Lessons from over 30 Years of Buy versus Rent Decision (2012)

Housing decisions seem to be this weird place where people have a really hard time disentangling their thinking about various things. As someone who's rented most their life, I'm constantly reminded by others that the money I give to my landlord will never come back. But these same people tend to be a little surprised when I point out to them that the money spent on home loan interest, property taxes, the cost of maintenance and upkeep, etc., is also something you'll never get back. Or that a house you live in has some peculiarly unfortunate characteristics when viewed as an investment: extreme illiquidity, not being able to sell only a part of it, generally not being able to sell it without simultaneously buying (or renting) another asset in the same class so that you can keep a roof over your head, how property taxes function kind of like an expense ratio that would be considered highway robbery for any other investment class, etc.

But if you point all that out, people also go all weird and assume this must mean that you're trying to argue that owning a home must be categorically a bad idea. Possibly because we're so caught up in thinking of one's own domicile as an investment that we've lost the ability to think about it as just being another useful thing one might own. I've worked out the math and confirmed that, for the amount I drive, renting a car when I need one is much less expensive than owning one. But I own one, anyway, because I value the convenience, and that doesn't seem to be a difficult concept for anyone to grasp. Similarly, I currently own a home and it's much more expensive than my previous living arrangement, but it's worth it to me because I get to choose the appliances, decide whether or not I get to have decent insulation, etc. And that's valid, too. I just don't harbor any illusions that I'm saving any money by paying for these luxuries.

I do not know if laughing or crying... Buy means acquiring an asset, an asset might became a burden or not, but it's still something, an investment. Rent means consume resources to end up in nothing or non-investing.

Of course if just some invest and most do not those who invest are happier, if all invest the game is much less interesting. But that's an individual vs society advantage and can be fair only if ALL own or ALL do not, and ALL means exactly all, meaning we consider homes a State property in a Democracy, rent as a tax.

The rest is a matter of timing: there are moments in history where buying is interesting, moment not to buy but hold, moment to sell etc, as for stocks, only with a much slower cycle.

Aside there is an important consideration common is the Slavic world but often ignored here in the west: LAND ownership. If you buy a portion of a building your asset have an unspecified due date, because a day the building will became garbage. If you own the land it's value is connected but distinct from the current building on it, at a certain unspecified point in time you might change the building on your own ground.

It largely depends on the market you're in and timing. In SF Bay, things are extremely skewed toward renting right now because so many people are sitting on houses benefiting from ZIRP and locked-in prop taxes. It's probably 50-70% cheaper to rent on per month, even considering building equity. We own and are looking to rent a bigger place because it's much, much cheaper. I'm surprised more people aren't talking about how incredibly skewed things have gotten. The problem is there's a lot of "high-end" rental stock in our area, but it tends to be outdated.

NYTimes has an excellent calculator for informing your own rent-vs-buy decision based on factors like rent, purchase price, marginal tax rate, interest rate, etc.

edit: adding link - https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...

Seems a never ending conversation and that's not a bad thing - but things aren't and shouldn't always be about money.

For me, the key point was very simple - I wanted to own and do what I want with my place and I did.

If it's more expensive - fine - but I get the pleasure of fixing stuff when I want, learn along the way and just enjoy a great place that meets my personal needs (small studio, garage gym, sauna...).

Over the years - I'm sure the value of the work I did myself represents a solid number in every house I've been in (5 at this moment and moving to the 6th one in 2 months).

Each and every time it's been a positive move and gave me the chance to see different places along the way and refine my way of living as I get older.

But back to my main point - do what fits your lifestyle but for myself during the past decades - owning has been a struggle sometimes but in the end is just better for me.

The differences between renting and buying are so large, you shouldn't make the choice based on which one is cheaper. If you rent, you have a flexibility to relocate that can have a very high value. If you own, you can greatly increase the stability of your life.

The model makes some assumptions that I wouldn't make when making the buy vs rent decision.

> The individual uses a typical 20% down payment and the remaining balance is financed with a conventional 30-year fixed rate mortgage at the average market interest rate at the time of purchase

Is 20% down still common? I think we put only like 4% down.

> The individual expects to hold the property for a period of 8 years (footnote: According to Hansen (1998) the Census data shows that 8 years is the average home holding period in the U.S.)

I've been in my house for 9 years and expect to be in it for at least another 10 more, if not until I die or go to an assisted living facility.

I think the model should have at LEAST been done twice: Once with the 8 year average, and maybe another run with a 20 year or even 30 year holding.

To be honest, my eyes started glazing over and I got lost in all the details, but I didn't see if the study controlled for the fact that rents nearly always go up. When I bought my house in 2015, my mortgage payment was $1,600/mo, plus property tax of $300/mo. Zillow estimated the rent value to be $1,800/mo. Now in 2024, 9 years later, Zillow estimates the rental value to be $2,700/mo.

Even ignoring the equity I have in the house, renting would clearly be a huge loss. The $100/mo I would have invested would be currently being absolutely devoured by the higher rent today.

If you include equity, the high side to owning is insane. I bought for $338K, and now it's estimated to be worth $557K. Even if I went for some insane interest-only loan, I'm still holding an asset that's gained $219K in value. 9 years of $1800/mo rent is $194K. Imagine dumping all that money and getting NONE of the financial benefits of holding an appreciating asset.

If you think you're going to live in a house for only 5 years, then yeah, it might make sense to rent, because then you avoid closing costs and the awful amortization that a mortgage has for the first couple years. It also avoids being subject to price crash volatility. But if you think you'll live in a house for 10+ years, I cannot possibly see how it can be better to rent.

Of course renting is financially the better choice in the long run. But on the other hand you have to deal with a landlord, and this has a cost (aka they might force you to move out).

Needs a [2012] in the title.