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Your math only works if you're near the end of your mortgage life. At the beginning, nearly every penny of your mortgage payment goes to interest, which is front-loaded.

For most Americans, who move around fairly often, they will never come close to paying off a mortgage and the only equity they will ever own will be what they bought with their down payment plus whatever they get on the margin if the value of the house goes up.

If you, say, live in a house for five years and then move, then you basically rented the house from the bank for five years. Except that unlike a renter you also assumed the (upside and downside) risk of home value change, and assumed the cost of taxes, maintenance, etc. Plus you tied up a large sum of money in a down payment.

This may be worth it if you want to bet that home prices will go up in the next five years. It also may be worth it because mortgage interest, unlike regular rent, is deductible from your taxes, which is perhaps the most obscenely regressive thing in the tax code.

Even if 99% goes to interest, $10 is still better than $0.

10$ is the cash asset. The big picture demands that you look at all the assets/liabilities/revenues/expenses. It's far from being that straightforward if you take into account net equity over time, risks, cash flow, depreciation, what-ifs, etc.

As long as you ignore the many thousands of dollars you paid in transaction costs to get the place. And potentially the many thousands you pay in opportunity cost if the house keeps you from moving when you otherwise would.

And don't forget the opportunity cost of having the money for your down payment locked into an asset and not earning returns in other investments.

If the homeowner gains $10 (or whatever) in equity over a certain period, that means he can break even renting the property he owns for $10 less than if he didn't have that gain. So competitive rental rates will tend to be somewhat cheaper than the cost of ownership. If it's cheaper by $10, renting and owning cost the same.

Your math example is silly on two counts. (1) you simply assume the rent and mortgage cost exactly the same, when they generally don't. (2) you ignore the downpayment. A renter doesn't have to make a huge downpayment, so if s/he has the money to make one, that is valuable flexibility - one can easily use that money in an emergency and can profit by investing that money in the meantime.

You are correct.

There are a lot of factors that can change the calculus. Buying is not always for everyone. People who move a lot where fees can eat up any benefits. Or people who do not have down payments or other cash flow problems (which can be a pretty effective market moat).

Rent, though, is often pretty comparable to a mortgage + taxes. In my area rent is substantially more for the same house.

So, liquidity is an important factor, no doubt about it. But I think one would be hard pressed to make a consistent investment profit that would make up for your 100% loss in rent compared to purchasing all other things being equal.

that's only correct if you assume everyone starts afresh every time they move - eg start with a 25 year mortgage, move after 5 years, take out a new 25 year mortgage.

why wouldn't the next mortgage be a 20 year term? that's a like for like replacement at that point.

Let's apply common sense.

Part of the reason "common sense" doesn't apply to this situation is that a huge number of factors (and costs, and risks) do apply. Maintenance and taxes are going to cost far more than $100 / month. For example:

* these numbers don't include a down payment on the mortgage

* they don't include transaction costs in either buying or selling

* they don't take into account interest on the mortgage versus how much the same money would appreciate if invested in an index fund instead of a house—in other words, the time-value of money.

* they don't take into account (and can't) how valuable moving might be; in finances, options are usually valuable because of their flexibility.

* they don't include homeowners insurance.

In short, "common sense" is anything but. That's why it's dangerous to do simple, back-of-the-envelope calculations about a major decision in the lives of most people.

Also interest rate risk for ARMs.

I was pulling numbers out of the air for simplicity.

But essentially, even if you only bank $10 in equity, $10 is better than $0 you'd bank if you paid rent.

> I was pulling numbers out of the air for simplicity. But essentially, even if you only bank $10 in equity, $10 is better than $0 you'd bank if you paid rent.

Heck, then I'll do the same. Let's just pull some new numbers out of the air such that the rent is $20 cheaper than the mortgage payment. Now as a renter you can bank $20 in savings, which is better than the $10 you'd bank in equity if you had a mortgage. Problem solved!

Ok. But in my area rent is often more than mortgage + taxes. I know it is different in other places but that's why it is a simplifying assumption.

Is it also more than mortgage + taxes + broker fees + interest to borrow the downpayment?

So, I did some more detailed calculations on a $500,000 home with closing costs included. I left out property taxes because I assumed anybody renting would recoup property taxes through increased rent. So, assuming rent + taxes == mortgage + taxes on a $500,000 property with $100,000 down payment where the value of the property stays the same over the life of the mortgage:

$500,000 30yrs at 4.25%

20% down $100,000

$1967.76 monthly payment

$22,644 closing costs

By year four you are in the black compared to renting by $6132 You'd need an investment on your $100,000 that returns 1.49% compounded annually to make up the difference if you rented and invested the $100K that would have been spent on the down payment.

By year five you are in the black by 14,122 You'd need 2.645%

By year six you are in the black by 22459 You'd need 3.382%

7 31157 3.881%

8 40233 4.234%

9 49701 4.5%

10 4.683%

30 5.222%

Here is the amortization chart: http://www.myamortizationchart.com/30-year/400000-dollars/4_....

Here is the closing costs calculator I used: http://michaelbluejay.com/house/closingcosts.html

In short, you have a pretty good shot at breaking even between renting and buying if you invest the down payment. If you have less than a 20% down payment (3% I think is what you need for a FHA loan) then you reach covering the closing costs faster with accumulated principal payments but your monthly payment can be significantly more (up to 20% more a month). IOW a huge amount depends on what you can rent the same house for. If rent == mortgage + tax these calculations hold. If rent is less than it is almost always going to be better to rent. If rent is more you are looking at a better situation buying if you are staying more than a few years. Also, interest rates would play a huge part.

Why does "common sense" get to ignore realistic interest payments, maintenance costs, and the massive costs involved in paying middlemen during the purchase?

It doesn't. But the discussion of the common sense idea does, because otherwise the conversation becomes unwieldy getting mired in aspects that aren't all that significant, in general.

For example...interest payments will not eat 100% like rent so the fact that interest payments could be higher is nearly irreverent.

You can pay $400/year for maintenance protection for your home so the maintenance costs are nearly negligible.

This is the most significant factor you mentioned:

The middlemen payments amount to less than 5% of the purchase price (for the purchaser). This can be a problem if someone needs to buy and sell relatively frequently but as long as it doesn't add up to the difference between rent and the amount of equity stored in the time that the person owns the home it is still better to buy. But, you are correct, this is a significant risk.

Keep in mind, we are not talking about owning a home as an investment. We are talking about owning a home compared to renting. As long as you are not taking a a full loss and then some it is still superior to renting which is a guaranteed 100% loss.

Maybe things are different where you live, but around here, the realtors take 3% each (buyer's and seller's), and then there's taxes, title company, appraisals, etc. It's not 5%, it's more like 8%.

Yes, if the amount you save by buying outweighs what you spend on buying, then you're better off buying. That is actually "common sense".

But the problem I have with your supposed "common sense" scenario is that it completely ignores this by claiming that having a small amount of equity after a year is a win. Buying a house loses money up front. The only reason it's worthwhile is if the long-term tradeoff is worth it. That long-term gain almost never happens after a single year. It's typically 5-10 years before you break even.

So no, $10 in equity is not better than the $0 you'd bank if you rented, because you're ignoring the tens of thousands of dollars you paid out up front.

Not if you've tied up $200 to buy your house as you could have made more than $10 on investments or even cash in the bank.

In other words, the opportunity cost of capital is not always accounted for in these comparisons...

Now, fill the house with renters paying 10% of the purchase price per year. Mortgage property to 75%, recouping capital at a fixed interest rate. Re-invest capital into index ETF.

Opportunities are what you make of them.

Although I agree that there are some cases where it [buying] has merit, I can't help but point out what I consider to be a flaw in your math that likely exacerbates the problem. This is especially true IMO for those that are likely far less informed than the HN crowd.

Due to how amortization works, it's very unrealistic to assume that with a $1k/mo mortgage payment, that $900 of that is going to equity. In fact, in most cases (standard down payment, 15 or 30 year mortgage, etc.), it'd be closer to the opposite of what you outline, especially at the beginning of the loan term. You can pull up a calculator to see for yourself but typically in the first few years of a new mortgage you'll be paying closer to $900 of that $1k towards INTEREST with the remaining going to principle / money that you may see later assuming home value is indeed retained.

That said, I hate paying rent -- but I've also been "burned" a bit on home purchases a couple of times, too! ;-)

EDIT - As someone above mentioned, you also have to keep in mind things such as PMI, property taxes & special levies, upkeep, etc...

This is part of the problem with the American housing industry. How did it become "normal" to borrow 4/5ths of the value of a home? It didn't used to be that way. If you look at average loan-to-value ratios over the last 40 years, they've consistently gone up. Same with the home value to income ratio. Home prices have appreciated much more quickly that they should have based on fundamentals of the economy, propped up by government incentives, cheap money sloshing around, and an oversized mortgage industry.

Ultimately, what we really need is to go back to a system where people can actually afford the homes they live in. The vast majority of Americans, whether they "own" or "rent," are still renters with no real chance of ever actually owning their home outright. If that perception changed, prices would come down, and we'd eventually get back to a system where you could buy a home for 2X your annual income.

The problem with a return to a sane system is that it would bury existing homeowners, and we aren't willing to accept the pain in the short run. We need to artificially inflate housing prices in order to allow people to sell their homes, keep the economy functioning etc. So, in short, we're stuck.

http://www.doctorhousingbubble.com/wp-content/uploads/2013/0...

If all but $10 goes to interest, $10 is still greater than $0.

Have you ever actually had a mortgage? The majority of your mortgage payment goes directly to interest, NOT equity.

Equity contributions only ramp towards the very end of the term. Up front, you are paying mostly interest.

And if you live in a state with high property taxes, like Texas, then your taxes will likely dwarf any principal that you pay at the beginning of your loan.

It seems like so many people fail to realize how much property taxes can add up too?

On the plus side, just by paying a couple hundred bucks extra a month you can double to triple the amount going into equity at the beginning. Bonus is they send you a check every couple of months as they recalculate how much interest you've headed off at the pass.

Correct me if I am wrong, but I tried to used numbers which fit your scenario, and roughly got this:

Mortgage: 100,000$

Term: 25 yrs

Rate: 1%

Principal payment for the 12th month: 59.38$

Interest payment for the 12th month: 993.84$

Cumulative interest after 12 months: 11,998.64$

Cumulative principal after 12 months: 675.02$

All this with an incredible 1% rate.

The pedantry in this thread is really disheartening. I thought it would be obvious that I was using made up numbers for the sake of simplicity but that the underlying idea is the same.

Storing any amount of money for the amount spent is better than banking none of that money.

You're the one making the unfounded assumption that mortgage and rent are the same price. Imagine if rent was 10% cheaper: you would bank much more money, in a much more liquid form, than having a mortgage.

Honestly I downvoted your earlier comment specifically because of your edit saying that it doesn't matter if equity is 900/1000 or 10/1000. It matters a hell of a lot. Only a fool* would avoid putting 900/1000 into equity, with an effective 'rent' price of 100 if they move out after a few years. But there are real decisions to be made if just about none goes to equity.

*assuming they expect to live in one place for a while

Fair enough. I fell into hyperbole...

Of course when you are down to a 1% storage of wealth other investments become much more attractive. You could rent the equivalent house (assuming price is the same) and be confident that you could make up the difference by investing what you would spend in transaction fees etc.

It doesn't take much improvement in that storage rate, though, for that confidence to evaporate.

> "Storing any amount of money for the amount spent is better than banking none of that money"

It's not just the cash flow which matters, you must consider many other factors. Have you heard of "depreciation", you know the expenses required in order for your house to keep its value? It's a whole lot more than the "10$" gained in the first years when using a mortgage. You keep focusing only on the cash flow of one part (mortgage vs rent) of the whole deal and ignore everything else. That's nonsense.

It's not pedantry when your simplification is off by at least an order of magnitude. Believe it or not, an error that large could make a difference in the calculation.

And because you "simply" forgot to include maintenance and property taxes, you end up being just plain wrong. In reality, a house is a money pit in the first years of the mortgage. Whereas in your simplified example it looks to be a good deal because it's assumed one is gaining $10K in equity every year.

So, I did some more detailed calculations on a $500,000 home with closing costs included. I left out property taxes because I assumed anybody renting would recoup property taxes through increased rent. So, assuming rent + taxes == mortgage + taxes on a $500,000 property with $100,000 down payment where the value of the property stays the same over the life of the mortgage:

$500,000 30yrs at 4.25%

20% down $100,000

$1967.76 monthly payment

$22,644 closing costs

By year four you are in the black compared to renting by $6132 You'd need an investment on your $100,000 that returns 1.49% compounded annually to make up the difference if you rented and invested the $100K that would have been spent on the down payment.

By year five you are in the black by 14,122 You'd need 2.645%

By year six you are in the black by 22459 You'd need 3.382%

7 31157 3.881%

8 40233 4.234%

9 49701 4.5%

10 4.683%

30 5.222%

Here is the amortization chart: http://www.myamortizationchart.com/30-year/400000-dollars/4_...

Here is the closing costs calculator I used: http://michaelbluejay.com/house/closingcosts.html

In short, you have a pretty good shot at breaking even between renting and buying if you invest the down payment. If you have less than a 20% down payment (3% I think is what you need for a FHA loan) then you reach covering the closing costs faster with accumulated principal payments but your monthly payment can be significantly more (up to 20% more a month).

IOW a huge amount depends on what you can rent the same house for. If rent == mortgage + tax these calculations hold. If rent is less than it is almost always going to be better to rent. If rent is more you are looking at a better situation buying if you are staying more than a few years. Also, interest rates would play a huge part.

I'd love to know where you get your mortgages. 900 of 1000 most certainly does not go to equity unless you are in the last few years. At first it's more like the reverse, and that's not counting pmi (we are talking about low income borrowers, unlikely they put 20% down), house insurance, maintenance, or taxes.

Owning a home can be a good thing, but it isn't just easy money and wealth.