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Comment by onlyrealcuzzo | Hacker News Reader

> Except that you don't have a 5:1 leverage,

Except if it's your primary residence, you can get close to 30:1...

The fees on $1m homes are usually less than 1.5%. It's essentially 5:1 unless you're investing in very low value homes which are a completely different type of investment - that you're usually going after cash-flow instead of appreciation.

> House Price Index YoY in the United States averaged 4.63 percent from 1992 until 2024

4.63% on 5:1 leverage is... 23%... And you cherry picked at the start of a recession...

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Again, I'm not disputing the leverage.

I'm disputing the fees that are removing at least 3 or even 4% a year, and that is on top of the interest. (I'm in the housing industry and I can tell you for a fact that everybody underestimate the fees until the tax increase, insurance increases and you need a new roof)

Now, your house is going up 4.63% a year. You have 3% of fees and 3% of interest a year (or 7.5% if you buy today). How is your 5:1 leverage going to help you?

You quickly realize that in order to make the math work you need your house to go up AT LEAST 5 or even 6% a year. In the current environment your house even needs to go up close to 8/9% a year to just break even.

And you are right that you use leverage so if it goes up above those numbers you start to make up equity very quickly. But there is almost no chance those type of returns will hold in the future.

> Now, your house is going up 4.63% a year. You have 3% of fees and 3% of interest a year (or 7.5% if you buy today). How is your 5:1 leverage going to help you?

This is not how it works.

You would have to pay rent.

You'd take the opportunity cost of the difference in rent vs the cost of your house after the mortgage interest deduction (discounting principal, since that isn't a cost).

If it's an investment - you'd consider your cash-flow and principal.

you are right and you also need to include the rent equivalent, yes.

I would advise to use the rent or buy calculator: https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

It is the best one I have found so far. Even in the ZIRP era, I couldn't find places that made sense buying based on that calculator. Nowadays it is even more clear cut that buying doesn't make sense financially (it could make sense for you if you put a ton of personal value on owning).

The buy vs rent calculator is good, I’ve used it before.

In my particular case, I hoped to live in the same place for multiple decades, and correctly guessed that my city was on a strong growth path, and was able to get once-in-lifetime interest rates.

Obviously if those factors changed housing would be a worse investment. But as it is, those are two of the best financial decisions I’ve ever made.

> I would advise to use the rent or buy calculator

I've used it. It's not good.

If you asked someone to make a calculator that makes renting as attractive as possible - it would look similar to the NYT calculator.

It's not surprising this calculator comes from a city where the majority of people rent, and is read mainly by "elites" who live in areas where more people rent...

At the time, I lived in LA in this exact calculator convinced me that housing was a horrible investment in 2013.

Had I bought then instead of had my money in the S&P my net-worth would almost be triple what it is now.

Luckily, I'm doing fine either way, and did buy and lock in a 2.7% interest rate, after learning this calculator has some serious flaws and building a much more realistic spreadsheet to model it...

In what specific ways is the calculator flawed?

I looked at it and what I noticed:

It assumes home prices will rise equal to inflation which hasn’t been true in recent years

It doesn’t allow you to add monthly utilities for renting but assumes 100$/month for buying. I personally have never rented a place where all utilities were covered

It assumes quite high property taxes compared to what I pay

It assumes market returns of 4.5% which is true in a long term sense but not really in the short term

It assumes rents will increase 3% per year, configurable but not true in recent years

It factors in closing costs so I guess it’s assuming you will sell at the end of the period? This is a somewhat strange assumption to me. At the end of the period I could borrow against the value of the house without selling it for instance.

I think it’s a really good tool though I wish it had just a few more options to tweak, and that the defaults got updated to reflect current rates perhaps

You can change all those assumptions? I changed most of them and even by having rent going up 5% a year and a market return for housing of 6% a year.

It also assumes the SP500 only returns 5% a year while in practice historically it is closer to 10.

Most home made calculator/spreadsheet completely gloss over all the fees and details. But also most people have already emotionally decided to buy and want to pretend they did the math to justify their decision.

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