patrick.net

Most people grossly underestimate the recurring costs of owning, especially the lost use of that capital tied up in the house. The lost interest alone could be more than the cost of renting.

Can you do a sample calculation please?

$500k house with 20%down, so 100k tied up as you say. Let's see, interest on 100k would have to be around 2600/month because thats what it would cost to rent the place. How do you make $2600/month with 100k??

Savings accounts pay 1% as an average - that's nothing. Might as well keep it under the pillow. And if you invest it in the stockmarket then you are subject to lose it all.

I am curious what you mean.

House ownership is a fun experience, for those who can afford(including these costs y'all are discussing). These owners have freedom to do whatever they want in their home, and even take a hobby of learning or fixing things around the house. If you cannot afford, or not inclined to doing housework/cleaning, the best is to stay as a renter or purchase a less expensive condominium property, and as a way to have some feel good experience, end up rewarding selves with luxury items like coach bags, bmw, smartphones.

SubOink says

Most people grossly underestimate the recurring costs of owning, especially the lost use of that capital tied up in the house. The lost interest alone could be more than the cost of renting.

Can you do a sample calculation please?
$500k house with 20%down, so 100k tied up as you say. Let’s see, interest on 100k would have to be around 2600/month because thats what it would cost to rent the place. How do you make $2600/month with 100k??
Savings accounts pay 1% as an average - that’s nothing. Might as well keep it under the pillow. And if you invest it in the stockmarket then you are subject to lose it all.
I am curious what you mean.

Sub, all of this depends on a property and on the buyer.

As of late problem with housing has been that people tie up almost their entire income in housing, and several years down the line realize they are left with nothing because the banks have conned everyone in a giant ponzi scheme. It's money one will never get back, but most importantly years of life one will never recover.

Several thousand of interest paid out to the bank every month is several thousand not being used for more important things like business. Even if one is unable to run a business themselves you can invest into other peoples businesses, our stocks have been averaging roughly 5% per year gains. And it compounds. And we do own, but we bought before all the craziness happened when it made sense to buy. Back in the days you could mow lawns and buy a house, today one has to pay a 30 year toll to the banks.

ChrisLA says

Several thousand of interest paid out to the bank every month is several thousand not being used for more important things like business. Even if one is unable to run a business themselves you can invest into other peoples businesses, our stocks have been averaging roughly 5% per year gains. And it compounds. And we do own, but we bought before all the craziness happened when it made sense to buy.

This is what I don't get. If the rent is comparable to the mortgage, what difference does it make. I'm finding in some cases, rent is higher than mortage in certain markets. For example, I was looking at home SFR homes in Martinez,CA. It will be $400 cheaper for me to buy (with mortgage, insurance & monthly property tax) than to rent.

If you're paying $2000 a month rent vs $2000 a month mortgage. Even though you are paying "rent" to the bank, you will eventually get something out of it. The extra cost is property tax, maintenance, but you still get something out of it down the line in 30 years. It is not like the renter will have the extra "opportunity" cost income to invest somewhere else. Both renter and owner are negative $2000 a month regardless.

The only difference is the home owner paid a deposit and a closing cost.
On a $300K house, that comes out to approx $68K (20% down and closing cost). The renter would have to be a prudent investor of that $68K to really come out ahead. Most people aren't good at investing the stock market (myself included).

The mortgage "interest" is indeed rent, in my eyes, but like I said, the home owner will eventually gain some equity. Now the issue is whether or not it is financially wise for the individual to rent or buy in this current economic times.

eastbaydude says

This is what I don’t get. If the rent is comparable to the mortgage, what difference does it make. I’m finding in some cases, rent is higher than mortage in certain markets. For example, I was looking at home SFR homes in Martinez,CA. It will be $400 cheaper for me to buy (with mortgage, insurance & monthly property tax) than to rent.

What don't you get? Isn't the whole point of the site is to educate potential buyers of potential costs of ownership and to teach them to buy when it is financially favorable? To teach people to buy without screwing themselves over in debt.

There is even a calculator that will tell you when it's better to buy than rent. If you plug in all the numbers correctly you should have your answer. The only part of the answer that most struggle with is inflation/deflation of the price. I'm inclined to say that it will deflate because it now costs way more than most can afford to pay. But nothing is guaranteed in life, you still have to make your own judgement calls.

eastbaydude says

If you’re paying $2000 a month rent vs $2000 a month mortgage. Even though you are paying “rent” to the bank, you will eventually get something out of it.

The key word to the whole issue is eventually. Up to a certain point the cost of buying and selling will exceed the forced savings. If your situation has any possibility of not going past that point then renting would probably be better, unless the home ownership thing is worth the extra cost. All this is a personal choice. There is no better, just what is better for you.

I would certainly consider water as this is definately the cost of woning a home but not typically a cost associated with renting...

SubOink says

And if you invest it in the stockmarket then you are subject to lose it all.

This seems overbroad. If you invest in something that's a common index fund (e.g. S&P 500 or something in bonds), when would you ever lose it all? If that apocalypse scenario did happen, why do you think your housing value would do better?

Sure, if you put it in penny stocks, you could lose it all literally.

E-man says

#8- Budget $1k/month for cars replacement if you and your spouse buy new cars every 5 years or so.

Depends on what kind of car. $1000 seems like a big budget.

If you get a 4 year loan at 2.99%, you could get a $45,000 loan for $996/mo. Capital One Auto Finance would allow you to get a 6 year loan at that rate, I believe, but I'm being more conservative in this calculation and you said you are only keeping the car 5 years as an assumption. I guess if you are getting a BMW 3-Series or Mercedes E-Class, you could get a new one every 5 years at that price. The insurance would drop slightly per year as would car tax in California over those 5 years, but not by much, so maybe it's a $42-44K car, even with 0 down.

If you got a 5-year loan, it'd be $55K with 0 down.

But why are we including this in housing costs? :)

If you aren't living in the place for 10+ years, you have no business taking out a 30 year mortgage. Rent will always come out over that. Maybe even 15+ years, given the current financial charade--if not in dollar terms, then in standard of living.

This is not always true in places like Florida or Michigan. . . .

What if you plan on buying a home, living in it for the first few years...lets say 3-5, but keeping it as a rental, and move onto buying your second home to live in...

How are you supposed to use these calculators in that case?

UAVMX says

How are you supposed to use these calculators in that case?

You don't, at least you don't use this calculator exclusively. If you are planning to do that, you should be able to calculate return on investment, as well as any number of other things. If you don't get enough return, having a rental property doesn't make sense.

E-man says

That’s a budget for 2 cars, not one.

Oh, okay, that makes more sense. I was really confused.

But why are we including that in housing cost generally? The only reason I can think of is, for example, if you were comparing living in San Francisco and working in San Francisco and did not buy a car vs. living in Oakland and working in San Francisco and did buy a car. (of course, if, like many San Franciscans, you have a car, then this doesn't work)

E-man says

Permanent Marker,
That’s a budget for 2 cars, not one. Knowing PM’s nationality, I guess that budget should be adequate or a little bit on the generous side for a couple of Toyota and Honda sedans.

lol Eman!

Most people grossly underestimate the recurring costs of owning, especially the lost use of that capital tied up in the house. The lost interest alone could be more than the cost of renting.

Right! Rent vs Buy have been looked at from different angle. When all costs at truly included, (including the opportunity lost in equity ties up, etc), and the use of excess cash to make money elsewhere, renting is cheaper, hands down.

But there are factors why people buy, such as, keeping with their brother in-laws; smooth talks by realtors; owning a house for ego, etc.

I made a graph once from my data service that showed me that the rent to buy ratio is pretty much proportional to house price.

That is, the deals are progessively worse for buyers as you move upscale.

The poor people who rent should probably buy, but never manage to save enough or can't get a loan anymore.

The rich people who own should definitely rent the identical house for half as much, but it would just be too embarassing for them. They would lose social status.

But you guys are not factoring in the "emotional" cost of owning a home. Yes, math will trump that metric all the time, but try explaining math to a wife who's in love with a home....you might as well hit your head against some rocks... :)

People buy because they WANT to. No amount of reasoning/math/logic will take away the emotional factor. If a person buys something and is HAPPY regardless of its value, then everything else is irrelevant. Really.

The motive in life cannot be just math/logic/investments/etc etc.

Hell I got one of the best BJs :P when I bought my first house (with my ex wife...but that's a whole different story). Try explaining that with math or logic. :)

kapone says

Hell I got one of the best BJs :P when I bought my first house (with my ex wife…but that’s a whole different story). Try explaining that with math or logic. :)

I think BJs explain far more of the housing market than any academic study so far.

SHE wants a house, and it's YOUR job to buy it for her, cost be damned. Not PC, but I honestly believe that's how it works for most people.

The rich people who own should definitely rent the identical house for half as much, but it would just be too embarassing for them. They would lose social status.

You are correct, Patrick, because sometimes there is an informal ceiling on rents, even on the high end. For example, there aren't that many rentals in San Francisco with a rent above $10K, even though the cost to buy would be significantly more than $10K for some of those houses.

The other factor to consider, however, is that the potential rental pool at these levels is incredibly shallow. I have no problem finding a well-built, renovated, 2-4 BR house for rent in most of the Bay Area, but a mansion or other luxury property is a different story. There really aren't many rental options at this level, so people buy for that reason too.

From what I read, there are actually a lot of high-end rentals in NYC. Wonder why it isn't that way in SF.

SHE wants a house, and it’s YOUR job to buy it for her, cost be damned. Not PC, but I honestly believe that’s how it works for most people.

I joked about the "nesting" instinct at my friend's housewarming party in the Sunset in mid-2000. I thought they were buying rather late in the cycle, and was right, until the damn market got reset with Greenspan's post 9/11 interest rates and all the mortgage craziness.

How's this for a synopsis of the market:

May 25, 2011 Sold (Public Records) $530,000 -2.5%/yr
Oct 27, 2004 Sold (Public Records) $627,000 6.9%/yr
Apr 27, 2000 Sold (Public Records) $465,000 27.5%/yr
Aug 06, 1997 Sold (Public Records) $240,000 0.7%/yr
May 02, 1991 Sold (Public Records) $230,000 --

they made a good flip and moved to a more family-friendly nabe in 2004.