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What should you pay for a house?


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2015 Jul 11, 2:06pm   36,808 views  71 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Answer: It depends on rents and interest rates.

Rent and interest are the same kind of thing. They are what you pay to use
something -- either to use a house, or to use money. Interest is the rent paid on
borrowed money. To know whether to buy, you just have to compare one rental
option to the other.

Even if you use your own money to buy a house outright, you're still in the
rental game -- you are renting to yourself. Even though all the rent goes to
yourself, owning is still a lousy investment if you overpay for a house.

Say you can pay cash for a $250,000 house that would rent for $1,000 per month.
Should you buy it? That depends on current interest rates.

$250,000 invested at the current interest rate will produce a certain amount of
income for you each year. Ignoring taxes for now, say you can get 5% by
investing in bonds with no risk of loss. This means that $250,000 will return
$12,500 per year, since $250,000 x 5% = $12,500.

So if you have $250,000 and need a place to live, your choice is between these
two options for the coming year:

  • Buy the house for $250,000 and don't pay any rent.
  • Invest the $250,000 at 5%, and pay $1,000 rent per month to live in a house.

Which one is better? In the first case, you're not getting any investment
income, but not paying any rent either. Owning outright means giving up
interest rather than paying interest, a different kind of loss, but a loss
nonetheless. In the second case, you're getting $12,500 in interest income from
your bonds, but paying out $12,000 in rent. $12,500 income - $12,000 rent =
$500

So you would be $500 better off in the coming year as a renter.


"But I don't have $250,000 to pay for a house. I would have to borrow it."

In that case, it's an even worse deal to buy a house. Let's start with the
simplest case: an interest-only mortgage. To borrow $250,000, say you'll have to
pay 6%. If your credit is bad, you'll have to pay more. Let's assume you have
good credit and get a 6% interest-only mortgage.

The interest on $250,000 at 6% is $15,000 per year. In effect, that's the yearly
rent you have to pay to use the money. These are now your two options for the
coming year:

  • Buy the house for $250,000 in borrowed money, and pay $15,000 in interest.
  • Pay $1,000 rent per month to live in a house, so $12,000 per year.

Buying would cost $15,000 in interest, but you could pay only $12,000 in rent.
So you would be $3,000 better off per year as a renter.


"What if I put down 20%? Would that help?"

Not much. That's just a combination of the two cases above, both of which show
it is worse to buy than to rent. So it would still be worse to buy.

If you have 20% of $250,000, that's $50,000. If you could get 5% by putting that
$50,000 in bonds rather than in a house, that would be $2,500 per year in interest income.

These are now your two options for the coming year:

  • Buy the house for $200,000 in borrowed money plus your $50,000 downpayment,
    and pay 6% interest on the $200,000, which is $12,000.

  • Pay $12,000 rent per year to live in a house, but collect $2,500 in bond
    interest.

So buying would cost you $12,000 per year, and renting would also cost $12,000
per year, but if you rent, you get the $2,500 in interest on your $50,000.
So you would be $2,500 better off as a renter.


"But I'll get a conventional 30-year mortgage, not an interest-only mortgage."

That's still just a combination of the first two cases. As you pay off the debt,
the interest you pay each month decreases, but the principal you are putting
into your house is still a poor investment relative to your other options, like
CD's, the stock market, or bonds.


"What about the tax advantage of mortage interest?"

It's not enough to offset the other costs of owning a house. It's true that you
can reduce your taxable income by the amount of mortgage interest you pay, but
the other costs of owning eliminate that advantage. Furthermore, every married
couple gets a $11,400 standard deduction, just for breathing.

Take the previous case, but say that you pay that $12,000 in interest with
pre-tax money. You've really paid it, and it's really gone, but since you didn't
have to pay income tax on that money before spending it on interest, it's not
quite as painful. At a 28% marginal income tax rate, it's only 72% as painful as
paying $12,000 in post tax money. So let's say your interest payment is only
$8,640, which is 72% of $12,000.

But we should also consider that you'll have to pay property tax, maintenance,
and insurance on your house, forever. Property tax is typically 1.5%,
maintenance is about 1.5%, and let's say you can get house insurance for $1,000
per year. So for your $250,000 house, that's $3,750 property tax, $3,750
maintenance, and $1,000 insurance, a total of $8,500.

These are now your two options for the coming year:

  • Buy the house for $200,000 in borrowed money plus your $50,000 downpayment,
    and pay $8,640 interest after income deduction, plus $8,500 in property tax,
    maintenance, and insurance, a total of $17,140.

  • Pay $12,000 rent per year to live in a house, but collect $2,500 in bond
    interest. Property tax, maintenance, and insurance are paid by your
    landlord, so you have a net cost of $9,500 as a renter.

Buying would cost you $17,140 per year, but renting would cost you $9,500.
So you would be $7,640 better off as a renter. (Not even considering the
standard income deduction.)


"But haven't houses always appreciated in the long term?"

House prices track inflation, on average, in the long term. Prices did rise a
lot from 2001 to 2005, but that was very unusual, caused by exceptionally low
interest rates and very lax lending standards. Prices peaked in the middle of
2005, and have been falling since then. If prices fall another 5% in the coming
year, as they did last year, then your choice is this one:

  • A cost of $17,140 from the previous case, plus a 5% loss on your
    $250,000 house. That 5% loss is $12,500, for a total owner's cost of $29,640.

  • The renter has the same $9,500 cost as before, and does not care about
    the depreciation of the building he's in.

So you would be $20,140 better off as a renter.

If you look at the very long term, houses have been the worst investment
available to the general public:


From Yahoo finance


"But the bond interest is taxable, so you don't really get 5%"

Buying a bond is just the simplest possible investment example and not necessarily
the best one. You can actually get 5% and defer taxes for decades, or not even
have to pay tax at all. There are a few well-known ways:

  • Buy your bonds in your 401K account. 401K's are tax-deferred until
    retirement.

  • Buy your bonds in your Roth IRA. The principal you put
    into your Roth IRA is post-tax, but all the accumulated earnings are completely
    tax free, as long as you keep them in the account until retirement.

  • Buy US Treasuries in a taxable account. Though the rates are a bit lower
    than CD's, maybe 4% instead of 5%, there is no state tax on US Treasury bond
    interest.

  • Buy municipal bonds from your state. Now the interest rate is even lower,
    maybe 3%, but there is no state or federal tax on the interest.

  • Buy and hold solid dividend-paying stocks. If you hold a stock for more than
    a year, the tax rate on any gains is only 15%. And you can put off the tax
    indefinitely just by continuing to hold the stock.

  • Buy and hold index funds. Index funds, which are mutual funds that mirror
    stock market indexes like the Dow or S&P 500, have historically risen much
    faster than housing. And you can hold them indefinitely and put off the capital
    gains tax as long as you like.

  • Pay off debt. If you pay off credit card debt and avoid 20% interest rates,
    you're way ahead of even the best professional investors. If a penny saved is a
    penny earned, then 20% saved is 20% earned. Actually, it's even better because
    it's tax free.

  • Pay rent in advance for a discount. If you can get a 5% discount by paying
    an extra month's rent in advance, you've earned 5% in one month. That's an
    annualized rate of 60%, which is an insanely great return.

"What about leverage?"

When you hear someone telling you why you should use maximum leverage in real
estate, run, do not walk, RUN to the nearest exit!

Leverage is a bet that the appreciation will be greater than the cost of
borrowing. For example, if you buy a $100,000 house at 6% with nothing down,
and the house goes up 5% in a year, are you $5,000 ahead? Maybe. You spent
$6,000 in interest, plus all the others costs of owning, but you got the use of
the house plus the $5000. For many years this bet worked, so people assumed it
would continue that way forever.

The problem is that leverage works both ways. What if the house goes down 5%?
Then you've spent your $6,000 in interest, AND you've lost $5,000. Leverage is
the evil that bankrupts the most people during every housing market downturn.

Warren Buffet said the greatest threats to personal wealth are "liquor and
leverage."


"What about inflation?"

Most of the apparent gain in housing value has actually been inflation. What
you really care about is after-inflation returns. A glance at the
after-inflation returns of various investments in the table above shows that
housing has the lowest real return.

Banks take inflation into account when lending you the money to buy a house. You
can be sure you will be compensating the bank for the expected rate of
inflation. On the other hand, it's possible that the banks will be wrong and
inflation skyrockets, greatly reducing the value of the debt that borrowers owe.
In that case, owners do win, and banks lose. This happened in the S&L crisis of
the 1980's.


"But rents will rise, while a fixed mortgage payment will not."

Rents have not been rising in most places. In fact, they are being driven down
by the large glut of available housing because there has been way too much
building going on due to artificially low interest rates. My own rent is still
less than it was 10 years ago, during the dot-com bubble.

Rising rents (but not rising house prices) are counted as inflation by the
Federal Reserve, so if rents rise significantly, interest rates will probably
also rise as the Fed tries to prevent inflation from from overheating the
economy. That means it may still be a worse deal to buy, because it will cost
more to borrow money. Property taxes, maintenance, and insurance will also rise
with inflation.

If you own outright and interest rates rise, then the value of your house falls,
because fewer people can borrow enough to buy it.


"Anything else?"

Well, yes, I didn't mention the 6% that the agents will take in commissions.
That reduces the resale value of your house to you by another $15,000. There
are also thousands of dollars in closing fees, and PMI (Private Mortgage
Insurance) if you can't come up with the 20% downpayment.


"So what should I do?"

Don't take financial advice from agents, lenders, mortgage brokers, or anyone
else who gets paid only if they convince you to buy. Put in your own numbers and
calculate what it would really cost you to own rather than to rent.

Here are some housing calculators that may be useful:

#housing

Comments 1 - 40 of 71       Last »     Search these comments

1   rooemoore   2015 Jul 11, 3:15pm  

Patrick, you should have bought a house in Palo Alto in the 1990s. Can you explain how that would have been a poor decision?

2   Patrick   2015 Jul 11, 3:35pm  

maybe it would not have been a poor decision, but maybe not also the best decision, simply because the stock market has historically returned so much more than the housing market in the long term:

3   mell   2015 Jul 11, 3:37pm  

rooemoore says

Patrick, you should have bought a house in Palo Alto in the 1990s. Can you explain how that would have been a poor decision?

He explained it many times by taking the free money and investing it into the stock market instead. Of course it always depends on your life situation and priorities, where and what you rent instead and if your SO/family is on board with it.

4   tatupu70   2015 Jul 11, 3:44pm  

mell says

He explained it many times by taking the free money and investing it into the stock market instead. Of course it always depends on your life situation and priorities, where and what you rent instead and if your SO/family is on board with it.

I'd like to see that explanation. There is no way renting and investing in the stock market beats buying the house in Palo Alto in the 90s.

The mortgage payment is certainly less than renting now and probably has been for at least the last decade if not longer.

5   Patrick   2015 Jul 11, 4:10pm  

tatupu70 says

There is no way renting and investing in the stock market beats buying the house in Palo Alto in the 90s.

meh, palo alto prices were very flat for a long time. couldn't find any graph before 2000.

tatupu70 says

The mortgage payment is certainly less than renting now and probably has been for at least the last decade if not longer.

uh, no, never was and still is not. always cheaper to rent on a cash flow basis in palo alto. take your median median price of 2.5M and multiply it by the jumbo loan at at least 4.5%. that's $112,500 in freakin interest alone. maybe you get a tax deduction, or maybe not if you hit the AMT at that income level, but you definitely also pay property tax of 1.25% forever. not to mention maintenance, insurance, and the 5% or so the realtors will steal.

i bet i can rent that median place for less than $9,375/month.

consider no landlord ever buys a house to rent out in palo alto anymore. why not? because landlords can't make money. the rents are less than the cost of owning. they don't care about warm fuzzies. they care about cash flow. doesn't work there.

does work for dense apartment buildings, and for landlords who owned a long time and have other owners pay their property tax for them (thanks, prop 13!)

6   tatupu70   2015 Jul 11, 4:13pm  


uh, no, never was and still is not. always cheaper to rent on a month-to-month basis in palo alto. take your median median price of 2.5M and multiply it by the jumbo loan at at least 4.5%. that's $112,500 in freakin interest alone. maybe you get a tax deduction, or maybe not if you hit the AMT at that income level, but you definitely also pay property tax of 1.25% forever. not to mention maintenance, insurance, and the 5% or so the realtors will steal.

i bet i can rent that median place for less than $9,375/month.

You're missing the point. Your mortgage payment is constant as the rent rises. So, you have to compare the mortgage payment on the 90s price with today's rent.

7   mell   2015 Jul 11, 4:15pm  

tatupu70 says

mell says

He explained it many times by taking the free money and investing it into the stock market instead. Of course it always depends on your life situation and priorities, where and what you rent instead and if your SO/family is on board with it.

I'd like to see that explanation. There is no way renting and investing in the stock market beats buying the house in Palo Alto in the 90s.

The mortgage payment is certainly less than renting now and probably has been for at least the last decade if not longer.

Ask Patrick. It depends very much on your interest rate, ability to pay and change in rent. While rents have been going up people who have been in places for the long-term usually enjoy lower than average rents (even without rent control) as they are saving the landlord quite a lot of time. I don't know what he pays but I bet it is quite below market rate. I would add though that it is much easier if you are by yourself, where you can simply leave your rental for a cheaper one should the landlord hike prices significantly on you. With a family and kids that need to keep their social surroundings things may look different.

8   Patrick   2015 Jul 11, 4:18pm  

tatupu70 says

So, you have to compare the mortgage payment in the 90s price with today's rent.

you're conflating two scenarios: buying now and having bought in the 1990's.

buying now definitely does not cash flow.

having bought in the 1990's did not cash flow back then either. the owner lost every month compared to renting the same thing.

the difference is that the owner gets the appreciation (a windfall in this case caused by the internet boom - not necessarily predictable). but even then, the owner may well have done better in the stock market.

9   tatupu70   2015 Jul 11, 4:24pm  


you're conflating two scenarios: buying now and having bought in the 1990's.

Not at all. One of the big advantages of buying is it gives you an inflation hedge. As rents rise, your mortgage stays the same.

So, if you're comparing rent vs. buy from the 90s and you are including investment gains on the difference between renting and buying, you must understand that at some point, renting became more expense than your mortgage payment and the buyer actually was able to invest the savings over renting.

10   Patrick   2015 Jul 11, 4:31pm  

your mortgage payment will obviously go to zero eventually (if you are diligent about paying) but that definitely does not always make it better to buy.

the stock market will still usually gain value at a faster rate than a paid-off house.

11   marco   2015 Jul 11, 4:33pm  

If no water comes out of the faucets in California, I would think stocks would "trump" real estate. Si?

12   tatupu70   2015 Jul 11, 4:34pm  


your mortgage payment will obviously go to zero eventually (if you are diligent about paying) but that definitely does not always make it better to buy.

It does if you plan to stay in the house long enough. If your horizon is 40 years, I think buying is better under almost every scenario.

13   Patrick   2015 Jul 11, 4:41pm  

tatupu70 says

I think buying is better under almost every scenario.

no, that's simply not true, financially.

in fact, it's almost never true. palo alto might be one of the rare exceptions.

one difference is that housing is a leveraged bet. the problem with leverage is that it works both ways.

14   tatupu70   2015 Jul 11, 4:52pm  


no, that's simply not true, financially.

in fact, it's almost never true. palo alto might be one of the rare exceptions.

Really, you're going to misquote me and pull my statement out of context? That quote was qualified by saying--if you plan to stay for 40 years.

Patrick--your site was great in 2004-7 when lots of people didn't understand what was going on. But the stuff you're putting on here now is just wrong and doing a disservice to the site.

Rent/buy ratio is THE most important factor in the decision to decision to buy or not. I agree 100%. But you seem to be saying that it's never better to buy which is ridiculous.

15   tatupu70   2015 Jul 11, 4:54pm  


one difference is that housing is a leveraged bet. the problem with leverage is that it works both ways.

That graph is as much an argument for buying as it is renting. Once the mortgage is less than current rent, the owner invests the difference.

16   jimboinsf   2015 Jul 11, 8:27pm  

One thing about buying is that the owner is 'forced to save' .
I bought a 3/2 house in SF 8 yrs ago at the top of the last peak for $875k. I now owe $350k on a house worth $1.1MM. My mortgage is 3.5% fixed for 30 yrs and I pay $1550 mortgage per month, $2400 if you include property tax.
I could rent a 1 bed apt in the city right now for about $3k per month.
Maybe I would have been ahead by investing in the stock market, but I might have also bought a nicer car and taken better vacations.

17   bob2356   2015 Jul 11, 8:36pm  


Say you can pay cash for a $250,000 house that would rent for $1,000 per month.

Should you buy it? That depends on current interest rates.

@patrick Where are you finding a market where a 250k house rents for 1000 a month? That's absurd. I'm netting more than that on my rentals, like 900-1000 on 120-140k. Where are you getting 5% on bonds? Junk bonds maybe. Who is paying 6% on a mortgage right now. I've got a 2.8% 15 year with no PMI I closed on last winter. Your numbers are way off for a big chunk of the country. There are times to buy and times to rent for sure, I've gone both ways several times. But not based on these numbers.

18   Patrick   2015 Jul 12, 9:28am  

tatupu70 says

That graph is as much an argument for buying as it is renting. Once the mortgage is less than current rent, the owner invests the difference.

no, that graph clearly shows that any money invested in a house is appreciating far more slowly than that same money invested in stock. the owner loses that race.

there is no way you can spin that graph to say that housing appreciates faster that the stock market - on average.

19   tatupu70   2015 Jul 12, 9:33am  


no, that graph clearly shows that any money invested in a house is appreciating far more slowly than that same money invested in stock. the owner loses that race.

there is no way you can spin that graph to say that housing appreciates faster that the stock market - on average.

Of course not. I would never make that argument. My point is that rent increases with inflation while a mortgage payment doesn't. If you plan to be in a house for 20+ year, it almost always pays to buy.

20   anonymous   2015 Jul 12, 10:44am  

Saying that "what if I took out a loan and bought a house in Palo Alto back in the early 90s?" is like saying "what if I took out a loan put all my money in Apple back in the early 90s?" The stock market will probably win out in most of those types of upside scenarios. I think we have to look at historical averages and not special situations that significantly trump those averages, which is what I believe Patrick is trying to do.

21   tatupu70   2015 Jul 12, 10:56am  

debyne says

Saying that "what if I took out a loan and bought a house in Palo Alto back in the early 90s?" is like saying "what if I took out a loan put all my money in Apple back in the early 90s?" The stock market will probably win out in most of those types of upside scenarios. I think we have to look at historical averages and not special situations that significantly trump those averages, which is what I believe Patrick is trying to do.

Yep--and I think it would have been better to buy anywhere in the 90s if you planned to stay there for the next 20 odd years until now. It would take a very unusual situation for a rent/buy calculator to favor renting with a 20 year horizon.

22   Patrick   2015 Jul 12, 11:23am  

tatupu70 says

It would take a very unusual situation for a rent/buy calculator to favor renting with a 20 year horizon.

so you're saying it's not possible to overpay for a house? no matter how much you pay?

the reality which you can't seem accept, matter how clear the evidence, is that it's almost always more profitable to rent a house than to buy it in expensive neighborhoods, both on a month-to-month cash flow basis, and in the long term where you compare money stuck in housing vs money in the stock market.

but now we're getting into pure religion. you have a belief that buying is always better because it makes you more comfortable with your decision to buy. no facts will dislodge that belief. and that's what makes patrick.net interesting! the sheer will to believe in spite of all evidence and even in spite of pure mathematics.

so once again you will repeat to yourself and to the public that it's always better to buy, and the people who have already decided to believe along with you will indeed believe.

and i suppose that's ok. reality can be painful. maybe reality is overrated.

23   tatupu70   2015 Jul 12, 11:35am  


so you're saying it's not possible to overpay for a house? no matter how much you pay?

Of course not. I rented when it was cheaper to rent and bought when it was cheaper to buy. But I included my expected time horizon in the calculation--which you must do.


the reality which you can't seem accept, matter how clear the evidence, is that it's almost always more profitable to rent a house than to buy it in expensive neighborhoods, both on a month-to-month cash flow basis, and in the long term where you compare money stuck in housing vs money in the stock market.

Yes, that is where we disagree. I don't think you are doing the proper analysis in the long term and that's why you are saying that renting is always more profitable. When you pull up the assumptions in your rent/buy calculator, it becomes obvious. Put in a realistic rent increase and home increase and then run the numbers.


but now we're getting into pure religion. you have a belief that buying is always better because it makes you more comfortable with your decision to buy. no facts will dislodge that belief. and that's what makes patrick.net interesting! the sheer will to believe in spite of all evidence and even in spite of pure mathematics.

It might make you feel better to think so, but it's really not the case. Run the NYTtimes rent/buy calculator and the vast majority of situations will favor buying over a 20 year horizon. Most people don't stay for 20 years, however. That's why renting is better for a lot of people.

so once again you will repeat to yourself and to the public that it's always better to buy, and the people who have already decided to believe along with you will indeed believe.

and i suppose that's ok. reality can be painful. maybe reality is overrated.

Patrick--I'm no permabull. Like I said, I rented through the bubble years and am very happy I did. I look at the math and let the numbers guide me.

24   Patrick   2015 Jul 12, 11:58am  

tatupu70 says

that renting is always more profitable

didn't say that. renting is usually more profitable in expensive areas. and actually buying is usually more profitable in poor areas.

you can tell by the number of rental properties. landlords know what they're doing. have you heard of anyone ever buying a $2.5M house to rent out? (actually it might work with #airbnb, but that's a different story)

when you ignore cash flow, then it all really comes down to a bet on appreciation in expensive areas. are you willing to bet that house prices will greatly exceed the inflation rate in palo alto for 20 more years?

tatupu70 says

realistic rent increase and home increase

rents depend entirely on salaries. no one will lend you money to pay your rent. rents are what they are because people can actually pay that.

house prices depend on more factors than just local salaries

* unusually low interest rates continuing for 20 more years
* the willingness of banks to write mortgages at those low rates (which then lose value if rates rise)
* the number of baby boomers dying compared to the number of new families replacing them

* the density of people in the area with stock options in a booming industry, like internet companies

it's really that last one that drove palo alto prices. if the current internet bubble bursts, then it suddenly gets very hard to find people willing to pay $2.5M for the median house there.

tatupu70 says

doing the proper analysis

yup, that one factor - continued appreciation far beyond the overall inflation rate - is by far the largest factor in the analysis. historically housing appreciation beyond the inflation rate is on the order of 1%, and that's mostly due to population growth. you're probably assuming more than 5% above the inflation rate for 20 years running.

25   tatupu70   2015 Jul 12, 12:02pm  

For example. I ran the NY Times rent/buy calculator. With a 20 yr horizon, rent and price increases at 2.5%/year:

break even on a $1MM home is $3410/month.

break even on a $2MM home is $6889/month

So, looking at some houses in Palo Alto, they are actually pretty close. You are correct that in the very top, top of the market--most expensive areas, it is usually better to rent. Those are the special cases. Although it's also true that those areas have seen price increases far in excess of 2.5%/year...

But, in any event, in 99%+ of the country, buying will be a better decision with a 20 year horizon. Without question.

26   tatupu70   2015 Jul 12, 12:04pm  


yup, that one factor - continued appreciation far beyond the overall inflation rate - is by far the largest factor in the analysis. historically housing appreciation beyond the inflation rate is on the order of 1%, and that's mostly due to population growth. you're probably assuming more than 5% above the inflation rate for 20 years running.

lol--my analysis includes rent and price appreciation AT INFLATION.

27   Patrick   2015 Jul 12, 12:26pm  

tatupu70 says

But, in any event, in 99%+ of the country, buying will be a better decision with a 20 year horizon. Without question.

again, you just assert that buying is better. give your assumptions.

use the ny times calculator and assume a 2% inflation rate, 2% house price growth rate and 2% rent increase rate on a $200K median house in the US, 6% return rate on investments (the historical average for stocks)

i get an equivalent of $921/month in rent. whether you should buy the house depends on whether you can rent it for more or less than that.

looks like that's about what it would cost in fact, so on average it's about the same to rent as it is to own, which kinda makes sense because it's averaging together the poor areas where it's better to own with the rich areas where it's better to rent.

28   tatupu70   2015 Jul 12, 12:34pm  


again, you just assert that buying is better. give your assumptions.

tatupu70 says

With a 20 yr horizon, rent and price increases at 2.5%/year:

I did. I also assumed 5%/year return on investments. I don't think everyone will put all of their money in stocks alone. But, it's not worth fighting over.


i get an equivalent of $921/month in rent. whether you should buy the house depends on whether you can rent it for more or less than that.

looks like that's about what it would cost in fact, so on average it's about the same to rent as it is to own, which kinda makes sense because it's averaging together the poor areas where it's better to own with the rich areas where it's better to rent.

I get $889, but it's close enough.

You can't compare median rent with median house though---it's obviously two very different populations.

29   Patrick   2015 Jul 12, 12:46pm  

another fun graph:

sure, rents go up, but the average guy who bought 10 years ago is still underwater.

also interesting to note how closely they track, both essentially just being expressions of the overall inflation rate.

30   CDon   2015 Jul 12, 4:06pm  

tatupu70 says

Patrick--your site was great in 2004-7 when lots of people didn't understand what was going on. But the stuff you're putting on here now is just wrong and doing a disservice to the site.

Not only that, its borderline irresponsible.

Patrick, you should certainly take heart in that you saved a lot of people a lot of money during a very unique timeperiod when prices were severely out of whack, and countless ordinary people who someday wanted to buy a house and get on with life did not know where to turn for help. But for every person you helped in that timeperiod, you screwed another with your over the top anti buying zeal.

The fact that you cannot admit that with a forty year timeline buying is usually a better deal than renting speaks volumes about who you are and your ability to give honest rational advice for the 90+ percent of your (mostly former) readership who someday just wanted to buy a house and get on with life.

31   Patrick   2015 Jul 12, 5:17pm  

CDon says

with a forty year timeline buying is usually a better deal

true - in relatively poor areas, where basic economics works, meaning places landlords have to make a profit to stay in business.

as you move upscale, it gets to be a better and better deal to rent. the ratio skews because lots of people are grossly overpaying without regard to the rental value of the house. there are fewer rentals in those areas, but they are generally a good deal for the renter when they come on the market.

in the long term, both the typical house price and typical rent must increase at the overall inflation rate. if you just think about it for a minute you realize that has to be true, or pretty quickly no one could buy or rent. here's a good explanation of that:

http://michaelbluejay.com/house/appreciation.html

32   tatupu70   2015 Jul 12, 5:35pm  


in the long term, both the typical house price and typical rent must increase at the overall inflation rate. if you just think about it for a minute you realize that has to be true, or pretty quickly no one could buy or rent. here's a good explanation of that:

Yes, but you need to also remember that a mortgage payment is constant as rent rises with inflation. That is why buying wins over longer timelines. Not due to capital appreciation.

33   tatupu70   2015 Jul 12, 6:04pm  

Call it Crazy says

Wrong... a mortgage payment is not constant, as property taxes keep rising in many areas as well as homeowners insurance.

There have also been people here who have said that their rent payments had stayed the same for many years and didn't increase.

You're trying to put a blanket statement on a variable condition on both sides of the argument.

A mortgage payment is principal and interest. Property tax and insurance are separate entities and may or may not increase(typically they do with inflation).

34   tatupu70   2015 Jul 12, 6:20pm  

Call it Crazy says

Oh Tat, a typical mortgage payment for the majority of people is PITI,

I don't know if it's a majority, but yes, some people accrue their taxes and insurance. So, mortgage doesn't increase but property taxes and insurance might. Happy now?

35   CDon   2015 Jul 12, 6:39pm  


true - in relatively poor areas, where basic economics works, meaning places landlords have to make a profit to stay in business.

as you move upscale, it gets to be a better and better deal to rent. the ratio skews because lots of people are grossly overpaying without regard to the rental value of the house. there are fewer rentals in those areas, but they are generally a good deal for the renter when they come on the market.

Wow - Its almost as if you have learned nothing in the decade plus that you have run this site. You and I had a discussion about this just over 3 years ago.

http://patrick.net/?p=1212971

Point being, highest best use is but one of the many factors which dictate price. Even landlords recognize this when they decide whether to bid on "blue chip" properties or not.

tatupu70 says

in the long term, both the typical house price and typical rent must increase at the overall inflation rate. if you just think about it for a minute you realize that has to be true, or pretty quickly no one could buy or rent. here's a good explanation of that:

Yes, but you need to also remember that a mortgage payment is constant as rent rises with inflation. That is why buying wins over longer timelines. Not due to capital appreciation.

Precisely. In 1999 the rent ($2,500) vs. buy ($2,900) calculator was screaming rent rent rent!!! Today the rent ($4,000) vs buy ($4,500) is also screaming rent rent rent!!! Yet I thank god every day that I ignored it back in 1999 such that my payment ($3,100 - it rises slightly as CIC noted) is $900 less than what my rent would be had I followed the calculator. Oh and this is a blue chip area just outside of DC.

Thus, the capital appreciation is simply gravy at this point. The $900 a month savings is the true reward here - and I only got this because I was willing to sacrifice (paying more to buy than rent years 1-7) to get the rewards (cheaper to buy than rent years 7-30... Massively cheaper to buy than rent year 31 til death). Even better than this, now that I am just over a decade away from being mortgage free, I salivate at the prospect of being in my early fifties with a payment of only a few hundred bucks a month. Had I not had the discipline to put myself in this position in 1999, I would be looking at a mid fifties payment of (probably) $5,000 a month with no end in sight.

36   Strategist   2015 Jul 12, 6:47pm  


House prices track inflation, on average, in the long term.

Completely false. Maybe in certain parts of the country, but not Coastal California and regions with expanding populations where land is limited.
Here is my view:
Price increases in CoastalCal is 6%
Interest rates and property tax roughly 5%. Tax benefits on a 500K home will reduce that to 4%. Inflation is 2%, therefore the real interest is just 2%.
The annual cost of a home in Cal. is just $10,000 for a $500K home. The annual rent is an easy $30K for the same home. The difference is $20K, which easily pays for repairs.
Now add the 6% annual price gain, less inflation, which gives you 4%, i.e. another $20K
I intentionally excluded principal payments, as that is not a cost. I applied the mortgage rate to the down payment to compensate for opportunity cost.
Bottom line. Buying an average home in California, leveraged by a mortgage is very profitable over time.
Buying a home with all cash not as attractive, because the stocks do better over time.

37   tatupu70   2015 Jul 12, 6:48pm  

Call it Crazy says

In all my years, I haven't seen a bank give anyone a mortgage but let the owner pay the taxes. The bank doesn't want to lose the house to a tax sale, which is why taxes are included in the payment. The same with insurance, as the bank wants to make sure the property is insured against loss.

I'm not accruing insurance so I guess this is the day!

Call it Crazy says

Which kills your assertion that mortgage payments "stay the same"...

Nope. mortgage payments stay the same. Taxes and insurance do not.

38   Strategist   2015 Jul 12, 6:53pm  

Call it Crazy says

In all my years, I haven't seen a bank give anyone a mortgage but let the owner pay the taxes. The bank doesn't want to lose the house to a tax sale, which is why taxes are included in the payment. The same with insurance, as the bank wants to make sure the property is insured against loss.

The bank will not require property taxes and insurance be impounded with at least 20% down. With 5% down, yes, they will impound it.
Makes no difference over time.

39   Strategist   2015 Jul 12, 7:01pm  

Call it Crazy says

Strategist says

The bank will not require property taxes and insurance be impounded with at least 20% down. With 5% down, yes, they will impound it.


Makes no difference over time.

The average down payment today for buyers is approx. 10%, so the majority will have taxes/insurance escrowed with the monthly payment.

Yes. Most people must have it impounded. Even those with high down payments might choose impounds, just for the convenience.

40   Strategist   2015 Jul 12, 7:09pm  

Call it Crazy says

Strategist says

The average down payment today for buyers is approx. 10%, so the majority will have taxes/insurance escrowed with the monthly payment.

Yes. Most people must have it impounded. Even those with high down payments might choose impounds, just for the convenience.

Yep, but apparently Tat doesn't think so. According to him, mortgage payments NEVER change.

And I didn't even touch on the percentage of mortgages that are ARM's that readjust....

You guys are talking about apples and oranges. Assuming a fixed rate fully amortized mortgage.
Principal changes every single month.
Interest paid changes every single month.
Principal + interest remains constant for the life of the loan.
Property taxes and insurance changes every year.

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