Do you also think that way about buying a house with a mortgage (credit)? I don't.
A mortgage isn't used to make more money. It's used so people can own a house after saving for a few years, rather than waiting until they've saved for a few decades.
A mortgage isn't used to make more money. It's used so people can own a house after saving for a few years, rather than waiting until they've saved for a few decades.
It’s also a way to force saving, which is psychologically useful (and thus valuable).
It will cost you 35k a year for 25 years, or 875k a year
After 25 years you have no more expenses.
If instead you rent it for 20k a year, increasing with 2% inflation each year, by year 25 you're paying 33k a year in rent, and by year 60 you're paying 66k a year.
Over 60 years you pay 2.4m in rent, or 900k in mortgage (you could also then sell that house for 1.6m with a 2% annual inflation).
You'd have to invest the savings and get way higher than inflation returns to break even.
Of course there's maintenance costs of the house too, but that's with rent far cheaper than the mortgage. In reality rent tends to be a similar amount as a mortgage (in the UK it tends to be higher - as people won't rent places out if they aren't covering their mortgage - at the very least the interest part of it). You'll likely find house prices appreciating more than inflation too - just like stock prices do. Rent tends to track income.
Now you could argue that you'll get more by investing in high return growth stocks. And you might be right. In the 80s there was a whole "endownment" mortgage craze where you paid the interest on the mortgage, and then the rest rather than paying down the mortgage capital, instead was invested.
This was a massive scandal as many investments didn't have enough to cover the mortgage amount upon maturity. With a mortgage you know that no matter what happens with inflation, growth, returns, stock crashes etc, you will own one house after X years.
You say that like it's a difficult thing to do.
S&P500 is up 710% since 1996. Gold is up 92% since 2012.
Personally, the rent control is the best part of a mortgage and even though renting is typically better, I'm fine paying a premium for that. That said, good luck getting somebody to loan you 900k so you can play the stock market; it's much easier to get that for a house though.
And housing is up 125% since 2012, so the sucker who bought gold instead of a house has lost out.
We can all be rich in hindsight.
(There's also other benefits to owning - like being able to have pets, not being able to be evicted, etc)
But the biggest tell that housing is valuable is that nobody is spending $500k on housing to rent it out if they could make more money pumping $500k into the stock market.
Of course they are. I do. I do so knowing full well that my expected returns are going to be nowhere near my brokerage account invested in public equities. The past decade has followed that expectation.
I and many others do it as a form of diversification. It’s risk aversion in the end. Most people with capital don’t want to be putting all their eggs into one basket, so for wealth preservation and diversified income streams it’s a good option even knowing up front you are expected to lose money via opportunity cost.
That ignores other benefits of housing being a privileged investment category by the current government and monetary/tax policy. If you seek cheap leverage this is probably one of your few options as a “two bit” player in the market at that $500k level.
Are you factoring in property taxes, maintenance costs, utility costs, insurance, etc?
IIUC, Musk et al take loans at 25% of their share's value to avoid this ever coming up.
Also the average house price is 500k in the US so a 20% downpayment (which not everybody does) is still less than 200k.
After 25-50yr (depending a lot on macroeconomic factors and your specific municipality) property taxes will likely be comparable to your mortgage payment.
No property tax. No homeowner's insurance. No maintenance. Just living on easy street.
* maintenence
* taxes
* return on capital
Because otherwise your landlord is subsidising you, and why would they do that?
If I'm a landlord and my costs are $X, but I can find renters for $2X, I'm probably going to charge closer to $2X.
If my costs are $X, but I can only charge $0.9X, I'll most likely rent it for that, because losing $0.1X is better than losing $X; unless I own a lot of units and it makes more sense to push the 'average rent' up, even if it means more vacancies. If the market conditions are like that for a while, I'll probably try to sell, but I'll take the loss for a while.
Additionally, if local market conditions include something like California Prop 13, a landlord that has been holding property since before I was born most likely has a much lower property tax bill than if I purchase a similar property. In that case, renting could supply them with a nice return and me with a nice discount.
Because they may have capitalized decades ago and the market only bears a certain price. They're not subsidizing you because their cashflow needs are actually lower than new entrants.
btw this is usually false, and mostly irrational.
1. Realize that every landlord has a different capitalization structure. Many likely bought decades ago and thus only owe a fraction of what the current market selling price is. Additionally we also have had a long period of ultra low interest rates so their interest rate is different than what new entrants are paying. Because their capital cost is lower they can actually offer for far less than the (Interest+Taxes+Insurance+Maintenance) costs that a home owner would have to bear.
2. The rational move of a landlord is to price competitively based on what the market can bear, even possibly losing a little money per month in cashflow (but less bad than the appreciation rate and cost of disposal/selling/defaulting).
I'd say it is quite rational. Real estate represents value, and value should be earning at all times. Owning it free and clear does not change that one iota. Rents are based on the value of the property, not the mortgage on it.
Plus one can be "losing money" on cashflow but earning money in equity, so one can rent for less than the mortgage while the value of the asset is rising even faster than the monthly loss. Of course this only happens based on speculation and having free cash to "lose" monthly.
And that is the value of the property. I.e. the value of property is what income it will generate.
When those two values diverge, then "arbitrage" steps in which converges them again.
> If instead you rent it for 20k a year
Some good numbers, but what is missing is the result of investing $35k-$20k=$15k per year. Let's say you earn a %7 real return on $15k/year invested for 60-25=35 years.
Writing a little program:
import core.stdc.stdio;
void main() {
double d = 0;
foreach (i; 0..35)
d = (d+15000)*1.07;
printf("d: $%f\n", d);
}
I would think twice about buying real estate as an investment.
Personally, I own my home because I want to use it as I see fit, but I recognize that as an investment it's a lousy one.
Consider that I didn't pay property taxes, insurance, maintenance, and squatter eviction costs for the last 25 years.
Consider that the S&P500 went up 561%.
Buying a house is not a good wealth builder strategy.
Investing in the S&P 500 is even less effort. The last time I bought a house, I had to carefully read and sign about 50 pages of legal papers. Buying stocks is just pushing a button.
But that's beside the point. Substitute Bay Area with Seattle, Los Angeles, Manhattan, or some other area of your choice. Or, better yet, diversify your portfolio by buying real estate in multiple cities. The same options that are available in the stock investment to tune your risk profile are available in real estate investment as well.
Also you are acting like the housing market can't also crash.
The parent is minimizing a bunch of coats of owning: maintenance, property tax, included utilities, HOAs, and most importantly opportunity cost.
General advice for homes leads to buying a home that does follow the logic, given historic movement of home prices and rental prices. It rarely is put in those terms, but works. For vehicles, the financial recommendation generally is to buy less car as it is a depreciating asset. If you have cash for a luxury expense, then it is no different from any other large luxury purchase, but if you have to finance, go as cheap as possible (but making sure to account for the repair costs, fuel usage, and such, not just the initial cost and loan payments).
Sure, without mortgage you may not be able to afford a house at all but it does not change the fact that mortgage is a "good" loan (i.e. you benefit from taking it)
The cheaper money (credit) is, the "higher" the prices will go.
It's not so much that houses became expensive, it's more that money to buy a house (specifically mortgages) became relatively cheaper. Low interest rates did that.
That then pushes up home prices over time relative to inflation.
Inflation adjusted median US home prices Q4 2024 where 419,300 vs Q4 2006 ~382,00 that isn’t flat but the difference is far less interesting.
Further average home prices reflects overall economic gains. The top 10%, 1%, 0.1%, etc getting richer buy nicer stuff driving up the average but that says little about overall affordability.
Game out the economic implications of that sort of regulatory behavior across the entire real estate and housing sectors and suddenly a lot of stuff that makes no sense makes a lot more sense.
Housing prices are _generally_ rising. It's entirely possible to buy a house and wind up selling it later, having lost money in it. Many times through no real fault.
I mean, hypothetically. Some people. Might be kicking themselves.
Housing prices typically appreciate up with inflation over the long run, although local markets don't always follow the same pattern. (IE, Silicon Valley is a case where real estate appreciated faster than inflation.)
Remember, it's over the long run. There can be periods where a house will appreciate faster than inflation, and other periods where the real value of a house doesn't keep up. If you understand this dynamic, you can make a lot of money. (IE, flipping and then becoming a landlord when the market turns.)
Of course there is home insurance and repairs to consider. But also there is the increase in rent to consider on the other side as well.
My house is 7 years old and the various amount of things I need to fix is making me miss being a renter.
That being said, generally the reason why home ownership is a "good deal" in the US is because you can accumulate equity, even when the value of the home keeps up with inflation. (Technically it means that inflation works in your favor if you have a fixed-rate mortgage.)
- Why else would mortgage loans ave percentage rates if not to make money off lending you money?
(Never mind the homeowner has to live somewhere regardless — and anywhere but mom's basement [1] is going to charge rent which would, by comparison, be throwing money away.)
[1] Okay, my mom charged me rent to live in her basement when I was 19 or 20 and needed a place over the summer.
Money is only a means to an end. It has no inherent value. And very often, the subjective value of a thing is essentially unrelated to the monetary value.
Renting cheaper than owning sounds like a very short-term view.
My dad explained to me the nice thing about a 30 year fixed mortgage in simple terms: 10, 20, up to 30 years later ... your "rent" is the same.
It's a simple experiment to see what a person's rent was going for 30 years ago in your community and then see what a person with a typical 30-year mortgage would have paid each month 30 years ago. Because one of those two is still paying the same monthly amount today and about to have an asset they can pass along to their kids or spouse (or cash-out if they want to retire to live in a trailer in Eloy, Arizona).
Rents are ultimately based on what people can afford to pay. Home prices, on the other hand, also reflect the viability of the home as an investment. If the market believes that housing will not become more affordable in the foreseeable future, homes in that area are low-risk investments, and investors will accept lower returns for their money. Home prices grow very high relative to rents. Taking a mortgage to buy then becomes the financial equivalent of taking a loan and putting the money in a savings account.
The city where I live in California is one of those places. Before Covid, home prices were high but tolerable. Then the prices jumped due to WFH, while rents grew at a much slower pace. And then interest rates went up without making a dent in home prices, making homes too expensive for those poor enough to need a substantial mortgage.
[0] https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...
That highly depends on where you live. In some countries/cities, buying really makes no sense both short and long term. In others, it absolutely might.
But there is absolutely a segment on HN who will act like home ownership is nothing more than pulling out a card for the next four digit expense every month or more.
“What are you going to do when (not if) you hot water dies? And then you need a roof? Oops your house needs painting and new appliances and now the AC is gone too, what about pest control, and hopefully your sewer line doesn’t collapse? Can’t handle all that happening to you? Can you realllly afford a house then?”