Rent vs. Buy: Why Buying a House Generally Wins

Rent vs. buy. In finance circles, it's a bigger debate than "paper vs. plastic" or "tastes great vs. less filling."

It remains a debate fought by smart people on both sides, because the variables make calculus look like third-grade math.

Advocates of buying will use arguments that feature phrases such as "throwing away money on rent," "mortgage interest rate deduction," "locking in a monthly payment," and "forced savings." They may even appeal to your sense of community by pointing out the social benefits of an ownership mentality.

Advocates of renting will say the benefits of homeownership are overrated while the costs are underrated.

From the title of this column, you know where I stand. But let's give the rent advocates their due.

Rent vs. buy: The case against buying a house
A popular argument against owning housing is that home prices barely keep up with inflation. Using Yale Professor Robert Shiller's data that goes back to the late 1800s, we're talking about just 0.2% annually. Yes, that's a decimal point before the two. Compare that inflation-adjusted return with the 6%-7% historical real return of the stock market and you can see where their argument is headed. 

Buyers also pay closing costs, real estate agent fees, homeowners insurance premiums, property taxes, and sometimes refinancing costs.

Then there are the "investments," which are often better classified as "cool stuff I want," or maintenance costs -- neither of which meaningfully increase the value of the house.

I've owned a house for 10 years, so let's use me for illustrative purposes. Here's a list of things I've bought that cost at least $1,000 (often much more). Renters normally don't directly pay for any of this stuff.

  • Hardwood flooring
  • Deductible on homeowners insurance after my washer flooded the basement
  • Landscaping (twice)
  • Laminate wood flooring
  • New roof
  • Painting and fixture upgrades (pre-wife)
  • New heating/cooling system
  • New sliding glass doors
  • Cutting down of diseased trees or trimming of healthy trees (three times)
  • Stainless-steel refrigerator
  • Blinds
  • Painting, bathroom refurbishing, and fixture upgrades (post-wife)

I fancy myself strategically frugal, but stuff breaks, neighbors complain about overgrown vegetation, and new wives refuse to live in a bachelor pad. So I've averaged more than one $1,000-plus item a year -- and I fully expect that trend to continue. Also remember that I'm excluding anything costing two or three digits -- like replacing the dishwasher (twice), the washer (twice), the dryer, the refrigerator (twice before the stainless-steel upgrade), the sump pump (whatever that is), the water heater, and a toilet. We haven't even talked about the countless Home Depot and Ikea nickel-and-dimes. And I've so far avoided the big kahunas of homeowner money pits -- additions and full-blown renovations. Others haven't.

Given all this, I'd agree it's fair to factor in a good deal of hidden ownership costs that go beyond sizing up your mortgage against a comparable rental.

Plus, there are the harder-to-quantify costs. The lack of liquidity (hence the term "house poor"). The massive debt you're taking on. The inherent risk and lack of diversification once you sink so much into one asset. Reduced mobility, making it harder to move to a new city or perhaps change jobs within the same city. The nights and weekends you spend on house projects. The ever-present responsibility and stress.

You get the idea. There are careers' worth of arguments, theories, and speculations on why homeownership is overrated. But when you step away from the rhetoric, there's one fact that trumps everything: Nothing has built wealth for the typical family in the United States like homeownership.

Rent vs. buy: The buyer's trump card
When the Federal Reserve tallied it up in 2010, the median household had $77,300 socked away in net worth. In other words, when you look at a family that's doing better than 50% of us and worse than 50% of us and you add up all their assets (stocks, bonds, house, cars, IRAs, 401(k)s, gold, equity in private businesses, checking accounts, savings accounts, certificates of deposit, cash under the mattress, etc.) and subtract out all their liabilities (mortgages, student loans, credit card debt, etc.), you end up $77,300 to the good.

How much of that is due to owning a house? Here's a picture:

Source: The Federal Reserve Board's Survey of Consumer Finances for 2010.

It's pretty stunning that for all the hidden costs and arguments about better investments, housing makes up more than 60% ($47,500/$77,300) of the median family's cushion against bankruptcy. 

Now you still may not be convinced. You may be clinging to the thought that those without homes should be able to put the money they don't spend on curtains and sump pumps to better investment use. It's a compelling theory refuted by reality. Here's the picture:

Source: The Federal Reserve Board's Survey of Consumer Finances for 2010.

That's over a 30-to-1 net-worth advantage in favor of homeowners. Anticipating the sharp readers who will argue that this could be demographics (e.g., older people, more educated people, families, or high-income people are more likely to own houses), I looked further. Households headed by folks under age 35 have a median net worth that's about double the $5,100 median net worth of non-homeowners. Households headed by folks with no high school diploma have saved more than triple what the non-homeowner has. So have single folks with no children. And, yes, even families in the bottom 20% of income have more net worth than the non-homeowner.

Pretty darn stunning.

We can speculate on why this is. I subscribe to the simple, classic argument in favor of homeownership. Each month, homeowners are automatically squirreling away the principal portion of their mortgage payment -- as opposed to the renter, whose whole rent is an expense. People sometimes forget that the alternative to a mortgage is paying rent (not investing in the stock market) when they argue that home prices barely keep up with inflation.

As for the hidden costs of homeownership, I think a greater percentage of us than we'd like to admit end up blowing the money anyway -- on fancier vacations, or extra glasses of wine on nights out, or living in a more upscale house or neighborhood, or shoes, or playoff tickets, or whatever it is that keeps our median net worth at just $77,300.

Don't misunderstand me. This isn't a call to arms for everyone to jump willy-nilly into one of the biggest, most complicated financial decisions of their lives. The harrowing stories from the housing bubble showed us what happens when we buy when we don’t have enough income or savings, overpay, or don't do our due diligence. There are also non-financial reasons that buying a house just doesn't make sense for some people.

And nothing I've written should be interpreted as a justification to buy that expensive rug instead of putting a little extra into your 401(k).

This is just a reminder that there are many theories on the other side, but the real-world numbers greatly favor buying versus renting when all else is anywhere close to equal.


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  • Report this Comment On September 23, 2013, at 11:29 AM, leradron wrote:

    the reason homeowners have a greater net worth is because buying a house effectively forces your average citizen to save (via equity) whereas your average citizen lives paycheck to paycheck otherwise.

    however, if all else is equal and you have someone that will save regardless, then probably homeownership does not lead to greater long-term wealth.

    the other great factor is that people tend to buy more than what they need when they buy a home whereas when people rent they pay for exactly what they need. that monthly cost savings for renters is often enormous in urban environments.

  • Report this Comment On September 23, 2013, at 11:37 AM, jordanwi wrote:

    This appears to be more of a "affirming the consequence" set of data. The real question is, had those home owners chosen other avenues of investment, would they be better off financially?

  • Report this Comment On September 23, 2013, at 12:11 PM, Schneidku40 wrote:

    You forgot to say that, generally speaking, owners of houses make profit when they rent. Right now, where I live, I could get rent for $100 more per month than what a 30 year mortgage would be (including taxes and insurance). That's $1,200 profit per year, which covers that $1,000 per year expense you cited in your article.

    IMO, the ultimate trump card is that someday (recommended in 15 or 20 years), you have the house paid off! Imagine being able to then save that extra thousand, two thousand, whatever it is, every month! If you rent, you pay FOREVER. Buy a house over 15 years or rent for 60-70-80?

    To Jordanwi- you raise a fair point about other investments, but I'm sure it varies from housing market to housing market. Using my example above renting costs more, so, even with a $1,000 repair needed per year into a house, the owner would actually have $200 less to invest in other areas if they rented.

    Now, if you want to compare apples to oranges, sure I could rent an apartment for less than my mortgage is, thus freeing up a lot of money for other investments. But that's a lifestyle choice for each individual to make, not necessarily a financial one. If you like living in apartments, by all means rent (Sure you could buy, but at least in my market there are very few condos available and they are multiples harder to sell than a single family home when you want to move). But give me my freedom on my own property anyday!

  • Report this Comment On September 23, 2013, at 2:16 PM, damilkman wrote:

    I think this is a good example of a bad use of statistics. The basic requirement for home ownership with the exception of the housing bubble is that you have to be a saver to own a house. So it is a self fullfilling prophecy that those with little or no money saved are not going to have a house.

    So in order to prove that owning is financially superior to renting the author has to look at a set of people who have the same level of prudence prior to a subset choosing home ownership.

    I think it is pretty easy. Determine the cost to rent verse the cost to buy. Claiming that home owners are forced to save by the ownership of their homes is false in my opinion. By the way I am a home owner and never considered home ownership an investment tool.

  • Report this Comment On September 23, 2013, at 2:23 PM, jordanwi wrote:

    @Schneidku, I agree with some of the points you've made. First and foremost, buying a house is an investment in a lifestyle, absolutely. Using the numbers you've provided though, a $1200 profit on a (probably) $300 000 investment is a paltry 0.4% yearly yield. And this is excluding maintenance - factoring this in, you'd almost assuredly be cash flow negative. In addition, most people go for a 5 year fixed. When interest rates bump, your cash flow negative investment is now a money pit (-$500 or more a month). Finally, taxes will climb, eating into your "profits".

    Don't get me wrong - I think home ownership is valuable. I'm more of the create-an-income-suite type of investor, though. In my case, me and my girlfriend live in home with a basement suite, which covers the entire mortgage. That's the real game: live as cheap and nice as possible, and invest in REAL investments. That's just my opinion, though. There are many ways to skin a cat.

  • Report this Comment On September 23, 2013, at 2:27 PM, pedorrero wrote:

    Pray tell, how well did home buying work for people who bought just before about 2006 ?

  • Report this Comment On September 23, 2013, at 2:37 PM, TMFBomb wrote:

    Thanks for reading, everyone! Really interesting comments so far.

    @leradron,

    Agreeing wholeheartedly on your first point...I hope that's what people get out of the article.

    Your other points get at the complexity of the rent/buy decision...that's where on the individual level, a person would have to factor in the level of home prices (and rentals) in their area, mortgage rates, their own credit score, how long they plan to live at the house, how handy they are, how susceptible they'd be to overspending various items, etc., etc.

    I may try to tackle those complexities in a future article, but this one was more focused on showing the empirical evidence that despite best intentions, most of us don't save much without forced savings (i.e. the principal in your house payment).

    @jordanwi,

    Similar to the my response to leradron, I agree that buying a house isn't appropriate for everyone. The variables are many. But I believe the vast general savings gap between homeowners and non-homeowners should be factored in when we try to assess our own abilities and strategies to save.

    @Schneidku40,

    This article was focused on folks' primary residence (not rental properties), but, yes, there can be pretty big fluctuations when you compare home prices with rentals (Trulia has some interesting data on this: http://info.trulia.com/rentvsbuy). That is one of the factors an individuals should consider when they make their decision.

    The beauty of living rent free after the house is paid off is a good way of explaining why homeowners tend to amass net worth. If you buy a house at age 35 with a 30-year mortgage, the eliminated house payment at retirement is a great boon.

    Fool on,

    Anand

  • Report this Comment On September 23, 2013, at 2:39 PM, TMFBomb wrote:

    @pedrorrero,

    I addressed that in the article here:

    "Don't misunderstand me. This isn't a call to arms for everyone to jump willy-nilly into one of the biggest, most complicated financial decisions of their lives. The harrowing stories from the housing bubble showed us what happens when we overpay or don't do our due diligence. There are also non-financial reasons that buying a house just doesn't make sense for some people."

    Fool on,

    Anand

  • Report this Comment On September 23, 2013, at 2:54 PM, sigiam wrote:

    Landlords and real estate investors generally don't do it for their health. The name of the game in real estate is cash flow. Cash flow refers to how much money landlords have left in their pocket at the end of the month after they budget for everything you would budget for if you were the owner (rent- mortgage principal, mortgage interest, expected maintenance costs, change in property value, etc.) plus expenses you wouldn't have as an owner (property management, legal fees, expected vacancy, marketing, etc.). If you take the total cash flow generated by your landlord, plus the expenses they incur that a private owner wouldn't, you have the total per month that you loose by renting. Of course there are exceptions to every rule, and multi-family dwellings/ apt buildings create economies of scale that offer costs that in some situations might be well under what an individual would pay to own a single comparable unit (condominium). Also not owning mitigates risk, so there is some value there. But in the long term on just about anything, especially single family houses you will be better of owning.

  • Report this Comment On September 23, 2013, at 3:11 PM, asdfk123 wrote:

    I would advocate that buying just does not pencil out for many people. I always tell people it comes down to whether or not it will be an emotional or a purely financial decision. For most people, it is emotional.

    Problem 1: Many new home owners do not fully appreciate all the costs of property taxes, insurance, and maintenance. The maintenance is really the big one most people are not ready for. A lot of the maintenance cost can be mitigated by those who can do the work themselves.

    Problem 2: Most people I’ve met don’t have a sizable down payment of at least 20%. Sure, a low interest rate looks great, but it is a low interest rate on a big dollar amount. For many people, I believe they will wind up paying more for the asset then it’ll ever be worth.

    Problem 3: Mobility. Buying a house comes with a lot of fees when you want to sell. For some people, this can be a barrier to taking a job further away.

    To me, the greatest benefit to owning a home is when you actually own it. You either rent from a landlord or rent from the bank. Once you’re renting from no one, ownership really pays off. So from my perspective: big down payment, pay it off quick, and try not to pay more in principal and interest than you presume the asset will be worth in the future. Once you’ve paid it off, enjoy working for yourself. 

  • Report this Comment On September 23, 2013, at 3:13 PM, OldTimeFool wrote:

    One other point that is probably as important as many others that have been brought up in this article, is that the majority of those who rent experience an increase in rent every year/every contract renewal (this increase can be significant or in line with inflation).

    Those who pay a mortgage will experience an increase in monthly payments due to an increase in taxes (hopefully due to an increase in the property's value), and an increase on insurance payments.

    It seems that over 30 years, the individual renting will end up paying more a month than the individual paying a mortgage. Plus, unlike the homeowner, the renter will have to continue paying rent at year 31.

  • Report this Comment On September 23, 2013, at 3:18 PM, Mathman6577 wrote:

    There is more to the decision than just the financial aspects. For example, Homeowners are not as mobile as renters. I know quite a few unemployed people who can't move to areas with better job opportunities because they can't sell their house.

  • Report this Comment On September 23, 2013, at 3:24 PM, TheDumbMoney wrote:

    It's a combination of ways in which the deck is stacked:

    1) Homeowners get a tax deduction a renter paying the same amount for rent does not get;

    2) Forced equity savings every month, in a significant amount even at the beginning of a mortgage (interest payment can be analogized as your "rental payment" component);

    3) Speaking of a mortgage, owning a house is the only way in which average humans have to employ leverage. Leverage creates risk, but it also creates reward. And with a 20% down payment you are not going to sell your house if it is down 10% the way you would a stock bought on that kind of leverage;

    And yes, people who rent (if they are thinking of it at all) say they'll put the extra in savings/investments, but the numbers simply put the lie to this, in aggregate.

    A house is a depreciating asset, but it depreciates relatively slowly compared to a car. The land on which it sits is a speculative investment, whose value will fluctuate according to the economy and micro-economy of the area where it sits, and also depends on zoning regulations (restrictive regulations drive up the value of existing land if the economy there is growing and people are coming).

    Note, too: Because homeowners employ leverage in buying their homes, and only pay the remaining debt over many years (in dollars that are devalued modestly every year), articles focusing only on the absolute percentage increase in home values do not provide an accurate picture of what people's return on invested capital actually is (offset by interest costs -- which themselves have to be offset by inflation). That is the number that matters, not the absolute amount by which home values go up or down in any given year, decade or century, and which we instead hear so much about.

    The housing bubble was what ALL manias are: a facially good idea taken to an absurd and illogical extreme. Bu that doesn't mean buying a house is a terrible idea. That is just another extreme.

    Nice piece,

    TDM

  • Report this Comment On September 23, 2013, at 3:35 PM, minttoothpaste wrote:

    I only saw liquidity mentioned once. As someone who has a house sitting on the market, its a pretty big deal and the difference between making money and losing it.

    My spouse and I moved for career reasons. We tried to sell, hasn't sold yet. Trying to rent as well, hasn't rented yet either. As it just sits empty, i'm gaining a small amount of equity, sure, but the expenses in interest, HOA fees, taxes are piling up at a far faster rate.

    I have a friend (also a former employee of the same company I left) same thing happened to him, after 9 months or so, he ended up offloading his house at a significant loss. Lost all his equity.

    I see home buying as a lifestyle choice not an economic/investment choice as I don't see the calculations working out in favor of buying right now.

  • Report this Comment On September 23, 2013, at 3:57 PM, n8larson wrote:

    I've done renting, buying (condo, small house, then large house), and landlording (both houses), and my experience, for me, is that renting is the way to go. The renting argument presented first is sound, but the statistical case presented for buying is not sound at all. Cart got way out in front of the horse on that one. If sailboat-owners are wealthier than those of us without sailboats, does that mean buying a sailboat will increase my wealth, too? Tax deductibility of interest looks good until folks realize that the standard deduction is probably pretty close to what they'll get for mortgage interest. Also, the "forced savings" argument is pretty weak: it costs a whole lot of money in interest, at least early in the mortgage, to guarantee that savings in the form of home loan principal paydown.

    In a way, the argument for renting is a bit like the argument for term life insurance (over "whole" life). If you're diligent, you can do better by renting and investing the difference.

    Finally, you might consider whether you want the 'throwaway money' of mortgage interest/rent to go to a bank or to a person, though it depends on who owns the dwelling you'd rent. YMMV.

  • Report this Comment On September 23, 2013, at 4:02 PM, ems79 wrote:

    I bought my house in 2010. With about 30% down my monthly out of pocket (PITI+water/sewer) is about $1700, which is probably close to, but less than, what I'd pay to rent an equivalent amount of space and features in the same town.

    Now add to that the $500/mo in principal pay down...

    ...then add the 10-15% return on the taxes/interest

    ...then add appreciation over time (even just through inflation)

    Yeah being a home owner makes great sense long term as long as you are making good choice when it comes to repairs and improvements...

    Then again if you have a less than 7 year view it can be pretty lousy:

    ... maybe you bought at a peak and are selling after ~5 years or so but you're just barely break even, or maybe underwater, despite your principal pay down...

    ...maybe you bought a home of an age that is enter a cycle of needing work done--roof, furnace, pipes, siding... so now your repair costs are hobbling it when considered an investment...

    ...let's not forget the 5-7% of gross sales price that ends up going toward realtors, lawyers and other fees...

  • Report this Comment On September 23, 2013, at 4:14 PM, Schneidku40 wrote:

    Minttoothpaste, I am sorry to hear of your situation. Illiquidity is certainly a problem in some areas.

    To be completely objective (and no offense to you intended), real estate has different levels of risk and value that any other asset class does. Just like stocks, some houses are good investments and some are bad investments.

    Jordanwi- My example is actually for a $130,000 house. I'd like to offer some different ways of looking at the numbers for you, though. If you paid that in cash to purchase the house, you wouldn't have a mortgage payment to make, so that factors into the ROI. Instead of a $800 total escrow payment, you'd only have ~$200 in taxes and insurance. That would increase your gross margin to $7,200, minus maintenance costs, say $1,200, for net profit of $6,000. That would be 4.6% return. Conversely, if you took out a mortgage but only put 20% down, you can use that 20% payment of $26,000 as your invested capital. You'd have the mortgage payment, though, so even a gross margin of just $200 would be only .7% ROI. The difference in the two situations is basically the interest you're paying on the mortgage, which is what you'd expect. No wonder so many investors like to pay cash!

    I think you definitely have the right idea on the rented basement though. Having somebody else pay your mortgage for you would sure be nice. As long as you like your tenants anyway!

    Pedorrero- It's definitely a disadvantage for those who purchased any asset at an inflated price. However, one could argue that if the person stays in the house long enough, the value will come back once you pay the house off and start to reap the rewards of having no payments. Of course that means being very immobile for decades.

    TDM- I think you are the first person I've heard say a house is a depreciating asset. Of course I could drive around and point out houses that have had lapses in maintenance and would consider them quite devalued, but doesn't the Shiller data of 0.2%/year increase in value point to house value appreciation?

  • Report this Comment On September 23, 2013, at 4:38 PM, hbofbyu wrote:

    "It remains a debate fought by smart people on both sides, because the variables make calculus look like third-grade math."

    Of course there are temporary fluctuations (and bubbles), but home prices and rental rates are going to adjust to the mean and be exactly where they are supposed to be - that fine line where renting vs buying is a toss up.

    Capitalism does the math for you.

    (something that Obamacare "planners" never undestood - sorry, but I had to get that jab in there)

  • Report this Comment On September 23, 2013, at 5:24 PM, plantoretire1day wrote:

    Don't forget the nightmare neighbor or neighbors you can't get rid of. Owning a home next to a nightmare neighbor will make the 'liquidity' of renting look very attractive. Oh, let's not forget contractor ripoffs that you may encounter. I have had both within two years of home ownership. It's nice to have money in the bank from tax savings, but peace of mind is priceless. Only prayer and practicing the golden rule has gotten me through these issues.

  • Report this Comment On September 23, 2013, at 5:26 PM, carvercash55 wrote:

    In so many "rent vs. own" debates, it's all about house value over the years and getting back a profit on what you pay for it. But when you rent, that monthly check is down the toilet forever, every single month. Regardless of the costs of home ownership, you write off your interest (first-timers do anyway) and you're building equity every month. So compound that with any profit you make when you sell above purchase price and there's no argument which is the better way to go.

  • Report this Comment On September 23, 2013, at 5:31 PM, cmalek wrote:

    I've owned a house on one quarter acre and now I own one on 3 acres. My reason for buying a house was rather mundane - I wanted to get away from noisy neighbors. Now I don't have anybody running wild parties on the floor above or next door. If I want to have 5 or 6 cars in my driveway nobody can tell me I can't. I used to rent in New York City, both in apartment houses and in private homes. Never again. No more airplanes, cop cars or fire engines going by at all hours. The loudest noises Now are crickets and occasional loud muffler.

    Oh, and since I "settled down" and bought my first house, I have built up an investment portfolio of almost seven figures. Owning houses has forced me to have a budget and to save.

  • Report this Comment On September 23, 2013, at 5:31 PM, LogicalD wrote:

    In 30 years inflation will likely make rent double what it is now. A mortgage payment, however will go to zero in that same time.

    If your time horizon is short: rent.

    If your time horizon is long: buy

  • Report this Comment On September 23, 2013, at 5:51 PM, 12sandwiches wrote:

    I think of it in terms of leverage. Buying a home is akin to a mini leveraged buy out (LBO). You can buy an asset with other people's money (borrowed money). As long as the interest rate is low enough and you don't over-leverage (take on too much debt) you are likely coming out ahead.

    Some people have made the landlord case above - a landlord owns a home and rents it out for more than the costs. I think of the primary cost as being servicing the debt. If she (the landlord) can rent it out for more than it costs to service the debt (ie pay the mortgage) then the cost of the building was her down payment. Sit on it long enough and sell it and you reap the benefits of leverage. Example, you put $20k down on a $100k house. Once the mortgage is paid you have 5x your money without factoring in market rises.

  • Report this Comment On September 23, 2013, at 5:52 PM, hamerhokie wrote:

    No one really does the brute-force analysis required to make an informed decision:

    1. Pick two nearly identical homes, one for rent and one for sale.

    2. Calculate the difference in monthly cost between the rental and the home (assuming the rental will be cheaper).

    3. Run a scenario where the difference is invested in something that produces a dependable yield of X for 5-7 years.

    4. Estimate the appreciation of the home and tax savings over that time.

    5. Compare the net results. (very oversimplified but you get the idea)

  • Report this Comment On September 23, 2013, at 5:55 PM, ifdefmoose wrote:

    I believe that @damilkman has the right of it: this is a misuse of statistics: Well off people have houses, therefore if you have a house you are well off." This is an instance of the all-too-common fallacy of imputing a cause and effect relationship to a correlation: "con hoc, ergo procter hoc."

    n8larson explained it succinctly: If wealthy folks have more sailboats than most of us, does that mean that if you buy a sailboat it will make you wealthy? I think not.

  • Report this Comment On September 23, 2013, at 6:35 PM, wtatm wrote:

    A thought that didn't really seem to get expressed...

    My wife and I bought our present home 26 years ago. In that time, the value has gone up about 50%... or about 1.6% per year. Back out the real estate taxes, insurance, home repair, etc... and the cash flow is a net negative.

    However, renting would be a net negative, too.

    The two best things about home ownership:

    ~ We paid the mortgage off in 7 years. Every Fool should prepay their mortgage, if possible.

    ~ It's been a wonderful place to raise 6 kids.

    Bottom line... there are some things more important than a "return on investment". A "return on life" is one of them.

    Blessings to all,

    Jim

  • Report this Comment On September 23, 2013, at 6:38 PM, hockey33 wrote:

    Maybe I'm missing something, but that 0.2% increase makes no sense. Unless you are taking out inflation? A typical house in late 1800's, would cost in the $800 range. Compounding 0.2% interest for 130 years. That house is now worth a little over $1,000? Where can I find that deal. A relative of mine bought a house in the 1920's in Orange Country , Ca.. they paid $4,200, the land and house would be worth millions. Even in a depressed area of the country, you aren't getting a house much less than $50K. Also, why would we take a figure from the 1800's, house is nothing like it was back then. I think comparing a 30 year house cycle is a better comparison. Same for the stock market.

  • Report this Comment On September 23, 2013, at 7:18 PM, jrnhkkdo wrote:

    One key point to remind everyone is your premise that a home will at least retain its value over time. If not, your argument may be invalid. In the US - that is largely true. However, in other countries, it isn't always. Some places, home values decline with age. This is a key point.

  • Report this Comment On September 23, 2013, at 7:37 PM, wjcoffman wrote:

    Homeowner's insurance premiums are criminal at best! That's the only factor that would make me reconsider homeownership. My premiums since 1995 (in Fla mind you, sortof at the the small end of the hurricane alley funnel) have totalled probably $60,000 and have moved from a low of less than $800 to a high of $6,000 and even being dropped and taken up by the State until more insurers came back. If it weren't for the mortgage company requiring it I'd probably take the risk. I've never had a claim in 18 years yet because the home was built before 2003 (make up some number later than when my home was built, which was 1976) I get dropped now about every 3 yrs (seems to be a pattern starting). After being dropped you contact your independent agent, they find a few companies that give quotes, you pick one which then requires you to have a home inspection to the tune of about $200, and then cross your fingers some odd-ball non-insurable finding isn't made. (I've probably violated the "Please be respectful with your comments" text I'm looking at to the right of this box - sorry.)

  • Report this Comment On September 23, 2013, at 7:50 PM, tbarth88 wrote:

    I think one thing people often forget about when looking at the differences between renting and owning a home is rents are almost always going up. When you take out that mortgage, your payment stays at whatever you agreed upon until you refinance (assume a fixed rate loan). Not true for renters. You can count on that lease payment going up by at least 10% at the end of each lease term unless you are willing to move to get another move in special.

    When I first relocated to the Phoenix area, I got a sweet deal on a 12-month lease. Two months free rent. With the free rent, I was paying about $800 a month but when it came time to renew, I was going to have to pay $1100. I renewed for another six months while I looked for a house.

    Even during the housing market crash, there was upward pressure on rents in Phoenix because even as people in large numbers were losing their homes, they still needed housing.

    This is another bind when you rent. Even as your income increases, you end up putting it into higher rent payments so you never get to a point where you start pulling ahead like you do with a fixed mortgage payment.

  • Report this Comment On September 23, 2013, at 8:38 PM, sagitarius84 wrote:

    I have been renting ever since I started college. If I had purchased a home, I would have paid twice as much on the mortgage vs what I paid in rent.

    I then put the difference in dividend paying stocks. I would stay I did the right thing. I am not tied down to a specific location, do not have to spend thousands in property taxes, fixing things, and waste my time on maintenance.

    I do not own a home, yet because of my investment in dividend stocks every single month, I have a net worth that is above the median for my age. Go figure..

  • Report this Comment On September 23, 2013, at 8:43 PM, Fullstep wrote:

    If you graph median net worth of owners of fancy cars versus non-owners of fancy cars it would look the same as your graph for home ownership. Why? A fancy car is an asset. So is a house. Owners of assets tend to have higher net worth. This has nothing to do with the investment value of fancy cars or houses.

    I always thought that the main benefit of owning a home was that I got to live in it. This flow of housing services is like an untaxed income stream. Rent, if I paid it, would be in after tax dollars. That is why it is a no brainier to own one house. Investing in extra houses is another story altogether.

  • Report this Comment On September 23, 2013, at 8:43 PM, 7again wrote:

    If you want to argue against home ownership from a personal standpoint, I completely understand. From a financial standpoint, it is hard to justify. There are always going to be good times to buy and bad times to buy, good times to sell and bad times to sell, good deals, and bad deals, but the bottom line is that you need to live somewhere. Either you are paying your own mortgage, taxes, etc., or you are paying your landlord's!

  • Report this Comment On September 23, 2013, at 8:57 PM, ConsiderThis1 wrote:

    I myself are an example of this. I made a conscious decision to rent for a while because houses prices was going nuts back in 2005. I was a poor graduate working paycheck to paycheck. No old money here.

    But I did something different than your typical renter: Penciling how much I would've spent paying the typical mortgage, I forced the savings. (minus the tax deduction that I cannot manufacture out of thin air)

    Using the savings, I did two things. At first I just invested in the general market, to build up capital. Then seeing how the market is becoming irrational, I successfully timed the crash. Leveraged shorts and options. To me, it was no more risky than the leverage that homeowners were doing to themselves. And "worst case", I was throwing away money that I would've thrown away anyway as an owner. (but minus the neg-equity that mortgage leverage would've caused me)

    Did pretty good there. The housing crash blogs helped a lot. Then I rode the market on the way up once the tide turned.

    Started with debts, I now have net worth in the millions. Bought a house at one of the lowest interest rate in a decade -- but this time as an expense not as an investment. Rest of my money is diversified (not in bonds, gosh awful "safety" premiums there)

    I would say, I would not have any money to do any of these if I had followed the rich/dad;poor/dad advise I keep hearing. I would've missed the biggest opportunity in equities in a lifetime.

    No regrets so far. Take what you will out of this story. One consistent pattern I've been following the entire time -- do not follow the majority. They get sheared (by wall street machinery).

    Form your own opinion and do your damn best to make make sure it's NOT the majority opinion. (i.e. when everyone thinks Apple stock, at $700, is going to $1000 and my barber owns Apple stocks. Or when everyone was SURE British Petroleum is going to go bankrupt from the burst pipe. That's almost always a money loser.)

    Given enough timeline and participants, only the minority makes the majority of the gains in any trade. Don't be the majority.

  • Report this Comment On September 23, 2013, at 9:39 PM, TMFBomb wrote:

    All,

    Thanks for the great, thoughtful comments...you're really affirming what I wrote earlier: "It remains a debate fought by smart people on both sides, because the variables make calculus look like third-grade math."

    Rather than respond to every comment, I'd like to comment on some themes and clarify a few points.

    - To keep the focus on my point (that people underestimate the forced savings of housing), I purposely kept it simple. When I say that i believe buying is better than renting, I'm assuming the person in question is financially and emotionally ready for it. For example, I didn't mention that I would strongly advocate for saving up a 20% down payment before committing to a house. Further, as one commenter noted, the longer you can stay in the house, the more buying makes sense. I don't have a hard and fast number, but I wouldn't even think about it if you can't stay 5 years (perhaps longer). And I'm a strong advocate for not "over-buying" housing...either in size, amenities, or neighborhood...in the DC area where I live, you pretty much have to find a house with something wrong to get a reasonable deal.

    - If you are able to rent out part of your house (either because you're at that life stage or because you have enough room), that's a big boon to living below your means.

    - The point that you can lock in your principal and interest payments for 30 years while rents go up is a good one. If you sell your house before the mortgage is up, you do incur transaction costs. That said, once you own a house, you're effectively hedged against housing prices going up.

    - The 0.2% return on housing I cited is a real return...after inflation. I didn't word that as clearly as I should have in the article.

    Fool on,

    Anand

  • Report this Comment On September 23, 2013, at 9:49 PM, gilmomp1 wrote:

    I believe that there's only so much land to own in this world and if you can afford to keep it do it. The price will keep going up. Don't lose track of the big picture.

  • Report this Comment On September 23, 2013, at 11:10 PM, Stewpalooza wrote:

    I've read every comment on here (great view points by the way) and as someone currently trying to decide whether to buy or rent, I'm still on the fence. I'm a 35 year old non-college graduate that has been contracting overseas (Iraq

  • Report this Comment On September 23, 2013, at 11:17 PM, Stewpalooza wrote:

    oops.....

    contracting overseas (Iraq and Afghanistan). I've saved up quite a bit of money and plan on returning home to North Carolina next summer. My decision if I buy is basically do I pay cash for my home or finance it? I think that using the money that I'd pay on a mortgage to invest as long as I can keep my returns above the 13% range makes sense but seeing the amount of money the mortgage interest would be over 15 years makes me reconsider. I'm not liking the state of the economy or where our government is leading us....decisions...decisions.

  • Report this Comment On September 24, 2013, at 12:02 AM, sustik wrote:

    Let me ask you this: When it is raining I see a lot of people with umbrellas, does it mean that umbrellas somehow cause the rain?

    You show that people who own, have more wealth then people who rent. An alternative explanation to yours is that poor people cannot *afford* having a house. Once you get wealthier, yes you can buy a house because the costs (interest) are lower, you will be able to take advantage of the itemized deduction etc., and of course you have 20% of the value to put down. (If you do not, then you will pay so much through PMI and FHA that it will hurt bad.)

    However even with that it depends on the location and other circumstances whether buying or renting is a good choice.

    I live in Texas and here owning trumps renting. For example I know a 115k 3 bedroom house that rents for 1200 a month. If you buy it, you will pay much less a month in mortgage interest, tax, hazard insurance, upkeep and lost interest on the down payment.

    In the San Francisco area I saw a 2 bedroom condo that is for sale for 500k, an identical unit rents for 2500. Renting can look better in that case, because owning costs:

    * 14k mortgage *interest* assuming 20% down, excellent 3.5% rate,

    * 5.5k property tax

    * 3k in lost income from the 100k down payment that is not earning (quite conservative!)

    * 4k in HOA fees (covers outside hazard insurance)

    * 1k inside hazard policy and upkeep (conservative)

    which totals to: 27.5k. So if you cannot get 3.5% mortgage interest (can you?) and you think that your 100k could earn more than 3% and/or you assume more realistic upkeep costs than you will pass the rent amount of 30k quite easily. Of course recall that I did not calculate the principal payments here, so with the ownership you have a forced investment into the house which is not liquid. I neglected the purchase and sale costs. There is also the risk of real estate value change.

    The reality is that if you have only 2500 to spend on housing then you will rent that condo. If you have 3000 to spend and you have good credit and you expect to stay in the area then you buy it. If you have 3000 to spend but like to live beyond your means you will rent a bigger/fancier condo for 3000...

    However arguing that "Look all the wealthy people buy instead of rent, so you should buy to be wealthy!" is as valid as saying: "Look all the wealthy people buy Mercedes etc. cars so you should too to become wealthy!"

  • Report this Comment On September 24, 2013, at 1:02 AM, rana2608 wrote:

    as someone else has said, the best part of owning a house is you make mortgage payments for 15 - 20 years and after you have paid it off, you are living for free as against paying rent for 50 - 60 years!

    Another important thing IMO is: real estate/housing is an investment for your next generation. Imagine a nice chunk of change in your kids pockets (post tax) after you are gone! Wouldn't you be glad for them to have that kind of extra money!

  • Report this Comment On September 24, 2013, at 2:00 AM, Fullstep wrote:

    Lots of commenters noted the error in the "richer people own houses argument". I think you owe an apology on that one.

    Some comments note that cost of buying and cost of renting can never get too far apart. Selling price or value of asset is the capitalized value of its net earnings with some nod to appreciation. That's looking at a house, like a stock, as an investment.

    The first house provides that tax free stream of housing services. The high bracket tax payer benefits more by converting rent paid out into non taxed rent paid to himself as land lord.

  • Report this Comment On September 24, 2013, at 4:12 AM, matti12 wrote:

    Homeowners on average are better off than renters to begin with. Thus you are comparing apples to oranges.

  • Report this Comment On September 24, 2013, at 5:28 AM, hoipolloi9110 wrote:

    I subscribe to the idea of buying a low-maintenance rental property (e.g. condo or townhouse) where you plan to retire. You get your exposure to a real estate investment, the forced savings, tax deductions, and eventually own it free-and-clear.

    In today's economy, buying a house where you work carries too much risk. It can be a huge anchor if you need to move, we've seen what can happen to prices in the short term, and along with maintenance cost, let's not forget about maintenance TIME.

    Maybe buying makes sense as part of a diversified investment portfolio and to force savings, but I don't see that it must be the same place as where you live.

  • Report this Comment On September 24, 2013, at 8:27 AM, RobboV wrote:

    The time of "a job for life" is long past. It is indeed a brave soul who would buy a house these days. With all the outsourcing, downsizings, plant closings, bankrupcies, office relocations and such, the hope of being able to stay in one place doesn't have a prayer.

    A friend of mine worked for ARMCO until the production was moved to China and he lost his job. Another worked for ARCO and had to move 3 times in 10 years when the company's headqurters moved from city to city. Yet another worked for Delta Parts until they closed their US plant and opened a new one in China.

  • Report this Comment On September 24, 2013, at 8:44 AM, TMFBomb wrote:

    A few of you have commented that correlation of homeownership and savings doesn't equal causation...in other words, "of course wealthy people own houses."

    I was worried about that when I looked at the numbers, too. But remember I used median figures...which approximates the typical American household.

    Also, read this part closely after the second chart:

    "That's over a 30-to-1 net-worth advantage in favor of homeowners. Anticipating the sharp readers who will argue that this could be demographics (e.g., older people, more educated people, families, or high-income people are more likely to own houses), I looked further. Households headed by folks under age 35 have a median net worth that's about double the $5,100 median net worth of non-homeowners. Households headed by folks with no high school diploma have saved more than triple what the non-homeowner has. So have single folks with no children. And, yes, even families in the bottom 20% of income have more net worth than the non-homeowner."

    That last sentence really brought it home to me. As anyone who read "The Millionaire Next Door" will tell you, it's not about what you make so much as it's about having a saving mentality and living below your means.

  • Report this Comment On September 24, 2013, at 9:09 AM, borneofan wrote:

    As far as I can tell, you missed the item that bit me personally. The discussion so far is focused on rewards. There is no mention of risk.

    A homeowner needs a stable income, and cannot easily pickup and move to greener pastures in hard times. This risk affects the value of the asset as well as the income stream available to pay the mortgage. Ask the folks in Detroit how it feels to abandon a property because there is no work available to pay the bills.

    If you ignore risk and assume a growing or stable local economy, the choice is clear.

    I have been trapped for 5 years now in a house I can't sell, in an area I can't find work. You won't find that risk in the statistics quoted. Long tail risk.

  • Report this Comment On September 24, 2013, at 9:39 AM, tomsutc wrote:

    @TMFBomb - Nice article, but I remain unconvinced that aggregated statistics across a single metric (home-ownership to net worth) is enough to draw the conclusion that housing has the overall edge.

    I agree with many of the comments about the correlation/causation issue, also known as the "false cause fallacy," and here is why. The root of your question is "What will make my net worth go up more, buying or renting?" You have shown that people who buy generally have more net worth, but *that's not answering the question*. It's taking a conclusion and trying to back into the premise, despite using median income figures.

    Back to the question - what will make my net worth go up more? There is lots of dissent here because there are so many variables, and many people have lost lots of money doing one or the other. If we asked a random sampling of home buyers and renters-who-invested-the-difference, what would we find? I would take this data and try to find an R-squared (R2) value of whether buying will increase my net worth, but I highly doubt it would be anywhere near either extreme (1 or -1). In other words, I'd hypothesize that some people's net worth goes down, for some it goes up, but overall a lot of both. Because the R2 is not near either extreme, it's incorrect to conclude that it is the cause of my net worth going either up or down.

    An argument could be made that people are terrible at actually investing that remaining portion, but that's not the argument you made.

  • Report this Comment On September 24, 2013, at 9:45 AM, wrenchbender57 wrote:

    Personal experience over 40 plus years: I have owned several homes over the years. Made money on the first one. Bought it for under $15K and sold it for $25K. Made money on the second one. Bought it for $32K and sold it years later for $125K. However, we had second and third mortgages on the second one due to spending more than our paychecks could afford, remodeling costs, etc.. Moved in with my second wife and spent a LOT of money remodeling her home. She owned that one outright but it needed a LOT of work at it was over 20 years old when we married. We lived on 4.5 acres of land with trees. So, I had a LOT of work to do while I was married to her. Second wife decides she wants a divorce. So, I move into an apartment. Cost for my apartment is $850 a month including utilities. I am now 65 years old. Would I buy another home? Not likely. I could afford to do that but at this point it looks like a better bet to keep my money in other investments. I have far more time now and my to do list is much shorter than before. I don't have yard or home maintenance costs, insurance and other home owner costs. The only reason for me to buy at this point would be to have my 45 lb dogs live with me. Can't do that in my apartment. So, they live with my second wife at her home. I just can't see where buying a home at my age makes sense. Yes, I could afford to do that. But it would severely hamper my cash flow. I can live in a small apartment at this point and be happy.

  • Report this Comment On September 24, 2013, at 9:52 AM, wrenchbender57 wrote:

    Another example: My elderly parents own a 5 unit apartment house. I help them manage that. They make a decent net profit on the rents at this point. But, the apartments are paid for. But, they are old so we have been spending a lot in the last few years on upgrades and maintenance. That has eaten up some of the profits. The roof may need to be replaced in the next few years. That will be a major expense. It is a flat, torch down roof. Earthquake in this area some years back took all the brick off the outside of this investment. Cost to replace all of the brick was over $100K. This is on an investment that originally cost $50K many years ago. FEMA gave them a low interest loan for the brick work but that was IT. They still had to pay back the $100K plus interest. This investment is probably worth $600K today. They have done well on it but my father used to do all the maintenance and repairs himself. Now that he cannot do that I do some and we hire out the rest. It is reaching the point where it may be best to sell at this stage. This asset has not appreciated much in the last 10 years or so.

  • Report this Comment On September 24, 2013, at 10:00 AM, wrenchbender57 wrote:

    Third case: My parents home. Sold about a year ago for just under $200K. They had to move into an assisted living facility due to age related issues. That home sat on the market for about 6 months. We had to lower the original asking price and stage their home to sell it. We also had to do some repairs to get it ready to sell. While it sat on the market and they paid to live elsewhere it cost close to $700 per month to maintain that home. This was a home that was totally paid for. No mortgage. $4200 in lost cash flow for those 6 months. Plus the staging costs, real estate fees, etc.. They lived in that home for over 10 years. But, during that time the real estate market crashed. They made a bit of money when the sold it but not that much, after all the expenses.

  • Report this Comment On September 24, 2013, at 10:56 AM, dsmoyer1 wrote:

    This article is simply nonsense unless you live in areas where single family housing appreciates at rates above nominal inflation rates. I live in Ohio and I can assure you that you are all fooling yourselves if you think that single family home is an appreciating asset.

    My father built our home (six siblings two parents) 48 years ago for less than $25,000. He just sold it for $130,000. If you consider taxes, maintenance and insurance and invested the 25K he put in the house in a average mutual fund (ICA) and rented, my father gave up greater than $500,000.

    Owning a home is a lifestyle choice that is all it is. Keep deluding yourself into believing you are making money on that house but you are a FOOL!

  • Report this Comment On September 24, 2013, at 11:16 AM, dsmoyer1 wrote:

    Tomsutc, you are absolutely correct; people are terrible at investing the difference between renting and owning because most people have no discipline.

    Several years ago (2007) I considered the difference btween buying or leasing a Toyota Camry for my daughter. It was quite a simple experiment. Buying cost $500/month, leasing cost $250/month. I (dollar cost average) invested the extra $250 each month in a mutual fund (even thru 2008!) looked at the residual on the auto after 3 years and the mutual fund value after taxes and still made 2K and bot the car with the difference. If you do the same calculation on your home without convienently forgeting all those pesky expenses and you will find a single family home to be a very poor investment in most areas of this country.

    The government is responsible for convincing most Americans with a 50 year propoganda program that home ownwership is an investment.

  • Report this Comment On September 24, 2013, at 11:30 AM, rodolfopaiz wrote:

    I believe there will never be a definitive answer to this question of renting versus buying. As hbofbyu said, market forces generally act to make both similarly attractive. Personal factors like willingness to save, risk of job loss, other reserves (even including family members who could loan funds in a pinch), and preference towards long-term residential stability, all make this a very personal decision.

    I'd say the only reasonable "answer" is to develop a ilst of the key variables in play, both market-based and character-based, and guide each person to finding out what the best choice is for them personally. I've read tons of arguments in favor of either buying or renting, and NONE of them make compelling cases that either path is generally best.

    Make up your own mind as to what is best for you personally... be a Fool, not a fool.

  • Report this Comment On September 24, 2013, at 11:56 AM, singerred wrote:

    I'm 60 years old (young) and single and plan to stay that way.. I bought my first house 5 years ago. It seems pretty likely I will not pay it off before I kick the bucket. There are many foreclosures in the area where I live and property values are low. (I'm in east Fort Worth) I'm sick and tired of yard work (one acre)... worried about work that needs to be done (it's an 85 year old house and needs insulation, more return air for the A/C, floor leveling, and more electrical rewiring). Even though my house is really beautiful, and even though I've done a lot of work on it, at this time I might get a bit more than I owe on it or maybe only break even if I sell it. I want to unload it and go back to renting. Thoughts from anyone are appreciated.

  • Report this Comment On September 24, 2013, at 1:08 PM, CharlesVW wrote:

    I love reading these comments!

    I am a renter who has owned three houses. As an investor/renter my savings greatly improved since making that decision and with MF help made good ROI. In the US after living in your house 2 years no capital gains are recordable. I built all three houses myself and rolled over the profits into the next one each time by putting each house up for sale in the 22 month. By acting as the contractor I saved about 15% and through lessons learned it improved each time. My life is construction so I turned my hobby/employment into what I enjoy and love to make money.

    The most important reason to own that was not mentioned. Having a home for your children to return when they grow up and they know where mom keeps everything. It still feels like their home. Truly nothing better for a child of any age like me ( 50's) to visit my parents at my childhood home. The family all returns to the best smells and laughter as I remember that now all Gand kids get to experience which are in their 20's.

    Why I choose to rent? That house I just mentioned is in my parents will to be mine with first rights to buy out the shares of my siblings. They all have established homes and wish to see this house never to be sold. No other house will ever be good enough for me so owning a house really is a personal choice and not really a financial choice to be rich. By the way they have owned this house for 35 years. Bought for $22,000 and maybe worth $135,000 today. The house was worth $ 105,000 in 1984. ROI is not good. The city outgrew the area and what was once a new area is not the older section and dated. So it is true that houses and the associated cost to own is NOT a good investment.

  • Report this Comment On September 24, 2013, at 1:26 PM, WPON1963 wrote:

    I did not own a home until age 40. Rented and saved in order to buy a home. This in and of itself restricted my spending and forced me to save.

  • Report this Comment On September 24, 2013, at 3:23 PM, wwcnut wrote:

    This is a case of figures fool and folls figure. The assumption is that the population of renters and owners is equal and it is not. Home owners have a median net worth of $174,500 but the median home equity is $47,500. So the average homeowner has most of their net worth, $127,000 in non home equity ( 72.8%). So responsibilty may be the key not home ownership or perhaps it is age or frugality. This is a case of taking a corellative relationship and making it a causal relationship.

  • Report this Comment On September 24, 2013, at 5:37 PM, TMFBomb wrote:

    @wwcnut,

    The $47,500 can't simply be subtracted from the $174,500. The $47,500 is spread over everyone (homeowners and non-homeowners alike) while the $174,500 is exclusively for homeowners.

    Fool on,

    Anand

  • Report this Comment On September 24, 2013, at 5:45 PM, TMFBomb wrote:

    @singerred,

    The point I was making in the article isn't that buying is always better than renting...rather, I'm pointing out that people tend to underestimate the power of forced savings in buying.

    I don't know enough about you, your finances, or the rest of your personal situation to responsibly say whether you should sell your house or keep it, but the article and this comment stream combined offer many variables (both financial and non-financial) to consider.

    Fool on,

    Anand

  • Report this Comment On September 24, 2013, at 6:51 PM, TheDumbMoney wrote:

    Schneidku40,

    I'm very sorry I'm the first person you have ever heard say that!! People consistently fail to separate the structure from the land (or, in condos, from the proportionate component of the land and the location). But when you think about it, it's fairly obvious that the structure itself is a "good" like a car or a tv, which deteriorates over time.

    In areas of the country with high "home values" most of what you are paying for when you buy a "house" is the land/location value. In areas with low "home values," there is often very little excess value in the land/location, beyond the value of the structure itself. This is why I appreciate what the commentator from Ohio said: when you buy a house, if your speculative aspect fails because the neighborhood or city goes to seed (or even fails to grow), all you are really buying is a depreciating asset. It stinks.

    Your comment about the Shiller index indicates to me you are not quite understanding the distinction I am making. The Shiller index is better thought of as a PROPERTY value index, not a "home" price index. The "property" is both the "house" (depreciating asset) and the land (speculative asset).

    Now of course sometimes the land depreciates (as any speculative asset does), as it has in Detroit, and sometimes the structure can appreciate in value even without much maintenance (the classic example is if the house is built by a famous architect). The first of these phenomenons is just a function of the speculative nature of the land/location purchase, and the latter is the exception, not the rule.

    I hope that helps. News and commentary very commonly use misleading words for things, often as a result of deliberate misdirection. For example, in the immigration context, the term "illegal" is misleading, because immigrants who come without permission are not violating any criminal law at all, and "illegal" is a term used in regard to criminal laws. Instead, they are violating the INA, but it is not a criminal violation like burglary. It's a federal civil statutory violation, like a bank failing to provide TILA disclosures. Similarly, the term "undocumented" is misleading because it implies a helpless passivity that does not match the reality of an active action to come to America without permission (except where it is applied to people who were brought without permission by their parents and through no fault of their own when they were very young; to this group of people the term is probably most accurate). I could give numerous other examples. Anyway, in the context of "home ownership," the entire way in which the discussion transpires across virtually every medium, day in and day out, for years and years and years, treats the structure and the land as if they are one thing, a "home." This is wrong. "Residential Property" = Home (depreciating asset) + land (speculative asset).

    But it is so common that one can be forgiven for falling prey to it. I'm a fairly smart guy and until I bought my first house mid-2010, it had never even occurred to me to separate them. Then I started thinking about what it really means for a 3/2 house in LA to sell for $700K and a 3/2 house in rural Virginia to sell for $150K, given that the actual cost of construction does not differ by anything remotely near $550K. The difference is the speculative value that people attach to the land and location.

    That speculative value can be though of as an analogue to higher P/Es on stocks. It is an expectation that the good times will continue, that more people will want to come in the future. It is driven by the desire and expected desire of people to live in that location (which is in turn driven by jobs, climate, etc.), combined with the level of restrictions that exist on new development or on increasing the density of development (both of which constrict supply, and are especially impactful in large cities that people want or need to move to in order to find the best jobs). For that reason, anti-density rules that are common in CA cities, for example, are properly viewed as sops to the wealthy and entrenched landowners, even though they are often promulgated under the guise of liberalism. They favor the wealthy and old, and no such city with such rules builds a sufficient amount of "affordable housing" to make up for its broader structural bias in favor of its supposedly progressive wealthy and grey-haired property/home-owners.

    But in terms of a lesson to be drawn from all this, the lesson is as follows: for any "home" purchase, but particularly if a high component of what you pay is a speculative investment in the land/location, you need to at least ask the question of what you think the economy in that location is going to look like in 10-30 years. All else equal, that is going to be the biggest driver of your ROIC, or your loss.

    In that regard, note that the Shiller index captures the whole country: it captures Detroit and also New York City since 1960 for example. In that time, Detroit property values have taken a one-way trip to toiletville, whereas NYC property values have gone up many, many, many times, as suburbanization trends reversed, the squeegie guys went away (look it up), the financial sector flourished, and it became cool again to live there. And so in the end then, it comes back to the old cliche about real estate: it's all about location, location, location! But this is why.

    All best,

    TDM

  • Report this Comment On September 24, 2013, at 7:12 PM, TheDumbMoney wrote:

    If you want to see what I'm talking about concretely, try this: No matter where you live, call a contractor and ask him/her/it to give you a rough estimate of how much it would cost to reconstruct basically your same home if there were a hurricane, tornado or earthquake. If you live in an area with high home values, that amount will not remotely match what Zillow tells you is the estimated value of your "home." The difference is the value that people are estimated to put on your permitted land if no home were on it. As I understand the world, the vast, vast majority of any so-called "home value appreciation" you will ever see is actually appreciation in the value of that land. (The remainder relates to the increasing cost to rebuild a similar house over time, i.e., inflation.)

    Best,

    TDM

  • Report this Comment On September 24, 2013, at 7:34 PM, TheDumbMoney wrote:

    Finally, because I'm a longwinded blowhard, let me just say in regard to my penultimate comment the following:

    "Illegal"/"undocumented" immigrants should probably actually be called "non-permitted" immigrants. To me, their violation is most analogous to a man who builds a second house on his land in violation of local zoning rules. They failed to follow the proper permitting procedure -- in their case, federal permitting procedures for living and working here.

    So there is an example of entire major political conversation we are having in this country where nobody on either side is even using a term that accurately describes the problem. And the media completely lets them get away with it, and unquestioningly adopts non-objective language created either deliberately or (to be charitable) unwittingly, by partisans on each side. And in the real estate context we have millions of people buying and selling properties each year who have no conception at all about the true nature of the assets they are buying or selling: I'd say 99% don't. It's all really quite astounding when you think about it. Is it any wonder we have problems?

    Ok, done now.

    :-)

    TDM

  • Report this Comment On September 24, 2013, at 9:48 PM, Schneidku40 wrote:

    TDM,

    Interesting discussion. I had never thought of separating the structure and land in the value before. I watch farmland prices sometimes, though, and you can easily see the speculation at work in the price per acre, especially in times like last year when crop prices were high.

    I do have a question, however, about the replacement cost you brought up. Over time this replacement cost certainly goes up just due to inflation in the cost of the building materials. Is there any consideration in a home's value, then, given to the fact that the home is now more expensive to replace than it was years ago?

    I can understand the analogy between a car and a house in that they grow old and eventually need replaced. Little to no value is given to a 30 year old worn out car, and a new car certainly costs more than one 30 years ago did. A house should be the same, right? It just doesn't feel that way though. For example, I purchased my house for <130k. The county says my land is worth $24,000, leaving roughly $105,000 for the value of the structure. My house was built 30 years ago. I'm not sure what the price to build it would have been back then, but I'm guessing it was somewhere less than $105,000. Even if it cost $105,000 to build, that would mean the land must have been worth $0, right?

    My only guess would be inflation has been the main driver of the home value up from then to now. But the value of a car as it ages does not rise at the inflation level. Thoughts?

  • Report this Comment On September 24, 2013, at 10:27 PM, whitejd wrote:

    I think the key factor that influences financial implications of the decision between renting and owning is LOCATION. If the location is good, the house will go up in value faster than inflation. If the location is poor, better to rent.

    A non-financial motivation for me buying despite a less than ideal location was the lack of availability of a suitable rental property in the area to which I was moving. (4 children and one wife do not fit that easily into a 2 bedroom apartment!) That and the ability to modify the property (inside) to suit my changing family requirements.

  • Report this Comment On September 26, 2013, at 9:34 AM, mikecart1 wrote:

    I gave an entire speech a few year's ago that shows they other side of the argument. While this article is good about why owning a house is better, it doesn't convince me at all when it comes to monthly maintenance cost averages, the inability to be mobile in life and career, and the fact that you lose your ability to truly use the power of investment when you wind up spending your extra money on furniture, accessories, and other things for YOUR house. Your house never works for you. Money on the other hand does and will and always has been.

    Also the charts above include the heavy outliers and the poorest of the poor to expand the difference in favor of home owners. I'd like to see the same graphs with those of college degrees that choose to either own a home or rent.

  • Report this Comment On September 26, 2013, at 10:09 AM, TMFBomb wrote:

    Hey folks,

    I made a couple clarification tweaks based on your comments:

    I added the "inflation-adjusted" part to make it clear that the 0.2% return figure I'm citing is a real return (i.e. with inflation taken out):

    "Compare that inflation-adjusted return with the 6%-7% historical real return of the stock market and you can see where their argument is headed."

    I added the "don't have enough income or savings" part below to make it clearer that when I talk about the buy vs. rent decision, I'm assuming the person makes enough and has saved enough to commit to a home purchase:

    "The harrowing stories from the housing bubble showed us what happens when we buy when we don’t have enough income or savings, overpay, or don't do our due diligence."

    Thanks for making this article better with these changes, your insightful comments, and respectful discussion.

    Fool on,

    Anand

  • Report this Comment On September 26, 2013, at 7:16 PM, p366 wrote:

    Anand,

    Your article ignores two facts on favor of renting:

    1. Real estate, specifically school taxes, are out of control and this will likely only get worse as school districts have to deal with pensions of retiring employees.

    2. While it should be that one's rent would reflect any increase in RE taxes, in fact it doesn't always. I know several landlords who are loath to include the full cost of tax increases in the rents they charge because they are afraid of losing tenants.

    While renters don't get to deduct RE taxes on their Schedule A, I would much rather pay $0 school taxes and let someone else have my deductions. Why? Because a deduction is only worth whatever your individual tax rate is and there are no tax rates in the US equal to 100%.

    The situation today is that seniors living in homes they have owned for years are now facing hardships because they pay increasingly extraorbitant school taxes to "educate" other peoples' children, whether or not they ever had children or had any children who were of school age when they bought their homes.

    Renters are subsidized. In PA, all they pay for school taxes is $14.70/yr. per capita tax per person in the household. Quite a bargain.

    As the older people die off, IMO, it shall be seen that we are a nation of renters. Primarily, because so few younger people today will ever be able to buy a home. So, they will rent forever.

    Given the current dependence of school taxes on property taxes, the burden of paying for past extravagances will fall on a an increasingly smaller percentage of the population. When that percentage includes only the top earners, the laws will probably change, shifting more of the burden on the users of these services.

    Bottom Line: Homes are generally a terrible investment unless you can afford the right neighborhood. Typically, this is the neighborhood where home prices appreciate regardless of economic conditions because the residents are largely immune to the condition of the economy and because, oddly enough, the tax rate per thousand is lower than much less affluent areas.

    Best,

    Pam

  • Report this Comment On September 27, 2013, at 7:51 AM, Schneidku40 wrote:

    I've done a calculation on the house I bought 2.5 years ago. We're planning on selling in another 3.5 years. Even if we sell for only the amount we bought it for, and after including closing costs, real estate agent commission, and the $8k in upgrades we've done, the comparison to our current $1,000 total mortgage payment would be equivalent to us having paid $670 in rent over the 6 years we would own the house. There aren't many places we could find even an apartment for $670, unless it was a 1 bedroom or not overly nice 2 bedroom. Forget about renting a house or duplex.

    For me, the house wins.

  • Report this Comment On September 27, 2013, at 12:04 PM, Soakee wrote:

    Unfortunately, some people never receive social benefit of "ownership mentality" because they they never actually "get" the ownership mentality even when they are owners. They still have a renter mentality and do nothing to their property (maintenance), which then not only brings down their property values but their neighbors' as well. ALWAYS look for a set of rigidly-enforced restrictions when buying. Or, live in the middle of several acres.

  • Report this Comment On September 27, 2013, at 12:12 PM, rossmattp wrote:

    I agree with some of the comments regarding the unfair comparison of wealth of those with homes and those without. By nature, those with homes have to have some wealth just to get into the status, while the vast majority of this country's poor are not homeowners, ergo it is not a valid argument on its face. Had they qualified this by income class (i.e. Total Wealth of those earning between $50k to $100k, $100k to $250k, $250k to $1MM, you might have something worth discussing. Another point that should be considered (especially in these times) is the economic outlook of the City, State, and/or Region that you are living in. I happen to live in city and state (Chicago, IL) that have terrible looming fiscal crises that will in all likelihood force a massive increase to the already egregious property taxes. We own three homes and are planning to sell all three just to avoid the almost certain tax hit and subsequent hit to the property values. One last point I have against home ownership is the intangible cost of one's own time dealing with ownership, as well as the stress related to it. I personally long for the day that I can just call up a building super or condo owner to say (XYZ is busted...fix it) and then head out to enjoy a nice meal.

  • Report this Comment On September 27, 2013, at 12:25 PM, modelmasters wrote:

    I've recently purchased a new house. Why? Well, because the house note, etc. is less then what I would pay for RENT.

  • Report this Comment On September 27, 2013, at 12:35 PM, beyerch wrote:

    The author spoke to 'equity' many times while discussing the house; however, he mostly glossed over the fact that house prices fluctuate and the equity could disappear. (even if you didn't buy during the bubble)

    Furthermore, it may not be very easy to access depending on your specific situation. If liquidity is important, this should be a factor as well.

    The best way to make money with property; however, isn't by living in it. The best way is to buy property to rent/lease/resell.

  • Report this Comment On September 27, 2013, at 12:53 PM, revrobdiesel wrote:

    Many good comments here, and for some people in some markets, buying is a huge benefit. For other people in other markets, there is only downside.

    This blog post covers it pretty well;

    http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-op...

    Or as a short link: http://bit.ly/16MYqBk

    I bought my house in 2006 for $206K. It's now back up to about $180K in estimated value. I'm also down from a 6.5% interest rate to 3.6%.

    I had to move when work and life got in the way and I'm renting it out and thankfully it's in Denver (a great rental market) so it rented out in 3 days and had stayed rented out at more than the mortgage so at this point, barring any extreme weather/maintenance requirements, it's paying itself off, and giving me a few hundred every month.

    I am one of the lucky few and I've had a few sleepless nights when I was barely breaking even or a thermostat quit working, or the management company didn't blow out the sprinklers in time, so next spring they had to send a plumber (at MY cost!) to fix their mistake.

    I would feel a lot better owning stocks than owning a house, but all in all, I'm staying afloat.

  • Report this Comment On September 27, 2013, at 1:06 PM, pbk100 wrote:

    Net worth of "Owns a home" vs "Doesn't own a home" is the wrong comparison to make. "Owns/Has owned a home" vs "Has never owned a home" would be better.

    Why?

    Because in your chart just about everyone who lost their home due to foreclosure is on the right-hand-side - you're using their low net worth to support your argument that home ownership builds wealth, when it's actually evidence of the opposite.

  • Report this Comment On September 27, 2013, at 1:07 PM, AltReality11 wrote:

    There is a middle ground. I consider it to be similar to asset allocation which we all use in our investing, right?

    1) Buy less house than you can afford and only after doing your homework. The New York Times has a good calculator to use as one aid.

    2) The house or condo should be competitive with the rental situation. In other words, comparisons of rent to purchase should include principal + interest + taxes + maintenance. In my case, I wanted three bedrooms and two baths with a view and no outside work at all. I also made a comparison of utility costs (heating, cooling and hot water).

    3) In my case, I used 10 years of ownership as a basis in my decision making. I purchased a condo with the provision that I could rent it in the future. I also included a 50% HOA fee increase when making my purchase comparison. After 12 years, I can honestly say that my cost of ownership has been at most 10% over comparable rental costs, In fact, because rentals have been rising, my costs might actually be less to own! My experience includes the period of devastation of the real estate market. AND I've upgraded the kitchen - a complete tear out, and I also replaced all of the main flooring with hardwood. I did the kitchen myself and used 100% maple and plywood cabinets, new stove, refrigerator and super quiet dishwasher. I did sub-contract the flooring because of condo noise restrictions and specific installation guidelines. In addition, I can also state that I do truly have an investment because I'll get a nice chunk of cash if I should decide to sell. Or, I can rent my unit and get significant annual return. At present, because of the current disfavor in home purchases, rents in my area have been increasing at a very good clip.

    4) As a condo owner my utility costs are substantially lower than those of my "homeowner" neighbors. Electricity and natural gas for heating, cooling and hot water can eat one alive. My annual costs for this are about 25% of the costs of my friends with comparable square footage homes.

    5) In my case, I did take the difference between the "home I could afford" and did not purchase and I did invest it. That additional savings with prudent investing has allowed my personal nest egg to grow at about 35% annually during that same 11 year period.

    In summary, my experience has been a positive one.

  • Report this Comment On September 27, 2013, at 1:10 PM, spintreebob wrote:

    The biggest factor in any investment is the investor, not the nature of the investment. Some of us who had high SAT scores and are smart in other areas do not understand money, despite numerous attempts to learn. I've owned 9 places and lost money on 8 out of 9. I still own the 9th. The same is true of 40lk where I've lost a lot. In hindsight, I still don't see how I could have done different from what I did, except to not buy in the first place. But others, who have the knack for understanding money could have found ways to win.

    On a separate factor, the tax deductability only benefits those with an above average income. One factor in the recent housing boom and bust was that average and below average income people were told they would reap tax benefits, which was not true.

  • Report this Comment On September 27, 2013, at 1:18 PM, Dadw5boys wrote:

    i have been watching several homes that had been foreclosed on from the Homepath Fannie Web Site. For over 2 months there was very little action on these homes few bids and few contracts.

    The suddenly Tuesday this week ALL the homes with a asking price of $50,000 or less were being bid on and under contract.

    I was working to free up cash to buy a place for my 84 year old mother to go and get away from the cold weather. But I am late to the party again !

  • Report this Comment On September 27, 2013, at 1:18 PM, Dadw5boys wrote:

    I want to pay cash and not have to carry homeowners insurance !!!!

  • Report this Comment On September 27, 2013, at 1:20 PM, mrTpitiesMe wrote:

    When a person owns a house, it is possible to build a person-cave with tools and machines to slash maintenance costs and extend the life of appliances and vehicles. In the person-cave, light manufacturing can provide a back up job for your real job. This is helpful when your real job vanishes.

    Rent==Fail

  • Report this Comment On September 27, 2013, at 1:41 PM, ckryder wrote:

    The thought of buying a home for me, a single person, has been tempting on and off over the past 20 years, but all during that time I've been receiving dividends from real estate investment trusts and contributing diligently to the 403(b) plans offered by my employer, and making sound stock purchases. Bottom line: there is absolutely NO WAY that I could have accumulated the high 6-figure net worth I have now by owning a house. I think there was an article in the now-defunct SmartMoney some years back that helped convince me to stay the course. Renting in the right place and with the right landlord has its advantages.

  • Report this Comment On September 27, 2013, at 2:20 PM, TMFBomb wrote:

    I'm enjoying each of the real-world anecdotes folks are sharing. Thank you.

    I think regardless of whether owning a house is right for you or not, the really important trait that helps with financial security is saving (and investing that savings in prudent ways).

    Fool on,

    Anand

  • Report this Comment On September 27, 2013, at 2:22 PM, nate12680 wrote:

    I will start with the best conclusion. Buy a house and have room mates pay rent. That's how you get the apartment payment with the homeowner equity (and a bit of entrepreneurial spirit. It's the ultimate win win have your cake and eat it too. Then if you need to move, keep renting it or sell it to get your equity out. My buddy started doing this when he was 22. At 32 he now has 3 or houses in 2 states and has property management companies take care of them.

    Does rent increase faster than taxes and insurance nationwide? In 10 years which guy has a higher payment? I would like to know.

    Also the result of renters having lower net worth has more to do with the result that lower net worth households can only afford to rent. It only becomes a choice when you have a net worth that can afford a down payment and risk. A net worth of 5k is just trying to get by. It would also need to be considered those that have astronomical net worth and 90% of the money supply would undoubtedly have houses.

  • Report this Comment On September 27, 2013, at 2:49 PM, MCCrockett wrote:

    Once you get tired of the rumpy-bumpy noises coming through the apartment wall and decide that you would prefer the peace and quiet of a home, the decision to buy or rent wasn't much of a decision in the Seventies. The cost was, essentially, the same.

    The big question is whether or not a home is an asset. It is an asset to the extent that it offsets your mortgage liability but once the mortgage is paid off is it still an asset or is it just a very inexpensive place to live?

    As far as I'm concerned, it is an inexpensive place to live. It won't, again, become an asset until I die.

  • Report this Comment On September 27, 2013, at 2:58 PM, 4farve wrote:

    I believe Mr. Chokkavelu really misses the fiscal point. The primary reason why residential property ownership is an excellent financial investment is precisely because of inflation. The investment is highly leveraged because most purchasers only pay 5-20% of the purchase price and mortgage the rest. A significant portion of the purchase price simply offsets a portion of the capital cost. However the entire investment value rises (typically) at the rate of inflation or better if you live in a demand market like Alexandria VA. In many years, inflation may exceed the loan rate thereby devaluing the loan cost for a further benefit. Properties can be purchased in times of slow demand (like when interest rates are high) and the investment will be valued below real market and then the loan can be relatively easily refinanced to more beneficial rates. In conditions where housing costs decline, like recently, builders don't build and new housing stock does not keep up with demand from population growth ultimately driving up the cost of existing housing. Add the other factors that the author and others cite and residential property becomes an awesome investment. It is an important part of a total personal investment portfolio that is undervalued and not discussed by most financial advisors. As advocates of 'buy and hold' strategies, most Fools should understand the benefits of buying and holding residential property, for 15-20 years, as history has shown that the real estate marker has historically ridden out all of the market troughs and enjoyed one, two or sometimes even three peaks that outrace inflation by a substantial amount.

    For all of these reasons I appreciate the article but stress these more measurable characteristics of this investment type.

  • Report this Comment On September 27, 2013, at 3:10 PM, iarrgh2 wrote:

    What the pro-renter folks are not accounting for is that they DO pay the property taxes, insurance and maintenance costs. The landlord adds these costs to the mortgage and calculates the rent to cover them.

    But only the landlord gets the principal reduction and equity.

  • Report this Comment On September 27, 2013, at 3:13 PM, PenguinTrap wrote:

    I think you can clarify this a little by acknowledging that 'owing' in the first thirty (or 15 if you are disciplined) years is not accurate.

    You gain a little each month - principle reduction and price appreciation in normal times. But as long as someone carries the note, you are not really the owner. You are a forced saver.

    Once that last payment is made (if ownership is really your goal), you now have a windfall each month. This can be invested, saved etc. and that will really accelerate net worth.

    The average 'free and clear' homeowner is of course still on the hook for taxes, insurance and maintenance, but I bet that same 'average joe' has an extra 1200-1500 in cash every month.

    You'll never realize this as a renter. Your rent payment last as long as you do.

  • Report this Comment On September 27, 2013, at 3:33 PM, mhayon wrote:

    As some of the other commenters have pointed out, the statistics are a bit misleading here.

    Yes, a lot of these groups are self-selecting, which confounds some of the variables.

    Take the comparison of the median of the homebuyers to the median of the renters. The author already alluded to the fact that there are a couple of self-selecting variables at play for the homebuyers, but what about the external variables for the renters? Well, the reality is that a lot of the renters don't choose between renting and buying-- they rent because they have to (whether it's because they can't make a down payment, get a mortgage, whatever). Because it's the median we're talking about (ie: the middle number), and the numbers are likely skewed toward a lot of low income earners, the median will reflect this.

    Similarly, when you talk about median for homebuyers, which has more of the high income earners, the number gets skewed again-- this time in the opposite direction.

    Net result, you're getting that 5-to-1 ratio, even though that 5 is probably too high and that 1 is probably too low.

    While there very well may be a higher ratio in net worths because of people's inclination toward spending when they aren't forced to, the use of median is a bit misleading (as opposed to, say, mean).

  • Report this Comment On September 27, 2013, at 3:45 PM, anartistindc wrote:

    That “owns a house”/”doesn’t own a house” seems a very misleading statistic, unless it is specifically limited to renters on the "doesn't" --

    It could include

    a. the homeless

    b. students

    d. people living in communes

    e. nuns and monks

    f. military boot camp

    and many other persons who are at points in their lives when their incomes may bee at an extreme low point.

    Also the point about bankruptcy is a little fuzzy. When facing bankruptcy, having to lose one's home for the cash, or trying to stay in it without cash, are both horrific situations--nothing like cashing in a brokerage account.

  • Report this Comment On September 27, 2013, at 4:13 PM, bnorthcutt wrote:

    Nice graphs. But like most graphs, they poorly show true statistics and are even worse about raw data. I am a home owner. I am not a rich guy. I bought my house in Dallas and took out a mortgage for 185,000. That was 7 years ago, just before the real estate market crash. Ok, no problem. I still have the house. But my payments are 1900 per month and the property taxes are 5300 per year in the area I live in. The value of the house has dropped to 150K. So for 7 years I have put in 159,600 dollars for the mortgage and 37,100 in property tax ( most of which goes to the hospital where they spend most of it delivering babies for uninsured moms). So that's 196,700 dollars for being just 7 years into a 30 year mortgage. Agreed, I got a bad interest rate when I bought the house. But because of the recent changes in home loans, I cannot refinance at a lower rate without paying off 25% of the total estimated value of the house. So.....so far I have already paid more than the house was worth when I bought it. And I would have to come up with over 40K just to refinance. How is this good? If a had rented a property I would have no debt, could have accepted jobs in other cities, would not have had to pay such high property taxes, and could have invested more than half of what I paid into the stock market. I can rent the house for 1500 per month at market value. So if I had lived there as a renter, I would have paid a total of 126K in seven years. so that's a loss of more than 70K in seven years. And that doesn't include a loss of 1400 for the seven years for HOA and numerous repairs and lawn service that have totaled in the thousands as well as mortgage insurance which is 238 per month x 12 months x 7 years= 19,992. And what will I do with this after finally paying it off in 23 more years? Probably move to an apartment because I will be too old to take care of the lawn or house in general. I completely disagree with the concept of buying. If you move just ONCE, in your life, you will lose a lot of money. And if you stay in the house all your life, you will have paid many times what the house is worth, and maybe leave it to your kids. But, I'd rather leave them a good trust fund.

  • Report this Comment On September 27, 2013, at 4:18 PM, dreamimmigrant wrote:

    Those statistics don't represent me... the typical American is financially illitrate and look to their homes as some sort of asset. It's money draining pit. I'm 32, frugal and save around 55% of my income (including wife's). I pay $650 bucks for a very small one bedroom, sitting room, dining room, covered parking apartment in a gated apartment complex with a swimming pool. That's all we need now. We save money on all sorts of taxes, community fees, repairs, security, landscaping etc. So a flat rate beats owning a home which becomes a liability with all these additional costs.

    So now, 67% of our savings is in the stock market through a dividend growth portfolio and 33% in cash. At some point, we need to spend more on housing once we have a kid or two. We may have a kid God willing after three years and may buy a house when the child is born. By then, we would have built up a good enough cash position to buy a house without a loan while dividend income would be as good as 25% of our monthly expenses...but we plan to reinvest those.

    the US government loves housing - it provides s false sense of security, ownership and makes you have a feeling of success.... all on leverage. In reality, it's just a pit draining your money with expected and unexpected costs

  • Report this Comment On September 27, 2013, at 4:37 PM, djramco wrote:

    Why wouldn't you consider growth on the leverage? Let's say you buy a house for $600K, but you have a $300K mortgage. You would be earning the 0.2% on $600K. However, rather than average growth over 200 years, it would be preferable to consider the last 25 years (or possibly 50). Growth, according to the statistics from the economist averaged about 3.8% over the last 25 years. Considering the leverage, this is higher interest on your investment than the stock market.

  • Report this Comment On September 27, 2013, at 5:20 PM, cmalek wrote:

    @Dadw5boys:

    "I want to pay cash and not have to carry homeowners insurance !!!! "

    Even if you own your home outright, it is still wise to carry home owners insurance. Insurance provides the funds to rebuild in case your home is destroyed or damaged. Insurance protects you against lawsuits if someone hurts themselves on your property. Home owners insurance is like liability and collision insurance for your car.

  • Report this Comment On September 27, 2013, at 5:30 PM, lsbattista wrote:

    The proverbial "American Dream" - home ownership. Works for those whose income, geography/housing costs are aligned. Our work requires us to live in "high cost" areas. In our family, we have re-defined the American Dream e.g. Lifestyle - live close to work - 10 minute commute accompanied by excellent schools for our children. In the current economy, the liquidity of our "Human Capital" is our greatest asset and our family priority; not the asset of home ownership. Not being tied to home-ownership gives us the freedom to move where the income is. So where is our "home-ownership" equity? 401k/Retirement accounts, etc. Still creating "net worth" but in a different investment vehicle.

  • Report this Comment On September 27, 2013, at 5:36 PM, cmalek wrote:

    @Schneidku40:

    "Over time this replacement cost certainly goes up just due to inflation in the cost of the building materials. Is there any consideration in a home's value, then, given to the fact that the home is now more expensive to replace than it was years ago? "

    Your home owners insurance should include a provision for an automatic increase in the replacement value of your home. Each time you renew your policy, the replacement value of your house will be raised by the rate of inflation.

  • Report this Comment On September 27, 2013, at 6:23 PM, steveluannj wrote:

    My brother explained it to me fairly clearly: A house over the long run must be paid for by someone with a job that can afford it. There is time for speculation, and a time when those gains evaporate. Over the long term, incomes pay for houses, and if they are static, prices are static.

    Renting vs. buying should be driven by the cash flow tradeoffs, not by the fact that the commitment mortgage forces you to save. Right now, even with low interest rates, home ownership is saddled by large switching costs, making it a poor option for people that don't have a clear line of sight to a 10 year stable employment horizon.

    A a home owner, I agree that is is a satisfying asset, but that should not be confused with the numbers and hard analysis that should go into the largest single purchase many will make.

  • Report this Comment On September 27, 2013, at 8:17 PM, BentMike wrote:

    I think the whole analysis is wrongheaded.

    The vast majority of homes are not run with good money management principles.

    I think if you took a population of home owners that had reasonable saving, spending and investing habits they would be much better off than the sorry lot described herein.

    And, I think if you took a like population of renters that operated with reasonable habits they would be even better off. And furthermore, they would spend more time doing rewarding activities like getting together with friends (something that is hard to do while mowing). I think the intangible gains of renting outweigh the materialistic demands of home ownership.

    I think this is most telling of all - investing more money well has a far better payback in the long run than homeownership. I say this an investor in the SA vein and a longtime homeowner (home is about 20% of total, not 60%). I would have more if I was a renter.

    Really this was a comparison of a bunch of innumerates. Do the comparison with people who use money wisely.

    Now, I have to go home and paint all weekend. I got a quotation to paint my house for 4 months of take home pay. I like painting and have a ton of leave time saved up, so it is a no brainer. I would rather go to the international Bluegrass Music convention in town this week though. If I was renting, I would be there now.

  • Report this Comment On September 27, 2013, at 10:13 PM, LaurieItkin wrote:

    One of the key factors as to how I became a millionaire before I turned 40 was because I did not tie up capital in the form of a down payment for a home. I invested 100% in equities.

    Sure, rent is an expense, but a lot of the fees involved in home ownership are also expenses. The decision to allow homeowners to deduct mortgage interest was a bad public policy decision, in my opinion. Just another way to encourage people to take on debt and buy a home they cannot afford. I prefer the liquidity and historical returns of the stock market, despite the four years we had negative returns over my lifetime.

  • Report this Comment On September 27, 2013, at 10:30 PM, maniladad wrote:

    Wow! Obviously a subject of wide and intense interest. I've read every comment and they seem to confirm what Anand said in the beginning re the wide diversity of opinions. I won't try to add to the comments on rent vs buy but I'd like to ask a couple of questions and offer my tentative conclusions on issues that no one seems to have mentioned.

    The appreciation of a house is said to average only 0.2% above inflation over the life of a mortgage. But since most of the principle is paid off in the final few years of the mortgage and since this is paid off with inflated dollars, doesn't that tend to cancel out the effects of inflation? Seems to me that under these conditions the absolute gain is a more accurate measure of appreciation than the gain after inflation.

    My other question/comment is related to a concept that I recently heard in a talk by Ray Dalio. He defines diversification of assets as more than merely diversification within equities (industrials, tech, consumer, etc.) but rather as diversification between equities, fixed income, cash, gold(!) and real estate. (There may have been others but that's all I remember.) Not all of these areas may show profits but neither should all of them collapse at the same time. From this viewpoint, might not owning a home be considered a diversification of part of your assets into real estate? Obviously, there are many other personal and economic considerations that affect the decision to buy instead of rent, but if the decision is for buying then it seems the property could be considered to be part of a total investment strategy.

    D

  • Report this Comment On September 28, 2013, at 12:18 AM, rharris500 wrote:

    The comments in the discussion thread cover many of the flaws in the article, so I will stick to a few that have not been covered completely: 1. the author states that "those without homes should be able to put the money they don't spend on curtains and sump pumps to better investment use. It's a compelling theory refuted by reality." However, what he call "refuted by reality" is actually a look at whether or not people DO invest the money, not whether or not the can. Those who do not buy houses are much more likely that those who do to be spenders, rather than savers; 2. generalizations are generally pretty useless, because talking about the average person is basically talking about a myth. Nobody is average; 3. following up on #2, some renters find deals on homes that are rented out only because the owners are keeping it for future retirement, often renting below even the interest on a home loan--I know, because I did for several years before buying a home (and I built up equity faster that way--by saving the difference between the rent and the mortgage payment. My savings grew faster than the equity in the house; 4. Check any mortgage schedule and you will see that the equity buildup in the early years is extremely low--it becomes higher later in the mortgage period, because as you build up equity, more of your payment goes into equity. Therefore when rent is less than the interest on the value of the house, you will have more in 30 years if you invest the difference elsewhere while you rent. The bottom line is that you should rent if: 1. you are not likely to stay put for a long time, because buying and selling incurs selling and closing costs that can eat up much of the benefit; and 2. if you find a rental deal that allows you to save more on your own, rather than through a forced saving plan (a home mortgage), because whether you own a house or rent, you must pay the cost of the interest on the money tied up in the housing. Even after the mortgage is paid off, a homeowner is losing the interest that could have been gained by investing it elsewhere and which could have been used for rent payments. You should buy rather than rent if: 1. you are a grasshopper, rather than an ant--like the banks Christmas clubs of the past, owning a home can be a way to force spenders to save, albeit often inefficiently; 2.You can predict accurately that the house will appreciate sufficiently in the future to offset the taxes, depreciation, maintenance, and other expenses that come with home ownership; 3. you don't mind the lack of mobility that comes with buying a house, which is both time-consuming and expensive to sell; 4.the home mortgage tax deduction tips the scales toward buying for you; 4.or you put a high enough value on owning your own home, rather than renting someone else's. I love my home, but I would have been better off financially renting during the same period. Housing prices fell greatly in recent years, and in many areas, they still have not recovered. In short, it's dangerous to generalize about whether renting or owning is better. Most studies conclude that on average, home ownership gets an advantage because of the tax treatment, which was not even stressed in this article. And even then, that is a generalization that will hold for some people and not others.

  • Report this Comment On September 28, 2013, at 2:09 AM, ALLPAPERNOTECH wrote:

    I am truly fascinated by all the comments and realized how little I know about investing. I have a simple question that I would truly appreciate a sincere unbiased answer . Here goes, my primary residence is paid off & is worth around 700k in an established " recession proof" part of the country, I am looking to " move up" to a bigger house worth around 1.1K , I am 53 and still making about 225k a year before taxes . I don't have any debt & don't want to work till they bring my corpse out of my office. If I can rent my current house for 3,000 / month & take out a credit line of 550k & add another 250k, totaling down payment of 800,000 with a loan of approximately 300,000 for the new house. I was hoping to pay off the equity with the rent money within 10 years and the new house in 15 years with my income. My hope is to have extra cash flow by the time I retire in addition to social security & IRA savings by the age of 66. Does this make sense, please give me straight, no sugar coating answer, thanks.

  • Report this Comment On September 28, 2013, at 3:42 AM, b9f8 wrote:

    Playing Monopoly as children, buying was the only way to win.

    @ALLPAPERNOTECH

    Are you experienced as a landlord? How much experience, 0-100%? Multiply your % experience as a landlord times the $3,000 per month you want to collect. If you have 80% experience as a landlord, you may get $2,400 per month net from your rental property. As your % of landlord experience increases, year by year, you will realize a better return. It is common for professional landlords to figure an 83% occupancy rate per year; 30 days to evict for non-payment, and 30 more to clean and re-rent the property. So 83% of $2,400 per month actually amounts to $1,992 per month. Lease your property annually; do not rent it, and get some legal advice with your lease agreement, customize it to your needs. Amateurs often loose in the tenant vetting game. Besides rent, tenants may give landlords, headaches, ulcers, and heart attacks. Some tenants carry vermin, then complain about infestations to get favorable results in court. Increase your fire and liability insurance. When you are sued for lead paint poisoning, how will you prove the parents fed their kid pencils? If you are an experienced landlord, you know all this already, no steep learning curves to negotiate. If you are not an experienced landlord, save your sanity and your ability to sleep; sell your place first, and then buy yourself a new one. The new one may require ALL your free time and resources.

  • Report this Comment On September 28, 2013, at 9:30 AM, fl19 wrote:

    Isn't this really just a behavioral argument.

    Probably, most people with better overall financial behavior are more likely to buy a house.

    People who spend much of their money on cigarettes and lottery tickets, etc. also probably don't think it's important to buy a house.

    That is just general financial behavior.

    I'm sure there are many people who do not own a home that have quite a bit of money, just because they had better financial behavior.

  • Report this Comment On September 29, 2013, at 3:05 AM, DMTrader wrote:

    I own and also rent (I work around the country) and see the benefits of both. I also see greater benefits in renting than other home owners do who are quick to quote "throwing money away". Over here in the UK many people settle for buying arguably overpriced small rabbit hutch boxes that they're never entirely happy with. Renting can give people the opportunity to try different properties, maybe ones they would not be able to currently afford to buy. In days where a 'job for life' does not exist renting makes it easier to relocate. I know some people currently who have been trying to sell property for over 4 years. THat's a lot of time and stress and quite a chunk of ones life.

    It's a shame the average person has only $77k socked away in net worth and that much of that is tied up in the home. I expect if people didn't own their homes they wouldn't even be worth that much due to their inability to save.

    A few years ago it was quoted that if people intended to move house again within 5 years it would be cheaper to rent. I've never done the math myself however

  • Report this Comment On September 29, 2013, at 12:25 PM, sabebrush6 wrote:

    Lifestyle choice is a great dicision maker.

    Pro apt dweller.

    No maintanence

    Pay to park, no extra vehicles

    Noisy neighbors - healthy chance

    Crowded, don't come home late - no parking

    Neighbors moving constantly

    Pro - Homeowner

    Paint whatever you want,

    Room for all of your toys, Motorhome, boat, extra cars, build a street rod, hobbies, whatever.

    Feeling of acomplishment. Ownership.

    Neighbors usually stay for a number of years.

    Don't like something, change it.

    Pay it off - no more payments.

  • Report this Comment On September 30, 2013, at 1:06 AM, Robj2 wrote:

    I don't think there is any universal decision on this.

    However, having just paid off our house after 23 years, buying it and not moving/selling was one of the better financial non-decisions we made.

    If you're not staying in the area for 10 years, it's different. I think our original payments were about the same as rent and even after refinancing to finance the kid's college, we remained about even if you ignore upgrades/maintenance, which was about 2000 a year. Now it is owned free and clear before retirement, after 23 years.

    In our case, we would have been in much worse shape if we had rented, since I am pretty sure we would not have "invested" the difference. Some of you would, no doubt.

    The discipline of having to pay the mortgage every month is I think one factor in the wealth stats.

    We're going to move to the Pacific Northwest, but I could retire now if we stayed here, based on the fact the house is paid off, so it's only taxes, maintenance, and utilities now.

    Just another perspective--if you can stay in a house long enough to pay it off, the wealth considerations are considerable. Even if it is illiquid.

  • Report this Comment On September 30, 2013, at 7:58 PM, TMA251 wrote:

    Wise buyers/investors who are well educated, financially disciplined, and know how to buy prudently always do pretty well. Statistics provide zero insight into how any individual will do in making an investment in buying a home. A majority of people don't do particularly because a home is an emotional purchase predicated on dozens of ego and lifestyle driven criteria and far too little on value creation. A good financial education and real estate knowledge would quadruple the real returns on home ownership for most buyers.

  • Report this Comment On October 02, 2013, at 11:31 AM, maniladad wrote:

    to ALLPAPERNOTECH: I think b9f8 did a pretty good job of telling you the downside of being a landlord. There are some real horror stories out there but they are relatively rare. To skip some explanation and get to a recommendation, I think your plan is workable but given the limited information you supplied your best approach might be to hire a professional manager for the rental of your present house. They generally charge a percentage of the rental and provide expertise is setting the rent and screening of the potential tenant. They collect deposits and rents, hire professionals for needed repairs and maintenance and pay out deposits at the termination of the rental as well as send you a monthly check for your rental income. In your case that might avoid many of the common mistakes that new landlords make, as b9f8 discussed. Of course the important step then becomes to get a good manager. To do that, you need to do investigate the prospective managers carefully, try to get feedback from current clients, etc. It's a lot of work but it's better to do it once and get the right help. And it's the same sort of thing you should do with each prospective tenant; if you're not willing to do it with a prospective manager, you probably won't do a good job of screening your prospective tenants either. My guess is that the manager's fee would be well worth the advantages to you in terms of demands on your time as well as that of having a competent and experienced manager in charge.

    Under current tax laws there are a lot of advantages to being a landlord that aren't available to homeowners, primarily depreciation. You may be able to cancel out most or all of your rental income in this way. It's a bit of a trade-off because when you sell the house you have rented out you have to subtract the total depreciation you have taken from your cost basis, which will increase your capital gains tax. That will probably still leave you ahead since capital gains taxes are generally lower than the taxes you would pay on current income. You might want to discuss this with your tax return preparer. You can also deduct current expenses like insurance, taxes and repairs, and the fees your professional manager charges. Although tax laws are always subject to change, renting out a house is a business and businesses usually get better tax treatment than private individuals. I've rented out houses over almost half a century, and am presently doing so, and it's been a generally favorable experience.

    One thing that you didn't ask advice on that caught my eye is that you are moving up to a bigger house at the age of 53. That may make sense but it raised a few questions for me. If you are like most people your children will soon be leaving home and you may find yourself with a house much bigger than you require. Also you might be falling into an old trap, which is thinking that the more house you buy, the more profit you will make when you sell it. That is not necessarily so and may be completely wrong. Finally, you have a good income and seem to feel that it is secure. But don't ignore the possibility that some adverse condition such as job loss, company failure, health problems, and others may change your situation drastically. One of the hardest things to appreciate is that your life situation now is different than it was 20 years ago and you need to take a careful look at your present situation and make your decisions based on that and not solely on what your experience has been in the past. You are considering taking on a tremendous amount of debt, $850,000 if I understand correctly, and tying up a lot of capital, $250,000, and that may not be as safe a course as it was when you were 30. I'm assuming that your health is good and that you probably have a life expectancy of at least 30 more years. Even so, one of the principles that applies in investing and in life is that extremely bad things do happen unexpectedly - black swans - and it is wise to consider the possibility in making any decision. You're looking at a 15-year time frame and a lot can happen in that time.

    In that light you might even consider renting a home for yourself and your family while renting out your present home. As Anand discussed, renting may offer advantages over ownership in certain situations and that might apply to you. You could receive the full amount of your rental tax-free plus deductions that reduce your income tax liability, while getting the benefit of flexibility that comes with being a tenant and without taking on debt or committing your capital to an illiquid asset. I'm not advising that as a course of action, only pointing it out as an option. You might also consider renting with an option to buy, which gives you an opportunity to live in the house and experience the location, neighbors, as well as any problems with the house itself that wouldn't be apparent to you as a buyer only. You do have lots of options.

    I'm not an expert on this matter but it seemed that you didn't get a full answer to your question so I've given you my own slant. I've made a few posts on the boards and f you're a TMF member you can look me up and email me. I'll be happy to answer any questions my reply has raised, at least to the extent that I'm able to answer them. Ultimately you have to make the final decision but it's helpful to have someone to bounce your ideas off of.

    Good luck

    D

  • Report this Comment On October 06, 2013, at 8:51 AM, fool10201 wrote:

    Most (or all) business schools teach that the best answer in a particular situation depends on the circumstances. What is right for one situation is wrong for others. imo ONE CAN ONLY DRAW SOME GENERAL points.

    e:g.

    SAVE

    do not over-commit

    do not buy near a top or potential top

    do not sell at the bottom

    do your own repairs if possible.

    diversify where possible.

    manage your assets carefully.

  • Report this Comment On October 10, 2013, at 12:12 PM, Gary06 wrote:

    I keep hearing these comment about home mortgages being about "paying yourself" instead of the paying wasted rent to the landloard. Uh no, you're just "renting" your house from the bank, instead. The vast majority of your payment is interest and is basically the price of "renting" that mortgage. You are not building much equity with it; you are not paying yourself with it; and for many people, most of it won't even count as incremental mortgage interest deduction (over and above the standard deduction).

    So, rent from a landlord, or rent from a bank, unless you plan to stay in a house for a long, long time. Don't get me wrong - I own a house, but I do it for lifestyle reasons, not as an investment.

    And I agree with all the other posters who mentioned that it was weathier people who become homeowners, not homeowners who become wealthier people.

  • Report this Comment On October 10, 2013, at 4:14 PM, TMFBomb wrote:

    Based on some good comments, I added in "locking in a monthly payment" to this line in the article:

    Advocates of buying will use arguments that feature phrases such as "throwing away money on rent," "mortgage interest rate deduction," "locking in a monthly payment," and "forced savings."

    I think this was the best discussion I've seen in any article I've written. Rent vs. buy is a very complex topic and you've all shown plenty of the nuances I had to abstract away from to make the article concise. Bravo, commenters!

    Fool on,

    Anand

  • Report this Comment On October 12, 2013, at 5:28 PM, Netteligent09 wrote:

    We buy house to live and treat as a piggy bank, not investment or for profits. You do not consider as "homeowner" until you paying off your mortgage.

    Until them, everything is about mortgage slavery with high risks.

  • Report this Comment On October 14, 2013, at 1:26 PM, FoolTheRest wrote:

    <<The vast majority of your payment is interest and is basically the price of "renting" that mortgage. You are not building much equity with it; you are not paying yourself with it >>

    This really depends on your terms. Consider those who picked up a 15 year mortgage at 2.5-2.75% late last year or early this year. Initial principal payments are more than double initial interest payments.

  • Report this Comment On October 17, 2013, at 10:43 AM, Hwed wrote:

    This author, like countless others, forget the one immutable law of expenses.

    All expenses (including taxes), are passed on to the consumer through higher prices or the worker through lower wages.

    Renters may not pay directly for things like hardwood floors, but unless the owner likes losing money, those costs - ALL costs - are certainly buried in the monthly rate.

    The value of having a predictable monthly rent payment and not having to save enough capital for a down payment becomes the reasonable rate of return for the property owner.

  • Report this Comment On October 17, 2013, at 5:17 PM, richharding1 wrote:

    Isn't carrying a mortgage somewhat of a hedge against inflation? After all, if a decade goes by and you still owe $80,000 on your mortgage, but your home has appreciated in value, the $80,000 becomes a much less significant burden of debt over time because of inflation. I currently owe about $200,000 on my mortgage and that seems like a lot of money now, but will it feel like a big burden in 10 years?

  • Report this Comment On October 18, 2013, at 5:02 AM, smartlyfoolish wrote:

    Anand good one...

    Housing is the only instrument that appreciates anywhere in the world for sure when bought close to its intrinsic value.

    Also no matter what the cost of ownership is, in the long run the appreciation will out do cost of ownership(the essential costs)

    Besides the most important point, it gives an emotional anchor for life, which also helps to take more risk in other instruments of investment.

    Like you can be robbed of everything but your education, so is it with a house and rest of your investments...or something like that!

  • Report this Comment On January 05, 2014, at 2:45 AM, Isay67 wrote:

    Interesting article. But it appears to confuse correlation with causality.

    I believe home-owners tend to be financially better due to two main factors:

    1. (forced) discipline saving, by paying the mortgage, instead of spending the cash and, more importantly,

    2. Long-term LEVERAGE in large amounts.

    If people would save and use leverage/credit, not for consumption, but for long-term sound investments of similar size and tenor used for a home, I am sure they would be better off investing in the stock market.

    A recently published report about Warrant Buffet claims that has been a key driver for his investment success.

  • Report this Comment On April 27, 2014, at 9:40 PM, RachelLachance wrote:

    Yes, in some cases renting can be a better idea. However, rent is money used with no chance of future return. Anyone having done his or her homework before purchasing a home ( and thus maintaining it and making decisions on whether or not one is keeping it long term ) can usually expect to receive back the original investment - not including interest, of course. And therein lies the key to true financial success - controlling one's purchases and that all important wealth-stealing interest! Interest is something one should strive to earn, not to pay.

    I'm going to buy, but only when I've saved up enough to pay in full, in cash.

    While waiting for that, I will make smart decisions with my money:

    1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.

    2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($25/month from Insurance Panda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.

    3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.

    4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.

    5) I need life insurance to protect my daughter, but I ditched a $275 a month whole life policy for a policy from LifeAnt and now I only spend $25 a month. I save the difference to my Roth IRA.

    6) The most important one - make as much as I can. Save as much as I can.

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