Agreed. I don't view my house as an investment, but as a place to live. Yeah, it has value, but if I were to sell it, where would I sleep? Where would I put all my stuff? If its value were to plummet to zero, that would suck, but I would only be out 1 year's equivalent salary (I don't live in a high COL area), not 10.
Unless you sell it for a dollar, it’s likely the value now converted to money will allow you to easily solve the lodging/storage conundrum. Far more easily than if you were renting and then got evicted with zero dollars in your pocket (since you seem to be reducing the situation to that assumption anyway).
Yes. It’s easy. Easier if you pack up your stuff yourself. And obviously the less stuff you have the easier it is. But of the tasks humans find themselves endeavoring away at, it ranks among the more straightforward.
> Paying off a mortgage is a form of “forced savings,”
Nope, stopped reading there. The whole thing is inane. Most people don't get an option of not paying anyone anything for their housing at all. Only extremely well off landlords and some retirees with fully paid off mortgages do.
Someone owns the building where you live. Either that person is you, and you are paying off your own debt; or that person is someone else, and you are paying off theirs.
This article argues at great length for you to let someone else pocket all of that wealth rather than retaining some of it yourself.
If you pay mortgage, there is hope that one day you will have paid it off and no longer have to. If you pay rent, only your landlord profits.
> Someone owns the building where you live. Either that person is you, and you are paying off your own debt; or that person is someone else, and you are paying off theirs.
You're forgetting about the public ownership model that exists in countries like Singapore. There, the government something like 90% of the real estate and the vast majority of the population rents from the government.[0] The article I've linked summaries the benefits of this better than I could:
> The state land in Singapore is treated as a use value (public housing and industrial space), as an exchange value (leased for private developers) and as a source of public revenue (land leases and property tax). This triple way of using public land has caused Singapore’s economy to grow and, paradoxically, Singapore’s development companies to prosper.”
I don't, sadly, live in a part of the world that really believes in government ownership or management of anything at all except perhaps the military; our government has spent the last decade slowly dismantling the public institutions that do exist, largely unopposed.
Things like social housing, financial support to cover rent, and so on are also options if you are in a part of the world where those things are viable parts of the political discourse.
> Someone owns the building where you live. Either that person is you, and you are paying off your own debt; or that person is someone else, and you are paying off theirs.
> If you pay mortgage, there is hope that one day you will have paid it off and no longer have to. If you pay rent, only your landlord profits.
This argument only makes sense if the (monthly) rent payments are more than mortgage payments + maintenance costs.
no, landlords do not willingly operate at a loss. in a really bad market (housing glut) they may be forced to. that's not the situation right now, at least in highly populated areas.
rents are usually going to be at least 20-30% higher than mortgage + expenses, or else the landlords will start selling or go bankrupt.
however, that's the mortgage payment and interest rate from the time it was bought, not necessarily today. so if the landlord bought that investment property 5 years ago, his costs are probably less than 1/2 of what it would cost you today. even if the market rent goes lower than that, he can still be profitable. so, right now, temporarily, it can be slightly cheaper month-to-month to rent in a lot of markets in the us.
the fact that's what the markets are doing says some things about the current and future home sale prices.
Note there is also a distinction to be made between the absolute money leaving the bank account every month, and the portion of that money that is paying off the principal of the loan.
For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment.
Being able to actually afford the whole amount remains a concern, of course. Where I live obtaining mortgages for any significant portion of the cost of a property is generally hard for people on anything close to an average income or below, and so landlords can get away with charging rents that are literally higher than the total mortgage payment would be. Even though the tenant can demonstrably afford the repayments - they are literally paying a landlord more every month! - the bank will not lend more than a fixed multiple of their salary and so they cannot buy.
I understand this is something of a local issue, though.
> For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment
Yep, this is forgotten in many discussions comparing rent and mortgage. Only the interest portion of your mortgage matters for the sake of comparing expenses. The principal portion is money going from one of your pockets to the other and does not represent an expense.
You are right, except that you also have to account for the "cost of money". Meaning from your principle being "tied up". So you essentially need to account for that as well. For example, if my capital investment is $60000 (and the bank's is $240000 - remember this house was bought at a favorable time), that $60000 tied up is costing me $200-$400 (4%-8%) per month.
PITI: Principle+Interest+Taxes+Insurance. Out of which, ITI is straight up cost. P+I is a constant through the life of the loan. At the beginning P is very small in relation to I and increases over time.
So for the first 5 years or so, P is so small that it essentially is a wash with your cost of lending yourself the money. After that, I think you can take some small credit for principle repayment. Adding maintenance and assuming 5-10% vacancy, it's normal to have rents be 120%-130% of the equivalent PITI when things are stable - I don't think that's just a local issue - that's healthy.
This covers how much rents must be to be not a loss for the landlord. But if you comparing rents to purchase, you also have the same small effect happening for the purchasers potential mortgage too.
People have noted the tax benefits of deducting your interest and local taxs (I+T), but that may have diminished a little due to much higher standard deductions since 2017.
I have not noticed people pointing out that another benefit is that any "investment" growth, unearned equity increase when your house appreciates, is tax free on your primary residence. That can be substantial.
While it's true that mortgages have a debt-to-income ratio limit (it's not income to loan ratio), so do landlords, except the very worst slumlords who don't care.
Why would people pay a 20-50% premium to rent? Good and bad reasons:
- short term, no commitment, might move, etc.
- bad time to buy right now
- bad credit
- can't get together the sizeable down payment
- scared
- underestimate the financial benefits
Several of those reasons are rational even to pay a premium. But of lot if it is irrational. TFA didn't adequately address any of the "good" reasons not to buy a house and mangled the rest.
Here, it literally is; typically 4.5x the annual household income is the most the average bank will lend you. There is also a separate affordability test which works the way you describe. https://www.google.com/search?q=uk+mortgage+to+salary+ratio
Sorry, I was talking specifically in the US. I think you may be talking UK.
We have a "front-end" ~28% and "back-end" ~36% debt to income (DTI) limits (typically). Front-end is ratio of mortgage loan to income and back-end is ratio of all debt to income.
The interest rate can wildly change the size of loan you can get for a given income because of this method (as we saw prior to last year).
If you had a fixed ratio, when interest rates go up a 4.5x mortgage would be a lot less affordable. I can't imagine paying a 8% loan on $450,000 with $100,000 income. That's be $4000 a month, front-end rate of ~48%. Ouch! Guaranteed foreclosure.
Neither system is perfect, I still don't like that non-debt expenses are not counted and it should be net income after taxes.
In the UK, for buy-to-let mortgages, lenders typically require projected rent to be at least ~140% of buy-to-let mortgage interest repayments. Moreover they review the situation regularly and require the landlord to pay off some or all of the principal if they are no longer eligible by that criteria.
As a landlord, therefore, you will not be loaned the money unless there is profit to be made on the rent; we don't have to speculate - we know absolutely for certain that (rent-maintenance) is enough to pay off all the interest and a little principal each month, otherwise the bank would not have lent the landlord the money.
I am rather less familiar with the US buy-to-rent mortgage market, but I understand there are similar eligibility criteria involved there as well.
> This argument only makes sense if the (monthly) rent payments are more than mortgage payments + maintenance costs.
> In most cases, that's not true.
In most cases, that's not true initially.
Over time, rents rise substantially but mortgages are fixed and can go lower by refinancing.
When I bought a house, the monthly cost was a bit over 200% of my rent at the time (of a roughly similar-sized rental unit). Yes it was painful in that first year.
It only took ~3 years for the rents in the area to become similar to my then already lowered mortgage via refinance.
Fast forward a couple decades and my housing costs are ~20% of rental rates in the area.
By the time I retire the mortgage will be long gone. It is heartbreaking to watch older people on fixed income having to deal with ever-rising rents.
> mortgages are fixed and can go lower by refinancing.
This varies by country. In my corner of the EU, morgages are flexible rate (following an index such as EURIBOR), sometimes with a 5-year fixed rate option (for a premium).
Taxes pay for schools and ongoing infrastructure maintenance, as well as services, like trash collection.
Do you like having drinkable water in your house and not having piles of trash on the sidewalks (Or having walkable sidewalks at all)? Do you like talking to educated neighbors? Yeah, those taxes pay for that.
If you want to get as close to "owning your own land", move 100 miles out of a metropolitan area. Just don't complain about having no roads, no water, internet, electricity or access to the hospital when you need it most.
> Do you like having drinkable water in your house and not having piles of trash on the sidewalks
These are poor examples. Privately-owned water systems and trash collection are both very common, at least in the United States. Where I live now, both are city services. Where I lived immediately before, both were private.
> move 100 miles out of a metropolitan area. Just don't complain about having no roads, no water, internet, electricity or access to the hospital when you need it most.
Most houses in rural areas of the United States have perfectly adequate roads, have a private well, and get their electricity from a rural electric cooperative. Internet was tough, but Starlink has mostly solved that.
School teachers make nowhere near that, even post retirement, with a pension.
The state with the highest salary band for primary education is Maryland at $99500 at 90p.
Most states cap out below $132k, and that's after 20 years of experience and several Master's degrees in Education (not free).
Admins make more than that, but not much more.
Private school educators are paid by tuition and do not receive property tax revenue afaik.
Police officers in many cities make more than this (also funded by prop taxes).
Also, a thought experiment: what if it _were_ possible for teachers to retire as multi-millionaires? How would this impact the quality of education our children receive? How would this impact our future societies?
How much money would you have to have in order to retire with the pension and benefits a schoolteacher gets? Be sure to factor in the cost of the health insurance and cost of living adjustments they get.
You mention the cost of their education but you’re no doubt aware of the Federal Schoolteacher Student Loan Forgiveness Program.
Your reply is tangential to my post, except for the last paragraph, in which you make an astounding claim that there is some place in my country where a taxing authority fails to apply a tax.
Rather than me search for your myth, perhaps you can show me an example?
(I know plenty of people with land more than 100 miles outside a metropolitan area, and they do have roads, electricity, and schools. Water is from a well, and the govt does not supply internet. Some places have a county hospital, some don't)
As someone with a paid off mortgage (sort of), I can tell you that you still have to pay the State of Texas a Property/Wealth tax every year. They tell us we'll actually have power for this next extreme cold front, so maybe they actually put those to use in the last couple years.
“Real estate should be treated as consumption, not investment.”
Wow that’s quite the blanket statement to make - and no, it should not generally be considered consumption.
The article delves into the “rent vs buy” thing and it’s not as black and white as “let’s be against home ownership”. One has to do the math and decide what makes sense.
Also, it’s very US-centric :) the “everything is consumable” mentality permeates every pore of this article.
Housing is consumption for the person living inside of it. It is a depreciating asset and you have to constantly put work into it. The only part that doesn't depreciate is the community around the house and that isn't an investment either.
Houses need maintenance in order to maintain their value. Cars (which are depreciating assets) need maintenance but still lose value. There is a difference.
Also - I’m not going to give specifics / anecdata but where I live, house values have gone up almost 100% in 5 years. I fail to see how that constitutes a “depreciating asset”.
This is exactly right. The 1st house purchase is critical for most Americans. Becoming financial stabile within the current paradigm requires owning a home or receiving 2-3x the median salary.
I would prefer it if I could just earn my "wealth" on my own instead of having to rely on the luck of being born to the right parents or having to wait for my parents to die until opportunities are available to me. By the time I am old enough to inherit I won't need my parents' assistance any longer and I will be too old to care about the "wealth".
Soooo what, rent your entire life while the side that actually owns the home gets all the profits ? I agree that housing needs to stop being an investment and be brought down in prices but I don't think in people not buying homes in the first place is best way to do it
A house is only an investment if you can sell it and still have somewhere to live. For most people this is not the case. You know who it is the case for? Landlords who rent out housing.
If most people rent, then most housing is now investment - just not for the people living in it. If the goal is for housing to be treated as something other than investment, making more people rent instead of buy achieves the exact opposite.
This is a good point but leaves HELOCs out of the equation, and also the possibility of downshifting to a cheaper home. Ordinary, one-home-only people treat their home as an investment because they really can use it that way, though not as easily as a landlord. For one, they can always sell the house and move to a cheaper one -- or the might be able to if their local housing market hasn't been inflating past their means since they bought their house. More directly though, if they have any equity in their house, they can walk into a bank and walk out with a HELOC and they don't have to move anywhere. My house appreciating 100k this year means, potentially, that I get to spend 100k this year.
>they can walk into a ba[n]k and walk out with a HELOC. My house appreciating 100k this year means, potentially, that I get to spend 100k this year.
No it doesn’t. It means you can take on an additional $100k of debt this year. HELOCs are not free money, no matter how much the banks want to convince you this is the case.
No, debt is money you get to spend now and pay back later. You haven’t actually net gained any money by taking out that HELOC, unless you manage to wisely invest it with an ROI higher than your interest rate.
That's the point: I wouldn't gain any money by not taking the loan either. I gained the "money" (wealth, really) by my house appreciating in value. Anyway I'm not advocating that everybody borrow against every shred of equity in their house, just noting that this temptation exists. If my house is worth more suddenly, my spending can increase suddenly, without my even having to move. Whether or not this is wise is a separate discussion.
That's kinda the problem, how to incentivise making housing but dis-incentivise just buying them as an investment.
Taxing it just makes renting more expensive, high interest rates makes even less people be able to afford one in the first place, and you still need some rental properties as many people don't want to immediately get the forever home.
Regulating renting would make many people bitch and whine about their freedoms to do what they want with thing they own (and, well, rightly so) so there is not that much options left. Cities could build then rent housing (with maybe option to buy out at discount if you lived there for few years) but good luck trying to beat private investors without some heavy legislation on it.
> A house is only an investment if you can sell it and still have somewhere to live.
Only assuming they can’t downsize or move.
I know plenty of people that bought in a flash suburb, or a family sized home then kids have left home, so they sell up and go cheaper while retaining a lot of equity from the property valuation growth.
Also when people don’t need to work (usually retirement), it is very common for people to leave expensive urban areas and move to cheaper and nicer digs in semi-rural areas. This works especially well if you move countries or return to your birth country.
You are also ignoring the worse situation where a married couple divorce and now need two homes: halving total equity is financially difficult for most people (especially in later decades which leaves little time to catch up again).
so they have a chart that shows the top 1% holding more things like stock/mutual funds as a % then realestate. Of course they do they probably get loaded with it from companies they create or join as an exec.
As a part time real estate investor and someone that started owning when I graduated college its a cheat code to being independently wealthy. How else can one get a bank to leverage 80% of the risk but if I sell they don't get a any of the equity gains.
I also can 1031 gains into more rentals and not pay tax on the sale not to mention depreciation.
I have my kids college paid for and retirement setup thanks to realestate. Not to mention my kids will be given at least 6 units to either collect rent or sell.
Sure don't view your home as an investment but to say the rich dont see the importance of real estate is nuts. While I think homes should be affordable to everyone and housing shouldn't be seen as an investment its the world we live in and I like many many other people before me used to set themselves up for long term success.
I'd argue when the demand is predictable you should never rent, ever. Even with cloud services for example, if you have a very predictable amount of usage you're better off "buying." Whether that means reserving instances or bare metal obviously depends on you, but my point stands.
Renting is most effective when you're unstable - like moving around a lot, or are renting places that would otherwise require a lot of upkeep without a commensurately low purchase price.
> I'd argue when the demand is predictable you should never rent, ever.
How is it possible to conclude that without knowing relative cost of renting vs. owning? Where I live, mortgage payment would be 2x-3x the rent for the comparable apartment.
the article is talking about what decision is more financially optimal. of course, yes, if you don't care about that you could rent a mansion, for example, and be broke.
All things being equal, rent is always more than a mortgage. There's no such thing as a landlord renting at or below cost. They're pricing in the costs of financing, insurance, property tax, utility connections, etc. and you're getting the lump sum.
Most of the landlords here own the real estate outright and don't have too many costs associated with it (there is no property tax, homes aren't usually insured).
The landlord’s financing costs could be a fraction of yours. Suppose a landlord bought a unit identical to the one you’re looking at, in the same building, in 2012. I live in Manhattan, where the housing market is up 80% since 2012 (source: mildly sketchy website article I have since misplaced). Average interest rates on a 30-year fixed mortgage are also up from 3.65% (first Google result) to 6.6% (Bankrate.com). Assuming a down payment of equal percentage for both the landlord in 2012 and new prospective buyer in 2022 (which would be larger in absolute terms for the new buyer), this translates to a mortgage payment that is 2.5x larger for the new buyer vs. the landlord who bought in 2012. So the rent for an equivalent unit could be a lot smaller than a new mortgage while still delivering a profit to the landlord because the landlord’s older mortgage is much smaller.
> Real estate should be treated as consumption, not investment.
Real estate is seen as an investment because prices tend to appreciate over time, not because of some conspiracy.
IMO this is because:
1. Useful life of an unit is very long,
2. Prices tend to grow with people's income, which have historically grown faster than inflation.
This means that over a reasonable period of time people expect to be able to resell the property with capital gains greater than inflation and, even if not, at a loss much smaller than the cost of renting over the same period.
Prices would need to be expected to decrease until the house ready to be torn down for real estate not to be an investment... Because that's what make things 'consumables'.
> Real estate is seen as an investment because prices tend to appreciate over time, not because of some conspiracy.
Housing prices increasing over time is the conspiracy. Laws in this country are set up to pump housing value by making it hard to densify and providing tax advantages for owning. People's expectation that their house will increase in value has lead to a wide range of policy failures.
Until the government and therefore its constituents accept that housing can't be an investment it will remain unaffordable.
House prices appreciate over time because people's income increase and historically do so faster than inflation.
For instance in the UK, in the early 1970s, the average house price was less than £5,000.
Is it reasonable to expect houses to still cost about £5,000 when the average income pa. is now £38k. Of course not.
OK, what about adjusting this by inflation since 1970? Well it turns that gives about £63k. Clearly that'd still be a massive bargain compared to people's income, which means prices would not stay that low.
Bottom line is that as long as (a) houses do not depreciate fast because of fear and tear, (b) that population grows, and (c) that people's income grow in real terms then housing prices will grow and thus real estate will be seen as a viable investment at least to offset inflation.
Frankly this "housing can't be an investment" stance is ideological.
> Frankly this "housing can't be an investment" stance is ideological.
All stances are ideological. The fact remains. If housing increases in value faster than wages it is by definition becoming less affordable. If it doesn't than it isn't an investment. The only solution to housing affordability is to stop making laws that ensure housing will increase in value faster than wages.
Not faster than wages, as that's not sustainable over the long term, but faster than inflation as long as the same keeps happening for wages (which it has over the last 100 years though there is no guarantee to continue). The constraint is incomes.
This is not ideological. This is simply a natural consequence of people getting richer (incomes beat inflation). Nothing in my previous comment is ideological, either. It's an observation of the economic forces at play.
Housing is increasing in value far faster than wages. That is what makes it an investment. If it increased in value at the same rate as wages it by definition wouldn't be investment.
> Housing prices increasing over time is the conspiracy.
That's a stretch. It would be basically impossible for a house to not increase in price unless it was built to such low quality that it disintegrates when exposed to weather or the whole region goes into economic collapse (e.g. Detroit of some time back). Neither of these are conditions you'd want if you can avoid them, so you don't actually want a depreciating house.
The reasons are simple, no conspiracy. If you build a house on one of two empty lots today and then someone wants to build an exactly identical house in the other lot in 20 years, it's going to cost a lot more to build that second house. Because materials and labor costs have increased quite a bit. But the house is identical, so market price of the older house will necessarily be about the same as the new house.
(Yes this assumes the older house has been maintained so it is identical to the new one.)
> Because materials and labor costs have increased quite a bit.
Obviously housing value increases with inflation. The question is why it increases so much faster than inflation. Yes, there are some natural reasons like land scarcity in the face of demographic shifts toward urban areas, but the biggest reason is laws that have been passed by local legislatures that are captured by homeowners. I think that's a conspiracy.
housing prices tracked inflation very closely until the dot.com era. Then housing prices started to rise faster, until the 2008 crash. Then housing prices pretty much reverted back to the inflation curve.
The last decade has been an unprecedented bull market with low inflation, so yes, over these ten years housing prices have run away from inflation. But now inflation is rising and housing is dropping. It's anyone's guess whether it'll drop back to the inflation curve but it well might.
So it's clear that housing prices have much larger market swings than the steady march of inflation, but it's not clear that in the long run it actually outpaces it much.
Would be most interesting to see this same graph on a per-city basis instead of nationwide average, but I didn't find that info. Certainly housing prices will outrun inflation in a few hotspot markets like SF or NY. But that also means that for most regular cities the housing prices don't increase at the rate shown in the graph.
chesterton said that too much capitalism is not when there are too many capitalists, but when there are too few capitalists
similarly, too much home ownership is not when there are too many home owners, but rather too few home owners (banks and landlords)
giving the common man the ability to own, as outright as possible, his own land and home, to improve and pass on to his descendants, is the ideal of all just government, against which the elites, rentiers and usurers have always chafed
If the point the author is trying to make is about having the option not to have to buy a home, then they'll certainly be happy to see the amount of single family home purchases that large corporations are making with a plan to rent them out at scale. Hard to say that will free up the savings of the bottom 50% for anything other than exploitation by those very parties, though.
The target audience of The Atlantic are rentiers in the US who don’t want to have to deal with the cognitive dissonance of charging unaffordable rents and contributing to misery in the world.
I've read the first paragraphs and skimmed the rest, not gonna lie. But for what I understand it speaks mostly from an investment point of view.
I've been renting for 3 years, and I want my own place to do whatever I want regarding building around/inside it, not having to deal with the owner, things that break down and don't certainly belong to me, not having to deal with arbitrary rent raises (and the huge stress of having to move out somewhere else) to etc. etc.
It's not just an investment thing, it's about having something of your own instead of living in someone else's property and abiding to its desires and (rightfully so) conditions.
Another small step to make people even more rootless. How can local communities form, when what used to be inter-generational homes become as transient as a hamburger? Our only links to society will be through corporations and government.
But as usual, our sick society looks at it through an exclusively financial lens.
These articles come out every now and then and they all have the same financial and logical flaws.
The “forced savings” argument is nonsense. If you’re renting you are simply building equity and “savings” for someone else. Housing cost is a lot of monthly money going out the door to never see a penny of it again. People do dumb things like buy too much house, but it’s very hard to make a financially logical argument against sensible home ownership. Even in places were housing is super expensive it’s common for those that played their cards right to simply cash out later in life, buy some place in a less expensive part of the country and pocket all the equity.
In the US the whole tax system is also rigged massively in favor of home ownership. If you own you’re paying mortgage interest and real estate taxes and both are tax deductible. If you rent you are almost certainly paying both of these (your landlord includes it in the rent) and get no tax benefits.
The only realistic argument for renting is if you’re only living somewhere for a few years and the fixed costs of buying/selling outweighs the financial benefits of ownership.
Agreed, the best argument for most people is the fixed payment for housing. As time goes on, your income will grow but your payment won't (minus taxes). Additionally, you are paying for tomorrow's housing at today's pricing. That is far more powerful than the argument about paying the landlord vs paying the bank.
> If you own you’re paying mortgage interest and real estate taxes and both are tax deductible
Side note - As I understand it, you cannot deduct either of those if you take the common standard deduction. In high cost of living places I am told that these deductions do outweigh the standard deduction.
It's the age old "people fail at X, because government and society conspire to sabotage them. But the exact POINT at which they fail, very rarely, is Y, so Y is to blame!". Y is always unpopular, and usually banks, homeowners, police, large companies, older people ... never popular or large government institutions like universities, the education system, tiny companies, racism and expectations in the general population ... that are of course the real culprits.
Lack of homeownership is not what's making the US poor lose money. Lack of income is what's causing lack of homeownership. Lack of income is caused by society and government sabotaging these groups.
That last argument is something my wife and I are agonizing over. We own our current small one bedroom condo but want to upsize to something bigger, and preferably with a private entrance. Most likely either a SFH, townhome, or a duplex/triplex. At the same time we don't want to stay in our region (NYC area) forever - probably 5 years at most.
It would still seem to be a win-win situation to buy the current place you're in - if you sell it at profit you can keep the difference. If you sell it at a loss, you're still making the same payments (or less) as renting every month, but have a tangible asset to sell unlike renters.
That's our current line of thinking too. As in, if the market goes, we'd get dinged on our down payment but still recuperate most of it when we sell 5 years later. Assuming it's not a catastrophic market crash.
I know there's also a cost-benefit analysis involved surrounding all the various fees and taxes.
Exactly. Additionally - I like to reinforce the idea that your home is a home not an investment. Your second or third? Sure.
But in my time on various zoning boards and appeals boards more often than not I am the dissenter when someone says “neighbor on their own land doing something legal will lower my prop value.”
When I remind them “with investment comes risk” I am often looked at, by my own peers even, like I just said something crazy.
Owning your home is owning a home and I think we need to focus on that idea more.
I don't really buy this argument that you can rent and pay $1000/month, or you can buy an equivalent home and pay $1000/month, but now you can deduct interest rate and build equity.
Landlords can also deduct their interest expenses and so they benefit from leverage too (meaning they don't want to build up equity).
In a reasonably efficient market, this means that the equivalent cost of homeownership would be higher than rent, to offset these things (the rate at which you're paying down the principal, and the deductability of interest rate expenses). This is obviously a very simplified argument, and there's a lot of other factors going into this.
I don’t think this is right. An efficient market the costs are equal. I think you meant this - if you fully load the economic story the cost of ownership and renting should be equal. It’s true though that markets are rarely ideally priced. The ideal price is a mean reversion target but can randomly diverge due to a ton of other idiosyncratic factors. In fact housing prices and rents are rarely in balance. They just tend towards each other.
> I don't really buy this argument that you can rent and pay $1000/month, or you can buy an equivalent home and pay $1000/month, but now you can deduct interest rate and build equity.
Back in 2013 I was renting an apartment for $1600/month, but my dad made me do the math and I ended up buying a condo about 10 minutes walk away, larger and far higher quality everything and the mortgage was only around $800/month. Even with the monthly assessment fee (for the management company to handle the property and facilities) it was lower than what I was renting for. Just had to get over the down-payment hump.
A simple counter example: if you were 400k in debt on a 500k house, COVID-relief money printing caused 20% inflation meaning your home is now worth 600k and you still have 400k debt to pay off but with 20% cheaper money. Equivalently 20% (80k) of your mortgage was paid off for free / inflated away. If you rented the 80k would go to your landlord and your rent would go up by 20% - you'd need to seek salary increase to get back to being even.
Until every financial crisis ends up being fixed by freshly printed money By all means, if you can shoulder it, you should ALWAYS have at least one morgage.
Agreed. This reads as an advertisement for why the middle-class just needs to acquiesce to the wealthy ruling class because they know what's best for us better than we do.
The vast majority of people who own a single property (i.e. the vast majority of homeowners) don’t consider their houses as investments, since they can only realize liquid gains under very limited circumstances. Suppose you bought a $500k house and it appreciates to $1M. Unless your house appreciated faster than the overall local market or your are planning on downsizing/moving to a lower CoL area, all you can do is turn around and sell that $1M house to buy another comparable $1M house. That $500k of appreciation is completely illiquid.
While most people don’t particularly care about appreciation, nobody wants their housing value to fall because it could make them underwater on their mortgage, which in turn makes it impossible to move without paying out-of-pocket the delta between their house’s value and the remaining principal on the loan, which in the last housing crash was often hundreds of thousands of dollars.
At least in the US, where mortgage rates are fixed across the entirety of a 30 year loan, people buy houses mainly as a hedge against inflation, since your mortgage payment is constant across the entirety of the loan.
Except the additional time in your life not having to worry about repairs, soliciting quotes from contractors, redoing things, etc. and in many markets like the Bay Area where renting is cheaper than owning you could have squirreled away a sizable and liquid nest egg.
I say this as a homeowner, yeah the home equity is great but it’s not a pro without cons. Sure feels like I’m working for that equity while managing this house.
> Real estate should be treated as consumption, not investment.
Stopped reading there. Having personal space and a place to live is a human right, must be provided from birth. I wonder how many more articles like that The Atlantic will need to publish in order to please their ESG gods.
> Having personal space and a place to live is a human right, must be provided from birth.
That's the point of the article... If housing is an investment it is necessarily unaffordable for newcomers. If we want everyone to be able to afford housing its value can't increase faster than inflation.
Sorry, can't agree. To me it looks like all these talks about improvement come from the standpoint of more control and dependance on the govt. I lean more towards libertarian values where if you're a citizen of the country you have to be granted a chunk of territory, not rented, granted, for life.
I feel they are arguing for home ownership instead of against. If a home is not an investment in the sense that you will get more money out than you put in, why would anyone rent you a building? The only reason people rent out property is because it is an investment.
If you think homes should not be an investment in that way you should argue for home ownership. Everyone owns their home and they do not expect to get more money out then they put in. Just about the same and a place to live
I agree with pretty much all the criticism of TFA here, I just want to highlight three, in my experience very real, traps:
1. Interest rates are, at least in Germany, rather high if you didn't manage to save or inherit some starting capital somehow - so for most people the best course of action is probably to live for rent at first and put aside what they can to get a decent deal. Also bearing in mind that interest might jump up after the initial contract period.
2. At least for me, it was hard not to overinvest into my own real estate. "Just 10% more for these fancy light switches instead of the plain ones". "Just double for these awesome windows" and so on. The landlords I had in the past usually had the cheapest, most plain stuff and it never bothered me, but somehow with my own property I have this voice telling me to put in just a little more. Thing is: Houses can be changed to quite a degree after moving in, much like software.
3. Old houses are usually the cheap choice. But they are also, in my experience, always in worse condition than you (and even experts) think. So it's good to prepare for having to pay rent _and_ the credit for 3-12 months - as well as have some items on your fix up list that you could sacrifice in case you learn about something more pressing to fix.
The housing market were I live is solid enough that I broke even after about 3 years despite these traps, but I have a feeling I got lucky and it could have gone bad just as likely.
By not looking at real estate as a proper asset class is a huge mistake. The chart in this article is a counter argument of single asset risk and serves as a visualization for the stepping stones to becoming independently wealthy.
The arguments of being house poor are transient at best. Yes some people buy more house than they can afford, but most people stabilize with time and earning potential.
Sometimes I see these articles and immediately think they are propaganda to the ethos of America.
This is absurd - why does how you earn wealth - through passive investment or active - matter at all? There’s no moral imperative that says earning wealth through sweat equity is somehow more noble or desirable.
“””
This is a key, uncomfortable point: Home values, which purportedly built the middle class, are predicated not on sweat equity or hard work but on luck. Home values are mostly about the value of land, not the structure itself, and the value of the land is largely driven by labor markets. Is someone who bought a home in San Francisco in 1978 smarter or more hardworking than someone trying to do so 50 years later? More important, is this kind of random luck, which compounds over time, the best way to organize society? The obvious answer to both of these questions is no.
“””
The first questions answer is “so what,” and the other question is “why not.” Investments aren’t meant to be egalitarian, fair, or reward the morality of labor. They reward people who allocate capital in a way that happens to increase in value over time. Will someone investing in SF real estate benefit as much as someone who did 50 years ago? Definitely they won’t in the next year if that’s their point. It took their entire lifetime to realize that investment return. They’re likely dead now. In 50 years will it be as good an investment? Who knows. If you knew for sure one way or the other, which they imply they do, you can in turn use that knowledge to improve your investment returns. But only, apparently, if you’re smarter than the author.
The problem with housing as an investment is that there's a limited amount of desirable land and if housing is an investment it quickly becomes unaffordable to buy housing in those areas. If we want to solve the housing affordability crisis we need to stop treating it as an investment that grows in value faster than inflation.
If it is an investment that grows in value faster than inflation why would we treat it any differently? Housing affordability issues aren’t because people treat housing as an investment. Someone owns the land the house is on whether it’s you or a landlord. The value of the land is a supply and demand issue.
Maybe the answer is to make it so employment can be had in many places and not just a few? Carry the remote work stuff further and people can work from less dense areas where land is more affordable?
The only other way I see to make housing not an investment would be nationalize all property and everyone rents from the government. We’ve tried that in parts of the world and it wasn’t awesome.
> If it is an investment that grows in value faster than inflation why would we treat it any differently?
I don't think it has to be. Housing and land aren't the same thing. Land can increase in value while the cost to live on it doesn't if we densify in the face of increased demand. Unfortunately local legislature are captured by homeowners who believe their house is an investment so laws that would fix the "housing as an investment" issue are impossible to implement.
Multi family properties can be owned as a condo and therefore as an investment. The idea that land appreciates but the house on it doesn’t is absurd, if you subdivide into condos the condos don’t own the land the condo association does. But the condos are subject to supply and demand and have a price, either as rent or as an investment as a condo owner. The utility of the land is what has value. That’s why when you look at land for sale it’s not all uniformly valuable. Land that can be used for multiparty housing is more valuable than your typical city single family home lot because it has more uses. A 5000 sqft lot can only host so many people even if it’s zoned for multiparty construction. A 20000 sqft plot can host a bunch of units and is more valuable per sqft as a result. Once it’s been developed into a multiparty development the cash streams on rent or the implied npv represented in the unit price are for the HOUSING not the land - the housing is the useful element. But if you don’t think housing should be an investment, I still don’t understand who you believe should own the housing. Whoever owns it necessarily has invested their capital in it and presumably to make a profit - either through rent, or appreciation, or both.
I think the density argument is specious. If you increase density prices may drop in the short term but as prices drop demand increases and supply gets exhausted and you’re back to rising prices, just with more people. To make housing affordable you need to do the opposite and decrease densities by making it unnecessary to live in a small number of extremely expensive urban areas and make it more attractive to distribute people to many different cities. Just cramping more people into small units in SF doesn’t solve jack.
> Just cramping more people into small units in SF doesn’t solve jack.
There aren't an unlimited number of people looking to pay $3k for a sf studio. As you build more you eventually run out of people willing to pay that much and prices necessarily decrease.
But once prices decrease people priced out come into the market. The prices won’t drop if there continues to be demand in excess of supply below the current market price. The $3k price you mention is equilibrium, if it drops then more people want units than exist as units because now it’s become affordable, so prices go back up to $3k.
Ultimately though, this is the affordable housing problem - the prices are so high all those who want to live in sf can’t afford to live in sf. You made my point for me in fact - even if you make high density housing you don’t make it affordable.
The only way to make it affordable is to make it unnecessary to live in SF by unlocking SF employment anywhere.
> the wealthiest Americans are the least likely to store their wealth in their homes.
The bar chart is listing percentages of wealth in each asset. Wealthy invest a lower % of their wealth into toilet paper. So in the bar chart it would look like the wealthy don't wipe themselves at all.
I live in an area that is high risk for wildfires. Many locals have been dropped by their insurer and are paying ~1% per year to the CA "FAIR" plan. Add on taxes (1%) and the fact that any house in the $500k range around here has deferred maintenance, in serious need of an updating and is likely a (poorly) manufactured home and so you are looking at 1.5% for maintenance. Add in interest (post deduction) and the opportunity cost of 80-100k in an investment portfolio and a home owner here is throwing away a lot of money - (those add up to much more than I pay to rent a $500k house here).
Compounding all of that, in ~20 years of home ownership, I have never lived in one house longer than 6 years - despite my intentions otherwise.
This is just to say that there is no one-size-fits-all approach to the complex problem of domicile/investment and if you live in a high risk natural disaster zone, you are rolling some tough dice.
I lived with my family on rented houses for a few years... Got kicked out of houses twice in 5 years because homeowners wanted to sell; this happened at great personal cost to my family with broken relationships with neighbors, school uncertainty, furniture changes, etc. Nevermind landlords promised that they wanted to rent "long term" in all cases.
Renting is fine in many scenarios, but homeownership can bring a lot of stability to life. Sure it's not for every single person out there, but if you plan to stay put for at least a few years and can afford it, I say go for it.
I think that dollar-for-dollar cost comparisons with renting can only go so far as it's not easy to measure the value of the aforementioned stability (and neither is the lost flexibility of renting).
This article spoke to me much more deeply than I expected it to.
I'm a 35 year old married person living in a Medium Cost of Living area that's making very good money. I do not have student loans and am inches away from paying off my wife's loans. While I don't have sizable savings (largely due to years of non-frugally paying off said loans), this has changed recently. We are also not having children.
I think I'm a textbook candidate of someone who _should_ be looking into purchasing a home, as I'm not far off from being able to put the traditional 20% down (and could do the down payment if I went the FHA route) on something decent in our city. However, I shudder at the thought every time I think about it.
I'm actually very happy with renting long-term and moving as needed. I like the flexibility this affords, the financial stability of a static monthly housing payment, and never having to worry about the "fun" of home ownership (as I really dislike doing house work; would much rather be outside).
Unfortunately, this viewpoint is derided every time the age-old "owning vs renting" discussion comes up. Several greatest hits always make an appearance, such as:
- "Renting is for poor people!"
- "Do you like throwing your money away? Owning _builds equity!_"
- "Landlords suck, so home ownership wins by default."
- "What if you decide you want a new kitchen?"
I loved this article because Jerusalem took the time and did the research to debunk (or at least significantly challenge) all of these talking points while confirming a lot of my suspicions about home ownership that don't seem to get as much attention.
The biggest one that really spoke to me was the common perception that "home ownership is an investment," for several reasons:
- Almost every anecdote I've heard of homeowners profiting off the sale of their home ended with either "I used that as a down payment for my next home" (usually much bigger, for, in my opinion, no reason other than to flex) or "we moved into a cheaper area and pocketed the difference". What if that "cheaper area" is a non-walkable car-adled suburb an hour away from the city?
- A much more common anecdote I hear are people re-upping their mortgage through HELOCs for all sorts of (IMO) irresponsible reasons (like expensive vacations or play-things, like Jerusalem pointed out) and hoping to make themselves whole they sell their house, since house prices "never go down." On its face, it's technically fine since this is "just" a more pedestrian version of a margin loan against an investment portfolio, but it feels really shaky to me, especially since "you" are supposed to own your home, not the bank.
- Maybe I'm super lucky, but I have yet to have a negative landlord experience. Big apartment complexes in nice neighborhoods are typically managed by well-run property management groups, at least in my limited experience.
- SO MANY PEOPLE are quick to mention that mortgages are typically cheaper than rent AND completely gloss over the fact that mortgages are a FLOOR, not a ceiling like rent is. "I sold my house that I bought at $x for $y but paid $z in maintenance and had to pay $w in closing costs and other fees, so I really made $x-$z-$w" is a rare anecdote because I don't think a lot of people track maintenance costs with any sort of granularity. I'm also not comfortable with the idea of "Oh shit, my roof caved in a bit because the previous owner deferred maintenance and now I'm paying $14k" dropping onto me at any moment! (The responsible thing to do would be to build a maintenance fund that's a percentage of the home's value, or something...this gets glossed over too, because...)
- SO MANY PEOPLE get their down payments from their parents! Like SO SO MANY. A shocking number of people, IMO. When you get a down payment as a wedding or graduation gift without knowing some basic personal finance, then "my mortgage being cheaper than rent" is a much easier story to tell, and saving for the $14k floating bomb is much easier to do! Jerusalem calls this out towards the end of the article where he talks about the obvious wealth and racial inequalities inherent to real estate, and I think he was spot on.
The argument on owning vs renting feels a lot like the ages-old "children or no children" debate. Almost every experience I've read or heard about vis a vis parenting sounds like a lot of work, commitment, and sleeplessness I don't want or need, but ends with something like "I wouldn't trade it for anything in the world; you'd have to be a parent to understand." That's a hard gamble.
reply