $800k since the mortgage debt cannot be called by the lender so you do not have to worry about unexpected increases in mortgage payments.
I think the fact on the ground is that the housing market is not fair and that some people get incredibly lucky in their timing and others would be just better off renting.
If I wanted to, I could get a house or buy an apartment, but it would require me to put in most of my wealth to cover the mortgage.
Currently in a rent-controlled apartment, so my housing costs after buying would go up about x5 with the interest rates we're seeing now. And then my utilities, insurance and other maintenance costs on top.
I feel I'd need to earn 2-3 times what I'm earning now to be comfortable with that level of spend. I would feel trapped if I'd have to sustain property ownership on my current salary level, as it would force me to keep working certain jobs and long hours.
But many of my peers seem to have made a different choice
We've moved four times in the past five years. We don't have kids; we only have cats.
Each move was for a very good reason. Had we owned, we never would have discovered just how much we love our new city or how much I dislike the suburbs without losing substantial amounts of money or being "forced" into becoming a landlord. We'd also still be paying student loans.
I love renting. It offers so much flexibility and offloads so much potential headache.
We will probably buy soon, but renting has made it possible to buy when I was ready in a city we were both very very sure is "it" instead of scrimping and saving for a crappy starter home somewhere we would both develop an acquired taste for.
Also, when I buy, I want our place to be _our place_, not a financial vehicle to buy low and sell high. Renting for a while is giving me enough time to develop enough financial security to make that possible.
Now if we're talking about 'buying an apartment' that'd be a better comparison, as in that case it would be better than renting if you plan to live in a single place for a long time.
The amount of money people blow every month on mortgage interest, maintenance, insurance, and taxes on a big house is easily more than many peoples' rents, but yet people are convinced that buying (before they actually need a house) will lead them to a better financial future.
Mortgage is such a huge leverage (with the risks that come with it)
I have to re-run the numbers all the time because my guts keep telling me to buy. Probably due of my cultural background where the first thing everybody did was buying a house.
Luckily attaining this only requires a few thousand bucks a month for a mortgage and maintenance on a property in exactly a place like that. So I actually get a great deal, for $500k I get $5M value. If I rented so I can invest the difference, I doubt I could make $5M.
Which is fair, and makes total sense, but to GP's point, there are people for which renting an apartment does make more sense. Example: I'm single and rent a 2 bedroom apartment. Every time I've run the numbers on buying a house in a similar area of town, it ends up costing me more because I'm buying things I do not want (a yard, a garage, extra rooms, etc).
Financially, we might (or might not) miss out on some equity growth, but our expenses would be more steady. Instead of sporadic multi-thousand dollar repairs and a giant property tax check every year, we'd make a single monthly payment to replace both. Some months we would pay more than if we stayed put, some months we'd pay much less. In the meantime, an apartment would be much smaller, and so utility bills would decrease, too. Rent would go to maintain the shared pool rather me having to pay separately for that, too.
In a state where property taxes weren't running more than $6k/year, the math might be different.
We'd likely have moved already if we didn't have two electric cars.
try having most of your annual earnings to be long term capital gains with some of your other unrealized long term gains donated to your non-profit.
if you're just doing "income" and saving, taking no risk or spending, then don't take a second look at California. but if you can drive some Net Operating Losses in conjunction with capital gains and capital donations to non-profits, you really don't have to worry about income taxes anywhere, just the local property taxes, and those are much lower in California than Texas.
But that is not relevant for anyone looking to purchase a home, and generally, land in CA is much more expensive than TX, so I doubt there are any property tax savings by buying in CA.
In fact, property taxes are not typically less than half of Texas. I think you mean that property tax rates are lower, but given the difference in house prices, that doesn't work out to half. For example, WalletHub[0] says that California's median home value is $573,200, resulting in property taxes of $4,279 at a rate of 0.75%. In Texas, on the other hand, the rate is more than double: 1.75%! But the median home value is $202,600, so the taxes end up being lower: $3,520.
In my case, home values in both cases would be more than double that, and so would taxes.
To be clear, we own this house outright. At this point we could sell it and invest the proceeds in index funds, and cover rent entirely by withdrawing about 3% returns per year. After the first year, that would all be long-term capital gains, too.
0. https://wallethub.com/edu/states-with-the-highest-and-lowest...
Don't you have a 30 year fixed-rate mortgage? The increase in rent every year over the next 30 years is going to be way more than whatever maintenance costs you have.
Rent is "steady" in the short term, but every year you are exposed to market volatility and inflation.
Rent increases are definitely something to watch out for, but in another six years we will no longer have any school-age children, and our ability to move around without regard for school districts increases dramatically. In 30 years, I will have exceeded my life expectancy at birth, although I hope to still be kicking, obviously. I will probably be retired in half that time.
I've watched my parents end up in a house far too big for them after kids moved out, and they downsize to another house that ended up still being far too big for them.
My willingness/desire to rent may be a reflection of my phase of life more than anything: when I was very young, I rented because I wasn't yet sure I wanted to be locked in somewhere for decades. Then I owned a house for decades until a divorce, rented while I figured out what my life was going to be like again, and now another marriage and another house, but my future looks like it will be a lot less locked in, a mirror of my youth. We intend to travel extensively, spending just shy of six months overseas. At that point we don't need to be paying expenses for a place in which we're not living.
And just like jobs are now "anywhere in the world" so it changes everything in terms of the available candidate pool, the available renters are now also anywhere in the world. Landlords need to compete!
Regarding a16z, that’s rich they want to help renters but at the same time, the founder is privately NYMBYing in their neighborhood because it might hurt their property value.
Why is this remarkable? because the fodder for the business was private homes. It is like porn for some people. Flipping houses is tangible and real. If you enjoy watching your competition get crushed by pressure and cash flow problems, more's the better. Yet, these houses were not stable places for families or DINKs .. they were chips on a table. And where did that ultimate money go? into RENTALS.. because MONEY. Zero new houses were built. Stability of life was undermined as table stakes. There are a dozen winners and hundreds of losers, seen and unseen. Drink to that! the side effects? brutal alcoholism, soul loss.. things that could have been but were left in the rush to the seven figure check.
real 2000s in California housing market
I will say the value of not having to worry about your toilets, oven, etc when you're career centered has intrinsic value not tied into the money you'd make over time owning the asset. I hate having to deal with that stuff with the little free time I have.
Basically anyone with any job mobility should be in this bucket.
FHA loans require you to fog a mirror to qualify [1] [2]. More importantly, Fed interest rate hikes have not yet hammered real estate prices sufficiently for mortgage payments to reach what wages can support [3] [4] [5].
[1] https://www.nerdwallet.com/article/mortgages/fha-loan-requir...
[2] https://www.hud.gov/program_offices/housing/sfh/lender/origi...
[3] https://www.youtube.com/watch?v=DsuwbJaVGqI
[4] https://www.youtube.com/watch?v=FPJ0KYI1SKE
[5] https://fred.stlouisfed.org/series/CSUSHPINSA
(ignore the clickbait youtube titles, the charts shown are sufficient)
If people are deciding not to sell b/c of the above, yes, higher interest rates might bring down the prices of house that people "have" to sell but that's not going to improve the supply situation.
Don't expect a crash. It's going to be a slow stagnation burn.
You’re not buying a house in most circumstances, you’re buying a mortgage.