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Clubber | 9 months ago
This analysis relies on someone to have a mortgage that takes 100% of their salary every month. The general rule was don't buy a house over 3x your annual pre-tax salary. I think it's moved up past that in most places though. Either way, don't buy so much house you can't afford food. I would think that goes without saying.
>Moreover if the fear is your portfolio losing value, buying a house doesn't really mitigate that. Sure, you might still have a house at the end of the day, but that's cold comfort if you paid $2M for a bay area house that subsequently saw its value tank (eg. something like Detroit).
This analysis is an edge case and in no way represents the norm. I'm not sure of any area that has gone from Bay Area prices to Detroit prices in a single lifetime.
>Even in some sort of apocalypse scenario a house isn't obviously better than stocks, because the whole concept of owning a house relies on some sort of functioning legal system.
Another crazy edge case. It's saying don't buy a house because an asteroid might hit. I'm pretty sure that newly non-functioning legal system wouldn't protect your stock portfolio either. If it comes to that, best to invest in bullets and whiskey.
>On the other hand there are very real problems with investing in "bricks / house". It has historical under-performed stocks.
Include paying rent in your analysis comparing it with stocks, particularly after you pay it off. You're sinking $X into a rental property with zero return and zero equity gained. I don't have to pay $2000 to the mortgage ever again and I have an asset that has more than doubled in 20 years, and a place to live that is essentially rent/mortgage free for life. That's a lot of dividends comparatively. Also, rents go up, mortgage payments typically don't, so factor inflation in your rent analysis.
>Moreover a single house provides poor diversification compared to a basket of stocks and its performance is tied to the economic health of your local area.
You shouldn't ever put all your money in stocks. Putting money in real estate, bonds, CDs, cash, etc. is the definition of diversification.
>If you lose your job, there's a good chance that your house won't fetch a high price.
Housing prices are unrelated to an individual losing their job. If you lose your job and haven't saved up enough runway, you could default on your mortgage. You could also not pay your rent. You get kicked out either way, but the bank should cut you a check for the equity you have remaining, minus whatever fees they conjure up.
>All of this makes for a poor risk adjusted return, and it's unclear how "has value to you" counters this.
All of your points were based on invalid assumptions, edge cases, or are irrelevant when compared to paying rent. Buying a house is a long game.
gruez|9 months ago
The problem is that in much of the anglosphere, housing is so scarce that you have to ignore such rules of thumb, or live in the middle of nowhere.
>This analysis is an edge case
>Another crazy edge case
If you ignore edge cases, then you're left with just the median case, and that says that at current price levels, houses aren't worth investing in because they have historically worse returns than stocks, and provide poor diversification.
>Include paying rent in your analysis comparing it with stocks, particularly after you pay it off. You're sinking $X into a rental property with zero return and zero equity gained. I don't have to pay $2000 to the mortgage ever again and I have an asset that has more than doubled in 20 years, and a place to live that is essentially rent/mortgage free for life. That's a lot of dividends comparatively. Also, rents go up, mortgage payments typically don't, so factor inflation in your rent analysis.
This calculator[1] factors everything you listed, and the math doesn't work out for the hottest housing markets. It might work out for Miami or Huston, but not San Francisco or even Albuquerque. Using default assumptions implies a break-even price-to-rent ratio of 14, but most US metros are far above that[2].
The nice thing about the calculator is that if you don't agree with the assumptions, you can plug in your own numbers. I'd like to see what numbers you come up with to make to make the math work out in favor of buying in the top US cities.
[1] https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...
[2] https://www.sofi.com/learn/content/price-to-rent-ratio-in-50...
>Housing prices are unrelated to an individual losing their job.
The point isn't that a Bay Area housing market will crash because Google Employee #68908 lost his job, it's that if there was an AI winter/tech crash, that will result in Bay Area housing prices dropping, along with layoffs.
majormajor|9 months ago
This is a bit circular, supply-and-demand-wise. Especially in the US - why is demand in some areas so high that people will bid houses in San Jose up to 2M+? Why aren't they buying the same thing for 450k in Dallas?
Why aren't the companies based in those crazy expensive areas and paying million-plus total comp to large sections of their workforce being eaten alive by ones with lower labor costs in other regions?
Housing is scarce in the areas that are already the most densely populated, which itself is a bit of yogi-berra moment.
Too much discussion about housing in the US focuses only on the supply side and ignores the geographic concentration of demand that has happened over the last few decades. Is that centralization good for the country in the long-run regardless? Obviously that centralization goes back way longer in many European countries, so was the distribution and the number of growing populaces in cheap, not-yet-established areas part of the secret sauce for the 20th century US? Could you start the companies that made the Bay Area what it is today in today's Bay Area? Could you even start them in somewhere cheaper today, or would you not be able to get the talent to join you there? We're five years into remote work being way more common than it ever was before, and it hasn't broken that stranglehold of concentration yet.
cwalv|9 months ago
That's a great calculator; I remember using it like a decade ago. And while it includes all factors they listed there are a few it doesn't:
1. If interest rates go down, you can refinance, but if they go up, the inflation and appreciation values likely will as well, but your rate is fixed, for (up to) 30 yrs (!!)
2. It's relatively easy to make improvements while you live there (and capture increased value when you leave)
3. The calculator assumes that the down payment and cost difference vs renting would be invested, which is fine but ignores psychological realities that prevent this more often than not
Also:
> The best hedge is to also "invest" in something that has value to you. Like bricks / house.
The suggestion was mentioned as a 'hedge'. The point being: you don't know what the values entered into the calculator will really end up being. Having some costs locked in can help with concerns around cash flow (and shelter costs are usually a significant percentage of costs overall). It's an "also 'invest'" strategy, so there's a whole lot not included in the calculator here as well