Homeownership Doesn\'t Build Wealth

[djohnflatfeecfp]

Under the no kidding file - https://www.cnbc.com/2017/11/16/homeownership-doesnt-build-wealth-study-finds.html

[VagabondMD]

Just talking to my father about this today. My Home has a better chance of making me poor than making me rich. In all likelihood, so does yours.

[docnews]

So true but sadly when people's net savings rate is often negative at least it is some forced savings. A home is not an investment just a savings account that is hard to raid.

[The White Coat Investor]

I disagree with all you all. Buying a home at the right time in life not only assists in building wealth but is a good investment.

• The capital value generally keeps up with inflation


• The dividends consist of saved rent and generally go up over time


• It is a relatively safe way to use a reasonable amount of leverage

The only problem is when people buy homes when they're not in a stable social or job situation or when they pay too much for the investment. Any investment can turn into a bad investment when you overpay for it. I can't believe I'm having to defend this. I'm usually the guy telling new interns not to buy a house because they're only in a 3 year residency and they're not going to want to live there when they're an attending.

[Complete_newbie]

Eh just like any investment it depends. No right or wrong answer.

Actually I built a spread sheet back in the day and it absolutely is better to rent than to own a house when you take into account HOA dues + upkeep + Prop tax etc vs just investing that sum in an index

So I guess I disagree with WCI disagree?

[Donnie]

This makes no sense. I will post some charts later, but people wouldn’t rent houses to you if buying and renting lost money. If buying then renting makes money, then buying and living in makes money.

[Complete_newbie]

Donnie wrote:

This makes no sense. I will post some charts later, but people wouldn’t rent houses to you if buying and renting lost money. If buying then renting makes money, then buying and living in makes money.

Click to expand...

I'll psot the spread sheet once I hack thorugh my old desktop. May be my base assumptions were wrong but pretty sure thats what the number showed to me.

[hightower]

I think it totally depends.  I think the usual American way of buying as much home as the bank will let you is a bad idea.  This also leads to people being in too big of a space which ends up costing them dearly in terms of all the stuff they have to cram in there. Then there's the cost of heating, cooling, and lighting the place.  Repairs, upgrades, etc as well.  Then there's the fact that they will end up moving multiple times trying to get into an even more expensive house each time.  When all these things are added together, I would venture to say that most Americans can not afford the house they are in and their home does nothing then make them poorer because they never come close to paying off the mortgage.  Especially when you look at what they are saving (we already know that American retirement savings rates are abysmal).

IF however you get someone like most of the people on this board who buy a house that is reasonably priced below their means, they are careful to not over do it on the upgrades and furnishings, and they continue to save aggressively during their lifetimes, and they stay in that house for most, if not all of their life, then yes, owning that piece of property can end up being a good investment someday.

[Zaphod]

Donnie wrote:

This makes no sense. I will post some charts later, but people wouldn’t rent houses to you if buying and renting lost money. If buying then renting makes money, then buying and living in makes money.

Click to expand...

I think it depends on the market. Some places they just cant charge much, but houses are cheap as well of course. Renting/buying isnt that simple since the tax codes make it work for both sides, that is its incentivized. For example if my rental income werent almost totally deductible with depreciation/expenses (which are obviously real) it wouldnt be worth it at all.

I've seen both arguments made pretty well. As usual depends what you do with the money. I'd love to sell our house and live in a small condo (rent/own) just to be smaller/cheaper and less upkeep. Houses are expensive and taxes/insurance/maintenance make sure to keep you slightly inflation adjusted.

[Donnie]

Zaphod wrote:

Donnie wrote:

This makes no sense. I will post some charts later, but people wouldn’t rent houses to you if buying and renting lost money. If buying then renting makes money, then buying and living in makes money.

Click to expand…

I think it depends on the market. Some places they just cant charge much, but houses are cheap as well of course. Renting/buying isnt that simple since the tax codes make it work for both sides, that is its incentivized. For example if my rental income werent almost totally deductible with depreciation/expenses (which are obviously real) it wouldnt be worth it at all.

I’ve seen both arguments made pretty well. As usual depends what you do with the money. I’d love to sell our house and live in a small condo (rent/own) just to be smaller/cheaper and less upkeep. Houses are expensive and taxes/insurance/maintenance make sure to keep you slightly inflation adjusted.

Click to expand...

There is no rational reason that people would be renting out homes if owning and renting the homes generated a negative returns.  Sure, a couple people might do this irrationally on a one-off basis, but the existence of a home rental market suggests a positive ROI.  If you are saying that somehow the tax code would favor the "buy and rent" person , then you should buy the house and rent it to yourself.

[Donnie]

Here are the charts.  As shown, the break-even time is about 4 years for these assumptions.  Home buying is better in times of higher inflation.

[Donnie]

Rex wrote:

That kind of logic doesnt actually work.  Thats like saying im guaranteed to do well in the stock market because everyone does it.  (I am actually very in favor of investing in stocks by the way).

 

I own a home.  It hasnt worked out as a good investment for me to date and i didnt do anything crazy like purchase too much or anything.  It is also the only home i have ever purchased so im not trying to time anything.  Maybe it will turn out okay but i think it will turn more into a savings account when i actually consider all the costs (currently it would still be a loss after 8.5 years).  Its really hard to compare some of the costs bc i definitely spend more money on the home that i own then anyone whom i rented from would have spent on the same house and thats a real life factor.

 

Im not against home purchase but i do find physicians early in career move a lot and that additional cost really adds up so that you have to get lucky thus if someone wanted to just rent, i dont think thats a bad idea.  Every time someone tells me they sold for a profit and i ask if they considered just taxes, major repairs, and sales commission, they arent sure any more if they made any profit (usually the person hasnt really done the math).  I own bc i want to own (actually bc my wife does but thats another story).

Click to expand...

No, it's not like saying that everyone invests in the stock market, so I am guaranteed to do well.

People can't rent homes at losses ad infinitum for obvious reasons - they run out of money.  The market is rational.  If people were renting homes at a negative return, they would sell the home.  The next buyer would rent the home, lose money, sell, etc.  Eventually no one would rent homes, or rents would increase to allow a positive ROI.  Not complicated.

Just because it didn't work out for you doesn't mean that you made a mistake buying.  Every decision in investing has a probability of success and failure.  Nothing is guaranteed.  This is like investing in the S&P 500 in 2007 and saying the market generated a negative return from 2007 to 2010, so investing was a mistake.

 

 

[ENT Doc]

Just like any study, the relevance depends on the applicability of the methods to your situation.  They only included the 23 largest metro areas in their analysis and don't account for all costs.  For example, if you want to buy in order to secure a good public school system there might not even be a comparable home to rent, and even if there is your longevity there is not determined by you.  They didn't describe adding other costs to the rental situation, like moving, rental insurance, etc.  I'd take this with a grain of salt and do your own analysis for your specific situation.

[White.Beard.Doc]

The investment value of buying a home varies so much depending on how long you live there, how much you pay, inflation, mortgage rates, job growth and other demographics.  I know most of you asking these questions are early on in your career, but I can share my gray bearded perspective.

Buying has worked out extremely well for us, but a lot of that is due to inflation and good fortune with buying at opportune times through sheer luck.  My initial 20% downpayment of 100k back in 1990 turned into 1.25M (paid off 400k mortgage in full) when we sold that house after 20 years.  We traded up (even trade dollar for dollar) to a ridiculously cheap foreclosure in a premium location 5 minutes from work, in the throes of the real estate downturn.  Now similar houses in this area are going for over 2M (very HCOL area).  So my 100k in equity turned into over 2M in equity.

The comparative cost of renting vs. owning is so variable in different areas.  Over 27 years, our monthly cash outflow for the mortgage, taxes and repairs was just slightly cheaper than the cost of an equivalent rental.  However, in contrast to a rental we now have over 2M in equity.  We will cash out by trading down when we fully retire somewhere down the road.  If I had to do it over, since we tend to live in a house for a very long time, I would definitely buy again.  We have more house than we need, but we have room for extended family to visit and my spouse loves the garden.  We are likely spending around 5% of our annual income on the house so it isn't too bad and it brings us a lot of pleasure.

Many of you already know about this calculator from the NY Times that compares costs for renting and owning.  It is worth a look before making a decision.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

[CM]

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