Home ownership vs. renting

Investment Analysis Clubs Macro Economic Trends and Risks
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Owning a home is part of the “American Dream.” The government has favored home ownership for many decades as they supported the creation of the United States government-sponsored enterprise (GSE) in 1938 during the Great Depression as part of the New Deal,[.

The economy has changed dramatically since then. I think it’s a valid Macroeconomic question: Does it make more sense to buy a home or to rent? Every household has to make this decision. Each will have different factors in play. For example, a person who intends to move frequently for career development would probably do better to rent since selling a home entails major inconvenience and expense.

Home prices have soared in the past couple of decades so ownership brings the potential for capital gains.

But for the sake of this discussion I’d like to ignore that factor and focus on the expense side.

Many years ago (in the 1990s?), I read that the average American family bought a car every 3 years with borrowed money. Over a lifetime that resulted in spending $350,000 on cars. I was deeply shocked by this huge number. I decided to buy small cars with cash, maintain them well and drive them as long as possible.

I followed the same strategy with my house. I rented until I had a down payment. In 1983, I bought a small 1927 house via a special regentrification program in Staten Island, NY with a mortgage rate 3% below market (9.75% vs. the market rate of 12.75%). I lived in this house until I moved in with my boyfriend in 1988 (married in 1993). Due to the tax laws of the time, I bought DBF’s home from him in 1990, paying off his mortgage with cash and writing a mortgage to him. (Which I paid off before we married.) Because of this, neither of us has paid either rent or mortgage interest to an outside interest since 1990. When we moved from Delaware to WA State in 2003 I bought a home for essentially the same as the sale price of the previous home. We have lived in the same home since then.

@intercst has repeated many times that the key to wealth is to “minimize the skim.” Home ownership removes the “skim” of monthly rent. A fully-owned home provides secure housing in case of loss of income (due to job loss or retirement). Still there are many who rent.

I’d like to see a discussion of the benefits of home ownership vs. rental.
Wendy

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But to be sure, it adds other forms of “skim”. All sorts of things, expected and unexpected.

A big example is that home ownership ties up capital. If your home is worth $250k, and has no mortgage, that essentially means that you have $250k of capital invested in that home instead of invested in an S&P500 fund earning 8+% over the long-term.

Home ownership comes with variable expenses that are not smooth. Most people prefer smoothed expenses, so they know month-to-month and year-to-year what they should plan for. For example, taxes increase by $1k, that means my November expenses suddenly go up by $1k. Of if the roof needs to be replaced, boom, suddenly a huge $20+k expense that year.

There’s also added hassle (and time spent) owning a home. When anything breaks, it needs to be fixed, and even if you hire someone to fix it, you need to take a day off from work to be home and let them in.

But the biggest example of a HUGE expense of home ownership is when you have to move. Then you pay HUGE amounts of skim. Sometimes repeatedly. You get a job on the east coast, you buy a home, you find a better job elsewhere, you move, you pay all sorts of fees, tens of thousands in fees. Then suddenly the company goes bust and you need to move to the west coast, again more fees, massive ones. People tend to move every 7 years or so, so essentially all those fees get paid again and again, maybe 3, 4, or 5 times in a career!

This isn’t strictly true. Take the example of someone with a fully paid off $250k home. They still have to pay $5k/yr in taxes, and $3k in insurance, and $2.5k in maintenance, etc. If they have zero, or close to zero, in the bank, and suddenly lose their job, then they have to scramble each month to pay their bills until they find a new job. If the lack of a job is protracted, they may lose their home, or incur all sorts of fees/interest, due to non-payment of those items, and they will suffer in other ways as well. But had this person instead had the $250k home, but with a $150k mortgage, then they would have the $150k in the bank (or invested). And even with the extra $1k monthly payment ($150k @ 7.5%/30 year fixed), they can support themselves for many months, even years, if their job loss is protracted. The numbers show that it is FAR MORE risky to have a paid off home rather than a mortgage and money in the bank.

Of course renting also has plenty of negatives. The primary negative is that landlords are in business to earn money, so that means that over the long-term, you are paying ALL the expenses described above PLUS perhaps a 10% or 15% profit.

It’s a very difficult thing to calculate, because it depends on so many things, and especially so many assumptions (the biggest being “how long do I realistically expect to remain there?”)

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Owning appeals to me because I get in less trouble when I lose 66% in the market and put my fist thru the wall . .

MS

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I was on-the-move for 20 years. Rented almost the entire time except for 4 years when I decided to buy a house. It was a financial wash in its own right. Broke even. But the headaches? Nuff said.

What I liked about renting:

Ease of everything. All of life’s problems solved with one monthly fee.
The only way to go with a mobile job and no spouse who stays there till you come back. Easy to acquire without LAWYERS and 3d parties looking to clip you somehow, someway. Choices…choices…choices! But like most things You don’t actually have total say over the choices. They are made for you based on income, location, housing markets in general etc etc. but still usually better than buying.

What I liked about owning:

More privacy and more protection against rude Americans and their lack of impulse control and need to generate bass pulse. I wasn’t looking to make any money. I thought just being apart from so many other rude a/h’s would be worth it. It was. I do not see buying vs renting as any kind of financial or economic play. I see it as buying something you want. Like a motorcycle or a nose job. You really want one? What does it cost? Pay it.

What I didn’t like about renting:

Loud idiots. Also, it constricted me from doing what I wanted. Can’t play the guitar and have a recording studio. If apartments were built to a standard that allowed for an acceptable standard of living nobody but rich people could afford to rent them. Rank and file have to live in places where the paint is thicker than the drywall. I lived in Utah in a place where I could literally hear the guy next door reading his newspaper and could tell what channel he was watching. And he wasn’t being obnoxious loud. And this was a new building in a toney white suburb. They were sprouting like mushrooms at the time when tons of Californians were invading after the quakes, the fires and Rodney King riots.

What I didn’t like about owning:

They didn’t call that movie with Tom Hanks “The Money Pit” for nothing. Mine was in the country. Cows, corn fields. In a city you’d likely be pressed closer and still have to deal with idiots close enough to ruin it for you. Only you can’t give your 30 days notice and split. You have to spend months and 10% of the house’s value selling it just to move.

Had a GF who lived in a wealthy area of Minneapolis. Early 90’s. Houses $500,000 and up even back then. She reported the same noise and a/h neighbor problems. How much do you have to spend to live in this country and have a life?

The most important feature for me all along has been — Renting an apartment is cheaper than buying because I was single. If I rent, I rent a 1 bed-1ath. That’s it. If I were to have bought, I could only buy, in effect, what other people want to buy. Usually 3 br/2br, basement yadda yadda. There is no 1bed/1bath equivalent with buying so, as an economic move, there was never any contest.

If you have a family or just a lot of stuff, apartments are, in general, not feasible. Ergo, get out the checkbook. So you’ve decided to buy a house.

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I think we know Intercst decided to rent and invest in stocks during the dot com boom with much success.

There is only so much land. The real estate trend is up. Locking in a mortgage rate gives you fixed rates for up to 30 years. A big advantage compared to rental rates that can increase annually. Rent controls help some places. But can encourage landlords to skip on maintenance.

Rising property taxes, insurance, and maintenance are all concerns. But usually owners win with increasing value.

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I like Intercst and have learned from his posts. But I disagree with his beliefs about home ownership (different strokes for different folks).

Ms. Wolf and I purchased our small (about 1500 s/f) first home in 1982. It’s in a nice location with a nice yard in a place with reasonable cost. We paid half and took a mortgage for the other half. IIRC, mortgage rates were around 13% in 1982, so we refinanced a few times as the rates came down. Paid off mortgage around 2002.

We’ve lived “rent free” for over 20 years (for some ungodly reason, the town, county, and school districts insist that we keep paying taxes. And yes, we still pay for maintenance and improvements). People who rent often think they don’t pay for taxes and maintenance, but in actuality, it’s built into rent cost. And, after we paid off our mortgage, we put the “mortgage” money into our retirement savings rather than spend it. LBYMers to the core.

My issue with rent vs buy scenarios is I find them to be an apples and oranges comparison. I’d like to see a home that was for sale or rent and then run the numbers for both scenarios. Sure, an apartment might be less expensive than a house, but a van down by the river would be even less expensive! There’s a quality of life issue, here.

I love having a yard that I can landscape any way I want (I love gardening) as well as the privacy a home. And, if the damn clouds go away I’ll be able to see the total eclipse tomorrow without fighting the crowds.

Our house has been a home to our children and a place to try to destroy to our grandsons. And they’re quite proficient at it.

It’s my kingdom and I can do anything I want in it. As long as Ms. Wolf gives me permission. :innocent:

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I always find this somewhat of a hoot. You can pretend to plan nickles and dimes and housing expenses 30 years out but it’s a fool’s errand. Sure, lots of people will say “Well I did it. And it work out for me.” Who cares? It’s one of the biggest dice rolls of a lifetime. It cannot be done with that kind of precision, except on paper and after the fact. That does little good except as an exercise. In real life a crystal ball would be more helpful than a calculator and current interest rates.

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NYT has a good rent vs. buy calculator.

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I don’t understand this statement at all. When renting a home was favorable over buying, @intercst rented. When buying a home was favorable over renting, he bought a home. Which part of that do you disagree with???

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Good intelligent posts all, and they show the wide variety of factors to be considered.

Luck and pluck! I enjoyed putting in significant sweat capital (thanks Dad!), and had been taught (thanks Dad!) to patiently watch for and seize on turns of the reliably turning tides of Los Angeles RE fortune (yes, buy low sell high).

I started by renting a 3 bedroom apartment I crammed with reliably room and board paying obedient roomates (me cooking) until I had

saved enough capital to buy a very small, solid, well located, ugly house
that bloomed in value with strategic DIY remodeling
(much easier than running & cooking for a rent based boarding house!)
mortgaged for less than half the total cost of purchase,
when the volatile Los Angeles RE market was nastily downdrafted.

After that I traded up through (“flipping”) a succession of money mine homes (each needing only a little strategic investment, pleasurable weekend sweat, and time, to have much higher value).

Doing so was only possible because of construction skills I had (thanks Dad!) and a mob of loving gay friends who understood “decorating” stuff far better than me and gave free advice and some labor for the fun of it.

My third (first two died :sleepy:) husband was a lot like me in homeowning habits, and we make a formidable team. We bought a collapsing house in a depressed recently drug addled but fabled old Hollywood neighborhood, worked our butts off (therapy :smirk_cat: for me as I was struggling with rage and depression :japanese_goblin:), and finally sold it for a nice profit when it again became an “it” place for trendy show-biz stars. We sold and moved to Mexico. We are still doing RE investing here, admittedly with less sweat.

Penny squeezing balanced with strategic BIG spending when truly useful is crux across so much of money management, but in Real Estate even more than most.

d fb

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It is hard to overestimate the value of a sub 4% mortgage. The historical long term inflation rate is about 3.5%. Which means you’re borrowing the money for pretty close to free. I have two sub 4% mortgages and have no intention of paying either of them off. Why would I?

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I don’t disagree with what Intercst did.

And he is certainly more than capable to state his own views. But I get the feeling that he is anti-buy except under certain circumstances while I tend to be more anti-rent except under certain circumstances. And I get the feeling he makes all his decisions based on finances (not that there’s anything wrong with that :grin:) while I tend to incorporate other non-financial factors. I also think he has no problem with a mortgage because he can make more than enough money in the market to offset the cost. I like no mortgage because I sleep better with no debt.

It is important to note there is no judgment on my part, there are many paths to peace-of-mind and success.

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Well, you can look at the data in the aggregate and come to some conclusions. While there are certainly horror stories of “the money pit” and people buying overpriced properties and/or at the top of the market, in general home ownership is one of the single best ways of building generational wealth - and personal wealth in this country.

As for renting, there are no savings, unless you think the landlord is, from the goodness of his heart, running his business to benefit you. All the costs that you would incur in ownership you still have in renting plus the landlord’s profit margin . More to the point, most people end up paying off their mortgages sometime before or slightly after retirement, whereas a lifetime renter never does. That means that costs continue to escalate for the renter, and sharply decrease for the owner.

[At this point I expect someone to chime in with “Well let me tell you about Homer Siegfried, who…” which is why I began with “in the aggregate.”]

It is not without reason that minorities complain about the redlining and other impediments they have faced in getting to home ownership over the past century, and how that has impacted their family’s financial prospects.

Now if someone wants to rent, fine with me. It does smooth out the costs, it takes many of the maintenance and other home ownership headaches out of the equation and for some that’s worth it. But if we are talking about financial impact then ownership comes out ahead almost always.

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“Home ownership removes the skim of rent” if you’re buying the home at a price that gives you some prospect of unleveraged price appreciation that meets or exceeds the S&P 500, and at a low enough price to give you a discount to the fair market rent in the neighborhood. It’s as rare as a total solar eclipse for these variables to align in your favor. Thus, I rented for the vast majority of my financial life even though mortgage bankers and real estate agents would say I could easily afford to buy a home.

Just to give you some numbers, when I bought my current home in 2012, the price had declined by 70% from it’s 2008 high, and the comparable monthly rents in the neighborhood were 0.80% of my purchase price. (Buying a home with a monthly rent of less than 1% of the purchase price is generally considered to be favorable.) Absent those numbers, I’d still happily be a renter.

intercst

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The marketplace sets monthly rents, not what the landlord paid for the building. If you happen to be living in a area where the market is “out of whack” and favorable to renting, it pays to take advantage of that.

Most people don’t consider all the costs of owning a mortgaged home. It’s likely changing today, but 20 years ago your monthly payment was just principal, interest, property taxes, and you had to show “proof of insurance”, or the mortgage company bought a homeowner’s policy for you at a much higher premium. Nobody added routine maintenance costs (1% to 3% of purchase price per year depending on where you live), the risk that a hurricane or flood would destroy your home, or the risk that a major employer in town would shut down, or a whole industry would have a major reversal (e.g., oil and Houston in the mid 1980s) Plus homeowners tend to make a lot of upgrades and improvements to their home that lose money on resale. For most of my life, I was partial to palm trees, swimming pools and tennis courts. But it was much cheaper to buy those amenities by renting in and upscale apartment complex. Whats the resale on a home with a pool and tennis court outside of Beverly Hills? I bet those are drags on value in your neighborhood.

And of course, the rent vs. buy analysis assumes that you’re putting the savings from renting in the S&P 500, rather than going on a better vacation.

Check out the “rent vs. buy” graph (about half way down the page) in the study at this link. It matches my experience over the past 20 plus years.

intercst

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And the flip side of that coin (kind of) is what we did. When the mortgage was paid off, we didn’t give ourselves a raise. We continued to LBYM and plowed that money into retirement savings until we retired (in our case, almost 20 years).

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Let’s see which of those costs are “free” to renters, and aren’t included in the rent, OK? Principal? No. Interest? No. Property taxes? No. Insurance? No. Routine maintenance? No. So far, no savings.

live), the risk that a hurricane or flood would destroy your home

I thought we already had the cost of insurance baked in. So, “no”, no savings yet.

Well true. But then there’s also the “risk” that industry will boom where you live (Boston, California, Chicago, Orlando, Miami, Austin, Nashville, Atlanta, Salt Lake City, Dallas, Denver, Las Vegas, Seattle, Jacksonville, and lots more. Since the country is prosperous overall, it seems likely that your chances of being in a “good” area outweighs those of being in an economically depressed one.)

Irrelevant to the argument. If people want to spend money to improve their quality of life, it’s not a financial decision. Indeed, it allows them a freedom which renters do not have. If it makes you happy to paint your walls purple and green, you don’t have to ask permission.

You can build gigantic wealth by taking your mortgage payment and putting it into your own bank account once the house is paid off. A renter never gets to do that.

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We bought our homes mostly because we enjoy the noneconomic benefits of home ownership. First and foremost, distance between us and our neighbors. And it is painted, repaired, remodeled however and whenever we want.

However, our home is worth less than 20% of our net worth because equities are our primary source of wealth accumulation. It is a lot easier to buy low cost ETFs and index funds with the push of a button than it is to buy a house, repair and maintain it, cut grass, pay property taxes, homeowners, heat, sewer, water, etc., and still make as much profit as you can with equities. You can do it but it is hard work. So for me a home is a source of enjoyment and a cost to be minimized.

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I don’t think that’s the correct way to set up the analysis. On one side is the imputed value of rent plus any price appreciation of the home. On the other side is the opportunity cost of down the down payment, plus the interest, maintenance, taxes and insurance. The payments to principle are a wash, because you get to keep the house.

It is a reasonable assumption that the rent and house value will both increase at something like the rate of inflation. Not guaranteed of course, but reasonable. Maybe you get lucky and do better.

Regardless, that means your imputed value of rent increases each year but you are paying down your mortgage balance with decreasingly valuable dollars.

Let’s say both your imputed value of rent and mortgage payment are $1000/month. Assuming 3.5% inflation, 15 years later your imputed value of rent is now more like $1700. But your monthly mortgage payment is going to feel about like $700 (I’m neglecting taxes and insurance).

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One crucial point I don’t see anyone else has addressed so far that factors into the benefits of home ownership versus renting involves the build-up of equity over time. The premise of this question hinges on the assumption that a home PURCHASE involves an up-front outlay of money and a consistent “investment” over time (the monthly mortage payment driving down the principal owed to zero) in exchanged for a long-lived asset that provides value over (say) 30 years.

This was the pattern of “consumption” if you will in the 1940s through maybe the 1970s. A typical home buyer put 10-20 percent down, made mortgage payments for 30 years and over that 30 years, the homeowner tended to key expenses for required periodic maintenance like roofing, plumbing repairs, maybe window replacements, etc. The typical homeowner also paid the mortgage down over that time and did NOT take out a home equity loan to fund other expenses. At the end of 30 years of original mortgage payments, the home was fully paid for and the homeowner had equity equal to the original purchase price plus thirty years of appreciation in real-estate over that time. But they also had a 30 year old home that may have looked like a time machine.

That pattern of events became far less common starting in the 1980s for multiple reasons. As Americans move around (I think the average American moves every seven years…), rather than moving from one nominal $150,000 house to another $150,000 equivalent house (e.g. a physical equivalent of their current $150,000 home plus market appreciation), many Americans took the opportunity of a move to move to a more expensive house with a larger loan. I think this trend was encouraged at the time as an example of the “little guy” finally using “leverage” like the big guys to use frequent moves as a way to lever into larger and larger homes to ride rising home price trends into higher amounts of equity.

This made some sense if an employer was paying a 10-20 percent relocation fee in addition to actual relo expenses for every move. For someone earning (say) $100,000 a year and collecting a 20 percent relo premium every 4-5 years as they move from job to job, that’s an extra $80,000 dropped into a home over twenty years courtesy of the employer that might then appreciate 7-10 percent per year to add $309,000 over twenty years.

The second factor that negated this is that home equity loans skyrocketed in popularity beginning in the 1980s and (again) were pitched to average homeowners as a way for them to benefit from leverage by exploiting the “trapped equity” in their home just like the big guys. If this “equity” was being spent on other long-lived assets like advanced education that produced a long-term payback over time, this pattern might have made financial sense. Instead, for the majority of homeowners, dollars from home equity loans were instead spent on zero-longevity consumption spending like vacations, dining out, etc. or rapidly depreciating assets like expensive cars that were worthless in 7-10 years.

How damaging is this financially?

Assume home prices are growing a steady seven percent yearly. A home purchased for $150,000 would be worth $210,382 in five years or $295,072 in ten years. If at five years, the owner takes out a home equity loan for $60,382 for five years at 7 percent and spends it on a BMW that would have otherwise not been affordable, in another five years, that person now owns a BMW worth maybe $15,000. The house is still worth $295,072 on the market and the owner has paid back the borrowed equity but they have paid $11,356 in interest on a $60,382 dollar loan that tempted them into spending more on a car than they could afford. They have “lost” the interest and depreciation on the car, totalling $56,738.

Now sure, to keep the example simple I didn’t factor in the intangible value gained from the feeling of superiority of driving a $60,000 BMW or the value of the free coffee enjoyed in the waiting room of the BMW dealer or the extra friendship gained from getting to know your personal BMW service representative and watching his kids grow up in the photos on his desk… (smile)

What if the same numbers were applied to a home equity loan for a home remodeling project? The original financial benefits of buying a home and riding the real estate appreciation over the life of the mortage only hold true if the home actually purchased served as a long term asset. If instead, the owner purchased the home, then every ten years remodeled the kitchen and bathrooms and followed the latest trends by replacing flooring, expensive countertops, and appliances, they are essentially DESTROYING a large portion of the existing equity in the home and replacing it. A new kitchen in a current $400,000 home in 2024 can easily cost $50,000. A major remodel may make sense every 25-30 years but if done every 10 years, it’s the equivalent of setting money on fire.

This isn’t to shame what someone decides to do with their own home and money but from a purely economic perspective, the pattern of EXTRACTING equity from a home and using it to subsidize spending on assets that are NOT long-lived and doing so at levels that involve additional debt pretty much defeats the ability of home ownership to create a nest egg.

WTH

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