I am also skeptical of the conventional wisdom of home ownership. I think a mortgage is simply a way to force yourself to save money. If people save with the same commitment as mortgage payments, even while paying rent, they should end up doing just fine.
(heavily adapted/paraphrased/quoted from 28 Feb 2006 Berkshire Hathaway Chairman Letter by Warren E. Buffett)
The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns.
True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves.
Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.
Work it out. Play with unknown factors (future rent, interest & house prices) and see what you come up with.
Mostly it's about even.
But just as you say a lot of human elements come into play. People choosing a rental or a purchase choose radically different properties so usually saying 'I would be paying this rent' is meaningless since you would be living somewhere completely different paying different rent. And saying 'I would be saving X' is also meaningless because you probably wouldn't be.
I think these usually outweigh the pure financials. many people purchase houses that would have never saved a dime. But of course, that's beatable.
That's not even remotely true. The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. That's not even counting the tax deduction for the interest.
A mortgage is basically borrowing money with which to make more money. Your mortgage payment on a place is generally not much more than your rent payment would be, and it's tax deductible and, over time, builds equity.
You can't save with the same commitment while paying rent because you have to pay rent.
> Your mortgage payment on a place is generally not much more than your rent payment would be
This is not true in most of the formerly booming real estate markets in the U.S. My coworker just bought a condo for $500K in Boston. At 6%, his interest payments are $30K/year, or $2500/month. My friends are renting a similar place for $2200/month.
I've heard it's worse in California, eg. people paying $3500/month in mortgage payments for houses that rent for $2000 or so. The recent Businessweek article on Merced mentioned homes with $3400/month that the owners walked away from, then out-of-state speculators bought it at a foreclosure auction and are now renting it back to the original owners for $1200/month.
> The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years.
First rule of finance: any truly risk-free profit opportunities will be arbitraged away as soon as large numbers of people become aware of them.
That's exactly what happened in the 1990s. People suddenly realized that the stock market, on average, returned higher rates than a 30-year mortgage, so they took out mortgages and invested it in the stock market. As a result, the stock market quadrupled between 1995 and 2000. Then they pulled it out of the stock market and back into real estate between between 2001 and 2005.
It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.
True. However stock market returns have averaged about 10-12% a year going all the back to 1830. Furthermore, they've beaten real estate, bonds, gold and every other asset class over any given 15-year period. Even people who bought the day before the great crash in 1929, came out ahead of those who put the same money into real estate... as long as they didn't panic and sell at the bottom as most people did.
Of course we can't expect every decade to be like the 90's, but I think it is a reasonable expectation that the 200-year trend will continue barring a kurzweillian singularity or other freakish phenomena.
> It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.
Why? Stock market rises tend to be linked to technological advances. We are pretty close to some significant technological breakthroughs and these will only accelerate over the next 50 years.
Consider, for example, that within 15 years, it should be cheap and practical to use solar panels for almost everything. Consider robotics and the way robots will radicalize many industries as much as industrial robots have revolutionized factories, etc.
If it's an investment property the tax advantages are very nice. Deductions for interest, depreciation, insurance and maintenance can seriously add up. Add rent to that and the yearly cost compared to the medium-long term capital gains turns out to be quite nice.
Of course it depends on the state of the market, but if it's a long term investment, and you don't buy out in hicksville, that shouldn't be to much of an issue.
As for owning and occupying a home you're paying a mortgage on... well that's more of a lifestyle choice. I would agree that it's not really the best investment.
Note that I live in Australia, so much of this may not apply to other regions.
You just spelled out the problem: you still need to pay your rent. Why paying rent when you could be paying yourself? In the long run, owning the place you live is smarter.
I think your example is more realistic if the numbers are more like 3000/mo to buy and 1500/mo to rent. If rental prices were as close to mortgage rates as 2000/1500, then not only would buying be obvious, it would not even be a much larger financial commitment. The extreme case is when rent equals mortgage.
If you have a new mortgage, then somewhere between $1000-1800 is spent on interest, NOT saved, and it is GONE (well, it's a little less because of the tax advantage for mortgage interest).
He said mortgages were a good investment, not houses. In terms of EV they're pretty high up the list, especially compared to the alternatives (buying the house outright or renting).
Nothing always goes up, but over time real estate does pretty well. Plus the tax deduction on the interest rate, and the fact that the APR is lower than what you could get with the money if invested well in other stuff make mortgages so well-worth it that even people who could buy outright almost always take them.
Because mortgages remain a great leverage instrument. Find a bank who will lend you 4X your initial deposit with a low fixed (or not...) interest rate, without margin calls, in any other investment vehicles?
putting money into a house that maintains its value or even drops slightly is better than paying rent. rent money is gone forever. a mortgage is building equity that you can draw on. plus I don't get how people don't realize that renting out a house to pay its mortgage is basically free money. Someone else is building equity in a house for you and all you have to do is pay the down payment and manage tenants.
My personal plan is to buy a house that has something that can be turned into a studio, live in the studio and rent out the main house. I have a feeling this type of situation doesn't go on the market too often for obvious reasons though.
Duplexes sell fairly frequently. For mine, the rent of each unit is greater than the mortgage...
As a note, though, home ownership (esp. rental ownership) is more expensive than just the mortgage (and taxes, and utilities). Like any business, there is time and attention required. Like any other depreciating asset, there is also ongoing maintenance costs. And they are not smooth like the income stream. If your rent is $1000 and your monthly payment (mortgage + escrow) is $800, you may be netting $200/mo. Great! But then you have to scramble to find the $10k to replace the roof. Or it takes two months to replace the tenants (there goes 8 months' profits). In the long term, it should work out. Your mortgage + tax payments should increase slower than the monthly rent payment. But renting out a house is not free money.
as close to free money as you can get without lucking out I would say.
Of course it requires attention and time but it beats pissing money away on rent, especially in silicon valley where rents are more than twice as much as the national average.
I think you're overlooking the interest payments, which are gone forever as well. If you have a 300k mortgage at 6%, you are paying 18k year (1500 month) in interest alone. Yes, there are tax advantages but I think this is negated by property taxes, PMI insurance, etc. Your mortgage payments aren't buying equity in your house.
and viewing houses as just another investment is amazingly persistent and is the attitude that got us into our present problem in the first place.
a mortgage is building equity in a physical asset, stocks are gambling to try to get 10% returns in paper money.
How are stocks 'gambling'? Buying a stock is buying a fraction of a business. Is all business ownership gambling? A business is just a group formed to do something too complex for individuals -- are the constituent individuals also a gamble?
