Throwing Money Away (Buying vs Renting)(messymatters.com)
messymatters.com
Throwing Money Away (Buying vs Renting)
http://messymatters.com/2009/06/01/buyrent/
9 comments
Renting in the US also means you are not responsible for:
* leaky roofs
* broken appliances: clotheswashers, water heaters, etc
* maintenance of a/c, heat, etc.
* maintenance of water pipes, electricity, etc., etc.
* upkeep of lawn, sidewalks, driveways (except in rare cases)
* building safety compliance
* fixing damage from floods, storms, earthquakes, etc.
* worry about termites, the foundation, the well, property line disputes from faulty surveys (the latter occur ALL THE TIME in the US)
* building insurance (renter's insurance always a good idea tho)
* personal liability for visitors hurting themselves on the lawn, sidewalks, driveway, inside stairs (anywhere outside your actual unit)
I could go on and on... if you own a condo, you are subject to surprise "assessments" to care for the building/property amenities, but there's insurance for it. If you own a house, it comes out of your pocket. And if you make claims against accidents (tree falling, storm ripping off siding, etc.) on your homeowners insurance policy for damages, their habit of late is that they will drop you. (Lots of scandals about this.)
Renting means very little exposure to this kind of risk, or surprise housing costs, in addition to flexibility to leave.
Homeownership pr0n is really out of control.
* leaky roofs
* broken appliances: clotheswashers, water heaters, etc
* maintenance of a/c, heat, etc.
* maintenance of water pipes, electricity, etc., etc.
* upkeep of lawn, sidewalks, driveways (except in rare cases)
* building safety compliance
* fixing damage from floods, storms, earthquakes, etc.
* worry about termites, the foundation, the well, property line disputes from faulty surveys (the latter occur ALL THE TIME in the US)
* building insurance (renter's insurance always a good idea tho)
* personal liability for visitors hurting themselves on the lawn, sidewalks, driveway, inside stairs (anywhere outside your actual unit)
I could go on and on... if you own a condo, you are subject to surprise "assessments" to care for the building/property amenities, but there's insurance for it. If you own a house, it comes out of your pocket. And if you make claims against accidents (tree falling, storm ripping off siding, etc.) on your homeowners insurance policy for damages, their habit of late is that they will drop you. (Lots of scandals about this.)
Renting means very little exposure to this kind of risk, or surprise housing costs, in addition to flexibility to leave.
Homeownership pr0n is really out of control.
Encouraging buying instead of lending discourages a flexible labor market. Basically the government, with the mortgage tax break, is lining the pockets of developers and home builders, and making it difficult or expensive for families to move where there is a higher paying job or even better school district.
It also encourages boring lives. I recently had occasion to talk with several homeowners.
My plans over the next year? Move to Kerala, learn Kalaripayattu and work on my startup. Several renters had similarly interesting plans.
Every single homeowner (or homeborrower) had plans to remodel some room of their house.
I'm firmly convinced that a home is nothing more than a ball and chain.
[edit: changed 'similar plans' to 'similarly interesting plans'. A reply to this post made me realize it was unclear.]
My plans over the next year? Move to Kerala, learn Kalaripayattu and work on my startup. Several renters had similarly interesting plans.
Every single homeowner (or homeborrower) had plans to remodel some room of their house.
I'm firmly convinced that a home is nothing more than a ball and chain.
[edit: changed 'similar plans' to 'similarly interesting plans'. A reply to this post made me realize it was unclear.]
That's nice, because I'm sure if you talk to 100 renters, most of them also want to move to Asia and start companies.
Sheesh.
Sheesh.
One had plans to move to north dakota, play guitar and learn to shoot. One planned to follow his job to wherever. Overall, the plans of renters were simply more interesting than those of owners.
Orthogonality is good. If your investments are tightly coupled to your lifestyle, you will have less freedom.
Orthogonality is good. If your investments are tightly coupled to your lifestyle, you will have less freedom.
I'm a renter and I hit at least one of those points ;) Moving to Asia - not so much!
To be fair, despite owning a home, if I really wanted to pack up and move to Asia I could do it. I'd just have sell first and thus do it a few months after you. I'm also pretty sure that a spouse/kids would be much more of an impediment to that move than owning a house.
I live very near to RTP, NC, and only one home has sold in the past six months, so good luck.
How is learning an ancient form of South Indian martial arts at all relevant to the discussion?
You'll understand after you learn it.
I think home ownership is a good aspiration to have.
Just like 'working for yourself' is something a lot of people would like to achieve, 'owning your own home' features on the list.
It's also good for society, giving people more of an incentive to look after their home, their surroundings and to take an active part in society. As well as removing some of the separation of society - land owners, and renters.
Being less likely to move around has its good points as well as bad.
Just like 'working for yourself' is something a lot of people would like to achieve, 'owning your own home' features on the list.
It's also good for society, giving people more of an incentive to look after their home, their surroundings and to take an active part in society. As well as removing some of the separation of society - land owners, and renters.
Being less likely to move around has its good points as well as bad.
It also encourages nicer neighborhoods, because homeowners are better incented to bond with their neighbors, and the condition of their property isn't an externality to them.
It would be cheaper for the government to throw weekly block parties nationwide than subsidize homeownership to the extent it currently does. (I haven't done the math on that, but you get the point.) Government policies that try to achieve a certain effect via indirect means have all sorts of undesirable side effects. If we want to improve neighborhood cohesion, we should find a more direct way of doing that.
Actually, I have a better idea. Landlords within a neighborhood should band together and give their tenants a share of the appreciation of the property above inflation. Rents would probably have to rise to accommodate this. They should do it as a group because it's far easier to judge the appreciation of a neighborhood compared to a single property that isn't being sold. Once renters have an stake in the quality of the neighborhood, they should act more like owners.
... in theory. But not in fact. Nooooo way.
You clearly have never been part of a homeowner's association, condo association, or property dispute.
You clearly have never been part of a homeowner's association, condo association, or property dispute.
I rented for 12 years and then bought twice. I've never had a landlord that I would trust with the best interests of my neighborhood.
Also, I'm sure you can dredge up a whole lot of "approved exterior paint color" drama from homeowners associations, but I'm not as confident you'll find a lot of examples of negligence. Which is what we're talking about.
Also, I'm sure you can dredge up a whole lot of "approved exterior paint color" drama from homeowners associations, but I'm not as confident you'll find a lot of examples of negligence. Which is what we're talking about.
That could very well be the case: http://www.economist.com/finance/displayStory.cfm?story_id=1...
"Whether stability is such a good thing in a downturn,
though, is a different matter. A decade ago Andrew Oswald
of Warwick University argued that owning your own home
makes you more reluctant to move, so labour markets tend
to become more rigid as home ownership increases. He
claimed that increases in the level of home ownership
(though not necessarily the level itself) are associated
with rises in unemployment. Ireland, Greece and Spain all
saw large increases in home ownership in the 1980s and
1990s, and had relatively high unemployment. America and
Switzerland had stable ownership rates, and escaped the
long-term rise in joblessness."The NYT has a good rent vs. buy calculator:
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAP...
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAP...
[deleted]
For the mathematically inclined here is another one that accounts for more factors.
http://randolfe.typepad.com/randolfe/2006/04/bubblizer_a_req...
3. Leverage. Buying a house is the only way normal
people can invest a huge amount of money on margin.
Would you borrow 300k so as to invest in a fixed term bond on residential real estate with hefty exit penalties?
The cult of home ownership puts a respectable shine on brazen gambling practices. :)
It's really not that complicated, maybe if I write it in code people will understand:
if( {current value of house}*{interest rate} + {taxes} + {insurance} + {maintenance} < {rent} )
return 'buy';
else
return 'rent';
You forget costs for insurance and maintenance of the house. Plus the costs of having your money tied up in a illiquid asset.
And lets not forget that a house takes time and is something on your mind. Time is probably the asset I personnaly value the most. I purchased a house a few years ago (after many many years of renting by choice) and the cost in time is VERY annoying for me.
> You forget costs for insurance and maintenance of the house.
I did. I just put them in.
I did. I just put them in.
_Ignore_ any change in the prices of houses! It has no bearing on the decision.
It most certainly does.
Suppose you bought a 500K house now that you could rent for $3K per month. Paying $5000 in taxes (about what you'd pay in MA) means you should buy.
A year from now, don't you think whether that house is worth $600K or $400K has a big driving factor on whether you should have bought or rented?
It most certainly does.
Suppose you bought a 500K house now that you could rent for $3K per month. Paying $5000 in taxes (about what you'd pay in MA) means you should buy.
A year from now, don't you think whether that house is worth $600K or $400K has a big driving factor on whether you should have bought or rented?
> A year from now, don't you think whether that house is worth $600K or $400K has a big driving factor on whether you should have bought or rented?
Nope. If you want to make money on house values going up, invest in one. You don't have to live there.
Nope. If you want to make money on house values going up, invest in one. You don't have to live there.
Owner-occupied housing is taxed more favorably in many jurisdictions.
You forgot current policy & goals of the federal reserve and the presidential administration. Almost nothing else matters nowadays.
I think his arguments are quite reasonable, but his example is a poor one. A Manhattan apartment is a fairly atypical sort of real estate investment, imho. I live in Austin TX, where real estate has managed to weather the storm much better than average over the last couple of years, and I'm much better off having bought than rented, even though I bought my condo in 06, at the height of the housing bubble.
That's also an atypical example, I know, and so I wouldn't want to generalize from my case alone.
That's also an atypical example, I know, and so I wouldn't want to generalize from my case alone.
I don't think the situation is so black and white. I have always preferred this approach above everything else:
http://www.thesimpledollar.com/2007/02/27/renting-versus-buy...
http://www.thesimpledollar.com/2007/02/27/renting-versus-buy...
One huge plus of buying vs renting, is that when you buy you can get a home equity line for emergencies. A huge line of credit at very low interest rate, that doesn't expire, or change due to future events.
This is completely wrong.
To use HELOC, you need to have equity in your house. In current market where house prices are down significantly, most of the folks have either no equity or they are upside down on their mortgage. These folks can't get HELOC.
Even if you could get HELOC, it may not be worth it. HELOC is amortized interest only like a credit card. That means you will keep paying towards interest for first few years before you even touch the principal. Also, HELOC rate is tied to Prime rate and if it changes your payment will change. Federal Reserve has kept the Prime rate too low since 2001 and I think it's bound to go up.
Please be very careful (I can't stress this enough) if you are considering HELOC.
To use HELOC, you need to have equity in your house. In current market where house prices are down significantly, most of the folks have either no equity or they are upside down on their mortgage. These folks can't get HELOC.
Even if you could get HELOC, it may not be worth it. HELOC is amortized interest only like a credit card. That means you will keep paying towards interest for first few years before you even touch the principal. Also, HELOC rate is tied to Prime rate and if it changes your payment will change. Federal Reserve has kept the Prime rate too low since 2001 and I think it's bound to go up.
Please be very careful (I can't stress this enough) if you are considering HELOC.
If you were renting you would have that money (that equity) in your pocket, and wouldn't need to borrow against your house to have access to it.
Vaksel is wrong, but so are you. If you were renting you wouldn't have any equity to appreciate (in the form of title to your house and the difference between what you paid for it and the current market value) so it would never be in your pocket to begin with.
You missed the point. If you were renting you would not have paid the money that otherwise went to principal - that money would still be in your pocket.
But nor would you get any benefit if the value of the property you were renting had appreciated, though obviously this is balanced out by not having a millstone around your neck when property values crash during a recession. Having both bought and rented, I don't think there is an unambiguous financial benefit either way. Renting gives you more temporal freedom (as in being able to just walk away and move to a better place or another country), a sensible buy can give you more financial freedom (as in a large chunk of collateral).
> But nor would you get any benefit if the value of the property you were renting had appreciated
If you want to invest in real estate you can. You don't have to live there.
If you want to invest in real estate you can. You don't have to live there.
If you read a lot of Calculated Risk blog, you could easily infer that it's the people with the HELOCs that were most vulnerable to being screwed in the downturn.
At least no renter is upside down on their mortgage right now.
Yes but many many landlords are, which cause some very sad stories of people being kicked out of their house or apartment because the bank foreclosed on the landlord. Renters have almost no rights in that situation.
That is no longer correct.
http://www.msnbc.msn.com/id/30891380/
Yeah, and sometimes the renters first notice is the deputy showing up telling them they've got 2 hours to get out before the locks are changed. Apparently there are cops in Vegas working 12 hour days just doing evictions.
> there are cops in Vegas working 12 hour days just doing evictions
They had better hope that there will never be a revolution which results in class-traitors being correctly dealt with.
They had better hope that there will never be a revolution which results in class-traitors being correctly dealt with.
Renters didn't loose money on the down true, but they also didn't gain any on the up (and they may have paid more rent).
For a single person it could be a big difference (some are up, some are down). But over the whole US it's a wash - the number of people who are upside down is exactly balanced by the number of people who made a lot by selling.
For a single person it could be a big difference (some are up, some are down). But over the whole US it's a wash - the number of people who are upside down is exactly balanced by the number of people who made a lot by selling.
But over the whole US it's a wash - the number of people who are upside down is exactly balanced by the number of people who made a lot by selling.
There's no such implied symmetry in markets. Trading is often very asymmetrical.
There's no such implied symmetry in markets. Trading is often very asymmetrical.
> Trading is often very asymmetrical.
Explain please. Because if you paid too much on your house, and are now upside down, the person you bought it from has more money than before. It seems symmetrical to me.
Explain please. Because if you paid too much on your house, and are now upside down, the person you bought it from has more money than before. It seems symmetrical to me.
Person A: Invest 10 borrow 90, sell for 120, profit 10.
Person B: Invest 10, borrow 90, sell...oops market has turned, default on borrowed money.
Bank folds, CDOs lose their AAA credit rating, investors lose their saving investing in CDOs.
Total profit 10, total loses due to leverage: far far greater then 10.
Person B: Invest 10, borrow 90, sell...oops market has turned, default on borrowed money.
Bank folds, CDOs lose their AAA credit rating, investors lose their saving investing in CDOs.
Total profit 10, total loses due to leverage: far far greater then 10.
And the person that you bought it from in step B made money, and you lost money. I still see a perfect symmetry.
Renting provides you near elasticity in where you want to live. Besides your lease (which could be month-to-month) you have nothing binding you to an area. You also don't face the risk of a declining asset. While housing typically increases in value, we've certainly seen the opposite happening a lot lately. When you're young, you probably don't want to be tied down to an area. Things change quickly at this stage in your life.
Ironically, a lot of these people who were afraid they were "throwing money away" while renting got into situations where they literally were throwing money away to PMI and too large of interest rates.
If renting was such a god-awful idea, it wouldn't exist. There are tons of reasons to rent instead of buy and anyone who insists that home ownership is the only way is foolish.