I'd point out that the data for homes is averaged nationally. Historically, there have been Good Places and Bad Places to buy a home. Home price growth in in-demand coastal areas is very different than in rural areas. In the US, "Flyover states" I'm sure skew this number heavily.
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
I'd point out that while an asset, yes, it is a liability. Not in the typical financial sense, either!
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
The mortgage interest deduction is incredibly over rated. For most people the last few years of high standard deduction + salt cap mean few people really get much benefit from it. At lower tax brackets it's a pretty minor discount on your interest to begin with.
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
> If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE.
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
I've done the math on this many times, and it still puzzles me how anybody would choose to buy a house in the Bay Area today versus renting an equivalent one. When mortgages are over 2x rent, the calculation skews tremendously in favor of renting and investing the difference in an index fund. This considers all possible factors and even chooses favorable conditions for homeowners (high appreciation, low stock market returns, high rent increases y/y). The permanent costs of owning a home (property tax, insurance, HOA, maintenance) are typically around 40% of rent, but can be even higher for certain types of property.
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
This is my conclusion (and the path I've taken - basically max our index and retirement accounts).
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
If you're in a place with good tenant protections (rent control), then yes. And it's true that large swaths of the Bay Area fall in this category. But otherwise, the threat of arbitrary rent increases and/or eviction can be overwhelming if you're looking for long-term stability.
I would need to make $550k/year to afford to buy a home where I grew up in San Jose.
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
One very important thing to keep in mind with these kinds of comparisons: are you actually going to be investing the money you save by renting? I think for most people the answer is no, and that money will just be spent on stuff. In that sense, homeownership is more of a "life hack" that forces you to save rather than a superior investment.
I was always a little puzzled by this concept and I think it gets more silly every decade. How can someone routinely spend money on goods given how insanely cheap goods have become?
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
This whole argument assumes that the 1977-2024 period is a good basis for predicting the future, but that period is the height of globalization, a long stretch of stocks (almost) always beating commodities and land. Looking at much longer timescales however, the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
> the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
I think the downside of your analysis is you don’t consider the impact of leverage on rate of return. The amount of equity you actually put in is very small so even though the overall return is low, the actual return on investment is much higher than your analysis shows. Or put simply no one would buy stocks with a very small down payment and an enormous amount of leverage the way that they buy real estate and that’s what you’re missing
> crucially selling the appreciated home after XX years
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
They both also default to much lower increases in rent than the US average, so it's off on both ends of the equation. Over the last few decades, inflation-adjusted rent has increased by several percent per year: https://nowbam.com/rent-prices-vs-inflation-and-income-growt....
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
> most investors don't rent property out at a loss
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
Central NJ was a great place to buy, at least until Covid. A great way to build wealth here has been: start at a young-ish age at a low end. Over time, sell / rent that out and keep moving up slowly using a mortgage for your primary residence. Over the decades one can own their own residence and have one or more rental properties. Those bring in steady retirement income, which does not depend on daily stock market gyrations.
These rent vs. buy calculators all end up in paralysis by analysis. Everything depends on assumptions. Yes, in the Bay area the calculations may work one way. But there are so many ways around that. A remote job. Starting with a rental property 100 miles away.
It feels really market by market. Where I live, the house I’ve been in is 50-75% mortgage cost vs rent on a comparable property. That mortgage is a bit over 10 years old, and has been below rent rates for nearly the whole time. Sure, I have upkeep, but I also get to make whatever modifications I want (and that’s a thing that’s appealing to me). And yes, I live in a major west coast city.
These broad numbers games feels like rationalizing a decision today. Maybe it’s true for a particular locale (I don’t live in the Bay Area), but these articles feel like they’re painting with too broad of a brush given I can’t maths out a negative for my situation.
I have both owned and rented. Having done this buy vs rent calculation many times and renting generally wins. Three factors not usually considered in the buy equation:
1) the house you’re willing to rent is less expensive than the one your willing to buy.
2) the value of the time you spend maintaining a home should be included in your return calculation
3) putting a lot of $ in any one investment asset (i.e. a single family residence) is riskier than a diversified portfolio of assets.
One thing this seems to ignore -- a mortgage gives you _leverage_ for an investment. Is any bank going to loan you hundreds of thousands of dollars to invest in the S&P?
The NYTimes/NerdWallet calculators implicitly account for that in their logic - they track money you gain/lose from down payment/mortgage/interest/taxes, then selling the house at the end.
On the renting side, they only assume investing the money that isn't going to down payment/monthly mortgage payments, not investing the full value of the house.
My blog post here is just giving an argument that 2 of their parameters should be updated, then showing the result of that update.
Usually these kinds of calculations take that into account. E.g. the up front investment in the stock market == the downpayment on the house. But remember that you're paying for that leverage with interest, which further eats into your gains on the house.
A major aspect of successful real estate investing involves understanding your particular market and doing the legwork to find value. You completely lose that signal when you assess the entire market in aggregate like this.
I’m paying far less on my mortgage than I would on rent in my nice neighborhood, based partly on luck, partly on finding a good opportunity, and partly on locking in my housing costs while the rent around me steadily increases.
Aggregate analyses aside, I have a hard time believing that a mortgage will generally be worse as an investment than renting in an era where algorithms are deployed to push rents as high as possible, as often as possible.
I have to be reading this wrong. Is it just tracking the value of the S&P 500 vs the value of an average house? Does it assume that unless you buy a house you have no housing costs?
Yes, you're reading it wrong. It is not just tracking S&P 500 vs the average house value. It does not assume that would ever have no housing costs. The calculators in question model housing costs, rental costs, mortgage rates, and all the rest of it.
It says it’s based on buying: mortgage, taxes, and income from selling the appreciated asset after XX years / renting: rent, and income from taking the difference from rent vs buy and putting it in the markets.
> "For those unfamiliar, these rent/buy calculators attempt to estimate the cash flow over XX years for renting vs buying a home. For buying, this is the down payment, mortgage, taxes, etc, and then crucially selling the appreciated home after XX years. For renting, this is mostly rent, but also crucially investment income from investing the money that would have gone into the mortgage/down payment. When I recalculate these numbers, all I'm doing is saying that the default home appreciation rate and the investment appreciation rate should be updated in the tool, and showing the result of that."
When you buy a home, you pay a down payment you counterfactually could have invested (and any difference in rent vs. mortgage can be invested). The article is just saying the calculators skew towards buying by underestimating investment growth and overestimating housing appreciation.
Sweeping generalization with bias toward the side of perpetual renting. It depends where and the ratio of housing:income. There are plenty of terrible housing economic choices, but these are all individual and required nuanced, personalized calculations from an unbiased, helpful source to determine if and where renting vs. owning makes sense. That would be a better than triumphantly declaring "owning is bad."
Nobody is going to challenge you on a 7.9% asset growth assumption in the SpY? That’s an incredibly ambitious assumption by any measure. You essentially have to assume you will see another couple decades of record growth in the us that will significantly outpace any global growth.
Okay, somebody help me out here. Maybe I'm missing something, but the basic equation is that you as tenant are paying the landlords costs plus their profit. How can renting ever be cheaper than buying?
In some housing markets, if you were to buy a home (using a mortgage, with current interest rates) and immediately rent it out at market rate, you’d be losing tons of money. The price-rent ratio varies dramatically from city to city and even between different types of properties.
Because you, as someone who is buying a $500k house with 20% down in 2025, are going to have much higher costs than your landlord, who bought it for $100k in 1995 and has already paid it off.
Bake in the fact that many rented houses today were either purchased or refinanced with the historic-low interest rates of ~2021, and there is really just a time difference between someone with pre-existing capital to invest years ago that you didn't have.
That’s not true at all. Rent is determined by demand and supply—not by a landlord’s costs. Plenty of landlords operate at a loss; rent just helps make the loss more manageable.
Eg. when you live in a premium apartment. For even moderately nice houses 20 years of rent would pay a third of the home's value at the start of the renting period. And rent will never increase as much as the property value, no taxes and maintenance. It's much cheaper AND simpler, especially if you are unsure how long you stay.
Rents go up but the landlords costs stay static. A lot of small landlords start out at something close to break even from a cash flow perspective. At this point the landlords “profit” is the appreciation.
That said the cash flow gets better over time as rents increase.
I suppose depends on the ownership structure of housing stock. If it is mostly repaid mortgages, eg. inherited housing or investment stock, then the rental need not be tied to mortgage costs, but rather investment yield, which may be lower.
Atreiden|7 months ago
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
bravetraveler|7 months ago
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
pitpatagain|7 months ago
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
centra_minded|7 months ago
Velorivox|7 months ago
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
TL;DR: Location matters. A LOT.
readthenotes1|7 months ago
Where I live, the highest source of inflation for me has been property taxes. It's almost as if my landlord wants me to sell.
stopping|7 months ago
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
dekhn|7 months ago
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
archagon|7 months ago
burnt-resistor|7 months ago
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
AlexandrB|7 months ago
bottlerock|7 months ago
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
OgsyedIE|7 months ago
AnimalMuppet|7 months ago
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
daft_pink|7 months ago
robocat|7 months ago
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
msgodel|7 months ago
dlcarrier|7 months ago
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
bryanlarsen|7 months ago
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
weepinbell|7 months ago
https://fred.stlouisfed.org/graph/?g=1Kion
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
CommenterPerson|7 months ago
These rent vs. buy calculators all end up in paralysis by analysis. Everything depends on assumptions. Yes, in the Bay area the calculations may work one way. But there are so many ways around that. A remote job. Starting with a rental property 100 miles away.
RijilV|7 months ago
These broad numbers games feels like rationalizing a decision today. Maybe it’s true for a particular locale (I don’t live in the Bay Area), but these articles feel like they’re painting with too broad of a brush given I can’t maths out a negative for my situation.
ljsocal|7 months ago
asherlc|7 months ago
weepinbell|7 months ago
On the renting side, they only assume investing the money that isn't going to down payment/monthly mortgage payments, not investing the full value of the house.
My blog post here is just giving an argument that 2 of their parameters should be updated, then showing the result of that update.
AlexandrB|7 months ago
CodingJeebus|7 months ago
I’m paying far less on my mortgage than I would on rent in my nice neighborhood, based partly on luck, partly on finding a good opportunity, and partly on locking in my housing costs while the rent around me steadily increases.
Aggregate analyses aside, I have a hard time believing that a mortgage will generally be worse as an investment than renting in an era where algorithms are deployed to push rents as high as possible, as often as possible.
reverendsteveii|7 months ago
recursive|7 months ago
reactordev|7 months ago
centra_minded|7 months ago
When you buy a home, you pay a down payment you counterfactually could have invested (and any difference in rent vs. mortgage can be invested). The article is just saying the calculators skew towards buying by underestimating investment growth and overestimating housing appreciation.
burnt-resistor|7 months ago
nothercastle|7 months ago
ivape|7 months ago
brian_spiering|7 months ago
adiabatichottub|7 months ago
ashdksnndck|7 months ago
lsy|7 months ago
Bake in the fact that many rented houses today were either purchased or refinanced with the historic-low interest rates of ~2021, and there is really just a time difference between someone with pre-existing capital to invest years ago that you didn't have.
whobre|7 months ago
poisonborz|7 months ago
mikeryan|7 months ago
That said the cash flow gets better over time as rents increase.
rich_sasha|7 months ago
izacus|7 months ago
Henchman21|7 months ago