America's Rental-Market Mystery | Hacker News Reader

America's Rental-Market Mystery

economist.com

36 pointspg_123445 comments

> In America oer accounts for about a quarter of the consumer-price index, making it the single biggest component.

Or ~50% of total spending for most renters.

Trying to measure inflation in one way when the biggest expense (by far) is completely different for two large groups is interesting (~67% own vs ~33% rent).

If you've owned a house for a while, you should be doing fine. If not, you probably aren't.

Do 67% of people own a house? I don't think 67% of people own a house.

As I recall, 67% is the percentage of people who live in a house which is owned by somebody who lives in the same house. This includes children, spouses, other dependents, but also boarders.

I'm not sure if you could get from that statistic to the percentage of home owners, especially since, presumably, people who own homes are more likely to have other people they support in the same homes.

This also belies the stark age differences between owners and non-owners. Ignoring that it is becoming dramatically more expensive to move from one category to the other does not seem correct. Particularly if the majority of individuals would eventually move to the latter category.

Dependents sort of inherit the economic wins/losses of the person supporting them, so this feels like a distinction without much of a difference, or at least not nearly enough of a difference to invalidate the high level result that the situation is bimodal.

Going back to live with your parents has become a meme - which was not the case a few years ago. Most people who say that don't exactly see it as a plus ("Oh good, I'm sharing in my parents' win!")

They may not see it that way, but IMO that is the reality as they are heirs to the estate in most cases, presumably. Compared to those whose inheritance will not include a considerable estate, it seems like a win.

high medical costs, esp. in old age, will annihilate most of the wealth before the Zoomers get a crack at it. My dad's home ran 9000/month for regular care, and even after we sold her house and other assets, it was looking like she'd be short of cash before too long.

After the estate settled me + siblings walked out with around 50k each. Not terrible, but wouldn't do much for me buying a house on the west coast; I'd need triple that, and even then might not cross the 20% threshold for mortgage insurance.

> As I recall, 67% is the percentage of people who live in a house which is owned by somebody who lives in the same house. This includes children, spouses, other dependents, but also boarders.

No, its the share of occupied housing units which are owner-occupied, not the share of the population that lives in owner-occupied housing units.

Here’s an actual link to the census data. What you want is “owner occupied housing” as another commenter said. That’s % of people who live in the place they own. And it’s 65% as of 2022.

https://www.census.gov/quickfacts/fact/table/US/VET605222

I don't know if this is useful, but in Econ 101 we were told that the "household" is the economic unit, not the individual. What you mention was given as the reason. That was 4 decades ago, and I don't know if it was or is the mainstream view.

Beyond inflation numbers that may interest economists, the extreme cost of housing worldwide means that people who might seem to have identical lives actually have completely different lives. For example three men working the same job at the same company, having the same salary:

Man 1 has his home paid off, he owns it because of an inheritance that came his way. He can have a great quality of life from his salary and earns an extra yearly salary each year from his real estate increasing in value. He doesn't need to sell to reap that money, he can borrow against his increased home value and use a small part of his salary to pay off the loan.

Man 2 is paying off a mortgage on his home. His salary is enough to do it and depending on what stage he is at, he starts getting some money to spare. He earns an extra yearly salary each year from his real estate increasing in value. If things become desperate, he can refinance for some extra cash or even sell.

Man 3 is loosing most of his salary to rent to pay somebody else's mortgage. He is desperately trying to save money to get into some real estate of his own, but he's getting more broke for each year working. If he can ever get onto the real estate ladder, he will have hefty payments for forty or fifty years. He still needs to get his own real estate, because the yearly salary from owning real estate is higher than the yearly salary from working.

To reach the living standard of Man 1, Man 3 would need a salary that is 3-5 times higher than what the three of them are earning. Now how do you set wages as a business owner? You can employ the people who get by fine with a low salary because they own their homes and complain that young people don't want to work. You can hire cheap foreign labour that accept living in dismal conditions to be able to send some quids back home. Are they going to consume your product?

If I would predict the future, I expect to see an enormous mobility of labour worldwide. Not only the cheapest labour as has been, but all labour including the highest qualified labour and everything in between. If you don't have real estate, you have no future no matter where you live and no matter how skilled you are at your vocation. And that's true right now, except for in few countries. You have to go somewhere where you can make a future ASAP.

At least since the Seattle housing market man, number two is paying way more per month than man number three.

There is literally a 4x difference between a man that bought 4 years ago and one that bought 1 year ago.

Man 2 can sell his real estate at any time he pleases and become a renter if he likes.

Yes, but Man 2 has a 3-6% transaction cost on an already upside down property.

Why do you think Trump doesn't want to sell his properties and become a renter?

Very few people with a mortgage are upside down. But yes, if you're upside-down that is of course the worst situation. But they are so few as to be marginal.

Most rent vs buy calculators project a break even rate is ~9 years, to never, after your home purchase. Meaning if you sell before the 9 years mark, you will have a loss.

https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator

Is that calculator simply comparing the monthly payments between paying rent and paying a mortgage? In that case, that is completely misleading. Rent can only be compared with the interest part of a mortgage payment, since rent is 100% interest and 0% amortization. If you can rent for less than the interest part of your mortgage payment, then it is a better deal to rent. Or if you expect real estate to come down in value.

If you clicked the link, you would see it accounts for inflation, appreciation, and opportunity cost of your investment compared to other investment alternatives.

> if you can rent for less than the interest than the interest,

This is completely false. If I owned my home, my home value could fall when the stock market goes up (see 2022-2023). In this situation, it would have been better for my money to be invested in SNP500 instead of my home.

Before you claim 2022-2023 and 2008-2009 are exceptions, not the rule. Houses typically appreciate 2-3% where as stock appreciates 8-12%.

Of course I clicked the link and examined the calculations.

>This is completely false. If I owned my home, my home value could fall

Yes, and it could go up as well. You can't take that into consideration when comparing renting to buying.

But I re-examined the calculator, and I find it incredibly misleading and wonder why somebody would bother to make such bad page. It's basically calculating all housing cost as lost money, whether it's rent or mortgage, completely ignoring the fact that you are building your own equity when paying a mortgage and not when paying rent.

Or to put it in crystal clear terms: You can sell a house that you've been paying a mortgage on. You can not sell a house that you've been renting.

In simple terms, even without factoring in the mortgage:

- Buying a home costs about 4% of its value (closing costs).

- Selling a home costs about 6% of its value (real estate agent fees).

- Ongoing expenses like repairs, property taxes, insurance, and possibly HOA fees amount to around 1% of the home's value annually. (Ignoring the time cost of dealing with repair people)

These costs occur about three times in a person's life as they buy and sell homes.

However, homes typically appreciate by about 4% per year.

Comparing these expenses and gains to investing in the S&P 500, which averages an 11% annual gain, shows that homeownership expenses are substantial.

Home investments only come out ahead in these situations if they have a mortgage (and this 5x leverage on the 4% appreciation).

If you are paying rent you don't have any money to invest in the stock market, because that money is being paid in rent. If you can pay that money into a mortgage instead, at least you're paying into your own equity. If you already have a lot of money or huge income, it definitely can be a better idea to rent and invest the surplus in the stock market. Or purchase your home outright.

Repairs on your own home means you are paying into your own equity, increasing the value of the real estate. HOA fees and property taxes are lost money yes, that you have to pay as a homeowner. If you are renting you will always pay those fees and ongoing expenses as well, either outright or baked into the rent. Just as you have to put gas in a car whether you own it or rent it. The landlord is going to make sure that the renter foots every and any bill.

That is why, as I mentioned earlier, you can only compare the interest part of a mortgage with the rent. And I agree that there are very special situations when renting is better than buying with a mortgage. For example if your income is very high compared to rent prices where you live. Then you can have a sustainable surplus to invest in more lucrative ventures such as the stock market. Or in another case where home prices are going down faster than rent. Ie, the price of a home equivalent to the home you are renting is falling more each month than you're paying in rent. Or you expect that it will have fallen in price more by the time you want to purchase, than what you will loose in rent during that time.

I am randomly choosing this property in San Francisco:

https://www.zillow.com/homedetails/1915-Washington-St-San-Fr...

The Rental Estimate is $16,970/mo.

The cost of home ownership:

The Property taxes are $4,573 /mo. Insurance is $1,628/mo. Interest portion of the loan is $20,522/mo.

In summary, the cost to own the home $26,723/mo (NOT INCLUDING PAYING INTO EQUITY, DEPRECIATION), which is $10,000 more per month than it would be to rent this same home.

As a renter, you take that extra $10k/mo you are not spending on property taxes, insurance, interest, transaction fees, and investing that into the SNP500.

Yes, I completely agree with you. If the total of interest + other costs is higher than rent, then yes it is a better deal to rent. But you can not include equity paid when comparing to the cost of renting.

> He can have a great quality of life from his salary and earns an extra yearly salary each year from his real estate increasing in value. He doesn't need to sell to reap that money, he can borrow against his increased home value and use a small part of his salary to pay off the loan.

I don't see how that would work. Borrowed money has to be paid back plus interest. My house is currently worth about twice what I paid for it ~17 years ago, and I do have a home equity line of credit so I can borrow against the increased value at will, but the current interest rate on that is over 9%.

The only effect I and most of my neighbors see from rising home values unless we sell our homes is that our property taxes rise by about the same factor, which is vary annoying to those whose salaries have not also risen by a similar factor.

Of course you have to pay it back with interest, what do you expect? But you can use that increased real estate value if you need to, without having to sell your home. And usually with the lowest interest rates available to any individual person.

A renter can not use any of the rent he or she has paid as security for any loan.

You originally described it as "an extra yearly salary each year from his real estate increasing in value" though, which I think is greatly overstating its utility.

It's really more useful for those occasional things that are too big for the liquid assets you have available right now, but that aren't so big that it will take you too long to pay off.

For example you need a new HVAC system, but to pay for it would have to take some money from an IRA. You are close enough to the next tax bracket that half of that IRA withdrawal will be taxed at that higher marginal rate.

It may then be cheaper to only take 1/2 of what you need from the IRA and the other half from your home equity line of credit. Then at the start of next year make another withdrawal from the IRA to pay back the home equity loan. That way none of the IRA withdrawals end up in a higher bracket.

A similar scenario would be if you are getting ACA tax credits and taking all the money at once from your IRA would push your income over the maximum income for ACA tax credit eligibility.

For most of us I think such situations will be rare enough that what we can gain by doing them won't be as much as what we lose from the increased property taxes from our home values going up.

An extra yearly salary in appreciation each year is not an overstatement, and I'll tell you why: Many people are for decades in unskilled or low salary jobs, that in the past paid plenty to afford a house/mortgage. The wages have not kept up with real estate prices, but for the person who has his home paid off or mostly paid off, this is not a problem. For the person without real estate this is a problem. But yes, combine a big house with a low wage and you will have a real estate appreciation that is bigger than the yearly take home.

Secondly, many countries have always had low salaries for all occupations, such as European countries. These countries have now seen an explosion in real estate prices, while salaries remain low and highly taxed. In these countries it is not unusual to have real estate appreciation being larger than the take home salary.

But even if it's half or a third yearly salary in real estate appreciation every year for not working, that's still a great deal.

Outside the USA property taxes are usually extremely low, with governments paying for schools and roads etc by taxes on labour.

In practice people borrow against their real estate to buy new cars at low interest or to renovate their homes to increase their real estate value. One hour spent renovating your home as an amateur gives you several twice the value as one hour spent working in your field as a professional. And it's tax free.

Man 1 didn't borrow. He paid for it with an inheritance.

Those are not realistic scenarios. While many people do receive some sort of housing assistance from parents, the number who inherit a home with no mortgage is tiny. And in the rare cases that it does happen, the heirs tend to be close to retirement age themselves.

Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income. US median household income is $75K and median single family house price is $387K. Virtually no one is seeing 19% annual price appreciation on their home.

So what happens is that people are paying on their mortgages and then they have a windfall from the inheritance and can get out of debt if they want to, or not if they think their current mortgage is a good deal. In the past decades, what I've seen is that a debt-free house is normal inheritance when it comes to real estate. But maybe not for the future.

Yes, as you say the heirs are usually not young themselves, but maybe with 10-15 years left of working before retirement. And as retirement ages get pushed up for today's young to 70 years and further, this means these people are staying at the workplace and will be staying there.

> Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income.

Then we live in different worlds. With people and places I know it is normal to have a higher return in real estate appreciation than from labour. Mainly because taxes take away most of your salary, while real estate appreciation is tax free. People have been talking about "real estate careers" for a long time now. Meaning that they're borrowing the maximum amount possible and getting more and more expensive homes as their main career, while their day job is just a way to make minimum mortgage payments and qualify for more expensive mortgages.

Yes, we live in different worlds. To be more specific, you live in a fantasy world. The circumstances you describe are so rare as to be irrelevant to any macroeconomic analysis.

It is possible to make a fortune through leveraged real estate investments on multiple properties. But doing that with just a single primary residence is virtually impossible regardless of tax effects or financial engineering.

> Virtually no one is seeing 19% annual price appreciation on their home.

What?

Issaquah Washington, 88.2% this year, from $625K in 2019 to $1.36M this year.

Kirkland Washington, 56% this year, from $700K in 2019 to $1.4M this year.

Inglewood Washington, 43% this year, from $676K in 2019 to $1.3M this year.

just from a few moments of quick digging and looking in one census tract.

Those numbers don't represent value increases on individual properties. The mix of sales has shifted. And cherry picking data from a handful of locations is meaningless and off topic for the macroeconomic issue under discussion here.

This occurs far more often than you expect. When I first started in Tech 15 years ago in a major urban environment - I was extremely surprised to see young professionals living in housing that I viewed as utterly unaffordable. For a time I assumed that I must have a missunderstanding of the labor market, and that the designer/engineer/assistant at company X must make substantially more than I did as a software engineer at company Y.

Over time, I noticed this was not atypical. Many professionals in dense urban areas use familial connections to purchase a home when they are ~22-25 through one of several arrangements ranging from. "Buy me the house now, and I'll buy you out when I can afford a mortgage", or "Give me a downpayment now, and I'll cover mortgage", or "provide downpayment, you hold onto equity, I cover mortgage and we split marginal equity appreciation".

I had a very silly conversation at a FAANG team event where the principal engineer and I were discussing finally being able to purchase a home after working for 10+ years. A junior engineer chimed in earnestly asking why we didn't have a rich uncle lend us the downpayment money :shrug:

In 2024, housing in urban areas is still appreciating at 8% per year in desirable markets - on a 1 MM house, this is easily more than the average income for the city.

I suppose the conclusion, "the biggest picture is that OER inflation is running well above pure rent inflation (see chart)...it may well the deter the Fed from cutting interest rates anytime soon" may be relevant today, but when I see the chart over time, I see that the entire concept of OER inflation is completely out of touch with reality, and that if they were observing observed rent instead they wouldn't have been so far behind the ball on inflation. Not sure if paying attention to observed rent now makes up for ignoring it earlier yet.

I feel as if they buried the lede. That is, the government has an index to track something and that index is inaccurate for a number of reasons. Nonetheless, other gov "agencies" use that defective index to make decisions, decisions that eventually have significant impact on all (i.e. national, and international for countries that tightly coupled to the USD).

In this case at least, the Fed et al look at far more numbers than just "headline inflation". - Which does not avoid the greater problem that a lot of such (greater) numbers still tend to necessarily have politically and policy-influenced rationales. There are many ways that inflation could be computed (and for many sub-populations).

The numbers should be reflection of "reality on the ground" but if they are (by design) in sync with some group-think, then it does not matter whether the numbers are used to produce the decision or to justify it after the decision is made. The two are at risk of becoming the same.

https://archive.ph/ttVje

I've thought for a while that owner equivalent rent was a bad concept. I think it's more useful to think about marginal rent, i.e. the cost to house an additional person. If someone dropped into a given location from space today, how much would they have to pay to have a place to live? In some places the best available options without credit history or deposit are marginally attached dwellings like extended stay motels.

In the case of rentals, the cost between a 1 bedroom and 2 bedroom apartment is substantial. For owners, there may already be a bedroom or convertible space, but if not, the cost can be in the thousands at minimum to upsize or downsize.

Anyone notice OER didnt capture the rapid increase in housing prices during covid? Am I really to believe that housing increased by 2% in 2020?

The ecomomist says OER overstates inflation... but the chart looks like it understates it, at least until recently.

Edit: ok after covid:

https://fred.stlouisfed.org/series/MSPUS

https://fred.stlouisfed.org/series/ASPUS

Rents cratered in many large markets in 2020-2021, especially major cities.

This is an interesting take. I currently live in an area where my rent is about 35% cheaper than taking out a mortgage at the current interest rates.

statistically most people live in a handful of areas, and COL there is high. more jobs there, though, so it becomes a balance.

if I could pull 90k in rural Kentucky I'd live like a king, but that's not easy, and most people aren't that lucky.

Rent doesn't scale linearly with the prices of homes, rent is likely cheaper than a mortgage in HCOL.

This is especially interesting as new housing stock is often not even available for purchase. It’s lease-only so the REITs get a portion of your income forever.

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