Renters are wealthier than 95% of recent first time house owners.
invite response
2012 May 28, 5:29am 8,538 views 17 comments
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Someone who does not look at both sides of a cost analysis of a financial transaction must have a very shallow outlook in life. Looking at a home because it is an asset only and forgetting about the associated liabilities over renting is like calling your wife the perfect woman because she is a great cook while she sleeps with your neighbor while you are at work. If it works for you, great. I prefer to know the ins and outs of my finances, rather than be ignorant.
All the above costs associated with owning are prorated and paid for by the renter. It would not be worthwhile for a landlord to rent if the costs to him are not covered by the rent. Therefore. those costs should not void the value of the asset. I agree with the first poster. This post is garbage.
toothfairy
2012 May 28, 8:16am
if you want to twist the numbers to make renting seem like a better deal there are much easier ways to get there!
Perhaps the original post wasn't well presented.
My grandmother was a lifelong renter and a businesswoman who always lived in awesome places, and had money all the time. She actually was the one with the cash to lend my parents for the summer house on Martha's Vineyard. My NYC MD father didn't have it handy at the time.
She rented houses for a long time until she was much older and then rented an apartment in a former mansion in her little town.
She always seemed to have the most unique places to live. When I was young, I of course didn't know she was renting her place which was on the national register.
Your results may vary, but I can attest that my grandmother didn't suffer any privations for not buying a house.
It's kind of an apples and oranges comparison to subtract 40 years worth of future costs associated with owning a home to the first time buyer's current networth.
The biggest case to be made for not buying a house is that you are tying up way too much of your networth in a single asset that has very modest gains longterm. Opportunity cost of not having all that money in a diversified portfolio is the reason not to buy if you are trying to maximize your networth.
If you want to ignore your own personal balance sheet and start saying things like "well it's a place to live, stability, community etc..." Now it's an emotional conversation.
Sure, it makes sense to look at maintenance and other costs.
It also makes sense to look at what your cash flow is going to be when you are in your 60's, living on a fixed income, and all you need pay is (reduced homestead) tax, maintenance, and insurance... not rent. Why? Because you front-loaded by purchasing a home, leaving much lower living expenses in later years.
Also, this isn't some zero-sum game. It is possible to buy a modest home later in life when you have saved most (all?) of the purchase price, thereby owing little on the debt... by buying a property that's not marked up to some coastal premium. (Not everyone falls into the trap of living in outrageously priced metro areas).
All in all, the original post is quite lacking -- and condescending in all the wrong ways.
hm?
Where is that $300k debt coming from? You stated there's $40k equity in the house, so if you count the $300k debt (mortgage, I assume), then you also need to include the $340k asset (house)
Looks like the owner's balance is
100k + 40k + 10k + 25k = $175k
basically identical to the renter. Not sure what your post is trying to show anyway, how did you calculate the average $50k cash in the renter's hand?
Seems like garbage, I don't know why I respond.
hm?
Where is that $300k debt coming from? You stated there's $40k equity in the house, so if you count the $300k debt (mortgage, I assume), then you also need to include the $340k asset (house)
Looks like the owner's balance is
100k + 40k + 10k + 25k = $175k
basically identical to the renter. Not sure what your post is trying to show anyway, how did you calculate the average $50k cash in the renter's hand?
Seems like garbage, I don't know why I respond.
Is the equity being double counted here?
$40K in equity
$340K house
$300K in debt (I assume mortgage)
If the equity is double counted then the owner is actually -$165K in the hole. I think the extra cost of owning ($340K) in 4 years might be a bit overstated though. Who knows.
I think this is a great simplified comparison between the two choices, but I think you have to include:
1. Loss revenues on the money you used for the down payment
2. Tax breaks on mortgage interest and property taxes
3. Assumption on home price
Bottom line. People making $400K decisions should run the 30-40 year cash flows to figure out what is best for them. If I made $75K/year and lived in Oklahoma where the home price is $150K and mortgage rates are 3.5%...I would probably buy...but Cali is a different beast. Debt slavery or bust.
everything
2012 May 29, 9:52am
I'm single, I'll always be renting, RE can be expensive for one, but realistic for RE investors or families with two incomes. Some are just priced out of owning and don't need the room or hassle, so rent instead.
FNWGMOBDVZXDNW
2012 May 29, 9:57am
The original post really is a poorly conceived financial argument for many reasons. There are plenty of good arguments against buying at the moment, and they have been laid out over time on this site. This post is not one of them.
Patrick.net is great, but if I were Patrick, threads like this would make me second guess the value of my efforts.
In order to warrant a time value adjustment there would need to be different inflation rates on the liabilities, rents, and home values. All expenses relating to a home over renting will be subjected to the same inflation that home values and rents will face. If there are differences, that is another discussion. This is looking just at the extra liabilities of the home compared to renting. Again, there is no need to have an inflation adjustment when the costs of all related topics are under the same inflationary constraints. One must isolate variables to find relationships not confuse the data by including external influences.
Please keep the topic on course. By bringing in external influences to make an irrelevant point you are not helping the discussion. You are saying we should adjust for inflation for homes but not the expenses of homes. I am obviously assuming no adjustment in there relationship because that is not the topic at hand. If this is something that interests you, please post a thread with your thoughts. Out of respect, I would try to keep the conversation of your post on course.
you are going to discount the entire next 40 years of home expenses? (and not even adjusted for time value of money... cause you dont know how?)
But NOT give a future value on the home?
There is an error in the analysis from the standpoint that while a homeowner is assigned a debt of $300,000, a renter is assigned a debt of 0. Unless the renter has the option to live for free such as move back in with the parents, he also has a form of "debt" for the rest of their life which is rent payments. The value of that debt is subject to where the renter will choose to live in the future of course, so it is not set in stone. However, it is still real. Also, you have to factor in the future home value of the homeowner. While you cannot state for sure what the home value will be in the future, it has histrorically risen with inflation which is about 3.1% a year. Even if you are an utter pessimist, at least assome in your analysis, that your home will be worth exactly the same in nominal dollars in 30 years!
There is an error in the analysis from the standpoint that while a homeowner is assigned a debt of $300,000, a renter is assigned a debt of 0. Unless the renter has the option to live for free such as move back in with the parents, he also has a form of "debt" for the rest of their life which is rent payments.
This is my issue with the entire analysis.
dublin hillz and Rent4Ever, if you look closely at the beginning of the post it says the -$340,000 are costs over and above renting ("Extra" is the word I used). Also, why would homes increase in value but not the extra costs? The 6% realtor fees, mortgage origination fees, lost interest in more or less tied up funds, property taxes, and maintenance costs will all mirror the homes inflation/deflation (rate of return) trends. This makes this argument moot.
I guess it all depends on the price to annual rent ratio. In AZ it may make sense with a ratio of 10 to 15. In other places where it is 20 to 25, where I live, it does not make sense to buy if you don't know if you want to live there for the next 15 years. Plus property taxes are stupid high here!
FNWGMOBDVZXDNW
2012 May 30, 6:24am
The problems with the 'analysis' are that
1) it makes all sorts of huge assumptions without stating them clearly.
2) it is not clear if the net worth calculation is after 1 year, 4 years, or 40 years.
So, you don't have any way of knowing if the answer is anywhere near correct, and you don't even know what the question was in the first place. It is too much of a mess to try to fix. Just start over.
There is a well thought out calculator that Patrick made. That could be used as a good starting point for net worth calculations after 1, 5, or 40 years.
These calculations are based on a Price/Annual Rent Ratio of about 20 or 21, which is about average for the country.
Renter: 401k = $100,000
Cash = $50,000
Misc. = $25,000
Debt = $0
NET WORTH = POSITIVE $175,000
Owner: 401k = $100,000
Home equity = $40,000
Home = $340,000
Extra expenses associated with owning vs. renting over the course of 40 years = -$340,000
Cash = $10,000
Misc. = $25,000
Debt = -$300,000
NET WORTH = NEGATIVE $165,000
Over 40 years of living in the home, the asset is offset by the liabilities associated with it that do not pertain to renting. Between taxes, mortgage origination fees, realtor fees, expected maintenance, unexpected maintenance, and all other forms of additional expenses relating to owning over and above renting, the home will be paid for twice. Therefore the liabilities offset any perceived worth the asset may carry with it. 340,000 - 340,000 = 0.
One must not forget the liability side of the equation associated with a home.
Renting is usually done in larger complexes where efficiencies from economies of scale can be factored in to offset costs that a homeowner must pay entirely on their own.. Therefore due to the efficiencies of sharing land, building materials, insurance, snow plowing, lawn care, heating, cooling, fitness equipment, pools, garbage pick up, taxes, and maintenance, renters have these cost savings passed on through lower rents.
Where I live a $200,000 home has $5,000 taxes a year. Therefore the value of the home is wiped out solely from taxes over 40 years not even taking into account all the other costs associated with owning that are not associated with renting. This shows my analysis is a conservative estimate that the liabilities will at least cover the perceived worth of the home.
The same person before the home purchase could boast a net worth of $175,000 but after the home purchase must hide the fact that they have a net worth of -$165,000! My cat has I higher net worth than most recent first time home buyers. The only way a first time owner’s net worth would not be negatively affected buy a home purchase is if they bring at least 50% of the home’s value to the table. Not many first timers have this kind of down payment.
Most people don’t know their own net worth nor know how to calculate it. Many people are surprised to find that they have a negative net worth. If you are married don’t forget to divide by 2, unless you are Mormon, ha-ha then maybe 3 or 4. One major reason why the majority of people have a negative net worth is because of mortgage debt and housing liabilities. Everything else the same, if an individual has no mortgage or housing liabilities they have a greater probability of having a positive net worth. Even if a renter has a negative net worth, chances are that negative net worth is under $100,000.
Many home owners owe hundreds of thousands of dollars to the bank for their home. Even if a home owner has other assets, equity, cash, and a 401k, the debt and liabilites from a home usually over shadow all other positive values and leaves a large negative balance. Net worth is measured by dollars. Someone with more dollars, or less negative dollars, is wealthier than someone with fewer dollars. Since the majority of first time home owners have much more debt and liabilites than renters, ceteris paribus, these home owners have a lower net worth than renters.
Therefore, it is safe to say that renters are wealthier than most recent first time home owners. I thought home owners look down on poor renters. How ironic is it that many owners are actually poorer than most renters!
#housing