Renting vs. Owning a Home, by State
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This is because I had thought that the rise of rental houses was due to historically low mortgage rates leading to artificially high profitability for landlords. Now that rates are more normal, its my feeling that landlords will be squeezed out of the market, and more single family homes will be owner occupied. I'm actually hoping that the landlords and AirBNB owners on ARMs will be forced to sell when their rates adjust upwards, which will increase housing supply and finally pop this bubble.
Increasing rates will raise rents in the professional demographic cohorts of folks who buy houses.
Well with the way houses have inflated in my neck of the woods very few people even financially savvy DINKs are going to have trouble buying homes in cash.
Landlords are likely to be much more cash rich than owner occupiers. High rates are a serious impediment to first time buyers especially, who need to take on lots of debt to fund their purchase.
Especially as rental rates increase during periods of high rates (note that landlords are like to increase rental prices to try and keep afloat, and developers are less likely to build when it’s more expensive to do so).
I recommend the NY Times rent vs buy calculator because there is no one size fits all answer.
Also like some people I know, they have paid off a house which is a steady stream of passive (ish) income before buying their current place. That can also pay off on a longer timeline.
Of course you can. You sell or harvest dividends. The same as living in an investment property forces you to give up its cash yield.
But then you're not owning anything and renting it out, which was what the GGP was talking about.
If the stock market crash, you can't do anything useful with your stock portfolio.
If the housing market crash, you can do something useful with the house: live in it.
I don't argue that you can rent with the yield of your portfolio. I'm just saying that when the music stops, a house is useful and a portfolio of stock isn't.
So to me, owning a house is worth it over having a souped up stock portfolio. And if you rent out your house, even if in a high CoL area like the SF Bay area, the long term yield can be comparable to a stock portfolio. And during that time, you have an anchor in one of the most economically productive area of the world.
That seems really cheap for Palo Alto.
But then you're not buying any property and renting it out, which was what the GGP was talking about.
That post was not made in a vacuum. It was made in response to a particular claim, which was not as simple as "oh, sure, you can own stocks and pay your rent out of the dividends".
If you can somehow do that, sure! If you can get a service below market rates, take advantage.
But surely it's obvious that by definition, very few people are going to be able to luck into such a position. So it's not broadly applicable advise.
> renting $1800/mo in Palo Alto [...] and they aren't raising rent on me
That's the deal of the century in terms of housing. Yes you're way better off renting on those terms. Since nobody else can find a rent so low in Palo Alto, let alone one that won't go up, for most people reality is different.
I.e. it ignores the cost of rent that you would otherwise be paying.
This is particularly true in the current market. For example, if you bought the place I own today with a 20% down payment, the monthly payments after subtracting payments against principal would significantly exceed the rent on the same place. Yet I could rent it out at a profit. If it was purely about optimizing financial outcomes, it would make no sense for anyone to buy my place.
You can very easily come out ahead financially by renting in many markets.
You're going to need to show your work here, because, to me and apparently to several other posters at least, it makes no sense to even compare the numbers in the two cases you describe, because, as another poster responding to you said, you can't live in your stock portfolio.
> renting...
Renting the place you live in vs. owning it is not the comparison you are claiming to make when you say buying a house and living in it is a "bad investment". The comparison you are claiming to make is between buying a house and living in it, vs. buying a house and renting it out. Which, as noted above, doesn't even make sense as a comparison.
To put it another way, you could rent and save enough money to buy the house with cash before you'd be able to pay off your mortgage, ceteris paribus. You'd still have the house at the end.
Financial models that show you often come out ahead if you rent and put the difference in other investments have been done ad nauseam on the Internet, it doesn't need to be rehashed here.
Not the comparison I and others have been responding to. That was talking about buying a house and renting it out instead of living in it.
This is nearly never true. Tell that to all the people who say if they'd only bought a house X years ago but now they are priced out of the market.
The only scenario where what you say is true is if you bought at the peak of a decaying city, which can happen but isn't the normal scenario.
> Yet I could rent it out at a profit.
You seem to be assuming that you can find a place to rent for a price that is substantially under market rent, just because the landlord has a low cost basis on it and can make a profit even at such low rent.
Which is totally not how landlords price their rent. They'll charge what the market can bear even if their effective cost basis is zero (say, they inherited the property).
People who bought 10 years ago for 200k do not want to sell it for 250k, because they paid more interest, let's say "initial price + interest = 300k" today. If anyone wants to sell, they want to get at least 300k, buyer again gets a mortgage and in 10 years same house costs 400k or more.
rinse and repeat, houses will cost double digit millions. See Seoul for example, avg house costs around 1M$, while average salary is around 35K$/year (30x difference)
I think you are significantly overestimating the average American's willingness and ability to calculate and understand something as simple as their "cash on cash return".
I think you are also underestimating market forces, average American doesn't need to calculate, real estate agents will tell you the price, they are not going to sell your house for 100K, if it costs 1M
I doubt there are many people who think that way. If they want to sell, the market determines the price so stomping your feet and saying I want 300K just because, isn't going to work.
Second, that's an incorrect calculation anyway. They may have put 300K into it, but they also got 10 years worth of a place to live out of it already, which is a lot of value. So the breakeven price considering the rent they didn't have to pay for 10 years is not the full 300K.
The risk averse might prefer renting in that case. It can be quite a shock to find out that you need to pay $15,000 to replace your roof after a storm goes through. The ups and downs of the stock market don't require you to make a large payment on short notice.
If your risk averse window is only short term, that might make sense.
If you think of housing risk over your lifetime, renting is the worst because now you have this huge uncertainty over how much housing will cost in 10, 20, 30, 40 years from now. How much will it cost in retirement 50 or 60 years from now (for someone in their 20s) when you have no income anymore? Will rent increase so much you'll be homeless in old age?
If you're risk averse, buy a house and make housing costs quite predictable for the rest of your life.
But if you live in the house, then just considering appreciation and expenses leaves out a huge benefit: you have a place to live without spending any other money. If you buy and rent, you have to spend additional money for your own place to live. The latter situation is comparable to investing into the stock market instead of in buying and then renting a house, but the former is not. That's why so many people take the former option even though, "on paper" (i.e., leaving out the huge benefit of living in the house), it looks like a "bad investment".
What matters at the end of the day are the irrecoverable costs. When renting, it is just the rent. When owning, it is certainly not free: you're paying other irrecoverable costs (e.g. out of PITI+HOA, everything but P is irrecoverable; add on separate costs for when you must pay for repairs and it gets steeper). Sure, you have stability and can write off mortgage interest when you own (although the latter is an extremely unfair policy), but unless one is absolutely sure that one can stay in the home for close to ~7 years (the rough time it took for many HCOL cities in the US to recover their nominal prices from the GFC peak), it can be considered to be a risky time to make such a big financial commitment.
Ben Felix has some videos on this concept of "irrecoverable costs" which I find helpful to illustrate this, such as this one [0]. Although I disagree with his idea that leasing cars is a good idea (expressed in some of his podcasts), I find his ideas on renting vs. buying to be quite sound.
Personally speaking, I just doubled my compensation by moving from one HCOL city to another in the US because I was renting and not "locked in" to a mortgage. So many colleagues at my former place could not afford to come to the closing table with cash to close out their mortgage at a loss to move (the company I went to basically wanted to hire my whole team, but I was the only one who could manage because I wasn't committed to a mortgage). Eventually I do want to own a home myself, but it was eye-opening how poor of a choice it was for my former colleagues (although my choice to go to grad school during most of the QE decade probably more than compensates for this one win...).
No, what matters at the end of the day are overall costs vs. overall benefits. Many of both are not monetary, so any analysis that only takes monetary costs into account is obviously not going to be a complete or valid analysis. And different people will evaluate the non-monetary costs and benefits differently: for example, some people value the freedom and independence that comes with ownership of the place you live in much more than others.
> unless one is absolutely sure that one can stay in the home for close to ~7 years
Many people live in the same home for much longer than that.
What is too often overlooked is that the rent also includes all those PITI+HOA+maintenance costs, plus a slice of profit for the landlord. If you own it you still pay the same PITI+HOA(hopefully not)+maintenance, but you cut out the middleman which saves you some money.
The ease of moving is a factor, but not always easier. If you can have a month-to-month rent then yes, it's certainly easier. In many places though, you're locked into a year lease. Most of time as a renter my leases were year-to-year. Which made moving difficult unless I could time it perfectly to coincide with the yearly lease renewal.
The rental market is decoupled from the ownership market. This hasn't been an issue for a while because multi-family had not been built up enough (i.e. there had always been an apartment shortage, especially after the GFC), but given that the US is building these more than ever [0], this is going to become clear in the very near future. There is a carrying cost to an empty unit, and price will likely reduce to get someone into a unit. Unless there are significant job losses that push people out of their ~3% mortgages and into the rental market, this may persist for quite a while. Anecdotally, in my VHCOL city that built out these ugly 5-over-1s like crazy in the past couple of years, most are offering multiple months of free rent just to get units to be occupied.
Also, while it is true that these irrecoverable costs are "included" in the rent, what is not included in the rent is the time machine to go back in time to purchase a property before the pandemic. This means one's landlord can cover these irrecoverable costs with the rent, plus the mortgage (if any), and still make a profit, all while having the total rent be less than the total irrecoverable cost if one were to buy the same thing today. Anecdotally, this is the exact dynamic I've observed in colleagues and friends who have bought houses in the usual VHCOL tech cities (Seattle, Austin, Bay Area); it's possible to rent a similar house for vastly less money per month.
But yes, as a renter, one always has to be ready to make good on the "threat" to move out at the end of a lease, which is difficult to time and tiring to have to execute upon :(
I could have put $400 per month plus the entire principal repayment in the stock market. I'd have had less headache, less time spent on maintaining the property, and less stress from figuring out how to deal with problems while working crazy hours, plus a much better return. In my case, the house was a terrible investment. I didn't buy it as an investment (if I had, I'd have failed miserably).
Yes. So was buying the house a good idea for you, all things considered?
Maintenance problems can be solved purely by your equity savings put towards handymen. As that is exactly what most property owners do that would be renting to you.
The cost of the house (not counting principal repayment) was $400 above my rent, not $400.
If you’re saying interest, taxes, and insurance were all $4k/mth, $400/mth, then sure, but people usually don’t talk about the costs of their mortgage that way.
Indeed. If you bought a house stricly as a speculative asset and neither live in it nor rent it, it's a terrible investement.
But since you can live in it, the equation changes completely. You can't live in a stock certificate and you have to live somewhere. If you could live for free somewhere (e.g. with parents) then sure, invest in the market and don't buy a house.
I’m surprised home ownership is so high in California since it seems like you need an exit event to afford a down payment in many of its cities. Lots of those owners must be people who bought before the 2000s.
I agree it’s kind of irrelevant and the original point was correct: DC is an urban core without the rural split most other states have.
Not high enough imo
There is no such thing as home ownership for regular people. It's just a marketing term. If you own something, there are no conditions for you to be allowed to keep owning it outside of violations of the law. If paying a private entity and following that entity's rules is a requirement then it is rental with extra steps.
"But equity!" You say? Hah! Haah!! a savings account at a bank could do better. For most people, after accounting for interest payments, assuming your home value went up, just beating inflation is difficult.
Let me put it differently, it your insurance, maintenance cost, interest payment would be more than or close to rent cost then it's a terrible deal.
If your income is a 100k then since you shouldn't spend more than a third of your income on housing, let's say $30k/yr is your housing budget, in states with decent jobs (cali,texas,ny,etc..) you would have to save that much for ten years or pay mortgage and wait like 13-15 years before it is yours on paper, and then you get to pay at least $1000/mo in overall costs on it for the rest if your life.
The best you can do is buy land without hoa or deed restrictions and cheap insurance and build. If you're lucky and can WFH then finding a rural land with internet should do the trick, but if you have to commute to a big city/suburb you're screwed. Best to pay cheap rent, save up until your late 40s (if you start in your late 20s/early 30s) until you can afford to buy/build outright or pay 60%+ downpayment and take a risk.
The true cancer is HOAs and house owning as an investment being legal. If only there were more high rise condos without messed up HOAs. HOAs have a purpose but their lack of regulation makes them enemies of the public.