New study contends renting is superior investment to owning for most Americans
By golfplan18 Follow Wed, 8 Aug 2012, 7:31am 2,454 views 42 comments
In Irvine CA 92620
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47 male
Lafayette, CA
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I know plenty of people who got rich buying up real estate. In fact my godfather is the richest man I know, and he's spent his entire life buying and selling real estate. His hobby is breeding and racing horses.
Renting might be better short term, but buying is almost always better when you're talking about decades.
Having your "rent" fixed for your entire life cannot be overemphasized. In 1986 I rented my first home for $675 per month. That exact same home is now rented for $2300 per month.
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For argument sake in 1986,
Average home price 95,000
30 year fixed 10%
Monthly payment 783
Payoff total of 360 payments 282,000
Your 675 rent was cheap compared to the 1% rule for re investing
That 95,000 house was really costing 282,000 after tax income
Need to earn about 375,000 gross over 30 years to buy.
Tax break not included.
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Los Angeles, CA
KILLERJANE says
And this is why purchasing in overwrought markets like SF, NYC, LA, etc. will never pencil out. You can save 66% over mortgage costs and use that money to buy a house in a place that doesn't suck as much as CA does.
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Well, that's the quirk, that 95,000 house in say CA 1986 could now be sold for what? 500,000 most likely. So that is the oddity of CA coastal communities.
IWOG, what could that house be reasonably sold for today?
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47 male
Lafayette, CA
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KILLERJANE says
And had I not bought the home, how much would I have paid in rents as they doubled, then tripled, and finally quadrupled?
Why is this missing from your analysis?
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47 male
Lafayette, CA
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KILLERJANE says
Probably $320,000. It's in Pleasant Hill.
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I am just looking at the investment, not judging your words. What would that house reasonably sell for today? I never said there was no profit.
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47 male
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KILLERJANE says
As an investment you have to keep in mind that my contribution would have been around 20%. Therefore all the profits would have to be calculated on $20,000, not $95,000.
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So if I bought it in '86 to raise family etc for life, then it would have made a profit and shelter for 30 years.
and then in old age sell it for retirement if I wanted. Typical old school American dream financial situation.
So buying was better than renting for a typical American. Because that's how most get their nest egg.
A lot of people spend every bit of income and the house buying helps put some of that away, not everyone is a savvy saver, not many at all. Even if you take a loss over 30 it is probably better than not buying at all, long term respectively speaking.
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Boca Raton, FL
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Two generations: Gen X and the Millennials. I submit that the reasons the Baby Boomers did so well in the stock market is that they are a large generation that didn't have college debts (due to almost zero-level tuition compared to today) and had much better income. As a result, the Boomers drove up stock prices in the 1980s and 1990s when they were in their stock buying peak.
Now that Boomers are downsizing stocks and moving to fixed income and capital preservation to fund their retirements, the supply of U.S. stocks is going to far outpace the demand for them. I.e., as the Boomers exit the stock market, they need to find someone to hold the bag as the market prices of these stocks tumble.
That is why I'm a long-term bear on the U.S. stock market. What I don't know is to what extent, if any, this applies to the world stock market and in particular the stock markets in emerging economies. Anyone have some ideas on that?
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Madison, WI
Probably the largest problem with housing is that it is for profit like everything else around here, then subject to market forces, which when combined with your job also being based on the for profit model, things get unpredictable, combined with inflation, contractors ripping your ass off on home repairs, many are better off renting. Housing became more of an investment like playing the equities game, contractors, flippers, realtors, bankers, appraisers, inspectors, owners hold the bag. It's easy to see why so much of our housing is expensive, yet such junk.
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iwog says
Even if it is bought in 2006?
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Campbell, CA
Dan8267 says
The reason for their success is, before 1994 we still had more or less reasonable investment climate. In time the markets got more and more overregulated. (especially the financial system - bonds, currency, banks etc). No failure or recession was allowed and we got into the bubble period. Now everything is controlled and manipulated by the govt. Only speculators can profit from this market and no real investment is possible.
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still1bear says
Explain how that works. Exactly which regulations are responsible and how do they prevent "real investment". Also, please define "real investment".
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Scottsdale, AZ
robertoaribas's website
Funny, TODAY when prices in Phoenix have dropped by over 50%, and mortgage rates are below 4%, compared to over 6% in 2006.... NOW they advise renting. Where the hell where they 6 years ago????
I'm sure 10 years from now, when buying this huge drop turns out to be the best course, another study will come out saying "buying is better!"
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robertoaribas says
By any other definition is Marketers
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47 male
Lafayette, CA
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bubblesitter says
Possibly. Time will tell.
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robertoaribas says
very right Robert...clearly we have problems with journalist and media !
and of course has any of the journalist come out and apologized for their near decade errors on buy vs rent. Nope!
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Mountain View, CA
iwog says
There is one important factor, which distinguishes people like your godfather and the current generation. In good ol' times, commercial banks were not lax in lending; so, it was 'relatively' cheaper to buy then than now. Today, thanks to all programs (FHA, Fannie/Freddie Mae, greedy banks, etc), asset prices have 'relatively' increased. They call it asset price inflation, which, as a consequence, brings out debt deflation, because most of the earnings are not enough to service all these debts.
Add another component: except for govt gigs, except for hardcore programmers, who has stable employment? Of course, people buy in places like Cupertino, not so much because of stable employment, but because of the reality (illusion) that even if you loose your job, you can flip that Cupertino home and make profit.
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The problem with the buy vs rent discussion over decades is that the renter needs to consistently stash away the amount saved and put it to work in investments, of which some may work out better than other. In practice most people in the US (and parts of Europe) like to leverage themselves to the max and spend their money rather than investing it. This also pertains to homeowners who take out Helocs. The comparison becomes more and more difficult on a longer timeline. Paying for something forever without generating equity IF you could own instead with all cash or at least very minimal debt can be inferior. If you have debt for years to come when buying and are in a volatile, over-extended credit bubble the risks are huge and you pay an insane amount of interest while being chained to your home whereas the renter bought the freedom to move, downsize or upgrade almost instantly with their "throw-away" cash. I do think you come out superior renting without having long-term dependencies if you are fiscally conservative and know how to invest your money and wait at least until you can buy all cash for a reasonable down-negotiated price after prices have fallen to a level that can be supported by the average income.
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Campbell, CA
Dan8267 says
Let's start from the basics.
1. The FED was created to stabilize and regulate the banking system. Now, somehow, it is supposed to regulate the real economy. How did that happen, and who gave it this power?
2. In a healthy financial environment the savers have a say over the interest rates. In a centrally-controlled financial system they don’t. The central bank determines the interest rate, and the savers go to hell.
I could give you more examples, but these two are enough to screw all the markets over long term.
The real investment creates value and benefits both investor and the business he invests in. There is very little of this kind of investment right now. The value creation is anemic and benefits are disappearing. Whatever small profit is made requires huge leverage to improve it. In this kind of environment only speculators survive and the investors go to hell (those that are not savers, because savers are already there – see above).
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still1bear says
Are you implying that the Fed sets the savings rates in the US? Because that is completely false.
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Damn! what's wrong with you people? This seems to be a Civil & Serious conversation.
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Well, if people really heed this advice.. Rents are gonna go up!
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Mountain View, CA
tatupu70 says
I don't think he is implying that. Fed sets the interest rate; and the savers have no say on the interest rate. That is, because commercial banks create credit (debt, electronic money, etc--whatever you call) out of thin air. Later, these commercial banks search for reserves for the newly created debt. In the worst case when these banks can't meet the reserves, Fed is there to help them out.
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tatupu70 says
Yes. that is what the Fed does (amongst other shenanigans).
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mell says
No, that is not what the Fed does. And you can easily prove that to yourself by noticing that different banks pay different rates. It is market driven.
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raindoctor says
That's not really true either. Interest rates (US Treasuries, LIBOR) are set by the market independent of the Fed Funds rate.
raindoctor says
I would argue that savers do have a say--savings rates are market driven. When banks need money, they increase the savings rate. When banks have plenty of money, they lower the savings rate. Savers have their say by deciding where to park their money.
raindoctor says
Tell that to the 400+ banks that have failed since 2008.
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47 male
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The Fed only controls two rates: the Federal Funds Rate and the Discount Rate.
Neither of these rates have anything whatsoever to do with consumer credit or interest paid on accounts.
Mortgage rates are primarily influenced by federal bond rates, which are influenced by supply and demand and not controlled by anybody. The fed does have the ability to buy long term bonds and sell short term bonds, (operation twist) which can depress long term rates temporarily, but they still must contend with market forces.
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Campbell, CA
raindoctor says
This is exactly what I meant ;-) .
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Surely you must be jesting.. Come on, if you don't (want to) understand that the savings and credit rates are 99% driven by the combo of the federal funds/discount rates and libor (which are interconnected themselves) then there's nothing to discuss here. Saying the fed doesn't DIRECTLY control the savings rate is just semantics.
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Lafayette, CA
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mell says
It might help if you explained HOW they were connected, because they aren't.
Banks pay the lowest interest they can get away with. Since short term money market accounts, based ENTIRELY on the free market trading of short term bonds, are paying around 0% they can pay whatever they want.
Right now the fed is actively trying to INCREASE the yields on short term debt via operation twist. The fed is doing exactly the opposite of what you say they are. It's not surprising they aren't succeeding.
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Fine, nothing is absolute, so yeah, it doesn't control them entirely and not forever, but it can for quite a while. It injects massive amounts of liquidity into the "free" marketplace which might eventually figure out what's going on, but if you control a huge portion of the money supply (and can create money/credit out of thin air) of the still reserve currency, you have the biggest lever in town on interest rates, at least until the jig is up.
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The only good investments are cash and marketable securities.. Housing (own or rent) has turned into a scam by vested interest. They couldnt care if you had zero in your savings and living paycheck to paycheck. What ever happened to real savings ?
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Mountain View, CA
tatupu70 says
I am not denying that market plays a role. It is like saying that asteroids don't play any role in orbital motion of, say, earth; but such asteroids play a less of role. In chemistry, people talk about ideal gases; but such gases don't exist. The description I gave is one such: an idealization.
Usually, interest rate on your savings account is less than the fed funds rate, which is less than the rate banks charge for loans.
If bank X pays more (than the fed funds rate) for your savings, it is loosing money; it can get money from fed funds instead. You may raise another question, what if other banks don't want to lend to our bank X? Sure, Fed steps in. You can ask another question: why don't other banks wanna lend? Maybe, our bank X is junk. If other banks (highly connected, unethical, corrupt, whatever you call them) decide that bank X is worthless, the fed steps in here and sells X to other banks.
tatupu70 says
Follow the same logic above. If our banks are totally private, that is, they are not listed, and if they don't raise money from private investors via bonds, etc, they would be saved via Fed. What we have is a quasi-transparency. If our banks are totally transparent (it happens only when Fed opens its books), 1000's of banks would have been wiped out.
Which bank gets wiped out depends on other players (here, JPMC, Goldman Sachs, Citi, etc) and Fed (which is controlled by the same folks). Market forces are minimal, just like the effect of asteroids and meteors on the planetary motion of, say, Earth.
One way to test theories is to check whether they agree with the reality.
For more,
http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html
Sorry, comments are not allowing mathematical signs like less than and greater than. I had to edit few times.
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Also regarding the bond market, there is some back-door monetization going on, with the identity of indirect bidders/dealers concealed, you'd be crazy to think that the fed doesn't dabble in the bond market. Regarding operation twist, I wouldn't believe anything an institution that is refusing to being audited says about their operations and intentions.
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Tarzana, CA
From my viewpoint, not much too talk about, what? should I buy the 30k investor flip that came on the market this week? Been literallly two weeks since a single property in Encino came out under 325k? (Peanuts by BA, I know) a 99k, 475 square foot, 1 parking space Studio, should I buy it? The excitement is overwhelming.
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Campbell, CA
mell says
For that matter, FED thinks there is nothing wrong with buying stock index futures. Knowing this I have little doubt their tentacles extend into every so-called 'free' market.
(/sarcasm) And of course, all our problems come from the free market. We don't have enough regulation !!!!! (/sarcasm off)
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iwog says
LOL. It is always good time to buy a piece of RE - even if it is falling apart. Sometimes you make me chuckle a lot. Keep it coming - now that AF Tony Manero is not around a lot. :)
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HEY YOU says
Do we actually have those here??? Hmmmm.....