Lessons from over 30 Years of Buy versus Rent Decision (2012)(citeseerx.ist.psu.edu)
citeseerx.ist.psu.edu
Lessons from over 30 Years of Buy versus Rent Decision (2012)
https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=90db2525a8c74fe80b5771bb8422ea252bb642d8
23 comments
> 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.
Right...but all those things you mentioned are less than rent, and at the end of the mortgage, my continued monthly costs are significantly less than what rent would be.
When I put $15K down and borrowed $323K at 4% for 30 years. Over the course of 30 years, including interest and the down payment, I'll pay about $570K.
At the time I bought, the rental value was estimated to be $1,800/month. Over 30 years, that's $648K.
Property tax is about 1.5%, so that'll add about $152K to what I pay, bringing my total to $730K.
But rents go up. I've been in my house 9 years and rental value is currently $2,700/mo. If we say you pay $1,800 for 10 years, $2,700 for another 10 years, then likely $3,600 for the final 10 years, then over 30 years, you'll pay a whopping $932K in rent.
Home value goes up, too, which does mean my property tax goes up, though I live in Oregon where the assessed value of my house for property tax purposes cannot rise more than 3% per year. So no matter how much my actual value goes up, after 30 years, my house can only be taxed on a value of $820K, which at a 1.5% tax rate, is $1,230/month.
So after 30 years, my mortgage is paid off, I'm only paying property tax of $1,230/mo, while you're continuing to rent at likely $3,600+. The early savings you had is now being absolutely devoured. Meanwhile, I'm holding an asset worth at least $820K. It's illiquid, I'll give you that, but if I found myself needing an influx of cash, I can use it as collateral. Or I can sell it and downsize.
I'm open to being proven wrong, but in the long term, I think it's abundantly clear that renting will cost more.
Right...but all those things you mentioned are less than rent, and at the end of the mortgage, my continued monthly costs are significantly less than what rent would be.
When I put $15K down and borrowed $323K at 4% for 30 years. Over the course of 30 years, including interest and the down payment, I'll pay about $570K.
At the time I bought, the rental value was estimated to be $1,800/month. Over 30 years, that's $648K.
Property tax is about 1.5%, so that'll add about $152K to what I pay, bringing my total to $730K.
But rents go up. I've been in my house 9 years and rental value is currently $2,700/mo. If we say you pay $1,800 for 10 years, $2,700 for another 10 years, then likely $3,600 for the final 10 years, then over 30 years, you'll pay a whopping $932K in rent.
Home value goes up, too, which does mean my property tax goes up, though I live in Oregon where the assessed value of my house for property tax purposes cannot rise more than 3% per year. So no matter how much my actual value goes up, after 30 years, my house can only be taxed on a value of $820K, which at a 1.5% tax rate, is $1,230/month.
So after 30 years, my mortgage is paid off, I'm only paying property tax of $1,230/mo, while you're continuing to rent at likely $3,600+. The early savings you had is now being absolutely devoured. Meanwhile, I'm holding an asset worth at least $820K. It's illiquid, I'll give you that, but if I found myself needing an influx of cash, I can use it as collateral. Or I can sell it and downsize.
I'm open to being proven wrong, but in the long term, I think it's abundantly clear that renting will cost more.
Thank you for using numbers in your argument. Too often all the rent-vs-buy discussion is little more than magical aphorisms about "flushing rent money down the toilet" and "at least I'm building equity" and "buying always works better in the long run".
The point is that relative prices change over time. There is no one answer that is always correct. Sometimes relative prices renting is clearly cheaper, even long-term. Sometimes relative prices mean buying is clearly cheaper, even short-term.
Housing prices don't necessarily increase every year forever. Rents don't necessarily increase every year forever. Interest rates rise and fall. Economic booms and busts are unpredictable and can outlast your personal planning horizon.
The point is that relative prices change over time. There is no one answer that is always correct. Sometimes relative prices renting is clearly cheaper, even long-term. Sometimes relative prices mean buying is clearly cheaper, even short-term.
Housing prices don't necessarily increase every year forever. Rents don't necessarily increase every year forever. Interest rates rise and fall. Economic booms and busts are unpredictable and can outlast your personal planning horizon.
> Housing prices don't necessarily increase every year forever. Rents don't necessarily increase every year forever.
There will be dips here and there, but I think the general trend will always be up because inflation will always be a thing.
> your personal planning horizon.
That's really the only thing that matters. And I also think it's why rent vs buy arguments are people talking past each other. The "rent" people are likely assuming a sub-10 year horizon, possibly even sub-5 year, whereas the "buy" people are assuming 15+ years.
There will be dips here and there, but I think the general trend will always be up because inflation will always be a thing.
> your personal planning horizon.
That's really the only thing that matters. And I also think it's why rent vs buy arguments are people talking past each other. The "rent" people are likely assuming a sub-10 year horizon, possibly even sub-5 year, whereas the "buy" people are assuming 15+ years.
Oh ok, you started and made me think it wasn't acknowledging the benefits of owning, like: I want to drill in the damn walls (this is a stupid rule that was disallowed in every rent contract)
Don't forget the sudden/emergency expenses of ownership, too. This year I had to re-roof a garage, fix a leaking upstairs shower and the damage that cost, and buy a washer and dryer.
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.
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...
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...
depends on where you see interest rates, housing prices and everything else going. If you think there's more correction to be had and interest rates will go down then don't buy but if you assume property prices keep appreciating and interest rates will go up then buying now is still better than later. In particular, in California, Prop 13 heavily favors buying now vs later.
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.
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.
> 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).
There's a something to be said about owning the place you live at, not asking anyone questions about anything. I've rented all my adult life and while it's been OK, it's definitely not the same. Most sovereign states also give lots of advantages and protections to someone's primary owned home in terms of tax or historically in terms of reparations.
If you had money somewhere or gold or whatever after WW2 you probably lost everything, but if your house was razed to the ground in say Warsaw, chances are if you could prove even in a flimsy way (most people lost their paper deeds) you owned it, you got it back later. There's a powerful thing about owning a piece of land that other financial instruments don't have.
If you had money somewhere or gold or whatever after WW2 you probably lost everything, but if your house was razed to the ground in say Warsaw, chances are if you could prove even in a flimsy way (most people lost their paper deeds) you owned it, you got it back later. There's a powerful thing about owning a piece of land that other financial instruments don't have.
If your conclusion is that renting is better in the long run, then I'd argue that your run isn't long enough.
The article only used an 8 year home ownership period. If you move every 8 years, then yeah, maybe renting is better because paying closing costs of a mortgage every 8 years adds up, not to mention for the first couple years of a mortgage, 60-70% of the payments are just going to interest.
But if you're going to live in a house for 15+ years, I can't possibly see how renting works out. Even if you invest what you save by renting, rents rise, and eventually the rent will exceed what your fixed mortgage payment would have been had you originally bought, and that money you invested starts to vanish.
The article only used an 8 year home ownership period. If you move every 8 years, then yeah, maybe renting is better because paying closing costs of a mortgage every 8 years adds up, not to mention for the first couple years of a mortgage, 60-70% of the payments are just going to interest.
But if you're going to live in a house for 15+ years, I can't possibly see how renting works out. Even if you invest what you save by renting, rents rise, and eventually the rent will exceed what your fixed mortgage payment would have been had you originally bought, and that money you invested starts to vanish.
Why "of course"?
And what exactly "dealing with a landlord" means is strongly dependent on the legislation you live in. For instance, when I lived in Germany, I learned that tenants have extremely strong rights (compared to the US) which perhaps partly explains why most people over there rent. (Another explanation is that many people cannot afford to pay for a mortgage...)
And what exactly "dealing with a landlord" means is strongly dependent on the legislation you live in. For instance, when I lived in Germany, I learned that tenants have extremely strong rights (compared to the US) which perhaps partly explains why most people over there rent. (Another explanation is that many people cannot afford to pay for a mortgage...)
That doesn't really make sense to me. The homes you rent are owned by the landlord and they need to pay the mortgage and make a profit.
Landlords many times have other objectives rather than being cash flow positive.
One might want to speculate on the future price of the property. So instead of having empty the property they just rent it. This is obvious in the west coast where rent is so much cheaper than monthly payment of a 30yr mortgage.
Other landlords use property to just launder money. So any income is useful.
One might want to speculate on the future price of the property. So instead of having empty the property they just rent it. This is obvious in the west coast where rent is so much cheaper than monthly payment of a 30yr mortgage.
Other landlords use property to just launder money. So any income is useful.
Found the landlord.
OP mentions the cost of moving when you get kicked, and perhaps the "anxiety" cost, when you get a message on January 1st, asking if everything is okay, and he is thinking about selling the house...
OP mentions the cost of moving when you get kicked, and perhaps the "anxiety" cost, when you get a message on January 1st, asking if everything is okay, and he is thinking about selling the house...
> Found the landlord.
I think you misinterpreted that comment. "They need to pay their mortgage and make a profit" is meant to by a cynical take on landlords.
I think you misinterpreted that comment. "They need to pay their mortgage and make a profit" is meant to by a cynical take on landlords.
Eh? I'm saying renting is going to be more expensive (and less secure, as you say), I'm not a landlord...
Needs a [2012] in the title.
[deleted]
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.