20 hours ago: https://news.ycombinator.com/item?id=9739544
393 days ago: https://news.ycombinator.com/item?id=7783201
1775 days ago: https://news.ycombinator.com/item?id=1586757
1884 days ago: https://news.ycombinator.com/item?id=1283190
As a home owner, I'm going to ask someone to elucidate on this sentiment.
I would have thought that the biggest reasons were (roughly) freezing your shelter expense against inflation, and putting an upper limit on how long you pay for shelter.
i.e. If I rent a £1000PCM flat for the rest of my life, my bill for shelter will continue to be roughly £1000PCM in today's money for the rest of my life.
If I buy a house with a £1000PCM mortgage payment, it will remain roughly £1000PCM for the rest the mortgage (though current low interest rates mean that it probably won't), which, in 25 years time could be worth just over half as much as it is now. And in 25 years time, I won't have to spend on shelter any more. I will have maintenance costs to pay for, but they are unlikely to equate more than £1000PCM in today's money over my lifetime.
So, where M is homeowner maintenance costs, someone with N+M living expenses is more likely to be better off than someone with £1000+N living expenses.
Its easiest to understand the problem with specific numbers. Assume a home buyer has $120,000 that could be put into a down payment, but that the minimum required is only $20,000. What should the buyer do? Assume that the investment rate of return is 5% and the mortgage rate is 4%. Investing the $100,000 instead of using it for the down payment is essentially borrowing $100,000 at 4% and investing it at 5%. All the formulas/worksheets/programs like this one and even professional investment advisors will end up showing that is better to put down the minimum down payment and investing the $100,000. This ignores the risk between alternatives. Putting the $100,000 into the down payment produces a guaranteed, riskless, return the buyer of 4% per year (by saving him or her the mortgage interest payments on the $100,000). The 5% potential return from investing the money isn't a fair comparison. The comparison needs to be made to a riskless investment (e.g. US Treasury Bills). Currently the riskless rate of return available to investors is approximately 0%. This means that in the current environment the correct alternative is to put the $100,000 extra into the down payment (absent any liquidity concerns).
One may say that they are willing to take some risks to obtain a higher rate of return. Modern Portfolio Theory has its detractors, but as far as home buyers are concerned, its implications are still apropos. Having one component of your overall portfolio earning the equivalent of a riskless 4% (by making the larger mortgage down payment) is likely to produce better aggregate returns (on the home and additional equities etc.) at whatever risk tolerance one designs for their overall finances.
I have no formal training in finance or investing so none of what I've described here should be interpreted as advice, instead it is intended to spur discussion.
If I borrow at 4% and invest the same sum at 4%, then I'm guaranteed to lose money on the deal. How much more your investments have to yield, in order to break even on a loan-to-invest strategy depends on the degree of tax liability that your investments are subject to.
Buying houses for shorter terms is just more risky, period. The housing market can crap out in catastrophic ways. Just like the stock market. The risk aversi
It would be an unrealized loss if you were living in a house with a mortgage bigger than the value of the house, so long as you pay though, you've still got a house to live your life in.
What this does assume is that you'll live in the house long enough for the interest savings to catch up with investment gains.
If you make the minimum down payment, and the value of the house drops, you're still on the hook for the full value at the time you took out the loan.
Once you've secured your mortgage, your payment plan (and therefore debt) has nothing to do with the value of the house.
The picture is a bit different if that $500k is all your assets or even substantially more than all your assets (a common situation for a first-time buyer with a big mortgage). Which suggests you should rent until you've built up substantial investments of other sorts, and then consider buying.
Historically, I think the variability in price of a single house hasn't been any worse than that of, say, a typical index fund. (Disclaimer: I haven't actually checked the figures.)
Of course, all the above treats houses as just another investment. This is a useful perspective, but you're going to be living in your house too, and questions like "can I redesign the bathroom?" and "if there's a flood or an earthquake, am I liable for fixing/replacing everything?" and "am I bothered by the possibility that my landlord might just throw me out one day?" and "can I get up and move somewhere else with minimal hassle?" may be just as important to you as "what is likely to leave me with more valuable assets 20 years from now?".
Your stock will have lost 20% of it's value and you'll have lost 20k and 20% of your investment in the index fund. Your house will have lost 20% of its value and now at 400k, you've lost 100k of net-worth and 100% of your investment in your house.
No different than owning $500K worth of share in a public company.
Nothing wrong with buying a house, but people should be careful not to have their net worth all tied up in a single asset (house or not). The one rule I've heard is 90 minus your age. When you're young is OK to have a high percentage of your net worth in a house, but not when you're getting close to retirement. Too risky.
It's very different to owning shares in a company. You have to either buy a house or rent. You cant opt out entirely, whereas you can with shares.
By choosing to rent, you are betting on the housing market being stagnant or falling, if house prices shoot up and you opted to rent, you will need to now pay higher rents or a bigger mortgage.
So there is risk in renting too
If you decided to rent in london instead of buying 3 years ago, you'd be tens of thousands down
That said, if you actually own your home in retirement you've significantly mitigated against the risk of getting priced out by rising rents if the regional economy heats up. That could be a problem on a fixed income.
I mean, your mileage is going to vary on location, and a generic thread like this isn't necessarily all that useful, but in my area, a mortgage payment is actually less than a rental payment for a similar place.
So even if it's a "bad investment", I can reclaim at least some of the money I put into a purchase when I sell the place (or make a profit, but no guarantees). But I get nothing when I stop renting.
With a mortgage, you're essentially leveraging around 1:5, which means you put down your 20%ish and get 100% of an asset. If the asset moves down 20%, your net equity is worth exactly 0. If the asset moves up 20%, you've made a profit of 100% (simplified, not considering the fees and other costs).
The trick to understand this is, if you put your down-payment money somewhere else, like a long-term index fund, what kinds of profits would you have expected? What about the risk, considering you're highly leveraged in a mortgage?
Thus the calculator to do the math for you.
A home you live in is almost always a net cost. It's not really an investment so much as its a cost avoidance (vs renting). Buying more house than you need "because this is an investment" is almost always a bad idea if you live in the home and thus are the one footing the bigger tax bill, interest, maintenance, utilities, improvements...
Plus it "prevents" you from moving somewhere else. Or let's say, it increases the friction of moving somewhere else. Most home owners stay at the same place for the rest of their lives.
- Deep networks of friends - Strong community ties - Strong local family ties - Children with their attendant social networks - General aversion to moving frequently
Also, the idea that "most" homeowners never leave is antiquated. Nearly everyone I know who has bought a property has bought more than one before 40.
If you own it you can do all that. If you rent you have to ask permission which you might not get. Plus why spend money on somewhere you don't own?
I live in London, UK in a flat I rent for £950 pcm. This would cost me £379,000 to buy, at the very least as it's a relatively nice area.
I could scrape the deposit and get a £379,000 mortgage but the insurance, maintenance and other costs on top would result in zero disposable income.
Currently I have £1750 left over every month which is nothing but bags of freedom to do whatever I want.
If I was to drop dead on Monday, the last great event wouldn't be getting Magnet in to do my kitchen, painting the living room ceiling and sitting in all weekend eating Tesco Value food. It would be chilling next to Lake Geneva in Lausanne with my other half which is exactly what I'm doing.
Live life now before it's over.
Edit: This is based on the advice of my wife's grandparents who are just about hanging on at the age of 84 and 86 respectively. They had to cancel their cruise this year due to poor health and openly admit that they worked way too hard for a house. They have a nice £1m house in London and a pile of savings but it's worth nothing to them now because their health is gone. It's empty as the children have left and they realised the memories were more important than the bricks.
So, sod buying a house. I'll live an irresponsible yet fulfilling life now.
It's not irresponsible to spend money on traveling and adventures. You get back much more than nice time there and couple of photos and souvenirs - you are exposed to new environment, people, culture etc. and you'll grow inside in a subtle, yet steady way. On the other hand, usual "buying stuff you don't need to impress people you don't care about" is useless, and won't even bring any long term happiness.
>Plus why spend money on somewhere you don't own?
People have this mentality that renting is throwing out money. It's not - it turns your housing into another explicit cost like food and travel. I like this, I think too many people make the biggest investment decision of their lives (often by orders of magnitude) so lightly. And anyway, when you own, the costs that would go to renting are priced in, like: taxes, upkeep, opportunity costs, and interest payments. There is no free lunch - even the home ownership tax benefits get priced into housing costs.
On this thread it's visible that people try to promote their own decisions in this topic (and we all have been into it deep down). Let me put mine - I took loan 8 years ago, in a different country, on a small appartment that when looking back, wasn't the best idea (but neither really bad). Mind you, it was in 2007 :) Surprisingly the price didn't drop below the one I paid, but the pressure to bring every month enough cash to make it through was... not nice. THe perspective to have similar setup for next 20 years was a bit sould-crushing though (it was 50m appartment, so nothing to raise your family in).
But, this pressure forced me off my lazy but, I temporarily moved to another country to earn more and pay it off asap, realized that this country is SO much better than previous one (which wasn't my home anyway), so I decided to stay. 5 years forward, probably the best decision of my life (and there were heaps of people saying I should settle where I am instead of move).
Where are all these landlords, because the ones I have experience with in Florida, Texas, and Virginia get pissed if you so much as nail a picture to the wall.
Of course selling your house and buying a new one will take a few months, so it does restrict your mobility in that way.
This is also a market proof strategy -- if the market goes down, the your current house may lose value (but you're not upside down on your mortgage, because you don't have one after 5 years). But the next house will also be proportionally cheaper too. And if the market goes up, the house you just paid off has gained in value, making for a bigger down payment on the next house.
A good way of looking at this is: not owning is equivalent to having a large short position in the property market. If prices go down, you "win" by not losing money and/or your rent going down. If prices go up, you "lose" because your rent goes up and what you can buy now is less than what you could've before.
That's a fine position to take but my point is that it IS a position.
You don't necessarily need to own where you live but you should own _something_. It could be in the area you plan to retire to (to hedge against rising prices), an investment property to generate income or whatever.
IMHO REITs aren't the answer here. Residential and commercial real estate are different beasts. Commercial real estate is generally a means of generating income. Residential is far more speculative.
Some people compare long term returns on property vs equities. These compare reasonably favourably.
In all those cases borrowing to buy property is far more favourable. In the US at least you can get 30 year fixed mortgages that are currently hovering about 4% for 80%+ of the purchase price. You just can't get those terms on anything else.
Even on day 1 your mortgage payment is ~30% principal at these interest rates.
Property tends to be a great hedge against inflation too and higher interest rates and higher inflation seems to be a risk with the amount of quantitative easing occurring in the developed world.
Lastly, the ability to essentially fix your housing costs is (IMHO) huge, particularly in major urban centers.
Taking out a mortgage is clearly the best investment I ever made.
(It was obligatory.)
