Rent Vs. Buy Myths That Ruined the Housing Market

March 21, 2008 4:38 PM

Rent Vs. Buy Myths That Ruined the Housing Market
posted by Afroblanco (107 comments total)

Thank you, Kottke
posted by Afroblanco at 4:39 PM on March 21, 2008

Did you really just link to that on the front page of metafilter? It's not just that's badly written, or that it's completely inconsistent, or even just that the entire site feels linkspammy. It's mostly just that it's pretty much entirely incorrect.
posted by dersins at 4:47 PM on March 21, 2008

What? I'm buying... the housing market is great!
posted by mr. creosote at 4:49 PM on March 21, 2008

tl;dr: You can rent and still be cool!
posted by Citizen Premier at 4:51 PM on March 21, 2008

Ok, this part, at least, is wrong:

The reality is that housing is not an investment. It's shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn't be further from the truth.

Over the very long haul, real estate really isn't a bad investment. The problem that it's not a good investment now. It's been risky as hell for about five years, and now that the bubble has popped, buying a house is likely, at most, to break even in dollar terms for the next decade or so. (and that's even after the big price declines in some markets).

All of the gains for the next ten or fifteen years got front-loaded into the last four or five. If the Fed manages to stop the erosion in home prices, about all that's likely to happen is that they'll stay at about the same level while inflation makes everything else more expensive. Real estate is priced like it's 2020 .... in 2008. It's wildly out of whack with everything else. Either the price needs to drop substantially, or else the actions of the Fed will cause everything else to increase substantially. Mr. Market's invisible hand WILL return things to something approaching balance. Since we've been fighting this so hard for so long, the process is likely to be very painful.

By 2015 or 2020, real estate will probably return to being what it historically has been: an investment with a modest, steady return, in addition to being a place to live. A house, in a normal market, will not make you wealthy, but its appreciation is a nice addition to your overall wealth.

But right now? The Fed is doing its best to prop up that market, so you may very well do okay in dollar terms.... because the worth of the dollar is under siege. If you have a very steady job in an essential sector, it might be a perfectly fine time to buy, as long as you don't plan to move for a long time.
posted by Malor at 4:52 PM on March 21, 2008

One post link equals fail?

dersins, perhaps you could explain why you think this is "entirely incorrect".
posted by Slothrup at 4:52 PM on March 21, 2008

Over the very long haul, real estate really isn't a bad investment.

I'm sure it depends in part on where you buy. One reason the stats may not look good when averaged over the entire country is that the numbers include (for instance) a home purchased in Detroit in 1950.
posted by Slothrup at 4:54 PM on March 21, 2008

Generally, btw, bubble pricing tends to return to prices a little lower than before the bubble started. When the housing bubble started is somewhat arguable, but 1998ish is probably a pretty safe bet. That means that the actual worth of houses should tend toward what they were in 1998. If the prices of homes aren't allowed to fall, then the price of everything else will go up instead.
posted by Malor at 4:56 PM on March 21, 2008 [4 favorites has favorites]

At the very least, the tone of the article is a little bit bitter, a little bit ranty, and a little bit caps-locky.
posted by Flipping_Hades_Terwilliger at 4:56 PM on March 21, 2008 [4 favorites has favorites]

It's mostly just that it's pretty much entirely incorrect.
posted by dersins

No it's not. Every time I hear someone say renting is 'throwing your money away" I want to hit them. A place to sleep? A place to store your stuff? A place to be safe? Not exactly throwing your money away.
posted by justgary at 4:59 PM on March 21, 2008 [1 favorite has favorites]

One reason the stats may not look good when averaged over the entire country is that the numbers include (for instance) a home purchased in Detroit in 1950.

Which is certainly a valid thing to include.
posted by Space Coyote at 4:59 PM on March 21, 2008

Unfortunately, renting is also becoming more difficult, as desirable/affordable locations go condo, speculators build condos rather than rental units and, yes, the constant harping that renting is for losers and buying is part of the "American Dream" (like bankruptcy I guess).
posted by nax at 5:02 PM on March 21, 2008 [1 favorite has favorites]

The reality is that housing is not an investment. It's shelter. That is all housing has ever been.

YMMV. My home is now worth ten times what I paid for it. The trees and the privacy and the view of the lake have a lot to do with that, and nothing to do with shelter.
posted by weapons-grade pandemonium at 5:04 PM on March 21, 2008

In general I don't care for real estate as an investment unless it's part of a diversified portfolio and, better yet, income producing (i.e., not your personal residence).

However, as someone else pointed out, all "real estate" is not created equal. It's sort of like saying "corporations" are good investments. Well- sometimes yes and sometimes no.

I do think this article points out a lot of the real estate industry b.s. my friends and family have fallen for over the last 5 years.
posted by small_ruminant at 5:04 PM on March 21, 2008 [3 favorites has favorites]

I've also wondered about that, nax - with the eventual decline in the number of homeowners, won't rent prices jump through the roof?
posted by Baby_Balrog at 5:05 PM on March 21, 2008

Also - I don't own a home because I've lived in three different cities in the past four years and this mobility has proven to be quite lucrative. ymmv.
posted by Baby_Balrog at 5:06 PM on March 21, 2008

Funny, it doesn't explain how these myths ruined the housing market. Did more people believe these myths than did at some other time when the housing market wasn't being ruined?

Or did someone just decide to take a handful of vague truisms and give it some currency by relating it to the housing bubble in order to get a column out of it?
posted by George_Spiggott at 5:09 PM on March 21, 2008 [4 favorites has favorites]

Every time I hear someone say renting is 'throwing your money away"

Ok, fine, that one was shrill but not entirely unreasonable.

However:

The writer of that article appear to lack even the most basic understanding of, for example, how best to calculate taxable income.

I mean, come on:

Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone--including renters--is allowed to take.

Because, of course, mortgage interest could be THE ONLY POSSIBLE ITEMIZABLE DEDUCTION ANYONE WOULD HAVE.

The writer also appears to lack even the most basic understanding of the homebuying process, and who pays for what part of it:

a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner.

First, closing costs are generally not that high. Second, and more important, the real estate agent's commission is factored on the purchase price of the house not the load amount, and in any event IS PAID BY THE SELLER AND NOT BY THE BUYER.

Anyone who makes that basic of a mistake in an article that claims to be imparting knowledge about the real estate market is insufficiently informed to be writing on the subject.

Need I go on?
posted by dersins at 5:09 PM on March 21, 2008 [9 favorites has favorites]

Once again, Malor sums wise. The link, not terrible, but not terribly bright either. No byline, neither.
posted by mrgrimm at 5:12 PM on March 21, 2008

Pretty good. Although they forgot the myth about how homeowners are responsible members of their communities while renters are a bunch of degenerates who have to be kept out of decent neighborhoods with punitive zoning laws.
posted by transona5 at 5:12 PM on March 21, 2008 [7 favorites has favorites]

Over the very long haul, real estate really isn't a bad investment ... and now that the bubble has popped, buying a house is likely, at most, to break even in dollar terms for the next decade or so
...
By 2015 or 2020, real estate will probably return to being what it historically has been: an investment with a modest, steady return, in addition to being a place to live. A house, in a normal market, will not make you wealthy, but its appreciation is a nice addition to your overall wealth.

Ugh, how could you (or anyone else) possibly know that? You have a habit of mixing things that are probably true, with things you're just guessing at without any real justification.
posted by delmoi at 5:13 PM on March 21, 2008 [3 favorites has favorites]

First, closing costs are generally not that high.

True; I seem to recall them being about 2-3 percent of the purchase price.

Second, and more important, the real estate agent's commission is factored on the purchase price of the house not the load amount, and in any event IS PAID BY THE SELLER AND NOT BY THE BUYER.

But you ultimately need to be both a buyer (at the beginning) and a seller (when you cash out).

The point is that if I buy a house and then sell it, its value must have increased by enough to cover both the closing costs and the selling costs -- just in order for me to break even.
posted by Slothrup at 5:15 PM on March 21, 2008

First, closing costs are generally not that high. Second, and more important, the real estate agent's commission is factored on the purchase price of the house not the load amount, and in any event IS PAID BY THE SELLER AND NOT BY THE BUYER.

But the buyer and seller are the same person, at different points in time. If you buy a house as an investment, then you need some exit strategy, namely selling that house. And if you sell that house, then you'll need to pay the commission.
posted by delmoi at 5:16 PM on March 21, 2008

Can we all at least agree that condos are for chumps?
posted by Sys Rq at 5:19 PM on March 21, 2008 [3 favorites has favorites]

Just a detail in that crappy article, but owners deduct local taxes from their taxable income, and renters pay tax on their entire rent, some of which is used to pay local taxes.
posted by hexatron at 5:21 PM on March 21, 2008

No it's not. Every time I hear someone say renting is 'throwing your money away" I want to hit them.

Me too. Buying is so much more expensive than renting, and there really isn't a guarantee that you will get that money back when you sell. I bought a condo in 2001 and sold it in 2006 to buy my house. Huge mistake. I did make a profit technically speaking, but by the time you consider realtors' comission, the money I spent on fixing the place up, and all the extra money I spent just to live there when I could have been renting instead, it was nothing. It kills me to think how much smaller my current mortgage could be if I'd just kept renting and socking money away.

Renting is not throwing money away. Frittering away your disposable income is throwing your money away. Your living expenses will basically double once you buy a house. A lot of people could be saving the equivalent of their monthly rent or even more if they tried.
posted by orange swan at 5:22 PM on March 21, 2008 [3 favorites has favorites]

All I know is that I've been renting for five years, with a total damage of about $50K, and prices for many single-family homes and condos in the area have dropped by much more than that. So I'm really glad I didn't listen to everyone who told me to buy buy buy in 2004 because "throwing away my money" by giving it to my landlord may well have saved me a bundle when I do buy.
posted by brownpau at 5:27 PM on March 21, 2008

Where renting beats buying, I think, is in value for certain properties--for example, in the inflated real estate market which is just deflating slightly here in the NW, if you have $2000 a month to spend on housing, that much in a rental will land you in a much nicer place (generally) than that much as a borrower (assuming normal down payments, etc.). The owner of the rental property is, in effect, subsidizing your living in a nicer neighborhood than you might otherwise afford.

Where rents and mortgages are in-line with each other, value-wise, you are paying the property taxes as a renter, it would be foolish to think that the property owner hasn't factored that into the rent.

Buying gives a greater sense of permanence and I do think a greater sense of community. Renting gives more flexibility and the chance to get utterly reamed by the owner when they make up reasons to keep your security deposit. Wonder how I know that.
posted by maxwelton at 5:30 PM on March 21, 2008 [1 favorite has favorites]

I'm a renter who railed against the notion that renters were, if not throwing their money away, less responsible than those who bought houses. I argued against the overstated case for home ownership, but this goes to far in the other direction.

Houses and real estate, as stores of wealth, definitely are investments. They may not be good investments at all times, but they certainly can retain value and appreciate (and are probably better stores of wealth than stars wars collectibles).
posted by justkevin at 5:36 PM on March 21, 2008

I've owned several homes, and I now rent an apartment, and I love it. I have a nice place to live in an area I could never afford a home. I pay zero maintenance. I don't have to mow or shovel, or do repairs, or weed a garden. My rent is way less than a payment on any house I could reasonably afford.

Are there trade-offs? Sure, but in my current lifestyle, the negatives are far overwhelmed by the benefits.

Although I don't hear it often, I do sometimes get told I am throwing away my money by renting, and I usually just give the mature and reasoned response: sighing and eye-rolling.
posted by Fuzzy Skinner at 5:43 PM on March 21, 2008 [4 favorites has favorites]

As a renter, I think the linked article lacks nuance and context at best, or is utter bullshit at worst. WTF? Definitely not best of the web.
posted by KokuRyu at 5:44 PM on March 21, 2008

Well, all I know is that if you are a renter your homeowner can kick you out when your lease is up if he wants to move back in your home or if he wants to sell. So, there's that.

So much really depends on the market in your area. In our area, for years it has been cheaper to buy than rent. (High rental demand because of Bragg. Bragg also props our real estate market up too-life sucks when everyone is deployed.)
posted by konolia at 5:45 PM on March 21, 2008

A funny thing I've always wondered why people didn't think about.. if renting is such a poor deal for the renter, and presumably thus a better arrangement for the building owner, why are so many scrambling to convert properties into condos?
posted by Space Coyote at 5:46 PM on March 21, 2008 [2 favorites has favorites]

Renting is superior, for one indisputable reason:

People don't get loans to rent.

Rents are tied, fundamentally, to the amount of money people are actually earning. Sales -- even condo sales -- are tied to how much money banks will loan. With banks securitizing all the risk away, they got into the habit of loaning anything to anyone.

So, if you want a place to buy, you have to compete with what people can borrow. If you rent, you have to compete with what people can spend.

I'll take the latter in that equation.
posted by effugas at 5:46 PM on March 21, 2008 [16 favorites has favorites]

Houses and real estate, as stores of wealth, definitely are investments.

Yes. Property returns are generally quite paltry compared to equities, but they are usually quite decoupled from equity markets. Therefore, an efficient, balanced lifetime investment portfolio that has a blend of decoupled investments will have a higher probability of gain with a lower risk probability than a portfolio weighted either more completely in property, or in equities/bonds. Or at least, that is my understanding of modern portfolio theory.
posted by meehawl at 6:03 PM on March 21, 2008

At least at some point you get your mortage paid off. In about 10 years I will have my mortgage paid off, and my housing expenses will be upkeep and property taxes. Or I can choose to sell and either live off the proceeds or buy another home.
This article seems to presuppose mortgages never end. Perhaps for some people they don't - those who cash out regularly to buy cars or pay credit card debt, but that's a whole different problem.
posted by readery at 6:04 PM on March 21, 2008 [1 favorite has favorites]

One thing totally forgotten is that as real estate prices rise so do rents. Thus owning a house in the long term means you will be paying less to own than to rent (including taxes and tax benefits). Currently rents are twice what I pay after being in the same house for 21 years.
posted by Gungho at 6:08 PM on March 21, 2008

As always, renting is going to be better for some people, and owning for others. Myself, renting wouldn't (and didn't) support my eccentricities and the idea that someone could dictate how I live in my home was enough for me to want to buy. As it is, I don't like the restrictions placed on my home ownership by the town, but its much better than it would be renting.

I do, however, sometimes regret not having the flexibility of a renter. Like today - It's crossed my mind more than once as I watched 12 inches of snow pile up that I need to move the eff out of this od forsaken state, but such an undertaking is more difficult than if I rented. I could really just get up and leave and only lose a small amount of money, maybe not even that if it was month to month. Now I'll realistically have to wait until the housing market turns around in some form if I were serious about moving. Possibly years.

Both sides of the argument tend to over-exaggerate their value. In one, you're paying for a service (rent, providing shelter) and the other you're paying for a good. Me, I like ownership better than subscription services, but the trend seems to be going the other way these days so maybe I'm old fashioned.

I do think mortgages are a big hoax though that we're all part of. Pay all the interest upfront so that the ability to pay is dragged out so long that you're repaying several times the value of the initial loan. But alas, its seeped into the public consciousness as normal so I don't think that's going to change anytime soon.
posted by [insert clever name here] at 6:13 PM on March 21, 2008

This is just my observation, but it seems like home-buyers (especially young buyers) tend to buy more house than they really need. This could be rational if they're planning to start a family in the next 5 or 10 years and stay in the same house for the long run. But it can also be a big risk, as we're seeing now.
posted by mullacc at 6:36 PM on March 21, 2008

For me living in California, and being in a fairly low tax bracket (smaller return on mortgage interest deduction) means renting is the better option. Especially since I'm renting a relatively small place. Small condos have very few of the flexibility advantages of single family homes, and tend not to appreciate very quickly. Also, it's really hard to find small single family homes anymore. They seem to be geared much more towards 2000+ sq. ft. buyers.

Also, buying has significant potential liability. Renting your maximum downside is usually moving costs + security deposit. As a buyer, where you can really get hammered is if you refi your house and wind up with a recourse rather than nonrecourse loan. Then if the market goes south and you get foreclosed on while your loan is upside down they come after you for the difference in equity. On a CA foreclosure that could be over $300,000. If you negotiate to forgive the debt, that becomes taxable income.
posted by BrotherCaine at 6:39 PM on March 21, 2008

So ... to translate this article into actual meaning, as opposed to what it claims to be saying:

"If, given your current state of finances and the place where you live, the various costs associated with having a mortgage and owning a home significantly exceed the amount you would pay for rent, then it may make more financial sense at least in the short term for you to rent rather than take out a loan to buy a home, and invest the difference in the money."

Well ... duh. And the following needs to be added, as some have pointed out:

"However, if your finances are such that a loan plus associated costs are not significantly more expensive than renting, especially if you plan to stay in one location for a long period of time, then the eventual advantages of owning a home with a paid-off mortgage are significant, and should likely be factored into your long-term financial plan, since rent does not build long-term equity."

Which is why some people say rent is "pissing your money away" - I think that's far too strong, but there is some truth to it. It's exactly like leasing rather than buying a car. You pay the lease forever or the car goes away. If you buy, eventually you stop making monthly payments, and while there are other associated costs, they are usually a *lot* lower than the monthlies.

I reccomend my very succesful financial plan, which was to get run over by an SUV driven by a judge, shattering your knee, and buy a house with the insurance payout. Currently, I'm renting again, since I'm living in an insanely expensive housing market for what will likely be only a few years. I will probably try to buy when that situation changes, but yeah, buying would be dumb for me right now. So?
posted by kyrademon at 6:53 PM on March 21, 2008

(To be fair, the author of the article seems to be implying that not buying a house and investing the money instead will always give such a better rate of return that it will make up for the difference in the additional decades of paying rent, but that's ... showing the same ridiculous amount of faith in the investment market than others have shown in the housing market, isn't it?)
posted by kyrademon at 6:59 PM on March 21, 2008

As far as I can see, when you "buy" a home with a 20 or 30 year mortgage, you don't own squat. Miss more than a few payments, and you lose the house; whatever money you put in (equity) might very well vanish. On top of that, by the time you are done paying it off, the actual cost is at least 50% above and beyond the purchase price (depending on your down payment, of course). The myth of ownership is right up there with the value proposition for diamonds, IMO. I know that there's the tax deduction, but you can't count on it, especially as the U.S. descends into serious insolvency. If you rent, you pick up and leave when it's time to leave. There's something about freedom I find quite compelling.
posted by dbiedny at 7:05 PM on March 21, 2008 [1 favorite has favorites]

The article does take a very positive view of renting. It ain't all sunshine and roses. Firstly, you are paying interest. The interest of the person who owns the property you're living in. Plus their profit. The rent in the place we're currently living in has increased from $320 to $400 a week in two years. And that's far out of line with either CPI or interest rate increases in that period. We're getting fucked over more than someone who owns the house.

Secondly, and I get the impression this is more of an Australian thing, we are faced with the constant imposition of inspections. Someone did a poor job doing the floor in the shower recess in this place. The agent noticed "bubbles" in the floor of the shower last time she was here, and now they're on our case about it, as if we can prevent that. Then there's the fact that we went through a year's worth of 3-monthly inspections, in each case being told the house was in "excellent" condition with no problems to address...then suddenly, at the end of our first year, we get a call telling us the owner isn't happy with how we're keeping the yard...apparently he wants the lawn mowed more often, and he suddenly wants us to pay an extra $20 a week for a gardener. Or he won't renew the lease. Turns out he came around to the place himself, when we weren't home, and showed himself around. And then there's what happened three weeks after we first moved in. We've got two dogs who, based on the lease we signed, have to stay outside. We got a nasty letter from the agent telling us we had let the dogs inside and that if we continued to do this we would be evicted and made to pay for damaged. Except we had never let the dogs inside. We phoned the agent to ask "what the fuck?", and she replied that "someone in the neighbourhood had informed them that we had the dogs inside", and the conversation ended there.

Any extra money we pay, any interest, is worth getting out of the pathetic hell that is renting. That, and the fact that it was reported a few weeks ago that the average weekly rental payment has now exceeded the average weekly mortgage repayment in these parts.

I do have some sympathy with the idea that renting isn't that bad, it isn't "wasted money", but that's simply not true in the market I'm living in at the moment.
posted by Jimbob at 7:26 PM on March 21, 2008 [3 favorites has favorites]

Well, all I know is that if you are a renter your homeowner can kick you out when your lease is up if he wants to move back in your home or if he wants to sell. So, there's that.

As Konolia has pointed out, owning is superior because it better ensures that people will leave you the fuck alone. The amount of schadenfreude directed at homeowners since the mortgage shakeout began is really funny-- if the worst-wishers don't want to own, why the contempt?

Awesome, you rent and you're totally sticking it to The Man as long as you get his permission to paint. If I'm in my place for 10 years, due to inflation, my mortgage payment is going to be less than what people are paying to rent half the space I live in. And mostly I don't care what I'm paying as long as it doesn't choke me because I can do whatever I want without asking anyone, from getting whatever pet I want, to running cable, to burying hooker torsos in the back.
posted by Mayor Curley at 7:29 PM on March 21, 2008 [11 favorites has favorites]

the actual cost is at least 50% above and beyond the purchase price (depending on your down payment, of course).

I'm a long-term renter but what you're saying is misleading and basically wrong.

What you're saying is, "If you add all the payments you make together, the total of these dollars is greater than the stated price of the house." That's true but thoroughly misleading.

The point is that money today is intrinsically worth more than money at some point in the future (and if you don't believe this, lend me $100,000 for five years at no interest, I'm good for it).

The sum of your payments, discounted by your implied future interest rate, is exactly equal to today's prices. And the implied future interest rates for home mortgages are actually pretty good.

For example, interest rates are sufficiently low and inflation sufficiently high today that you'd be pretty stupid to buy a house in cash, even if you had the cash. You're much better off to pay "over 50% more in the future" if interest rates return to historical levels (and they will - when capital leaves the US, which is inevitable, the only way to attract it back will be high interest rates...) - you end up with more $$ in the bank.
posted by lupus_yonderboy at 7:35 PM on March 21, 2008 [4 favorites has favorites]

effugas writes "So, if you want a place to buy, you have to compete with what people can borrow. If you rent, you have to compete with what people can spend.

"I'll take the latter in that equation."

But your income isn't necessarily as elastic as rent fluctuation ; you are , reasonably indeed, assuming that the distribution and value of "rent" follows the distribution and value of "income" so that rent is less than income all over the year(s) , assuming that rentiers don't have incentive at keeping the house vacant, which isn't always the case when eviction becomes too expensive and people start realizing they can take a risk and squat.

Additionally , there is no guarantee that the same rent (inflation/depreciation adjusted) will rent you the same house during years, as if price perpetually reflected all or the most important properties of the "house" object. It may as well be that in x year the same portion of your wage rents you an house in an entirely different neighboorhood, maybe far away from your previous location (urban sprawl, lotsa mc-homes to rent) , which generates additional expenses, not necessarily discounted by a lower house rent price.

So competition with what millions effectively earn is indeed easier , but may land you in high density "projects" or in the situation of some rich wester countries, in which unemployements prevents youngsters from leaving home and starting their own families because of market distortions that price hundred thousand people out of being able to rent even a small apartment , so you may have 2 generations living in the same house, which isn't that uncommon in my country, but isn't a party as well.
posted by elpapacito at 7:37 PM on March 21, 2008

As in many arguments, the rent vs. buy thing depends a lot on local conditions. There are definitely markets where buying is a dumb idea -- any place in California, for example, this time of century. And there are places where renting is a dumb idea -- anywhere in Louisiana, for example, at any time, because of our wacky homestead exemption which means only rich people and renters (by proxy) pay property taxes.

I own my house, free and clear. I bought in a cheap market, in fact at the bottom of the last housing crash in '92. In such dire times with thousands of empty homes standing vacant, they will cut you a deal, and I moved into this place for 3% down (on $56,000), and dagummint paid my closing costs. It wasn't much more expensive than moving to a new rental. There will be a lot of deals like that afoot in the next couple of years.

My house is now worth more than twice what I paid for it. And since it was so cheap I was able to pay it off far in advance of the 30 year term of my mortgage, so when TS Bill and H Katrina came, the insurance companies just gave me the money directly. I own it. If I ever sell it, I don't have to do some weird dance, I can take out another loan if need be, buy another house, THEN worry about selling this one at leisure. Which won't be hard, because the structure is modest but the location, location, location is gold.

But if I had a lucrative job that might not last more than a few years in a place where even modest homes go for $300K up, I wouldn't advise anyone to buy. You're making at least theoretically a 30 year commitment. Those people who willingly entered variable rate contracts knowing their payments would go up no matter what happened to the economy -- what drugs were they taking? And the loan sharks who advised them to budget 30% of their income on such initial rates should be drowned in a bathtub.

Whether you rent or own, housing is one of the largest single expenses you will field over the course of your life. (Even if you manage to cheap it out by building a yurt, you will have made major lifestyle sacrifices in order to be able to do that.) This article's kind of oversimplification does nobody any service.
posted by localroger at 7:39 PM on March 21, 2008

Wow, this website has just about the worst possible information on this topic ever.

Here is why renting is always worse than owning: owning the property you are rent is making the property owner a profit. After he pays interest to the bank, property taxes to the government, maintenance costs on the building, etc, each apartment on average is still costing him less to own than renters are paying to rent it. If this were not true, he wouldn't be in the business of renting property. Rent = property taxes + interest + principal + maintenance + profit.

The problem is that renting seems to make sense if you run the numbers for the very unusual short-term period we've had in the last 2-3 years. for example, from the site:

"At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth."

Really, stupid? "After 2002" seems to be an arbitrary starting point, why not run it against 2000? Better year, what about people who've owned a home since 1998, how does their situation look? Oh, right, it looks fantastic.
posted by Pastabagel at 7:45 PM on March 21, 2008 [6 favorites has favorites]

This article is a whole pile of suck. Yeah, a lot of idiots took on more than they could handle and are getting burnt, but home ownership is probably the only chance most people will ever have to utilize financial leverage to their advantage.
posted by malocchio at 7:51 PM on March 21, 2008

When I rented, I always paid my rent on time and I never damaged my apartment. However, I have been told I had to move out at the end of my lease because: a) I let a friend sleep on my couch too long, b) I had a pet I told them about but they didn't like, c) they decided to renovate and go condo, d) the market changed and they doubled the rent.

Now that I own? No one cares as long as I pay my mortgage on time. I cannot put a price on the fact that September 1 is now a meaningless date to me.
posted by nev at 7:56 PM on March 21, 2008 [2 favorites has favorites]

All this hand-wringing and argumentation over what is largely a financial decision, that given well-defined constraints and reasonable assumptions, is pretty easy. More than one post in this thread fails to consider opportunity costs.

This was linked earlier somewhere around here, and if you set the advanced settings properly, it's quite useful. It obviously can't measure the intangible, but it's easiest to start with the economics, and then determine whether the intangibles are enough to overcome them.
posted by Kwantsar at 8:08 PM on March 21, 2008 [1 favorite has favorites]

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter.

buyers have shelter, too - how could he miss that?

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes.

and the person you rent from pays them too, so you pay them

It Doesn't Cost Any More to Buy Than It Does to Rent

no sensible person ever claims that, so why refute it?

Myth #4: Buyers Have Assets, Renters Do Not

get back to me in 30 years about that

Myth #5: Houses are a Good Investment

in the long term, they will go up - population is growing and they're not making more land, are they? - no, you're not going to make a killing on a house, but if you live in one for 30 years, you will likely see a decent return on your investment AND have a place to live - even after everything that's happened

this is a poorly thought out article - and i rent
posted by pyramid termite at 8:10 PM on March 21, 2008 [1 favorite has favorites]

Way too many people have big eyes and thin wallets.

If you at all identify with the previous statement, then rent, because buying will get you in a lifetime of debt and bad credit instead of simple eviction. If any out there have already bought into those 'too good to be true' mortgages, and are now on the eve of your foreclosure, may I recommend that you either get smaller eyes or a bigger wallet before you chose a high end apartment community?

Seeing it, and liking it, does NOT MEAN THAT YOU CAN AFFORD IT!

For the rest of you average folks out there, do your homework and make your best decision. I think this article is extremely helpful in dismissing alot of pass along myths we were raised with about owning your own home ALWAYS being the way to go.

And "shelter" used to mean keeping the rain off your head when you sleep....Go figure?
posted by LiveLurker at 8:10 PM on March 21, 2008

I should add that I have a unique perspective on the mathematics of finance and I have a secret, one that's mathematically correct, that I'll share here for the first time.

The essence of financing is valuing a cash flow; a series of cash payments that will appear in the uncertain future.

The secret is that you need to translate everything to the scale of zero dollars, today.

In other words, to value a set of cashflows, you have to think of yourself as starting with no money whatsoever but extremely good credit, and then financing each transaction you do appropriately; think of each transaction creating money and anti-money in pairs, and of future money's value decaying on a very strict schedule.

My Wall Street mentor Woody Hoffman told me, "The secret to understanding capital markets is understanding the repo," and he was completely right.
posted by lupus_yonderboy at 8:51 PM on March 21, 2008 [5 favorites has favorites]

I've never really paid a lot of attention to whether my house was a wise investment. The monthly payment is well-within reach, so unless there's a rental out there that puts me in the middle of nowhere where my kids can roam without traffic and I can head outside at dusk and take a piss toward any of the four points of the compass then sign me up in the 'ownership rules' camp.

I've had great landlords. But they were still landlords.
posted by docpops at 8:55 PM on March 21, 2008 [2 favorites has favorites]

Bet docpops doesn't have big eyes with a small wallet. Way to go bro. Nice to see you taking care of yourself and your family in a responsible way.
posted by LiveLurker at 9:25 PM on March 21, 2008

if the worst-wishers don't want to own, why the contempt?

Maybe it's the years of being subjected to artifically constrained markets due to house owners who will do everything in their power to use local governments to ban rentals from their neighborhoods. Or maybe it's the knowledge that we're probably about to bail you out. Because when the housing market is doing well, a house is a good investment that renters are too stupid or poor or irresponsible to take advantage of. But now? It's not an investment that went bad, it's a home! It's only an investment if you're one of those condo-flippers! Time for government price supports!
posted by transona5 at 10:23 PM on March 21, 2008 [9 favorites has favorites]

Or maybe it's the knowledge that we're probably about to bail you out.

That's pretty much it. Homeowners want it both ways, I think. A bail-out from renter taxpayers when times are tough, and scorn and derision for "sucker" renters when owners are living high on the hog. I can definitely sympathize with those who find this attitude annoying, to say the least.
posted by Blazecock Pileon at 10:43 PM on March 21, 2008

/me sits in his $207/mo rental (utilities included!) and gloats, knowing that all of his rent goes back into the community he lives in, and that he also has chickens laying eggs just for him tomorrow. You really can't buy this good.
posted by kaibutsu at 11:05 PM on March 21, 2008

To be fair, if renters can reliably be counted on to bail owners out, you'd be a sucker to not take that deal.
posted by klangklangston at 11:47 PM on March 21, 2008 [1 favorite has favorites]

Here is why renting is always worse than owning: owning the property you are rent is making the property owner a profit.

I've seen such a staggering number of examples of residential rental properties not making a profit for their owners that I'd be a little surprised to not find out that that is the norm for rental property. Most of the profit makers I've seen are people who buy multiple/multi-unit properties that are foreclosures, short-sales, or at a trough in the real estate cycle, and aggressively manage their properties. The other exception might be commercial REITs, but I have little experience with clients who invest in such. Granted, that's in the CA real estate economy, and YMMV.
posted by BrotherCaine at 12:15 AM on March 22, 2008

Houses are not very good investments. As you can see from this graph the real return of homes, after inflation, is just about zero for the last 100 years, excluding the recent bubble. What many people fail to account for is that inflation eats up the value of their home. A home may increase in nominal price by more than three times over a thirty year period, but that doesn't even keep pace with inflation. The net return is zero.

On the other hand, the real return on stocks, after inflation, for the last 100 years has been about 7%. A house is a good forced saving vehicle for those who do not have the discipline to save for themselves, but a disciplined renter who invests the cost difference between renting and owning can outperform a home owner. So after 30 years, when the home owner has paid off their mortgage, the renter instead has enough investment wealth that the earnings pay for their rent for the rest of their lives. The home owner does not necessarily have any advantage.

Mathematically, it becomes almost a wash between renting and owning. Local market conditions and how long you stay put in a single home can swing the outcome either way. There can be all sorts of other factors such as the desire to own vs the freedom to be mobile that determine your choice, but the economics don't make a strong case either way.
posted by JackFlash at 12:20 AM on March 22, 2008 [3 favorites has favorites]

This thread needs to be thrown under a bus.
posted by kristin at 12:47 AM on March 22, 2008 [2 favorites has favorites]

What a uniquely amoral thread! Only finance!

Buying is best seen as a life-long lease, albeit with benefits for children. For those of us with elevated liver enzymes, those of us who smoke, those of us with incapacitating psychological problems, the choice is clear. Proud renter!


Also: property is theft.
posted by nathan v at 2:59 AM on March 22, 2008

JackFlash, if you think houses are not good investments, you are right. But they aren't investments. They're shelter, which can act like an investment. So the investment return that your graph shows, is in addition to the shelter provided the renter. For a US owner, you then have to add back tax advantages and adjust for personal things like the value of the freedom to modify or mobility. Basically, its all about 'cash flow,' and what you want from your home.

This article has the suck, because it generalizes, and in general, articles that generalize about financial strategies, suck. lupus_yonderboy and pastabagel also are the shit here, malor, not so much.
posted by sfts2 at 3:08 AM on March 22, 2008

One other point not mentioned... when the washing machine breaks and you rent, you call someone, and they fix it. When the washing machine breaks and you own, you call someone, and they fix it, and then you pay them, usually lots and lots of money.
posted by Dave Faris at 3:38 AM on March 22, 2008 [1 favorite has favorites]

JackFlash, if you think houses are not good investments, you are right. But they aren't investments.

I think why some people think that they suck is that you take most of the weight during the first few years, at which point you are paying more than your friends are in rent. Five or six years in though, that will tend to have equalized, and as time goes on, your mortgage payments are likely to be significantly cheaper than your rent. Until you reach the 20 or 25 year point, at which you stop paying altogether. Yahoo!

A renter, in contrast, will continue to pay their rent for the next -- oh, 20, 30 years or more? That's a rent that *will* have kept pace with inflation in most housing markets. So, if you are that mythical person who has managed to invest the difference between rent and mortgage payments into the stock market -- well, chances are, it's only going to be five or six years of excess to begin with. Then you've got to be spend the next twenty or thirty years paying an inflated rent out of those investments. Sorry, but I just don't see it covering it.

Also, many people in the UK were on am endowment mortgage -- a scheme where your payment is split two ways. Part pays off the interest on the loan. The other part is invested in the stock market. The claim was that the market had consistently performed so well that most people would not only get enough to pay back their original sum borrowed, the amount returned would also afford them a big lump sum of free money into the bargain.

Well, guess what? A couple of years ago, the people who sold these mortgages had to start writing to people, telling them that -- not only would they likely *not* be getting any lump sum, but the market had performed so poorly, they probably wouldn't even be able to pay off the capital!

Despite this shortfall though, I don't know anybody who thinks that buying their house was a bad idea. Including my parents.

Quick story about my parents. Mum and dad were factory workers their whole lives. Dad, at least, was a committed socialist, active in the union, shop steward, etc. During the 60's, the house that I grew up in, which was next door to the house that my mum grew up in, which was just three or four streets away from the house that my dad grew up in, was about to be demolished. Slum clearance. My parents didn't want to go, they were intimately connected to that community, but they didn't have a choice.

But because they needed us out, my family had some leverage. The house we lived in was an early Victorian 3 bedroom terrace -- no bathroom, no hot water, located pretty well equidistant between Anfield and Goodison Park, but I digress. Because of this leverage, the council were obliged to rehouse us in public housing. At that time, Liverpool had some very nice public housing stock. Based on the Garden City model, they were homes fit for heroes.

The one that we finally got had actually been a private development and so was of a better standard again. Still a terrace, but opposite a little communal garden and located in a place where I could walk to school every day, and both of my parents could walk to work. And it wouldn't take any of us longer than five or ten minutes.

After we'd been there for a few years, some Local Authorities voluntarily adopted a Right to Buy policy, which allowed sitting tenants to buy their council house for a sum that was below market value. Significantly below market value. If you occupied a nice property -- which we did -- a three bedroomed house in an area which was predominantly privately owned, overlooking a park, etc. -- then it was free money, yours for the taking. The council would arrange your mortgage for you, there were no estate agent fees, stamp duty, etc. Get it while you can.

But they didn't. Get it, I mean. It was a violation of their principles, to take housing out of the public sector -- houses that had been collectively paid for and owned, and were allocated on the basis of need. Had it not been for such a policy, we'd still be sitting in a vile, rat-infested slum, owned by some slum landlord

But the scheme was very popular, and pretty well everyone else in our street bought theirs. These were just regular, working class people who, prior t o that, had been at the mercy of slumlords or the vagaries of the local authority and their unpredictable decisions.

Anyway, shortly afterwards, the voluntary scheme was ended and councils went back to solely renting. But we had the inflation of the seventies to contend with, and rents -- including public sector rents -- increased along with them.

So a couple of years later, they rued not having bought. Adherence to their principles meant that people were making mortgage payments that were a quarter of their rent payments. And so when Thatcher reintroduced the Right to Buy scheme as a national policy, this time around they could no longer bring themselves to put their principles ahead of their economic interests.

But I think they paid around £4k for their house back in 1970 or so. If they had to rent it today, they wouldn't be getting much change from £1000 per month.

In a dog eat dog world of fuck or be fucked, you gotta decide whether you want to lube up your dick or lube up your asshole. When my dad's asshole finally got sore enough, he finally made the decision, along with almost everyone else left in that situation, to lube up his dick.
Today, our public sector housing stock is completely depleted. In large parts of the country -- particularly the South East -- it isn't just the working classes who can't afford the housing prices. Nurses, teachers, policement, etc. are all pretty well priced out of the private sector in housing.

This correction in the overheated market is very welcome and long overdue, but if you happen to be one of the people who bought during the last four or five years, this particular game of pass-the-parcel ends with you holding the package.

And the contents are a turd.
posted by PeterMcDermott at 4:26 AM on March 22, 2008 [7 favorites has favorites]

>> It Doesn't Cost Any More to Buy Than It Does to Rent
>>no sensible person ever claims that, so why refute it?

Aritey, you've summoned the non-sensible person! Previously I lived center city in an office meaning they could kick me out any time they wanted for living there, it was an OK size but kinda crummy and all fixings we poured into the place we're just a bonus to the property owner.

Then we bought. Twice the size, silly amounts of space actually, two baths, two floors, a fixer-upper which we are fixing so every drop of sweat is invested into our home - and guess what? Yeah, not even two thirds of what that rental place cost. (This is after the interest went up, when we moved in it was exactly half the price of the rental. Twice the size, half the price!)

Course, I'm in Sweden, so this doesn't apply to the US market at all. I would have bought years ago but banks don't like to loan money to freelancers - leaving me to pay stupid amounts of money for illegal rentals instead.
posted by dabitch at 4:42 AM on March 22, 2008

Anyone who makes blanket statements about any of this stuff is just an idiot. So much of the rent-or-buy decisionmaking process depends on the market in the local area. In my Portland, condos have long been overpriced compared to rentals, but multifamilies never got as inflated. So now the condo market has dropped dramatically but the value of multifamilies is staying pretty steady.

So 3 years ago, it was probably a chump move to buy a 1 br condo for 250k, because you could rent something for less than that. But buy a 3-unit for 300k, and get income of 1400 or more a month in rent, and pay a much smaller amount that you would for rent.

Like it's been said, the problem is if you overestimate the amount you can pay, or underestimate the maintenance costs of a property.

But this article assumes that in every housing market rents are cheaper than mortgages, which still isn't the case, and minimizes the tax benefits. Dumb.
posted by miss tea at 5:05 AM on March 22, 2008

In my grandparents' day (20s & 30s) you bought a house if you had enough cash (back then maybe $5,000 in suburban New York). In my parents' day, you bought a house if you had 25% down payment, the asking price was no more than 250% of your pre-tax income, and the mortgage payments were less than 1/4 your take home pay. (My parents' house in suburban Philly was $25,000 in 1965). I also learned that you should follow this formula when renting-- don't rent an apartment that cost more than 25% of your take home pay. We followed this formula when we bought our house and have never had a day's financial concern over affording it, even when one or both of us was out of work.

I have been stunned in the past several years to hear of young friends and their housing choices. Starting with the idea that a 25 to 30 year old ought to be buying a house in the first place; and they all seem to think that they need to get out of renting as quickly as possible. Then, the $3,000 and $4,000 mortgages. On top of the student loans. My question is-- how the hell are they doing this and why? Are they crazy? Are people just way richer now than I think they are? Am I insanely stingy?

And these are the college-educated ones. Certainly some of this problem is based on rapacious and dishonest marketing, but an awful lot of it is the sheer, mind boggling fiscal imprudence of the buyers.
posted by nax at 5:46 AM on March 22, 2008 [4 favorites has favorites]

Aritey, you've summoned the non-sensible person!

how much was the down payment?

how much fixing up did you have to do in and why don't you consider that a cost? what about maintenance, property taxes, etc etc?

Yeah, not even two thirds of what that rental place cost. (This is after the interest went up, when we moved in it was exactly half the price of the rental.

and if it goes up more?

it's quite possible i could find a house for less a month than i am paying rent for, but that doesn't consider what i might have to do with the house, how much i might have to spend fixing it up, what i would be getting for that money, my location or what my taxes might be

you may be still an exception to the rule, but you've got to factor in all that before you can say
posted by pyramid termite at 5:56 AM on March 22, 2008

Best piece of advice I got from a housing investor: the only thing that can't be be cloned is land. Therefore a house may not be an investment, but a nice piece of land always is (I must say this applies only to countryside).
posted by ddaavviidd at 6:02 AM on March 22, 2008

How many renters right now are at the end of a 30-year lease, and making monthly rent payments at 1978 prices?

Anyone? Anyone?

Didn't think so.
posted by gimonca at 7:16 AM on March 22, 2008 [3 favorites has favorites]

"Buying is so much more expensive than renting"

The first home I bought was a condo, in what had been an apartment building. In fact, it was identical in construction and features to the apartment I had been living in, and in a better location. My mortgage payment, condo fee, and taxes were less than 3/4 of what I'd been paying in rent. When I moved out of the apartment, I got my security deposit back (after my friend the lawyer wrote them a letter). When I sold the condo after five years, I made over $10,000. This is the only time I've seen an apples-to-apples situation, where two properties were identical. Renting was a lot more expensive.
posted by Kirth Gerson at 7:29 AM on March 22, 2008 [1 favorite has favorites]

OK feel free to skip this comment. The above comments are all likely more insightful and more intelligent than mine, but having recently gone from renter to buyer, here is my take.

Actually, it sounds more like I am venting, so you have been warned!

Disclaimer: I have had rather positive renting experiences (no bugs, no neighbours whose noise I could not tolerate, no maintenance or landlord nightmares, etc).

Disclaimer 2: To date, I have not had any significant home-owning crises, however I did go in with a really bad attitude (justified or not? well, that's a topic for another time I guess)

1) My rent and utilities were significantly less than the mortgage payment, taxes, insurance and monthly maintenance fees.

2) I have to do all the maintenance on the house (or pay someone to do it), whereas in my apartment, someone did it for me, for free.

3) All the money I would save from paying less on rent, utilities, etc. would be invested or spent on some fun stuff. Now I have to work 2 jobs to make ends meet (my fault? Possibly but that's also another discussion), and I wear the same clothes that I have been for the past 8 years.

4) Strangely with a living space which is significantly larger than my apartment, we still seem to have no space for anything (i.e. more space = more junk)

5) When two people each have thair own house, all they seem to talk about is their stupid house (or maybe I am just meeting the wrong people).

6) When I finally pay off my mortgage, I will be better off, sure, but that is only 25 years from now. Lord knows how bitter and sullen I will be then. Not to mention older. Or disabled. Or dead. I could be investing and spending that money now, rather than making some bank executive fat!

7) Before I would spend my spare time doing constructive things related to personal growth and healing. Now I spend my spare time mowing the lawn, fixing this, and putting up that.

I know a lot of people truly want a house of their own, because the idea of owning property and having a back yard and doing all the associated work pleases them. And for them and for all of you who fall into that category, I am very happy for you and I respect your decision.

I happen to not fall into that category. Sigh, I miss my apartment life!
posted by bitteroldman at 7:42 AM on March 22, 2008 [3 favorites has favorites]

but a disciplined renter who invests the cost difference between renting and owning can outperform a home owner

You left something out: a disciplined renter who rents a cheaper place than he would buy can invest the cost difference. Comparing apples to apples, there are many places where renting a free-standing home costs more than buying the equivalent home. Last I checked, which is not recently, this was true of the D/FW market. Probably true here in WNY.

If what you mean is that a disciplined person can live in apartments forever and invest the savings over a freestanding home, that's a different question from buy-vs-rent. That's a question of doing without goods, not a question of how to finance a given good.

And as others have noted, finding a place to rent that's cheaper than the mortgage payment you would have been making had you bought at time t becomes more and more difficult at t+5 and t+10 and is probably impossible at t+30.

On the other hand, your mortgage is unlikely to remain perfectly flat. If you have a normal mortgage with escrow for taxes, that portion will almost certainly increase over time. This is nontrivial here in WNY, where the escrow portion of our mortgage is a third to 40% of the monthly total.
posted by ROU_Xenophobe at 8:05 AM on March 22, 2008 [1 favorite has favorites]

From the article: Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash.

That's just a ridiculous assumption, that most renters put the money they'd otherwise put into a mortgage into investments rather than on lifestyle.

Dave Faris: One other point not mentioned... when the washing machine breaks and you rent, you call someone, and they fix it. When the washing machine breaks and you own, you call someone, and they fix it, and then you pay them, usually lots and lots of money.

Counter-argument: Maybe your landlord never fixes the washing machine. You certainly will have NO say about what kind of washing machine is there, and if you want to replace it for any reason other than complete disrepair, you're SOL. And it's a safe bet that any capital improvement costs a landlord incurs will factor heavily in his decision of how much to increase your rent at the end of the lease. If he decides to renew it.

A lot of the griping about the costs of ownership, IMO, come from people who got themselves a bigger mortgage than they can afford.

I drank the "rent is better" kool-aid for a long time, and am now in the process of looking to buy property. Values are down, rates are dropping, and I don't need somebody's permission to paint, change appliances, or knock down non-structural walls.
posted by mkultra at 8:05 AM on March 22, 2008

bitteroldman, thank you -- that's exactly what I think would happen if I ever bought a house! Especially "all they seem to talk about is their stupid house." The culture of house remodeling and upkeep appeals to some people, but not to me. And even if you end up paying more indirectly as part of your rent to maintain your home than you would to maintain a home you own, the stress and risk of the latter (did I pick the right contractor? am I getting ripped off? should I be doing this myself?) probably outweighs any cost benefit, at least for me.
posted by transona5 at 8:15 AM on March 22, 2008

i'm telling you transona5, apartments rock! especially the last one I lived in. I was so distraught at having to leave, I ended up taking pictures of the empty room one last time before I left. I still haven't had the strength to look at the (a tad over-dramatic, I know).

The worst thing about the upkeep is that you have to do it. You have to repair the roof, clean the gutters, check the drains, repair all cracks, solidify the foundation,
plaster here and there, change the windows, blah, blah, blah - otherwise the house falls apart. All those costs are not included in the mortgage, whereas they are included in the rent!

Especially "all they seem to talk about is their stupid house." The culture of house remodeling and upkeep appeals to some people, but not to me.

There is this guy at work who is nice enough but all he wants to talk about is his stupid house and my stupid house and what renovations I have planned in the future (picture 2 males standing by the water-cooler, trying to look all macho and manly but actually looking more like 2 Ralph Furleys).

Anyways, my sense of humor tends to be self-deprecating and sarcastic, so being tired of having to talk about my house for the umpteenth time, I told him, "I don't cut the grass anymore; I just am going to let it overgrow everywhere." (even though it wasn't the case). The guy's face just dropped as if I told him that I regularly beat my wife and kids. He was so offended that I would dare allow my house fall into disarray.
posted by bitteroldman at 9:47 AM on March 22, 2008 [1 favorite has favorites]

and don't get me started about the house-parties I have to go to, being stuck with my wife's friends' husbands. those are the worst because you have nothing in common with them, so eventually the conversation moves toward houses, and renovations and home theater and all that "manly" stuff that I am supposed to love talking about. Ugh! Worst New Year's Party ever!
posted by bitteroldman at 9:52 AM on March 22, 2008

Thank god I live in Vancouver where the question of buying has already been answered for me!
posted by monkeymike at 9:57 AM on March 22, 2008

Bitterman, you bought a house that's bigger than the apartment you had. How much rent would you have been paying if you'd moved to an apartment that was just as "significantly larger than my [old] apartment?" The apple you bought costs more than the orange you used to rent. How much rent would you be paying five years from now? Ten years?

Also, most of the upkeep expenses and efforts you hate would be taken care of if you'd bought a condo. Maybe you should have done that.
posted by Kirth Gerson at 10:11 AM on March 22, 2008

The plural of anecdote is not data. The data show that a house is not a particularly good investment. The fact remains that you can end up just as well or better by renting and investing the difference. The math includes all of the factors mentioned above -- tax deductions, lifetime inflation of rent, etc -- you can still come out ahead by renting.

Let's just take the down payment. Assume you put down $50,000 plus 2% in closing costs on a $250,000 home and the renter instead puts it in the stock market. With a 10% return the renter at the end of 30 years will have over $940,000 in their pocket. The home owner has only their house. That extra $940,000 will pay a lot of rent for the rest of their lives. In fact, they can easily pull out $40,000 in interest each year for the rest of their lives for rent without even touching the principal. With the other money they save each month by renting, they are millionaires and the home owner has just a house. Now you can argue about the details of this scenario but the fact remains that people tend to vastly underestimate the cost of buying a home and they vastly underestimate the alternative of renting and investing.

The point of this article, and it is correct, is that buying vs renting is largely an emotional decision. It depends on whether you prefer the intangible advantages of owning a home vs the intangible advantages of renting. But in most cases it is incorrect to base the decision on the investment superiority of one over the other. A cliche like "rent is just throwing away money" is just that -- a cliche, promoted by the real estate industry much like the cliches of the diamond industry. People should buy homes because they want to enjoy the intangible benefits of home ownership, not because it is a better investment.
posted by JackFlash at 10:43 AM on March 22, 2008 [2 favorites has favorites]

Also, most of the upkeep expenses and efforts you hate would be taken care of if you'd bought a condo. Maybe you should have done that.

Yes and no. Don't know if this is the same everywhere, but here there would be condo fees to pay in addition to the monthly mortgage, which can range from 100-500$ a month. So yes and no.

How much rent would you be paying five years from now? Ten years?

Yes, over the long term, the financial benefits are there. 25 years of a mortgage and I have a house to show for it. 25 years of rent and I have nothing to show for it. I agree wholeheartedly.

But the issue for me is my (and I hate to use this term) quality of life in that 25 years. If in this time I spend my time being stressed over the renovations to do and the bills to pay, and those dammed house parties, what kind of person will I be on the inside in those 25 years?

In other words, I would rather spend my 25 years doing spiritual and psychological renovation rather than on a house.

Besides, when I die and when my wife dies, we won't take the house (or the associated equity) with us. And if we have kids, hopefully we will have raised them such that they won't care whether we leave them a house or a hut, and will be smart enough to fend for themselves financially!
posted by bitteroldman at 10:54 AM on March 22, 2008

The fact remains that you can end up just as well or better by renting and investing the difference.

If there is a difference, and if renting is cheaper. This is not a foregone conclusion. In some markets, renting an equivalent dwelling costs more than buying.

If what you mean is that by living in smaller dwellings with shared walls and no yard you can save money compared to a single-family house, then duh. But that isn't renting versus buying, that's doing without more space, and doing without some degree of privacy in both directions, and doing without a yard to save money.

The home owner has only their house.

...which is worth something. Almost certainly less than $940K, but not nothing. A home that can be sold, or can be rented at market rates.

In fact, they can easily pull out $40,000 in interest each year for the rest of their lives for rent without even touching the principal.

I put it to you that in 2038, $3300 a month might well buy you a pretty crappy place to live in many markets.
posted by ROU_Xenophobe at 11:24 AM on March 22, 2008

And of course, for that matter as long as interest rates (and associated fees and costs) are less than 10%, the homebuyer can just put nothing down in any of several ways and also put that $50K in the stock market and come out ahead of making that down payment.
posted by ROU_Xenophobe at 11:26 AM on March 22, 2008

The fact that everyone is chipping in with details about their own rent vs. own decisions just serves as an illustration of how much the factors can vary and what considerations you need to keep in mind when making the decision.
posted by orange swan at 11:28 AM on March 22, 2008 [1 favorite has favorites]

But the issue for me is my (and I hate to use this term) quality of life in that 25 years.

Excellent point. Which is why renting works for me now. Maybe later my quality of life will be better by going back to home ownership. Maybe I will actually learn to like repairs and maintenance and yard work. Maybe I will value more privacy and freedom enough to take on my own home again.

In the end, it's always about quality of life. For some people, making a "good investment" is part of their quality of life. For others, like me, other things take priority.

But even if, in all cases every time, buying a home was a better financial decision (defined as having more assets in the long run) then that still doesn't make it the best choice for everyone. If having and making more money was always the top priority, then buying or renting the absolute cheapest place possible would be the "best" choice. Style, location, size, amenities, wouldn't matter above what is absolutely essential to sheltering yourself and your family.

Certainly that's an extreme viewpoint, but just to illustrate the many shades of gray in this equation. I find it an interesting discussion, because I do often wonder if I will ever want to own a home again. I will say this: the best place I ever owned, from a financial standpoint, was a 3 unit home. I rented out two and lived in one. I collected about $1200 a month in rent and paid a $700 payment. Nice! Maybe again someday...
posted by Fuzzy Skinner at 11:29 AM on March 22, 2008

I rented for a long time, and happily defend renting. The "throwing your money away" line always pisses me off, too. Hey, particularly for those of us who live in major urban areas, renting can be awesome. I could live right in the middle of the city relatively cheaply with no financial responsibility for appliances or repairs. Buying as a single person would've necessitated me moving to a much-less-convenient neighborhood AND being saddled with home repairs alone. Not so fun.

That said, I happily bought a house last year. The property values in my neighborhood, thanks to where my house is, will just continue to rise. Hyperbole like this, "At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country." drives me nuts. Somehow, I don't think that South Philadelphia is the only neighborhood in the country where home prices are rising. Oh, wait, cities don't count. Yawn.

I'm sure there's a good article out there somewhere explaining rent vs buy myths, but this one is whiny and, as noted above, not particularly accurate. Where's the explanation of how buying "ruined the housing market?!"
posted by desuetude at 11:33 AM on March 22, 2008

How many renters right now are at the end of a 30-year lease, and making monthly rent payments at 1978 prices?

How many here are boomers enjoying the benefits of an extended post-war house price boom?

Lots of you? Lots of you?

gtf
posted by bonaldi at 11:37 AM on March 22, 2008

How many here are boomers enjoying the benefits of an extended post-war house price boom?

Well, me. Exactly my point. I bought when housing prices were in the tank and interest was on its way down down down (early 80s). It was a good time to buy a house. This is maybe NOT such a good time to buy a house. At any rate, don't buy more house than you can afford. Don't move into property of any kind that you don't want to take care of (check AskMe for all the "I thought the landlord would mow the lawn" threads). Don't let the consumer culture sucker you into buying any kind of stuff that you don't need or can't handle (that goes for everything from iPods to mansions). It's not about metrics telling you what the better societal deal is--renting or buying. Figure out what works for you. What can you afford. What you can deal with. All the "renters are chumps, home owners are clueless" noise upthread misses the point entirely.
posted by nax at 12:02 PM on March 22, 2008 [1 favorite has favorites]

I agree that inflation will eventually hit renters hard. Another "benefit" of renting, however, is if applicable, local rent control. My rent can only go up ~2% a year (60% of the CPI?), though I expect that percentage to rise soon.

However, if you got into a two bedroom when it was $900/mo. or something in 1986 (a reasonable (high?) guess) ... you do the math. It would be well underpriced. I know several people living at incredible bargain rents. I wonder what to call this new class ... long-term rent-control arbitrageurs. Or people who don't like to move.

I suppose for that situation to exist you'd need strong rent-control and strong anti-eviction laws, which are both rare, so most of ymmv.

As nax mentions, everyone is different and everyone has different housing needs. Lots of pros and cons for both renting and owning.
posted by mrgrimm at 1:17 PM on March 22, 2008

Assume you put down $50,000 plus 2% in closing costs on a $250,000 home and the renter instead puts it in the stock market. With a 10% return the renter at the end of 30 years will have over $940,000 in their pocket.

and of course, you're guaranteed a 10% return in the stock market over 30 years, right? did congress pass a law mandating one?
posted by pyramid termite at 1:24 PM on March 22, 2008

I rent, partly because I don't have the money to buy, and party because thinking about things like water heaters is something I never want to have to do. Renting isn't "throwing your money away," it's paying someone else to take care of the shit that you don't want to deal with.
posted by emd3737 at 1:34 PM on March 22, 2008

mrgrimm writes "However, if you got into a two bedroom when it was $900/mo. or something in 1986 (a reasonable (high?) guess) ... you do the math. It would be well underpriced. I know several people living at incredible bargain rents. I wonder what to call this new class ... long-term rent-control arbitrageurs. Or people who don't like to move."

SF is not typical, and California's market as a whole is in turmoil, and it's hard to tell exactly where it will end up, but real estate is way, way overvalued in almost the whole state. Even shitholes like Bakersfield (no offense to residents) had skyrocketing prices for years, without the corresponding job market or salaries. Around here, $900 for a 2 bedroom is kind of high, and this is considered prime land in a resort area. A couple years before I left the East Bay and California, our neighbor sold his modest 3br for $500,000. Nobody in that neighborhood made enough to realistically afford a half-million dollar home, but people were talked into the idea that it was just part of the game. You could always sell and recoup, and trade up, even if you still make $18/hr., and somehow everyone thought that was sustainable. Rents were getting out of control for a while, too, but that was due to high demand and too much VC money. This ordeal is going to continue to shake up the state for years. I'd be nervous if I bought within the last 8 years or so, but probably optimistic if I were a renter anywhere but SF. Think I might stay away from CA for a while, though ...
posted by krinklyfig at 1:44 PM on March 22, 2008

There is this guy at work who is nice enough but all he wants to talk about is his stupid house and my stupid house and what renovations I have planned in the future

I know, yawn! For all the talk about the "American love affair with the automobile," at least there aren't any cable channels devoted 24/7 to the pastime of fixing up and decorating cars. (Are there?)

By the way, those of you arguing that buying is better than renting are doing better than about 90 percent of the mainstream media, who seem unaware that there is even any possible alternative to owning a house.
posted by transona5 at 2:36 PM on March 22, 2008

and of course, you're guaranteed a 10% return in the stock market over 30 years, right? did congress pass a law mandating one?

I never said it was guaranteed. There is no guarantee that house values will go up either, as many millions of Americans are finding out to their dismay right now. The best we can do is look at the last 100 years of history. It shows that houses have a real return very close to zero. The stock market has a real return of about 6.7%. These are real, not nominal returns, after inflation. I was simply pointing out that it is a fallacy that buying has a better financial outcome than renting. People should buy houses because they like owning a house more than renting, not because it is a better investment.
posted by JackFlash at 2:55 PM on March 22, 2008

This is why renting is better for me: I can afford it. I can not afford a house. I had a house. I could not keep up with the mortgage, utilities, property tax, maintenance costs, etc. on just my salary. So I sold my half to my ex, and moved out. If I'd stayed, I would be so far in debt I would not be able to see sunshine. And I would have probably lost the house any way.

Over the years, I have looked into buying a house again. I have a good chunk to put down on a downpayment, saved from my part of the house I sodl, but my monthly salary is nowhere near enough to pay the mortgage and everything else that goes along with it. And with the housing market all bubbling up and out and prices that keep rising, that house that could be mine keeps receding further into the distance.

If I'd been lucky enough to get a house in the 70's I probably would be laughing at renters too. But I'm looking at trying to buy a house now, and its just not possible.
posted by sandraregina at 3:11 PM on March 22, 2008

In about a year, year and a half, I will be out of the debt mess I made for myself in my 20s (knock on wood). My first thought was, "I guess everyone is going to start nagging me to buy a house now."

But you know what? I'm single and live in a city with an expensive housing market. I make enough money to keep myself comfortable, but not enough to buy something around here, unless I want to move an hour out of the city and spend a lot more time in my daily commute. ... yeah, not so much. Or live in a teeny studio condo in a neighborhood I don't want to live in and not have room for the things I do own. Again - no thanks.

I have to admit, because renting was my only option for a long time, I don't quite understand how everything works (loans, taxes, etc.). People tell me I'll be able to buy something without money down, which sounds implausible to me. Besides, how much worse would that make my interest rates/mortgage payments or whatnot?

The thought of being tied into something for 20 or 30 years scares me to death, but I have other non-commitmentphobe reasons to be skeptical as well. Mainly the costs of things like upkeep, repairs, property taxes, most of which have already been mentioned in this thread.

I will gladly listen to the people in my life who think I'm wrong and why it's really not so scary (can't wait for the lecture, mom and dad!), but I've already come to like the idea that I might be single the rest of my life. Maybe I'll come to like the idea that I'll keep being a happy renter until ... who knows how long?

And for anyone who might throw the "throwing your money away" line at me, I'll just practice my politest smile. Unless it's my parents, in which case I reserve the right to be a total brat about it. Ha.
posted by corianderstem at 4:16 PM on March 22, 2008

I dunno, guess I've just gotten lucky. I bought my first condo in the city, and rolled it for a 50k profit to buy a house in the suburbs in two years. I remodeled and then sold that house when I realized that the "gentrification" folks were moving in and would pay insanely stupid amounts of money for a 40 year old house if I daubed some paint on and tossed some Italian tile on the floor. I couldn't get an apartment that had the same amenities as the house (fully paid off) that I live in now.

On the "well this sucks" side however, my taxes are crazy high, and my homeowner's association is something straight out of hell.

That said, because I paid off the house, if I sell it for what I paid for it, I only paid taxes and HOA fees to live here, which is significantly less than the 3-5k a month it would cost to rent an equivalent house. I can probably sell the house for more than I paid for it, just because the bubble wasn't really a factor out here. And because of the homeowner's association, I am investigating selling my wonderful house and buying another project house out on some farm land, because frankly, I'd rather have to fix something up than deal with the HOA nazis. (As Eddie Izzard put it: "A jihad on those bastards!") I will never, as long as I live, NEVER buy another property that has an HOA. Huge mistake. Huge.
posted by dejah420 at 6:09 PM on March 22, 2008

Assume you put down $50,000 plus 2% in closing costs on a $250,000 home and the renter instead puts it in the stock market. With a 10% return the renter at the end of 30 years will have over $940,000 in their pocket.

and of course, you're guaranteed a 10% return in the stock market over 30 years, right? did congress pass a law mandating one?

FYI The George Putnam fund (One of the nation's oldest) has averaged a 9% return over the last 37 years,
posted by Gungho at 8:36 PM on March 22, 2008

Past performance does not predict future returns.
posted by Dave Faris at 9:13 PM on March 22, 2008

>how much was the down payment?
>how much fixing up did you have to do in and why don't you consider that a cost? what about maintenance, property taxes, etc etc?

My calculations include maintenance and property taxes in each month (property taxes are paid monthly to the building this apartment is in - I'm still center city so this is not a house, but an apartment) - the renovation and downpayment are also included in my monthly costs since they are loans as well and I still come out smelling like roses.

> and if it goes up more?

The interest has been locked down and can't for the next ten years, the property taxes could (that's actually what did go up) so I guess I'll have to keep an eye the politicians and consider my vote in the future. Electricity might also go up - but exactly like when I rented, this is a separate bill, but unlike when I rented it doesn't provide my heating or hot water so it's much cheaper anyway.
posted by dabitch at 6:36 AM on March 23, 2008

all they seem to talk about is their stupid house

These folks are not talking about the house because people with houses obsess about them in public. They are talking incessantly about their houses because they are boors. If they weren't being tedious about their houses, they would just find something else to be tedious about.
posted by nax at 7:03 AM on March 23, 2008

Well I prefer to own for all those intangible reasons but I couldn't rent even if I wanted to. The local vacancy rate is around .5% and I've got two cats. Even a willingness to pay significantly more than my mortgage payment couldn't secure me a place to rent. This is one of the big advantages of owning, minor lifestyle choices don't get you evicted when the market is good.

Space Coyote writes "if renting is such a poor deal for the renter, and presumably thus a better arrangement for the building owner, why are so many scrambling to convert properties into condos?"

Short term thinking. Many people would rather $1K this month than $50 a month for the next three years.

Mayor Curley writes "As Konolia has pointed out, owning is superior because it better ensures that people will leave you the fuck alone."

Preach it. I have enough hassle with the city telling me what I can't do or must do. I sure don't need to be under the thumb of the whims of a land lord.

Mayor Curley writes "Awesome, you rent and you're totally sticking it to The Man as long as you get his permission to paint. If I'm in my place for 10 years, due to inflation, my mortgage payment is going to be less than what people are paying to rent half the space I live in. And mostly I don't care what I'm paying as long as it doesn't choke me because I can do whatever I want without asking anyone, from getting whatever pet I want, to running cable, to burying hooker torsos in the back."

Plus you can make long term decisions. Even if you land lord was fine with it how many renters are going to, say, plant a fruit tree? A bit of work and no returns for several years. But then returns every year.

bitteroldman writes "I have to do all the maintenance on the house (or pay someone to do it), whereas in my apartment, someone did it for me, for free."

It wasn't for free, you were paying up front every month for maintenance. Myself and my family have been landlords for decades, we usually figure in about 25% over our fixed monthly costs for maintenance and capital improvements.
posted by Mitheral at 3:58 PM on March 23, 2008

while the article is bad, it is a legit topic. would like to see a better treatment
posted by think.how.simple at 11:26 AM on March 24, 2008