1. Why do you choose to live in a house rather than an apartment?
2. Why do you choose to own that house, rather than rent it?
To the first question, a house often provides a much higher quality of life than an apartment. You might get a backyard garden, or a workbench, a guest room, an office, a full kitchen, etc... and, you can drill all the holes you want, paint it your favorite color, and so on.
To the second question, buying a house rather than renting it generally increases your options by about a hundredfold -- many, many more houses are available for sale than for rent. And while property tax can be painful, it's generally substantially cheaper than what you'd pay in rent on the equivalent property. So you get to save a lot more of your income, or at least apply it to paying down your mortgage.
> To the second question, buying a house rather than renting it generally increases your options by about a hundredfold -- many, many more houses are available for sale than for rent. And while property tax can be painful, it's generally substantially cheaper than what you'd pay in rent on the equivalent property. So you get to save a lot more of your income, or at least apply it to paying down your mortgage.
It also reduces your options, in the sense that your mobility may be drastically reduced.
To me, though, the main advantage of home ownership is the promise of one day not having a rent or mortgage payment at all. That's one of the main steps towards retirement.
Financially, though, the fair comparison is whether the capital invested in a house generates more rental income (from yourself) than what the capital would make in equity, after accounting for property taxes, insurance, and upkeep.
Most calculations I see suggest it's pretty much a toss up at that point, and which you choose should depend on factors like preference for mobility or stability.
I don't own a house, but here is how I would justify it:
I assume (and you are free to disagree with my assumptions):
- Inflation will exist like it has over the long term
- I need to save for retirement
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With these two assumptions, a home allows you to take a leverage position against the area in which you live in's rate of inflation (hedge against rent increases with 4x leverage). Additionally, if you commit to paying down your home, you are deleveraging over a long period of time.
If you stay there for 30 years, you can live almost rent free. (you will still need to pay expenses), and will increase your buying power dramatically.
If inflation doesn't exist, or doesn't exist in your market, i.e. Buffalo, you are screwed. But, if you use an expected value, and a long-term history of what has happened, you are making a logical investment.
*additionally, in the US you get a nice tax savings from the interest which ends up having a pretty good value in and of itself.
Obviously, you can alter the assumptions and come up with different investment ideas, but in general, housing is at least logical.
The 30 year fixed mortgage, with a low interest rate and high leverage, is also the product of government subsidies.
The reason it makes sense for a lot of Americans to buy a house is because the government spends an awful lot of money making sure it makes sense. Otherwise economies of scale, differential costs of capital, and risk-free returns from diversification would lead to a very different picture.
This is an excellent question. First, note that you will always need a place to live. If you rent, you have no option but to pay market rents forever. Another way to put this, in the language of finance, is that you are "short" housing. Purchasing a home covers this short position - a homeowner must pay their mortgage, but need not be exposed to market fluctuations in the cost of housing. In this sense, the purchase of a first home is a risk reduction technique.
Second, market forces keep the cost of owning a home below the cost of renting a home (in most markets).
Third, there are substantial legal and financial benefits to owning at least your primary residence. Home sales are usually free of all capital gains tax; mortgage interest and property tax are tax deductible; and homestead exemptions exist in many states in the case of bankruptcy.
Finally, there are only so many other places to put your money. It is difficult for an employee of a corporation making in the low six figures (i.e. for a typical reader of this website) to shelter more than around $30,000 of earnings a year from taxation. Because of the advantages listed above, once you max out your retirement accounts and have an emergency fund set up, there is often no better investment than the purchase of a primary home. Also note that paying down your mortgage early is equivalent to investing your money in a savings account that earns a rate of interest equal to the rate of interest on the note (at this point, this rate is much higher than the rate you can earn in a savings account). This is on top of all of the other benefits.
This cannot be right. Buying a house surely increases your risk, because the price of your house now affects a majority of your wealth. If you didn't spend all that money taking on debt to purchase a home, you could have your assets spread across a far less risky portfolio.
That's not even counting all the risk you expose yourself to by being locked into a particular house in a particular neighborhood, such as not being able to switch jobs due to the expense of relocation.
You're thinking about this as purely a financial investment, but that's not all it is. It's a solution to another problem entirely: One way or another, you must have shelter.
By paying for it with a mortgage, you get shelter and a valuable asset at a set cost, and, once the mortgage is paid off, that cost drops to taxes, maintenance, and insurance.
Paying rent, you get only temporary shelter, for which you must pay whatever the market price is, forever. Your rent is unlikely to fall, can rise dramatically, and you don't come out the other end with an asset, that money is just gone. You didn't put it in a diverse portfolio.
I just bought a house outside the bay area last year, and tacked on a partial remodel with new wiring, heat pump, water heater, and bathroom.
My required payment -- including escrow for taxes, insurance, and (for now) PMI -- is comparable to the rent for a mediocre single-bedroom apartment in a sketchy area of the south bay. I'll be adding enough each month to have it paid off in 10-15 years.
For that, between the main level and the basement, I have around 2300 square feet that I can use as I wish, and I can modify it freely to suit my needs and wants.
But I would never buy a house in the bay area, at least not unless I had $20m+ in the bank.
Buying in the Bay Area is not that bad. It's a matter of trade-off, as with many things in life. You won't get huge lot or huge house for the cheap for sure, but there are other factors making up for it. For one thing the weather is fantastic. The food are amazing. It's closer to the tech center if that's your priority.
I own a single-family house on the San Francisco peninsula which I bought three years ago (and spent the summer of 2010 remodeling it and the summer of 2011 landscaping it).
What others have said elsewhere in this thread is true: owning a home limits your flexibility in terms of moving for another job. It ties up a lot of your assets, for most people, in a decaying pile of lumber that needs maintenance and upkeep and furnace replacements and driveway repaving and so on. Patrick.net, run by a SF bay area programmer-renter, is an able representation of this point of view.
For me, the benefits outweigh the costs. I'm in the mid-peninsula off the 280, so if necessary I can work at any job between and including San Francisco and San Jose and closer portions of the east bay. I was tired of renting and wanted a place that I could customize and run multiple Cat6 and RG-6 cables to each room, install a home automation system, etc. Plus single-family homes available for rental aren't as nice as the ones available for purchase. Finally it's a hedge against inflation.
Those are reasons why, to a first approximation, anyone in the SF bay area who plans to stay here long enough and can afford to buy a home does.
As bradleyjg said further down, the relative desirability of home ownership is also due in part to government subsidies. The first $250,000-$500,000 of appreciation in home value is not taxed when you sell. And mortgage interest is tax deductible.
If you're willing to disclose the data, how much did your house cost?
The cost of housing is one of my major deterrents to moving to the Bay Area. Otherwise I'd be there in a heartbeat if I could bring my SO along.
I just feel like with the typical developer wages quoted on Hacker News for the Bay Area I really don't see how I could afford a $1M home, which seems to be the going rate there. I'm in Houston and could get a $100k-$150k house here if I were willing to commute. Even if my salary doubled going to SF, it'd be hard to swallow the fact that housing would go up to nearly seven figures.
Quite right. What's interesting is that the Canadian homeownership rate is similar to that of the U.S., last I checked, even despite the different tax treatments.
My theory on this is that the prices adjust to cancel out the benefit from the tax break. The out-of-pocket expense to the buyer is the same and the general taxpayer is subsidizing a higher price for sellers. It's a cash transfer from taxpayers to established landowners cunningly disguised as a legup for the middle class.
I think the prices must adjust in this way since the supply of housing close to the supply of paid work is limited.
If anyone can point me to a decent analysis of this, I'd be grateful. But this is my pet theory.
This largely depends on the relative price of rent vs. mortgage repayments. If they're roughly similar, then it makes a lot of sense to buy a house because after 30 years you own a house. 30 years of renting doesn't leave you with a house.
In my case the tax deductions make it effectively $500/mo cheaper than renting a comparable apartment and the yearly coop fee increases are less than the yearly increases in rent. Doing some real quick math, I think, ignoring appreciation, its roughly an 8% ROI on the money tied up in the downpayment.
Nothing that I felt was even vaguely worth renting was available. This is a huge one. Most buy/rent arguments seem to assume that for any given area and type of property you will always have the choice of renting or buying an equivalent property. This has not been my experience at all. Being willing to buy opens up a much bigger and better selection of property to choose from. Any other argument is pretty much secondary to that one.
Also having crunched the numbers for our particular scenario, buying made financial sense. There is also a perceived feeling of security and stability that comes from owning. But really all of this is very much secondary to my first point.
Why not typing up a large percentage of the net worth in housing? What is net worth for beyond the cash needed for basic living? If the cash part of the net worth has already covered all/most of your needs, why not putting the rest in somewhere else? Like housing.
Of course you should do asset allocation to balance out the risk involved with each asset class, housing being one of the classes.
Because I need to live somewhere. It's tended to constrict certain decisions. But I have a nice spot on five acres in rural Mass. Will be paid off in the not distant future. And hasn't been a a particular drain on my other investments.
