Thursday, February 26

Switching gears: a serious question.

What's so great about owning a home?

I mean, "home ownership" is held up as this be-all, end-all goal of life in American society, but why? What's so great about "owning" a pile of bricks somewhere that you're probably never really going to "own" because it's gonna take you 15-30 years to pay it off and fewer and fewer people stay in one place for that long these days to begin with? Why do we use "home ownership" as an indicator of a strong economy, particularly when, as we've seen over the last few years, that statistic includes people who end up not being able to actually afford their homes at all and get foreclosed on and put the economy in worse shape down the road? And why in the world should someone like, say, a 30-year-old single male with a stable income have any interest whatsoever in dumping money into a house right now?

What's the difference between someone who takes out a mortgage on a $250,000 house that ends up getting foreclosed, and someone who puts a down payment on, say, a Bentley Continental Flying Spur that ends up getting repossessed because he can't make the payments? Somehow the latter individual would be ridiculed as a complete nutcase, but the former person is someone we're told we should feel sorry for because they were just trying to live the American dream. But aren't they both living wildly beyond their means? Why is one considered an extravagance and the other considered a necessity?

I know, I know, one's a ridiculous luxury car and the other's shelter, a basic human necessity, blah blah blah, but I've been paying rent on the same apartment for the last six and a half years and have done just fine in terms of maintaining a consistent roof over my head, thanks. And while I don't "own" any more of my little corner of heaven than I did when I plunked down my security deposit back in October 2002, nor have I had to watch a third (or more) of my "equity" (whatever the hell that is) disappear because real-estate prices went in the tank. I'm sure if I actually had bothered to buy a house in Birmingham back in 2002, rather than going straight to the apartment finder, I'd probably be opening a vein right now.

Yeah, one of these days I'll start a family and settle down in a place that I feel like staying in for a decade or two, and maybe then I'll look a little more deeply into this "home ownership" thing, but at the moment, my decision to remain feckless and untethered is looking smarter and smarter, even if it does mean wiping my ass with a rent check every month. Least I'm not getting my house taken back by a bank and having my possessions thrown out on the street. Seriously, though, what do y'all think? Am I completely missing something here?

34 comments:

Camel said...

I look at the positives about home ownership being much more subtle. Like I can plant a garden and make something fit my personality. Even if you are renting a house it is kind of like you are putting your personality on someone else's property.

My two cents.

Also, I live in Saint Simons so I can't afford to own jack....so I have been renting since I moved down here two years ago.

Anonymous said...

Historically - meaning about 90% of the last two hundred years - real estate (homes on land) has appreciated in value. Your Bentley probably doesn't do anything but depreciate for a while. Whether you are buying a home or a car, you should stick to what you can reasonably afford. Home ownership as a financial goal has huge positives in distribution of wealth (I know I would never have saved up as much equity as I have in my home even in today's market without it) to the middle class, in jobs (again, in normal markets), and in finance. The problem now - and you are going to get a kick out of this - has mainly come about because the Bushies, in the interest of deregulation and 'doing what is good for business' and America, basically gave the banks and Wall Street the keys to the Ferrari and a couple of bottles of Maker's Mark (apologies to P. J. O'Rourke) at the same time. Banks are like kids - they want what they want when they want it, but it isn't always good for them. And now we, the American taxpayers have to go down to jail and bail them out, but hopefully, we will at least ground them for a while.

The point is, owning a home is a very good idea usually, and in fact, because the market is very attractive (I saw where they are bringing Chinese millionaires to LA so they can buy homes and send their kids to American schools), now is a good time for you to consider buying unless for career reasons you think you may want to relocate in the next year or so. But if you are staying, there's good buys out there now.

TideFaninTN said...

A responsible person in their early 30s buys a house and has a mortgage payment likely comparable to a rent payment. So, bank foreclosure and eviction are equally likely and the money at that point is a wash. The difference is that in 30 years when you want to retire, the renter has to maintain a certain level of income to pay rent each month, and the owner has no (or more realistically, limited) shelter-related expenses during a time when income will be reduced.

tantra flower said...

Owning a home has many perks, but it isn't the end all be all. I sold my home in Fayetteville so that I could attend a decent college here in Greenville (i had let life get between me and my degree for too many years and didn't want to put it off any longer.) I couldn't believe how many people told me to stay in Fayetteville simply to remain a homeowner. And attend a substandard school? Nonsense.

When it bothers me that I'm basically flushing money down the commode every month, I remember that I'm going to be moving in three years anyway. In my case, I think I made the right choice.

It makes sense to buy if you are happy in the city you live in and know you'll be there for at least the next ten years AND the monthly cost of your rent is equal to or more than the monthly expenses involved with owning -- mortgage, taxes, insurance, upkeep plumbing, yada yada.)

But this is a personal decision. If you don't want to own a home, you shouldn't. And if you do, but can't do so responsibly, again, you shouldn't. Jmho.

runningbyrd said...

The benefit to me is that in 30 years, even if i live somewhere else, I'll have a condo to stay at every other year when georgia whups tech in atlanta.

Josh M. said...

As a homeowner for a number of years now, I can tell you that writing my mortgage check is not nearly as painful as writing my last rent check - and they are very comparable in amount. I know I should see that money back eventually, and will be able to use it to purchase my next residence.

Plus, and don't underestimate this, there's a different state of mind when something is "yours" - when you can paint the walls, have a dog without paying a deposit, mow your lawn, not worry about the guy cooking rank middle eastern food upstairs (a problem with my last apartment), etc. Ownership allows more personal expression and is, for many, a point of pride.

That said, it is a person's individual responsibility to not buy more than they can afford, and to pay their mortgage. If you can't do that, if you can't hold up your end of a signed contract, you should be foreclosed on. That is nobody's fault but your own.

Also, I'm struggling to find anybody who would castigate somebody for buying too much house but would defend somebody for buying too much car (much less a Bentley).

J Tin said...

To me, the decision comes down to where the money is going. Rent? It's gone, never coming back. Rent provides an instant gratification (shelter), with no future benefit at all.

A mortgage payment provides the same instant gratification (roof over the head), with a future benefit as well. The benefit is that you now own something of value. Sure, that value may fluctuate, but you still have something worth real money should you need it.

Kristen said...

I'm with ya, Doug. Sure, I'm throwing money away on rent. And yes, I'm still living with roommates like I'm 22. But when half the basement collapses, or we get some huge blizzard and half the damn roof blows off, here's what I do. Text message the landlady, something like "roof gone" or "furnace broken again - sucks for u!" and then my ass goes on my merry way. Makes rent worth every penny.

I'll buy a house when I'm certain I won't be moving for the next couple decades. And also develop some pressing desire to spend my weekends mulling bathroom fixtures.

Sparrow said...

While it's true that real estate, over the long term, appreciates in value, home ownership is generally an overblown idea. For fun, try out the buy/rent calculator in excel (you can usually find it by searching excel help or microsoft's website). It's a simple sheet that compares the true cost of renting versus buying, factoring in all of those fun, generally overlooked items such as closing costs, real estate taxes, homeowner's insurance, etc. You will be surprised how often, from a pure financial perspective, it makes more sense to rent than buy.

Anonymous said...

Typical dribble from a knuckle dragging neocon.

Will said...

Kristen brought up my favorite point: when something breaks of its own accord, and you rent, you don't have to pay to fix it.
Likewise, if you hate, hate, hate yardwork, and rent, someone else handles all of that.

Doug said...

In the span of one month I've now been called both a rank, partisan liberal hypocrite and a knuckle-dragging neocon. I win ALL THE EPITHETS. There are none left over for anybody else.

Sparrow said...

Anon 12:22 - Not sure if that's directed at Doug or me, but either way, I'm not sure you understand what neoconservative means or how to apply the concept. Doug is a self-professed pinko and, for the record, I'm as liberal as the day is long.

Care to explain how questioning the prioritization of home ownership in this country jibes with neoconservatism?

Tommy said...

I made the move from renting to homeowner in Austin, which until recently has been a white-hot real estate market. A few thoughts:

1. I'll probably own the house for five years and, even in a worst-case recession scenario, I'll still see some appreciation.

2. Even if I don't and the housing market collapses and I can't sell my house, I can rent it out to suckers like you. If people aren't buying, they're renting. The demand has to shift somewhere.

3. I like writing off my homeowners' interest every April 15. And I'm gonna like writing off a few environmentally-minded improvements next April 15. Try writing off your rent.

4. As investments go, real estate is still the best game in town. What other investment class can you take at least 10 to 1 leverage on and be practically guaranteed appreciation over time? You can get a car loan at 10x, but that won't appreciate, and no one will loan you 10x to buy shares of Apple. You can probably count on one hand the number of millionaires who don't own real estate. Real estate ownership is as much a cause of wealth as it is an effect.

Of course, in a year, if we're all in line at the soup kitchen, then forget I wrote any of this.

Sparrow said...

Tommy - Though real estate does inherently appreciate over time, it doesn't do much to outpace inflation (there's no one study or agreed upon number, but many experts come to a number around 4.5%). Consider the alternative of a market index fund, with historical returns of around 8%, and you get an idea of how residential real estate is not the greatest place to put your money. And while your initial investment in real estate can be as low as $0, let alone 90% levered, this is not in any way determinative of your IRR. Just think about how long it takes to get to 2x under normal conditions on a residential real estate investment. Not exactly a cash cow. And other than personal property (primary residences, vaction homes, etc, which typically are not purchased as standard investments), most millionaires do not own residential real estate or derive their wealth from residential real estate.

Home ownership isn't bad, it's just not inherently good.

Tommy said...

Sparrow,

Fair points, but are we talking about nationwide appreciation? Because I'm sure there are some dog, rust-belt markets that have dragged the number down for the rest of us.

And while residential real estate may not be the best investment class, the fact that it is one at all is kind of an added value, given that it also puts a roof over your head all year. If we're comparing it to renting, then the upside potential ought to give the edge to home ownership in a halfway desirable market. Conversely, your shares of a market index fund don't keep you dry when it rains.

As for me, I put $20K into remodeling my house last year and saw my appraisal go up $40K when I refinanced two weeks ago. That's a 2x return in one year, and a bad one at that.

Sparrow said...

The figures for home appreciation are based on national studies and tend to be longer views than would be affected by the rust belt market or other lagging areas. Your point is a good one in that averages are just that, but given that we are addressing the general concept of home ownership, averages are most applicable. Of course there are ways to hedge against the average (buying in Austin, TX, downturn not withstanding, is one very good one). My response is to the question of whether, on average, it is better to buy or rent.

To your second point, I am only addressing the financial aspects of the investment. I can't quantify the inherent value of home ownership or the notion of a "roof over your head". Where renting makes better financial sense than owning, you also come out with a roof over your head as well as a favorable ROI. However, it's not your roof to punch holes in, should you want to (although you may void your homeowner's insurance).

Finally, while your $20k investment may have increased your home's value by $40k, unless you then sold the house to capture this increase, it was not a return. And even if you did sell to recover that increase in value, I am talking about the average return on home ownership. That pick-up of $20k probably still leaves you a good deal short of 2x on the entire investment.

Tommy said...
This comment has been removed by the author.
Tommy said...

I don't understand how any ROI can be associated with renting. What's the investment? If you're talking about taking the delta between rent and a mortgage payment on a comparable home and investing it in index funds, then the comparison is between home ownership and index funds, not renting. Accounting for rent as an investment seems reminiscent of how WorldCom or one of the other 2002-era corporate scandals erupted.

I get that an appraisal isn't a sale. But, in the absence of a sale, it's the closest proxy to one if I want to know whether I did something smart with my money. And that 2x return on $20K isn't a bad proxy for how the rest of my equity is doing. It's not an exact parallel, but it's not way off either -- and it sure as hell doesn't make me want to go back to renting.

Sparrow said...

The question is what is a better choice from a financial perspective, renting or buying. You are right that there is no return directly derived from renting, but this is an overall evaluation of how to maximize return on all of your money, or at least the money you would consider designating to housing.

There is no such thing as a proxy for a sale. You cannot make your investment liquid without disposing of it (in the case of residential real estate). While it is possible that your $20k investment will yield a 2x, you cannot count that until you have obtained it. I'm not trying to be a dick on that point, it just flies in the face of accepted practices.

As for the 2x being an indicator of how your overall investment is performing, I think you're reading too much into that individual metric. By way of example, if I collect baseball cards (a common asset) and buy one baseball card that doubles in value over a short period of time, the value of my overall collection hasn't doubled. If that one card makes up a large portion, in dollars, of my total collection, you would expect to see a correspondant jump in the value of the collection. On the other hand, if the card's value is just a very small fraction of the total, the overall value of the collection won't have changed much. It doesn't make buying the card a bad investment, but you can't really extrapolate to the entire investment. If you want to use an indicator like assessed value to determine whether or not you've made a good investment, compare the value of the home when you bought it, plus improvements, to the current value of the home. I won't call that a return or a proxy for return, but I feel better about assessing your overall investment off of overall evaluations.

I am not trying to undermine your personal investment here. I think buying residential property in Austin is a decent bet to beat the national average and resemble an index-type return. I am simply trying to emphasize that home ownership is not inherently positive or beneficial.

Josh M. said...

Pay $900 a month to live in an apartment for five years - $54,000 in rent. Never see a penny of it after you move out.

Pay $900 a month toward your mortgage for five years - assuming you did a minimal amount of homework at the beginning, at worst you're seeing most of that $54,000 returned.

I'm not sure where you fail to see the benefit.

Tommy said...

Point 1: Agree to disagree. If your housing $ is going to rent, by definition, that's zero return. I can't be convinced otherwise. We could go on ad infinitum about the best return for all of your money, but that's off-topic.

Point 2: We're in violent agreement. I've already acknowledged that an appraisal isn't a sale.

Point 3: Again, violent agreement. I said it's not an exact parallel. It's an indicator. That said, if my remodeling occurred in my kitchen, I can't sell my kitchen piecemeal from my house, so the baseball card analogy doesn't work.

Anyway, I get your point about home ownership not being inherently positive. I'm looking at it in the context of the alternative -- renting -- and so far no evidence has emerged to support the latter as a superior financial alternative.

Sparrow said...

The problem with that assessment, and I think that Tommy would agree with me here, is that you aren't really counting the total cost of home ownership. You pay closing costs, homeowner's insurance, mortgage insurance (possibly), on top of all maintenance and improvements. If you can buy a home and have your all in monthly costs (including an amortization of one time payments such as repairs) equal to what you would pay in rent, you are right. The problem is that it is rarely that simple. The exercise is one of considering how to maximize the return of the money that would consider allocating to housing.

As I said above, go to excel and play with their buy/rent calculator. You will be very surprised how often renting, from a pure financial perspective, makes sense over buying.

Sparrow said...

Tommy - I think the best way to visualize the point I'm making regarding rent as investment is to run the numbers. Without being able to leave a comment in excel, as far as I know, I am having a hard time talking through it, but look at it this way. I am comparing the situation where you buy a home and your all-in monthly cost is $X versus where you rent for $Y. If $Y is equal to (3/5)X and you have the opportunity for an advantageous investment of that remaining (2/5)X wherein the return on (2/3)X would outpace the investment of $X in a home via appreciation, it makes more sense to rent for (3/5)X and invest the (2/3)X somewhere else. The focus isn't purely the dollars spent on housing, it's on the dollars you would consider allocating to housing. Obviously, in some situations (yours in Austin for example) the differential between X and Y is small and the appreciation of housing is large, making purchasing a home more advantageous. If you consider renting versus buying as a general prospect, using averages for appreciation, real estate taxes, etc., renting tends to come out ahead of buying.

Sparrow said...

and yeah, I meant 2/5 there, not 2/3

Schatten said...

It's a terrible investment. We suck up the illusion of being part of the landed class, simply b/c we have a deed...that we finance for three times its worth, that is susceptible to bubbles, busts, devaluation, changing demographics, bastards at lending institutions and insurance companies, etc. The true gentry shits deeds like sparrows over a blackberry bush. I've done it twice, will never do it again.

NRBQ said...

A., Doug, no bankers are gonna plead with you to take a loan to buy a Bentley, as they have done recently to unqualified home-buyers. If you had lots of equity in a home, they might.

B. After 6 years of mortgage payments, you're only beginning to pay interest, and aren't close to your principal (and owning equity).

Still, if you're buying, you take a step forward and a 7/8 of a step backward each month early in your mortgage.

If you're renting, might as well put your money in that toaster oven that you destroyed after a UGA loss.

Jen. CHICKTASTIC! said...

I rent because:

1. I'm 33 and have never done yard work, and don't plan to start.

2. If the toilet breaks or the hot water heater goes on the fritz - they fix it, not me.

3. I'm only stuck here for 6-12 months if the neighbors suck, but if you buy and the neighbors suck, you're kinda screwed.

4. I have white walls that I "can't" paint BUT I like to the believe they make the framed RED & BLACK art and my beauteous UGA diploma "pop" against the blank canvas.

Tommy said...

Sparrow, there's a lot of ifs in your supposition. You could've put that (2/5)X in an index fund last year and you'd be under water, plus you'd have pissed the other (3/5)X completely away.

If I assume 8% CAGR for the market and I use your 4.5% assumption for real estate, it would take close to 30 years for that (2/5)X to break even with X. And your average homebuyer would've bought and sold several houses at that point and either rolled the profits into the next home to reduce the monthly payment, bought rental property to collect income from renters who think they're outsmarting the market, or put it in one of the aforementioned index funds.

Either way, slow 'n' steady still wins the race.

Sparrow said...

Tommy - If you look to any specific point in time or any specific place you will be able to undermine the general assumption. The reason what I'm saying is true is precisely because it deals with averages and generalities, not specificities.

Yes, index funds have performed poorly over the trailing 12. And there is a reason I used X, Y, and non-specific rates of return in the example. If you apply an 8% rate (from an earlier comment) to the 2/5 concept (which was an arbitrary number), you are right, it takes a long time to break even, although, I genuinely doubt that the "average" homebuyer has bought and sold several houses and rolled profits to reduce current monthly payments (maybe the smart homebuyer does this, probably not the average one).

For a good reference on the general point I'm trying (seemingly unsuccessfully) to make check out
http://www.nytimes.com/2005/08/19/realestate/19real.html?ex=1282104000&en=f5ee3bed3ea4ed2f&ei=5090&partner=rssuserland&emc=rss
and
http://finance.yahoo.com/real-estate/article/102603/why-your-home-is-not-the-investment-you-think-it-is
or
http://www.viewfromsiliconvalley.com/id316.html
and finally a tool on the Times website that shows when one makes sense over the other (you need to be a member to access the chart)
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1#

Again, the point I'm making is not that you should ALWAYS rent, only that you shouldn't ALWAYS buy.

dctrojan said...

My $0.02 - I understand the economic arguments in favor of renting versus owning, especially as it relates to being able to put money into other, more productive investments. But I think that, and this is something that others have been pointing towards, the local context is almost overwhelmingly the determinant of rent versus buy, and some of that context might be non-economic in nature.

To be more specific: I live just outside DC in Montgomery County MD, inside the Beltway. We moved out of the city for the schools and slightly more space. The rental market for anything that we could put a family of four into, and still be in the catchment area for a decent school, suggests that month to month it would be at worst a wash for me to rent versus own, and likely more expensive. (This is on a monthly cost management basis; I figure that longer term capital improvements are a wash because that either gets put into rent or comes out of homeowner hide.)

So from that standpoint, it's worth it to me to own because I get some small return, long term, from ownership, as well as top-5-in-the-country-caliber public schools, and a reasonable commute (especially important because I split my time between Reston, Beltsville, and downtown DC, for locals).

As for maintaining value... dumb luck. We owned in DC from 99 through 07, and more than doubled our money. We're down about 15% right now on estimated house value, but I still owe less than 1/3 of the market price on the mortgage... and I don't expect to move any time soon. I've seen my folks take a bath (Holland, 1982) and rake it in (California, 1989 and 1997). You can only control for so much.

If I didn't have children, and I didn't think I was going to be here long term, I would rent.

Anonymous said...

Real life history:
1st house (1973); paid $15,000 (you read that right); same house house sold in 1978 for $25,000. Bought 2d house in 1978 for $40,000, and it sold in 1983 for $58,000. Bought 3d house in 1983 for $73,000, sold it in 2005 for $237,000 in a declining market. Deducted all the interest paid all those years. Doug, you are a dummy if you don't get into that when you are willing to stay somewhere for a while. Also, I lived in an apartment for about 9 months before buying and I couldn't get crap fixed in a timely manner. I am somewhat handy and it was just easier to fix it myself than wait on the apartment people. If you hate yard work, get a condo, but quit throwing your money away.

Hebbard said...

Long time reader, first time commenter.

To answer your question: "No."

Anonymous said...

"I am glad I shall never be young without wild country to be young in. Of what avail are 40 freedoms without a blank spot on the map?"
~ Anonymous