The average home owner is better off than the average renter so they're buying nicer places. The study made no effort to correct for this. Seems like their conclusions is a given.
And not just the fact that the average home owner is better off, but also that the inventory for buying vs. renting is drastically different.
You take on risk when you customize things. Other people could dislike your color choices and drive your resale value down, the trendy refrigerator you bought might be a maintenance nightmare, etc.
You are supposed to be compensated for taking on risk, which is why owning should be cheaper than renting!
What I found is that on a time horizon of ~7 years, it absolutely makes sense to buy a home. The reason is that when you have a mortgage, you're making a highly leveraged investment. If you buy a house for 100k and put 20k down, then you're 5x leveraged. If you're able to sell the house for 110k. The price has increased 10%, but your ROI is 50%.
There was a definite inflection point after 7 years, however, where the amount of leverage decreases to the point that the higher gains in the market begin to dominate the modest increase in home value.
Those can take a big chunk out of the appreciation when you sell and buy, and could make a difference of not breaking even for an additional year or two.
You can lever up an equity portfolio as well. Moreover, the going interest rate for a margin loan is only 1-2% (less than the cost of a mortgage).
1. Interest rate can be fixed for 30 years.
2. Interest is tax-deductible.
3. No margin call. If the price drops, you can wait until it recovers.
There’s really nothing similar available to the average person for other investments.
I've always understood that when you buy you should expect to be paying more than a renter for maybe 5-10 years. At least in the US mortgage payments are almost always fixed whereas rents are almost never fixed or controlled.
Rent just rises forever in most cities and usually mortgage payments of people who have owned for 10 years look like amazing bargains.
Rents do not have to rise. They have been rising in most cities because people are moving to cities. Rents dropped in Detroit when a lot of people left. (Rents also rise with inflation.)
I do wonder about the data. It compares the median rental to the median house purchase. And people usually rent smaller places. So, renting is usually cheaper because of that. I don't know that it is an apples-to-apples comparison.
In other words, rent is dictated by the market, not some "cost plus profit" calculation on a per-landlord basis as you're describing.
If you're renting from someone who just recently bought the house, they are very likely taking a short-term loss for long-term gain.
In what world is this usual? Most of the time when renting you're paying for a single floor of a house or a single condo unit. It would be insane to expect people who are renting a portion of a building to pay for the whole damn thing.
People opting out of ownership in favor of renting is an oddity, and usually is nothing about money and instead is about not wanting to be anchored by a mortgage.
If I treated the extra housing costs (we upgraded significantly from around 1000 ft^2 to 2500 ft^2) as an additional 401(k) that I contributed to, the house still wins but it’s at least close in that case.
With a 5% rent increase your monthly rent spend goes from $1500 to $5880 in 30 years (the most common mortgage term).
Most leases are written to convert to month-to-month, and in most states this is the default if not written. In all states but 3 + DC landlord can unilaterally terminate month-to-month tenancy with proper notice. Usually this is 30 days or one calendar month, in 9 states it is less than that (lowest is 3 days in CT, 10 days in Louisiana) and in 6 states it is always or sometimes more than 30 (e.g. 60 days in NY after 1 yr, 90 after 2 yrs).
If the free market finds a better way to supply housing (prefabs, 3d printing, bigger apartment complexes), then the cost of housing will fall, and thus the speculation on housing prices going up will not work out in the owner's favor, inflation or not, but at least the mortgage payments build equity instead of going into someone else's pocket.
Will the speculated increase in resale value outpace maintenance cost? Not if the resale value goes down for any reason, but then the sum of maintenance cost plus lost value would still need to be more than the rent.
Since housing prices are going up right now, and maintenance while expensive is not more than the value of the home equity, it really does make sense to buy, even at high prices, right?
However, if renting is substantially cheaper than buying, then you could dollar cost average the difference into stocks, and potentially make more. That is also speculative and depends on future stock returns.
Finally, some folks can only afford the cheaper option. For them, it's not really a choice...
crunch numbers...don't just guess
I have a 15yr fixed mortgage at 2.75% which I started with 20% down to avoid PMI. All-in (HOA, utilities, principle, interest, insurance, maintenance) I am paying ~$1200. And that's to live by myself, in a two-story, 1400sq.ft. townhome. We have a lovely community pool too.
There is no way I could pay that little renting a place with equivalent offerings. If I picked up a roommate or two? Sure, but that's not something I'm willing to compromise on. Keep in mind I have a more aggressive 15yr mortgage. The difference would be even wider in monthly cost for a 30yr.
* Cost of maintenance and upgrades. You now have to mow your grass or pay someone to mow it. You now need to shovel your driveway or pay someone to do it. When the toilet breaks, you now need to pay for it. When your roof wears out, you now need to replace it. If you don't replace carpeting and replace appliances, your value will slowly drop. A house is basically slowly falling apart, and with no work/money will lose value each year.
At my previous house, I put roughly 5% of my purchase price into all of this junk, per year. So on a 300k house, that works out to like 15k a year, or $1,250 per month. Depending how new or old your house is, sometimes this number can change a little... but it really adds up quite a bit.
* Exposure to real estate market. If you rent and property values double (or half), I doubt you care that much (maybe rent goes up and you move out). If you own and property values plummet (see Las Vegas in 2012), you can be really screwed. You are a lot safer from all this kind of stuff by renting. Yes you miss the gains when the market goes up, but you are protected from the falls.
* Cost to sell. Costs about 10% of your final selling price to unload a house. Stay there for 10 years and the house appreciated? Awesome, you can take it out of our appreciation. But imagine your house stayed flat or lost 10% of it's value? You need to pay another 10% on TOP of that to unload it. Again, compared to renter... the renter can just move out.
There are protections for house owners. In extreme cases, one can walk away from a mortgage, and take a 7-year loan default.
But in the short term, there really shouldn't be such a big gap between renting and owning. That means that there isn't a global shortage of housing in the market, but distortions in the market because of external factors. Clearly, right now, a renter is better off waiting and putting the difference in the bank.
Holding assets is a good hedge against inflation.
That and your mortgage is locked so your payment gets super cheap in high inflation situations.
Yes. This is what ultimately led me to a home purchase. I rented for 3 years, and moved each time. After the first year at each place, rent was increased anywhere from 4% a month to 15% if I were to renew. I ended up not renewing a lease each time, since I didn't have many possessions and could move within a day with the help of a buddy for the big things.
I think that might answer your second question too, but I was younger and had less obligations at the time, so moving was more feasible.
I ended up buying simply because I was already renting the cheapest in my market (really bad area, but good location for my needs), and rent was skyrocketing at about 5-10% increases everywhere I looked. I bought for many reasons, but the primary driver was as a way to secure a stable monthly payment and not have too worry about increasing my future wages to keep my current quality of life.
If they did increase rates, well, I guess move? Or buy a house if rent everywhere is crazy.
I do tend to move a lot, but that's what I like about renting. Freedom. Can just pick up and leave and onto the next adventure. I owned a house years back, and it felt like a big anchor holding me down.
Kids are an important factor. I think age matters a lot. Mine is in elementary school and is just happy to meet new people.
You do get 'stability' with buying a house, but that's not always good or even a sure thing. Maybe your city will implement a bussing program and cart your kid across the county. Maybe you get an awful neighbor(s) who make tons of noise, park cars in their yard, etc.
Stability is definitely a double edged sword IMO.
Because my experience with renting apartments was that rates will go up at every renewal - don't like it? Move.
I could rent a new construction 2 bedroom luxury apartment in midtown Atlanta and pay about 1250/month in 2011 (I did this several times with buddies) - usually between 1200 and 1400 sqft. Now you can only rent much older units (constructed 70s to 90s) usually 1 bedroom or a loft for that price - usually around 900sqft.
I just searched the area I used to live for anything with 2 bedroom for 1250 and below. There is one result, and it's old student housing.
If I wanted a comparable apartment to something I could rent 10 years ago for 1250, most options now start at 2500.
Now - home prices have also spiked in my area, but the population growth doesn't seem to be slowing at all, and if I buy I'm no longer subject to yearly increases, and the perils of the rental market continuing to heat up.
Basically - owning means I get to still live where I am after the gentrification occurs. Because as a renter I'll likely be pushed out of the area (even if renting still is cheaper somewhere else in the city)
Also when buying if I extend my mortgage to 35 years I can pay 550 a month, or I can reduce to 25 and pay 900 or more because it is a worth investment place to put your money
So I am only paying more if I want, and that is because it is also my savings, more rentable than a savings account anywhere
But it’s pretty dumb to do an analysis like this NYT article as it’s important to factor in some amount of time for decision making. These can get pretty complicated but just a basic personal model factoring in 2-3% annual increases in rent compared against ownership costs is what I used to choose rent over buy.
It can be used for a specific decision (eg, “I’m going to live in Fooberg for 5 years, what should I do?”) or macro life planning (eg, “I’m going to live for 60 more years, what should I do?”).
It’s funny how these articles are so clickbaity and missing on basic reporting and analysis. I think it’s based on the few people who actually sub to the NYT like reading about populist stuff (eg, landlords bad, can’t afford to buy).
Of course these things are true, but they’re always true. Maybe it was awesome in 1945, but it was super hard for someone in their 20s to buy a house in the 80s and 90s and it’s super hard now. Tl;dr; you probably still want to buy a place in 9/10 situations since rent goes up and mortgage is fixed and eventually ends (although taxes and insurance and maintenance sort of index to inflation).
