First-time homebuyers are MIA -- renting

[btresist]

@intercst

I can guarantee the 10% average return of the stock market by purchasing an index fund. But I can’t guaranty the 4% annual home appreciation on an individual home purchaser, about half of them nationwide are appreciating at a rate of less than that…

The term “average” typically implies that about half the time the returns will be below 10%. And you also can’t guarantee that in your location rents won’t suddenly start increasing at rates higher than inflation.

@MarkR

Well to be accurate, that $100k plus $861,627.80 of mortgage payments will get you ownership of a $1.6M house plus a place to live for 30 years.

Sure. And the $100K the renter puts in the index fund will give $1.7M in 30 years but will not provide a place to live. To get a place to live and therefore provide an equivalent comparison with the home owner you have to consider the cost of rent.

How much is the rent on a $500K house? Let’s assume the owner wants to at least break even on the rental so he uses the traditional 1% rule, in other words an average rent of $5K/month over the 30 year period. That comes out to $60K/year or $1.8M total rent cost over 30 years. In effect, the 30 year Index fund investment covered the cost of 30 years of housing, not much different from what a 30 year mortgage does.

As far as I can tell from using assumptions based on current national averages there is no consistent monetary difference in the outcome for a homeowner or home renter from an investment POV for comparable housing. The main difference is that at the end of 30 years, the renter gets his investment result in the form of stock while the owner gets real estate.

[btresist]

@intercst

I can guarantee the 10% average return of the stock market by purchasing an index fund.

Just wanted to add that we are all used to stock performance in an era where the US is the dominant economic power, the dollar is the world currency, protectionism was in decline, globalism on the rise, and freer trade was the trend. This all happened after WWII.

Prior to WWII, the economic world was much more multipolar, mercantile, and protectionist and stocks behaved differently. Here is the stock performance from 1920-1955

The 30 year period from 1920-1950 was nothing to write home about. We are now shifting back to a protectionist mercantile mindset with the added negative prospects of population declines in the major economic powers, rapid population aging in the major economic powers, and projections of disruptive climatic changes at a global level.

Worth remembering that stocks didn’t always increase 10% annually.

If the appreciation of stocks becomes less certain then owning a house becomes increasingly attractive.

[albaby1]

@intercst

That’s problem. I can guarantee the 10% average return of the stock market by purchasing an index fund. But I can’t guaranty the 4% annual home appreciation on an individual home purchaser, about half of them nationwide are appreciating at a rate of less than that – sometimes a lot less, or even a loss.

The problem with the above, though, is that you’re only looking at half the ledger. You’re running the same risk - you’re just taking the other side of it, and outside your investment account statements.

Remember, when you rent instead of buy, you don’t just get the asset sitting in your brokerage account for 40 years. You also then have to pay rent for those 40 years. This is what ML was pointing out on the buy side - you obviously aren’t making a net 10% return on your house because you have to pay your mortgage. You’re not making 10% return in the rent scenario, either, because you have to pay your rent if you don’t buy the house.

So it’s certainly true that if you buy instead of rent, you run a risk that the cost of housing will appreciate by less than that 4% - and then you’d have been better off renting. But if you rent instead of buy, you run the risk that the cost of housing will appreciate by more than 4%. Your rent goes up faster in that scenario. The assumption that your rental payments are equal to (or less than) the cost of servicing the mortgage breaks down. So by the time you get to the end of the 40 years, the returns in your brokerage account get eaten up by the increase in rent.

To use your Houston example, rents only went up by about 1.7% per year - the same as the value of the house. But in a market where residential real estate is increasing at 4% per year, the rents will roughly track it. So in your life history, rents only went from $400 to $800 per month - so the renter would have only paid about $300K over that 40 years compared to the $690K asset. But in a market where housing costs increase 4% per year (the national average), rents would have increased from $400 to about $2000 - and you would have paid closer to $600K in rent, all-but-offsetting the value of your investment.

[DrBob2]

@btresist

Prior to WWII, the economic world was much more multipolar, mercantile, and protectionist…

And cyclical. It was only in the '30s that central banks started acting anti-cyclically (largely thanks the Keynes) which added stability.

DB2

[btresist]

There is one other financial advantage that the homeowner has over the renter. In the given scenario the renter and homeowner have benefitted nearly equally over the past 30 years, with the renter holding $1.7M in stock from his investment (while paying about the same amount in rent over the years) and the homeowner owning a $1.6M home (after paying out about the same amount in mortgage and interest).

However, at this point the renter still has to pay for a place to live (i.e., continued rent payments) while the homeowner can continue to reside in his appreciated asset but now without mortgage costs.

[rainphakir]

@btresist

while the homeowner can continue to reside in his appreciated asset but now without mortgage costs.

I keep seeing this comment/concept.
Meanwhile I also see rent vs own discussed here, from a top 10% economic stratum POV.

Let me drag the POV down… To the median.

She accepted the “buy a house, it’ll be good for your retirement” conventional wisdom, 15 years ago.
Bought a small place, she could easily afford the mortgage, taxes, insurance, utilities, etc.

Retired 5 yrs ago, still ok with the “costs”.

Today, mortgage n utilities are “ok”.

For her, it’s not the mortgage. Or lack of…

Taxes have doubled in the last 3 years.
INSURANCE has tripled.

Taxes n insurance are exceeding her income.
Taxes n insurance are the problem.

She’s considering selling.
I asked her what she expects will change.
A Rental means she will not have maintenance costs.
But the “rent” payment will still overwhelm her income.
SS alone ain’t enough.

…
I “could” pay off her mortgage.
Let her go nekkid on the insurance.
$0 outgo for mortgage n insurance would kick the can down the road.

But that opens cans n cans n cans of worms.
And doesn’t “fix” the underlying issue.

She’s between a … and a .

So far, I’m watching. And wondering what CAN I do, that’ll actually help.

ralph

[btresist]

@rainphakir

So far, I’m watching. And wondering what CAN I do, that’ll actually help.

Sadly I don’t think much can be done. There are two macro factors at play here. The first is climate change and its obvious consequences on insurance costs. The second is continued development in high risk areas (primarily near water or anywhere in a warming, drying CA), which increases the insurance costs for everyone as companies try to spread the pain.

Insurance costs are now a major factor in location and relocation decisions.

A striking 48% of participants reported difficulties with home-related expenses, including maintenance, utilities, taxes, and insurance. Nearly 40% have experienced a significant increase in monthly payments, prompting over 25% to seek payment plans. Furthermore, 47% cited home insurance costs as a major factor in their decision to move, with 25% considering relocation due to extreme weather and 26% knowing someone who has moved for similar reasons. https://nationalmortgageprofessional.com/news/half-prospective-homebuyers-cannot-afford-basic-home-costs

.

[Goofyhoofy]

@rainphakir

Taxes have doubled in the last 3 years.
INSURANCE has tripled.

Are you somehow thinking that the landlord eats the taxes and passes the property along to the rent tax free? Or that he doesn’t have insurance costs on the property?

As a former landlord, I can assure you that my tenants paid the taxes and the insurance and the maintenance and all other associated costs (condo fees, etc.), they just weren’t broken out that way.

Yes, they got a “smooth” cost and as owner I had lumpy results as I had to pay for a plumber or a new window or whatever here and there, but I guarantee you I was not eating those costs out of the goodness of my heart.

Indeed, there wer some years where I lost $100/mo, and there were some years where I made $1000/mo over and above costs. On a single unit. And I got to depreciate the property, which was a savings that the tenant never saw.

My younger brother followed me into the landlord business about 20 years later, and said “Why didn’t you tell me about this sooner? It’s like making money in your sleep.”

[intercst]

@albaby1

Remember, when you rent instead of buy, you don’t just get the asset sitting in your brokerage account for 40 years. You also then have to pay rent for those 40 years. This is what ML was pointing out on the buy side - you obviously aren’t making a net 10% return on your house because you have to pay your mortgage. You’re not making 10% return in the rent scenario, either, because you have to pay your rent if you don’t buy the house.

How do you account for the fact that the 1.6% dividend yield (i.e., $11,000/yr) on my $693,000 S&P 500 account funded solely by the $9,000 down payment, is more than enough to pay the annual rent at $850/month in 2021?

And note, I’m paying $400/month if I rent in 1981 and about $400/month, after tax deductions as a condo owner. We’re just evaluating whether it makes more sense to put my $9,000 down payment into the condo or an S&P500 index fund.

Who is in better shape in 2021, forty years later? The owner of a mortgage free $100,000 condo with annual property taxes and condo fees of about $5,000 year, or the holder of the $693,000 S&P 500 index fund paying an $11,000/year dividend that’s more than enough to rent the nearby $850/month apartment?

intercst

[intercst]

@Goofyhoofy

My younger brother followed me into the landlord business about 20 years later, and said “Why didn’t you tell me about this sooner? It’s like making money in your sleep.”

I’ve found that holding a LTB&H stock portfolio lets you make “more money while you sleep” with a lot less effort and aggravation.

intercst

[MarkR]

I think it should be obvious to everyone that all else being equal, renting MUST be more expensive than buying. That’s because the landlord who buys would only buy if there’s some profit involved, and that profit is paid by the renter. BUT, not all else is equal, and that’s what makes the conversation so complex. You can find 100 examples of why not all else is equal. Common examples include:

• Some owners bought their property long ago, so their profit is sometimes calculated off a different (lower) base investment amount.
• The owner can depreciate the property, and that tax savings allows for a lower rent to be collected.
• Large scale owners have higher efficiency because they can hire full-time people to fix stuff rather than expensive one-time repair people.
• Rents are determined by supply and demand, so sometimes the owner can’t earn as much profit as they would like.
• Renting allows you to choose different sizes/levels of housing more or less “at will”, you can’t do that when you buy because buying/selling/buying incurs huge additional expenses.
• Etc.

[albaby1]

@intercst

How do you account for the fact that the 1.6% dividend yield (i.e., $11,000/yr) on my $693,000 S&P 500 account funded solely by the $9,000 down payment, is more than enough to pay the annual rent at $850/month in 2021?

The dividend yield would not have been enough to pay your rent for most of the time you held the stock. A 1.6% dividend yield in the first year of investment (for example) would have generated about $140 that year. And, of course, your calculation of total compounded return from 1981 for 40 years was including dividends as being re-invested - if you’re pulling your dividends out to pay the rent, you’re not getting that level of return on the account.

Plus, you are (again) just generalizing your very specific situation into a broader principle that just isn’t supportable. You, specifically, managed to avoid investing in a specifically bad real estate market. That’s not Houston generally, BTW - even during the specific time period from 1981-2021, home prices in Houston appreciated by more than 4% a year. A typical property in Houston would have appreciated by enough that you’d be better off buying than renting:

All-Transactions House Price Index for Houston-The Woodlands-Sugar Land, TX...

And even that was just an artifact of that specific time period - looking at a different time period (say, 1985-2025), home prices in Houston have appreciated even more - getting close to 5%.

Because your rental increase is also much lower than the Houston market, generally. Again, you’re looking at an atypically depressed comp within the Houston market - if rent had increased at the more typical rate of 4% per year, that $400 per month would have been closer to $2,000 per month. Far more than your dividend yield.

Ex post facto, you made the right call not to buy that specific apartment in that specific neighborhood. That specific apartment in that specific neighborhood did not appreciate by more than 2% per year, so it would have been a bad choice. But since housing across Houston did appreciate by more than 2% per year - actually more than 4% per year - the typical 1981-era Houstonian would not have seen anything close to the advantage you did.

[intercst]

@MarkR

Some owners bought their property long ago, so their profit is sometimes calculated off a different (lower) base investment amount.

One thing I’ve noticed is that Mom & Pop landlords seem to be willing to give a good, long-terrn tenant a large rent discount to keep them in the property and avoid having to find a new tenant.

I’ve got a neighbor who’s renting his condo at a 50% discount to current market rent because he’s responsible for all maintenance and repairs inside the unit. (The HOA takes care of everything outside the stud wall.)

I’ve owned my unit for 12 years and only spent about $1,000 total on inside maintenance and repairs.

I’ve advised my neighbor to put the savings into a S&P500 index fund. {{ LOL }}

intercst

[Goofyhoofy]

@intercst

One thing I’ve noticed is that Mom & Pop landlords seem to be willing to give a good, long-terrn tenant a large rent discount to keep them in the property and avoid having to find a new tenant.

Yes, I did. But not “large”.

After the first year I offered to renew “without increase”. That was typically a $50-100 savings for them, and a lot of wear & tear on moving in and out for me. At the end of the year they save $1200, not insubstantial, but worth it to me. From that point on the rent increased appropriately, and if/when they looked at competing units they could rarely match what they were paying. So over 25 years I probably left $10-20 grand on the table, then again I had one tenant stay 11 years and another 6. As I recall I only had one leave after a single year, and that was because she was moving to another city.

[rainphakir]

@Goofyhoofy

Are you somehow thinking that the landlord eats the taxes and passes the property along to the rent tax free? Or that he doesn’t have insurance costs on the property?

That’s why I asked her what she thought would change.
After a moment, her reply indicated she thought she’d still be struggling.

ralph