This is why I don't buy the home I live in as an investment. It conflates two very important things:
* My home.
* A large financial investment.
Changing one affects the other. I'm skeptical that life circumstances will magically align so that when it's a good time for me financially to sell my home, it will also be a good time for me to change location (or vice versa).
I bought a duplex, live in one side, rent the other. First time owner 5% down. Obama gave me $8000 to live in it for 3 years. mortage+insurance+taxes - rental income == about 1/2 what I would pay to rent similar place. I get many tax benefits (rental 1/2 counts as business). My equity + 8k (which was a one time thing but you should have taken advantage of it) is already more than my downpayment after 2 years. In another year or two I'll move out and rental income will be paying everything including building equity and providing a $4-500 of profit (which I expect to mostly used up in maintenance).
Duplex living is great deal. Assuming of course you live in a non-suck market (realestate and job). If I had the money for 20% down payment I'd be buying more.
The counter argument is that the rent you are putting down is not being invested into your home. I think that is a very cogent argument, but it relies on your ability to sell (or willingness to sell later on).
I concur with your analysis though, and don't plan to buy for a long time (ie, when I am ready to put down roots for 10-20 years).
This is missing an important point - if you buy, you are stuck there until you can sell it again. That loss of flexibility represents a significant cost of its own.
I'm not sure I understand the prevailing view that renting is always better than buying.
I bought an apartment in San Francisco in 2001 and frankly, it was one of the best decisions I've ever made. Before I did so, I calculated out the cost difference of renting vs. buying. After taxes, my living expenses were only a few thousand dollars more a year to buy vs. renting.
If I want to move, I don't have to sell my place, I can simply rent it out. Given current rates, I can do so for more than my monthly mortgage payment. Not only that, but my property is worth about 40% more than what I paid for it. I can actually use my equity in my house to finance another home and flip one to a rental.
Maybe purchasing isn't for everyone, but it certainly is for some. In the end, it depends on your finance situation and location.
Yes, you're special because your home is in an area where people want to rent it. Every home-owner certainly does not have this advantage. In your case it makes more sense to buy than in others.
When calculating the cost of purchasing/ renting, are they including condo fees, property/school taxes. In some areas the tax/condo fees alone exceed typical rents.
This is one of the most overlooked cost for first-time home buyers, all the cost in condo fees and taxes are not going to contribute a cent to your equity either.
I tried pretty hard to find a house in the New York Metropolitan area this summer. Once you factor in the taxes, HOA fees and mortgage I would be paying roughly 2x in monthly payments to get an apartment similar to the one I rent. When I consider that my house will not return me more than 3-4% pa over a long term I decided it was not worth it to buy. Also houses have a end load of ~5% for agent fees.
> it’s cheaper to buy a home than to rent in 74% of America’s 50 largest cities
This "statistic" wouldn't happen to come from a company that earns its revenue primarily through the buying and selling of houses, would it?
Most Americans should rent, especially in today's dark economy. The average American is unskilled, has not saved for retirement and lives paycheck to paycheck. Such a person should avoid big purchases because accumulating debt is a gamble on future earnings.
When my wife got accepted to West Chester University in SE PA, we went looking for a place to rent in the nearby area. Coming from Harrisburg, where I could rent a house for $500/mo, I was blown away that a 2br apartment generally ran $1200/mo (Stop snickering, New Yorkers)
We decided to buy a 2br fixer-upper on the cheap and ended up with a mortgage of ~$600/mo. That was five years ago. We've since renovated the crap out of the house (it's now the nicest on the block), bought a second house in Philadelphia (wife's getting her PhD at Penn now, and I can now walk to work), and are about to put it out for rent. We'll be getting at least $1200/mo for it.
Renting's okay while you get your financial situation together. Maybe most people shouldn't live paycheck to paycheck. You don't have to be well off in order to make a budget. If you look at my social security statements, I was making jack squat while I lived in York PA, and still managed to squirrel money aside.
Some people's lifestyles are more conducive to renting. I quite like having a place I can mangle and customize as I see fit. Some people like not having to worry about maintaining their building and grounds. Maybe when I can't do things for myself, I'll go back to having a landlord, but especially given how low mortgage rates are right now, I feel fortunate to have bought a house or two.
More importantly, the "statistic" also seems to contradict recent scholarly research that indicates that areas with high home ownership are the last to return to full employment.
"Oswald showed a correlation between homeownership and unemployment both within and across countries. These results have been confirmed by Nickell and Layard (OECD countries) and Green and Hendershott (U.S. states). The present paper tests the hypothesis with an individual household data base. We track through time individual households with people who enter unemployment. We find some evidence that earners in homeowning households who become unemployed find work less quickly than do earners of renter households."
I agree with the last bit about big purchases, but surely it's not an absolute rule that applies to housing unquestioned. You will always have the cost of housing whether you rent or buy. There are more risks with buying, but if you are in a market where you pay a premium for renting, is there a point where that no longer makes financial sense? I think the real epidemic was that Americans were acquiring too much house, disguising the extravagance as an "investment." You can also rent too much house.
I can't speak for all houses in all cities, but when I left the Bay Area, it was shocking- you really could pay same as rent in a middling place on some of these houses.
The tricky bit then becomes not "can I afford it" but, "will I be moving again? If so, how soon?"
Gross Rent Multiplier (GRM) is used in evaluating rental property investment. One rule of the thumb ratio is 1% for monthly rent over purchase price. For ratio over 1%, you will most likely make money after finance cost and taxes.
It can be used to evaluate renting vs buying decision for home buyer. If the likely rent for the house you are buying is close to or over 1%, buying has more advantage. If it's far below 1%, renting costs less.
I find the cultural differences with respect to home ownership fascinating.
In the US, people often own their own homes. Rarely do they own homes that other people live in. Apartments are typically owned a single owner/landlord (condos are different). Owning is a common dream, less so in cities (particularly New York).
In the UK, home ownership and the property market is an obsession. It is a common topic of conversation. People are heavily invested in their properties and often seek to buy more of them. There is a strong attitude of "if I don't buy now I'll never be able to afford to live here", particularly in London and the Southeast (less so now I suspect). The North and West are somewhat different. The market is highly speculative.
In Switzerland, the property market is essentially controlled. There is little real estate speculation. Transaction costs are high. Capital gains taxes on properties can be brutal, which strongly discourages speculation. Renting is not frowned upon. For tax reasons, people often buy houses and never pay them off. In Switzerland you get a tax exemption for interest but you also get deemed income from the effective rent the property is worth.
In Australia, owning one's house is a cultural obsession. People often end up owning multiple properties. There are few apartment buildings owned by one owner (it's much more like the American condo system).
I think of all the systems I've personally experienced, I like the Swiss system the most. It treats property as something you need to live not a financial instrument to speculate on.
That system isn't applicable everywhere however. Switzerland is unique in that it is fairly affluent, has a small population and very restrictive immigration. So somewhere like the US has >40 times the population so even excluding immigration, domestic movements of people can be incredibly large creating market pressures in places like New York that Switzerland will simply never experience.
Some years ago I saw an article (I'm sadly unable to find but the topic is covered elsewhere in depth) in the UK which showed that the rate of home ownership was inversely proportional to economic growth. The idea was that home ownership reduces labour market flexibility (which it clearly does). I don't know if the trend still holds up.
In Australia for example a family home can easily cost $1 million in Sydney. If the household income is $200,000 and that family wishes to move to, say, Melbourne and buy a new house they'll pay $20-50,000 in realtor fees and $50,000+ in stamp duty on buying the new house so they need to make back nearly $100,000 of after-tax income just to break even.
Sadly stamp duty is a cash cow for state governments in Australia so isn't going anywhere anytime soon. Yet I think it's a real problem. Transaction costs need to be relatively low. Financing requirements need to be relatively to limit rampant speculation, particularly in overheated markets.
To offer another very diverging datapoint: In Germany, renting is the norm, though owning something you aspire to, either as a home you plan to spend the rest of your life in (thus protecting you against market troubles) or an inflation-safe part of an investment portfolio. Speculation on home prices is virtually unknown (and there was no housing bubble).
Somewhat off-topic, but what's the rental situation like in Australia for those moving to the country? Are there substantial obstacles to a non-citizen resident like there are in other countries like Japan? My wife and I are planning a move, and this is something I've not been able to Google up very well.
This graphic only tells part of the story and the easiest part of the story. What the rental/some of the economic fundamentals are right now. When deciding to purchase for investment and to a lesser degree a personal residence, the decision to purchase or not should be driven by the future not the present.
I am more then willing to invest in any city on that chart if I know some or better, all of these:
- population is increasing
- employment is increasing
- income is increasing
- the neighbourhoods I'm buying show pride of ownership
- public transit improvements (highway, LRT, subway)
- supportive government (proactive business development office)
Though this infographic is very cool/informative, buyers should concentrate more on the future then the present. Just because it's cheap isn't sufficient reason to purchase. And if you want to live in an area with a negative outlook renting IMO is best.
For those of us (maybe just me) stuck on work computers in which we can't upgrade from IE7, is there any way to access the data in a plain text format?
It's really cool to see information like this laid out. I'm from Chicago, and even property downtown is not (as) expensive. I was always told that the bay was more expensive, but didn't believe it until I started living in San Francisco. We're planning on moving to San Jose, or somewhere a little further away to try and minimize that effect.
Chipotle is 50 cents more expensive across the board here. Damn.
A big component missing here is location within a city. Having been in DC and Boston, they're on the edge of buy/rent, but a big question is could I live in the same neighborhoods or areas as I rent. If I can't, it's worth renting even if buying might be better because it's closer to where I want to be.
Looking at the source, it seems to be built with jquery isotope plugin. I couldn't see any similar examples at isotope site. Any one else know more details on the implementation?
Also, the job growth numbers for each city look suspicious. Was there such a jump in growth rate in Jan '11?
Surely buying is the safest long term scenario? I wouldn't want to be renting when I'm retired, as you become totally dependant on the rental market (i.e. if rents shoot up, you're screwed). Even if the housing market tanks and my house halves in value, at least I'll have somewhere to live.
If I look at my friends parents who live in some nice parts of London, there is zero chance they could afford to rent the houses they live in now, the ones they bought 30 years ago.
I've said this before but this looks like a new discussion so I'll say it again: If you can switch jobs safely without moving, then yeah, buy a house. If, however, a job switch will involve a move, you're daft to do so. Too much risk in today's job market.
I'm thinking of the US marketplace, but I suspect it will hold up in similar areas as well. Houses can/will be illiquid at times.
Viewing this from Australia, where the 1 BR flat next door sold for $370K ($388K USD) this is very attractive. The bottom few ones are priced $50-$150K. It's plausible to buy outright - no mortgage.
However, unemployment ranges from 9% to 17%... I'm not sure how pleasant or safe that would make the neighbourhood.
I just moved from Melbourne, AU to Las Vegas, and its incredible. I have a running joke with friends back in Australia that you can go out for lunch in Vegas and buy a house with the change.
Having said that, I wouldn't trade my place in Melbourne for any number of houses here :)
Both San Francisco and San Jose are near the bottom in job growth. This surprises me, given the hiring market for engineers in the Bay Area. What gives?
There's a lot more to employment than engineers. This really goes to show just how vanishingly small our field/industry is compared to the overall economy.
Things are red hot for software engineers in the Bay Area, they are way less peachy for just about every other field.
I think it has to do with the number of tech jobs that are based in those cities. I'm from the midwest and am working out of an apartment in SF so I have no idea what I'm talking about it, but it seems like a lot of startups are based out of places that are "closer" to the tech scene.
Again, I'm still getting used to the whole scene, but the center of everything really seems to be further south.
[+] [-] techiferous|14 years ago|reply
* My home.
* A large financial investment.
Changing one affects the other. I'm skeptical that life circumstances will magically align so that when it's a good time for me financially to sell my home, it will also be a good time for me to change location (or vice versa).
So I rent.
[+] [-] njharman|14 years ago|reply
Duplex living is great deal. Assuming of course you live in a non-suck market (realestate and job). If I had the money for 20% down payment I'd be buying more.
[+] [-] Vivtek|14 years ago|reply
Otherwise, though: you're absolutely right. The only reason a foreclosure makes sense for me is that fixing houses is a hobby of mine.
[+] [-] pnathan|14 years ago|reply
I concur with your analysis though, and don't plan to buy for a long time (ie, when I am ready to put down roots for 10-20 years).
[+] [-] bitmage|14 years ago|reply
[+] [-] Symmetry|14 years ago|reply
[+] [-] kelnos|14 years ago|reply
[+] [-] unknown|14 years ago|reply
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[+] [-] pinoyboy82|14 years ago|reply
[+] [-] Aloisius|14 years ago|reply
I bought an apartment in San Francisco in 2001 and frankly, it was one of the best decisions I've ever made. Before I did so, I calculated out the cost difference of renting vs. buying. After taxes, my living expenses were only a few thousand dollars more a year to buy vs. renting.
If I want to move, I don't have to sell my place, I can simply rent it out. Given current rates, I can do so for more than my monthly mortgage payment. Not only that, but my property is worth about 40% more than what I paid for it. I can actually use my equity in my house to finance another home and flip one to a rental.
Maybe purchasing isn't for everyone, but it certainly is for some. In the end, it depends on your finance situation and location.
[+] [-] pedrolll|14 years ago|reply
[+] [-] roel_v|14 years ago|reply
I see no reason to believe that that's a prevailing view. It all depends on the region and economic circumstances.
[+] [-] Unregistered|14 years ago|reply
[+] [-] analyst74|14 years ago|reply
[+] [-] dman|14 years ago|reply
[+] [-] systemtrigger|14 years ago|reply
This "statistic" wouldn't happen to come from a company that earns its revenue primarily through the buying and selling of houses, would it?
Most Americans should rent, especially in today's dark economy. The average American is unskilled, has not saved for retirement and lives paycheck to paycheck. Such a person should avoid big purchases because accumulating debt is a gamble on future earnings.
[+] [-] leviathant|14 years ago|reply
We decided to buy a 2br fixer-upper on the cheap and ended up with a mortgage of ~$600/mo. That was five years ago. We've since renovated the crap out of the house (it's now the nicest on the block), bought a second house in Philadelphia (wife's getting her PhD at Penn now, and I can now walk to work), and are about to put it out for rent. We'll be getting at least $1200/mo for it.
Renting's okay while you get your financial situation together. Maybe most people shouldn't live paycheck to paycheck. You don't have to be well off in order to make a budget. If you look at my social security statements, I was making jack squat while I lived in York PA, and still managed to squirrel money aside.
Some people's lifestyles are more conducive to renting. I quite like having a place I can mangle and customize as I see fit. Some people like not having to worry about maintaining their building and grounds. Maybe when I can't do things for myself, I'll go back to having a landlord, but especially given how low mortgage rates are right now, I feel fortunate to have bought a house or two.
[+] [-] sc68cal|14 years ago|reply
"Oswald showed a correlation between homeownership and unemployment both within and across countries. These results have been confirmed by Nickell and Layard (OECD countries) and Green and Hendershott (U.S. states). The present paper tests the hypothesis with an individual household data base. We track through time individual households with people who enter unemployment. We find some evidence that earners in homeowning households who become unemployed find work less quickly than do earners of renter households."
Abstract: http://cura.osu.edu/research/roundtables/data/hendershott1.p...
NyTimes Article: http://www.nytimes.com/roomfordebate/2011/08/16/a-chance-to-...
[+] [-] scottkduncan|14 years ago|reply
[+] [-] toddmorey|14 years ago|reply
[+] [-] sliverstorm|14 years ago|reply
The tricky bit then becomes not "can I afford it" but, "will I be moving again? If so, how soon?"
[+] [-] anonymous246|14 years ago|reply
[deleted]
[+] [-] ww520|14 years ago|reply
It can be used to evaluate renting vs buying decision for home buyer. If the likely rent for the house you are buying is close to or over 1%, buying has more advantage. If it's far below 1%, renting costs less.
[+] [-] hessenwolf|14 years ago|reply
I have heard 7% is a reasonable long-term.
[+] [-] cletus|14 years ago|reply
In the US, people often own their own homes. Rarely do they own homes that other people live in. Apartments are typically owned a single owner/landlord (condos are different). Owning is a common dream, less so in cities (particularly New York).
In the UK, home ownership and the property market is an obsession. It is a common topic of conversation. People are heavily invested in their properties and often seek to buy more of them. There is a strong attitude of "if I don't buy now I'll never be able to afford to live here", particularly in London and the Southeast (less so now I suspect). The North and West are somewhat different. The market is highly speculative.
In Switzerland, the property market is essentially controlled. There is little real estate speculation. Transaction costs are high. Capital gains taxes on properties can be brutal, which strongly discourages speculation. Renting is not frowned upon. For tax reasons, people often buy houses and never pay them off. In Switzerland you get a tax exemption for interest but you also get deemed income from the effective rent the property is worth.
In Australia, owning one's house is a cultural obsession. People often end up owning multiple properties. There are few apartment buildings owned by one owner (it's much more like the American condo system).
I think of all the systems I've personally experienced, I like the Swiss system the most. It treats property as something you need to live not a financial instrument to speculate on.
That system isn't applicable everywhere however. Switzerland is unique in that it is fairly affluent, has a small population and very restrictive immigration. So somewhere like the US has >40 times the population so even excluding immigration, domestic movements of people can be incredibly large creating market pressures in places like New York that Switzerland will simply never experience.
Some years ago I saw an article (I'm sadly unable to find but the topic is covered elsewhere in depth) in the UK which showed that the rate of home ownership was inversely proportional to economic growth. The idea was that home ownership reduces labour market flexibility (which it clearly does). I don't know if the trend still holds up.
In Australia for example a family home can easily cost $1 million in Sydney. If the household income is $200,000 and that family wishes to move to, say, Melbourne and buy a new house they'll pay $20-50,000 in realtor fees and $50,000+ in stamp duty on buying the new house so they need to make back nearly $100,000 of after-tax income just to break even.
Sadly stamp duty is a cash cow for state governments in Australia so isn't going anywhere anytime soon. Yet I think it's a real problem. Transaction costs need to be relatively low. Financing requirements need to be relatively to limit rampant speculation, particularly in overheated markets.
[+] [-] brazzy|14 years ago|reply
[+] [-] bartonfink|14 years ago|reply
Somewhat off-topic, but what's the rental situation like in Australia for those moving to the country? Are there substantial obstacles to a non-citizen resident like there are in other countries like Japan? My wife and I are planning a move, and this is something I've not been able to Google up very well.
[+] [-] gonepostal|14 years ago|reply
I am more then willing to invest in any city on that chart if I know some or better, all of these: - population is increasing - employment is increasing - income is increasing - the neighbourhoods I'm buying show pride of ownership - public transit improvements (highway, LRT, subway) - supportive government (proactive business development office)
Though this infographic is very cool/informative, buyers should concentrate more on the future then the present. Just because it's cheap isn't sufficient reason to purchase. And if you want to live in an area with a negative outlook renting IMO is best.
[+] [-] EvanKelly|14 years ago|reply
[+] [-] aodin|14 years ago|reply
[+] [-] shashashasha|14 years ago|reply
Anyways, if it's useful to you, the data we're pulling from is here: http://insights.truliablog.com/vis/rent-vs-buy-q3/data/rvb-q...
[+] [-] tedkalaw|14 years ago|reply
Chipotle is 50 cents more expensive across the board here. Damn.
[+] [-] bialecki|14 years ago|reply
[+] [-] pnathan|14 years ago|reply
[+] [-] prpon|14 years ago|reply
Also, the job growth numbers for each city look suspicious. Was there such a jump in growth rate in Jan '11?
[+] [-] hugh3|14 years ago|reply
Sorry, that wasn't supposed to be a joke. A meta-comment is a comment about comments, though, and your comment is on the graphics.
[+] [-] JonoW|14 years ago|reply
If I look at my friends parents who live in some nice parts of London, there is zero chance they could afford to rent the houses they live in now, the ones they bought 30 years ago.
[+] [-] jleyank|14 years ago|reply
I'm thinking of the US marketplace, but I suspect it will hold up in similar areas as well. Houses can/will be illiquid at times.
[+] [-] 6ren|14 years ago|reply
However, unemployment ranges from 9% to 17%... I'm not sure how pleasant or safe that would make the neighbourhood.
[+] [-] praxxis|14 years ago|reply
Having said that, I wouldn't trade my place in Melbourne for any number of houses here :)
[+] [-] megablast|14 years ago|reply
I am guessing that you are central Sydney or Melbourne.
[+] [-] Game_Ender|14 years ago|reply
[+] [-] nh|14 years ago|reply
[+] [-] ootachi|14 years ago|reply
[+] [-] potatolicious|14 years ago|reply
Things are red hot for software engineers in the Bay Area, they are way less peachy for just about every other field.
[+] [-] Aloisius|14 years ago|reply
[+] [-] tedkalaw|14 years ago|reply
Again, I'm still getting used to the whole scene, but the center of everything really seems to be further south.
[+] [-] sdfjkl|14 years ago|reply
[+] [-] bb75|14 years ago|reply
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