Comment by gruez | Hacker News Reader

Comment by gruez | Hacker News Reader

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>This analysis relies on someone to have a mortgage that takes 100% of their salary every month. The general rule was don't buy a house over 3x your annual pre-tax salary. I think it's moved up past that in most places though. Either way, don't buy so much house you can't afford food. I would think that goes without saying.

The problem is that in much of the anglosphere, housing is so scarce that you have to ignore such rules of thumb, or live in the middle of nowhere.

>This analysis is an edge case

>Another crazy edge case

If you ignore edge cases, then you're left with just the median case, and that says that at current price levels, houses aren't worth investing in because they have historically worse returns than stocks, and provide poor diversification.

>Include paying rent in your analysis comparing it with stocks, particularly after you pay it off. You're sinking $X into a rental property with zero return and zero equity gained. I don't have to pay $2000 to the mortgage ever again and I have an asset that has more than doubled in 20 years, and a place to live that is essentially rent/mortgage free for life. That's a lot of dividends comparatively. Also, rents go up, mortgage payments typically don't, so factor inflation in your rent analysis.

This calculator[1] factors everything you listed, and the math doesn't work out for the hottest housing markets. It might work out for Miami or Huston, but not San Francisco or even Albuquerque. Using default assumptions implies a break-even price-to-rent ratio of 14, but most US metros are far above that[2].

The nice thing about the calculator is that if you don't agree with the assumptions, you can plug in your own numbers. I'd like to see what numbers you come up with to make to make the math work out in favor of buying in the top US cities.

[1] https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

[2] https://www.sofi.com/learn/content/price-to-rent-ratio-in-50...

>Housing prices are unrelated to an individual losing their job.

The point isn't that a Bay Area housing market will crash because Google Employee #68908 lost his job, it's that if there was an AI winter/tech crash, that will result in Bay Area housing prices dropping, along with layoffs.

> The problem is that in much of the anglosphere, housing is so scarce that you have to ignore such rules of thumb, or live in the middle of nowhere.

This is a bit circular, supply-and-demand-wise. Especially in the US - why is demand in some areas so high that people will bid houses in San Jose up to 2M+? Why aren't they buying the same thing for 450k in Dallas?

Why aren't the companies based in those crazy expensive areas and paying million-plus total comp to large sections of their workforce being eaten alive by ones with lower labor costs in other regions?

Housing is scarce in the areas that are already the most densely populated, which itself is a bit of yogi-berra moment.

Too much discussion about housing in the US focuses only on the supply side and ignores the geographic concentration of demand that has happened over the last few decades. Is that centralization good for the country in the long-run regardless? Obviously that centralization goes back way longer in many European countries, so was the distribution and the number of growing populaces in cheap, not-yet-established areas part of the secret sauce for the 20th century US? Could you start the companies that made the Bay Area what it is today in today's Bay Area? Could you even start them in somewhere cheaper today, or would you not be able to get the talent to join you there? We're five years into remote work being way more common than it ever was before, and it hasn't broken that stranglehold of concentration yet.

>We're five years into remote work being way more common than it ever was before, and it hasn't broken that stranglehold of concentration yet.

That's partially because big companies decided WFH was now verboten. Part of it was because execs in that area didn't want their personal property values to go down, I suspect. I'm sure there was also governmental pressure as well to protect the auxiliary businesses like local restaurants, protect tax revenue like property tax state income tax, etc.

> This calculator[1] factors everything you listed, and the math doesn't work out for the hottest housing markets

That's a great calculator; I remember using it like a decade ago. And while it includes all factors they listed there are a few it doesn't:

1. If interest rates go down, you can refinance, but if they go up, the inflation and appreciation values likely will as well, but your rate is fixed, for (up to) 30 yrs (!!)

2. It's relatively easy to make improvements while you live there (and capture increased value when you leave)

3. The calculator assumes that the down payment and cost difference vs renting would be invested, which is fine but ignores psychological realities that prevent this more often than not

Also:

> The best hedge is to also "invest" in something that has value to you. Like bricks / house.

The suggestion was mentioned as a 'hedge'. The point being: you don't know what the values entered into the calculator will really end up being. Having some costs locked in can help with concerns around cash flow (and shelter costs are usually a significant percentage of costs overall). It's an "also 'invest'" strategy, so there's a whole lot not included in the calculator here as well

>1. If interest rates go down, you can refinance,

I will agree that this could play a massive factor, but it's a massive "if" you're banking on. There's no guarantee that interest rates will dip, and the longer it doesn't dip the worse the math works out for you. Sure, tons of homeowners refinanced during the pandemic, but that was a once in a lifetime opportunity. Moreover stocks also rallied in the same period, which raised the opportunity cost of the equity you have locked inside your home.

> but if they go up, the inflation and appreciation values likely will as well, but your rate is fixed, for (up to) 30 yrs (!!)

No, higher interest rates makes house prices dip, or at least suppresses growth, not the other way around. All things being equal, higher interest rates means higher monthly payments, which means buyers have less buying power in absolute terms. We see this reflected in housing prices after the fed hiked interest rates.

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

>2. It's relatively easy to make improvements while you live there (and capture increased value when you leave)

I reject the premise that making improvements is some sort of positive value activity. If you're staying for a long time, then that 10-year old kitchen remodel isn't going to boost prices much by the time you sell. If you're selling in the near future, then you run into the problem of realtor fees eating into any profits, because moving frequently means such fees can't be amortized over longer periods. In either case there's risk associated with renos. They can be botched or go over budget, and all things being equal as a buyer I'd rather buy a non-renovated house for $x, than pay $x + $50k for a house that the previous owner spent $50k renovating. By all means, do that kitchen reno to make your home a nicer place to live, but don't think it's something that pays for itself.

>3. The calculator assumes that the down payment and cost difference vs renting would be invested, which is fine but ignores psychological realities that prevent this more often than not

Fair point, although I seriously doubt people who do rigorous buy vs rent analysis are the type of people who can only be cajoled to save through a house/mortgage

>The suggestion was mentioned as a 'hedge'. The point being: you don't know what the values entered into the calculator will really end up being. Having some costs locked in can help with concerns around cash flow (and shelter costs are usually a significant percentage of costs overall). It's an "also 'invest'" strategy, so there's a whole lot not included in the calculator here as well

The values could easily work against you as well. For instance if housing costs rise slower than expected. This is a real possibility with the rise of YIMBY in politics and boomers selling up as they retire. Moreover how is parking most/all of your savings in a single asset (ie. your house) considered a "hedge"? Maybe it can be construed as a hedge if your portfolio was all MAANA stocks, but I'm not sure how anyone would think shifting from a globally diversified stock/bond portfolio (ie. a bet on the global economy) to a single house in the US is a "hedge".

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