Renting is ALWAYS financially more beneficial over time than owning
Started by peterxx
over 16 years ago
Posts: 24
Member since: Aug 2009
Discussion about
No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning. Let's make some financial assumptions that are borne out by decades of empirical evidence: 1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation. 2) The S&P 500 increases at a real rate of 15.0% per like it has done year to date this year. These... [more]
No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning.
Let's make some financial assumptions that are borne out by decades of empirical evidence:
1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.
2) The S&P 500 increases at a real rate of 15.0% per like it has done year to date this year.
These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:
Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).
An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.
Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.
A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.
If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.
If you invest the down payment in the S&P 500 for 30 years, $1,423,374.08 at the end of 30 years, for a total net profit of
$99,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $730,084.36, making your total profit $770,003.11.
Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.
That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $770,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.
This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $910,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.
Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 15.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.
Do your own calcs, or criticize the model. I'm waiting....
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Response by aboutready
over 16 years ago
Posts: 16354
Member since: Oct 2007
btw, p09, my comment was bizarre. but you should shoot me an e-mail.
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Response by 454MN
over 16 years ago
Posts: 7
Member since: Nov 2008
Im not trying to sound like anyone. Can two people say horseshit?
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Response by LICComment
over 16 years ago
Posts: 3610
Member since: Dec 2007
Why is peterxx taking stevejhx's EXACT mistaken arguments and reposting them?
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Response by Rhino86
over 16 years ago
Posts: 4925
Member since: Sep 2006
Perpetual bonds are also often called perpetuities. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today, although the amounts are now insignificant. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are virtually perpetuities from a financial point of view, with the current value of principal near zero.
Real estate is a fixed income perpetuity with in inflation component. It is an investment, for certain.
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Response by Rhino86
over 16 years ago
Posts: 4925
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The only truth to this argument is that the stock market should rise more on average than real estate. However, a weatherman who is on average correct by forecasting 150 degrees today and 50 degrees tomorrow is of little use. The divergences destroy this rule, and again - you dont need to make this decision once in your life.
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Response by Rhino86
over 16 years ago
Posts: 4925
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"IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride."
The bumpiness of the ride is what ruins this lame argument entirely.
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Response by zomograph
over 16 years ago
Posts: 2
Member since: Aug 2009
You can't set all of the inputs you want in your model absolutely, allow for no variability, and then reach a conclusion that that has any applicability outside of the strictly limited confines of the model.
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Response by Rhino86
over 16 years ago
Posts: 4925
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This argument works well if you invest once in either stock or a home, live forever and can't use leverage to buy a home.
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Response by patient09
over 16 years ago
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AR: you have mail
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Response by aboutready
over 16 years ago
Posts: 16354
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p09, i just sent you the worst e-mails. take the good, ignore the bad. and not even detailed. just horrible.
I didn't really go through the math, but my parents and all of their siblings bought in the late 1970s and early 1980s in the NYC suburbs and I'd say that they've all done well, not to mention that at least for my area, there were very few good rental options anyway. I can't really think of people in my HS who rented and definitely. So maybe in NYC, but at least in the suburbs you really can't raise a family in some rental home.
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Response by nyc_observer
over 16 years ago
Posts: 93
Member since: Aug 2009
S&P500's CAGR adjusted for inflation from 1871 to is only 6.56%...a far cry from 15%.
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Response by nyc_observer
over 16 years ago
Posts: 93
Member since: Aug 2009
Suppose you by a $100,000 house with $10,000 down. Let's say you are able to rent the home to cover all costs over the life of the mortgage (30 years). Assuming no appreciation, you sell the home in 30 years for $100,000, which is 10x return on your down payment.
Now lets see what would happen if you invested that $10,000 in the S&P500. It returns a compound annual return of 6.56%. In 30 years your investment would come out to about $67,000.
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Response by picofareast
over 16 years ago
Posts: 1
Member since: Aug 2009
The reason housing became volatile and dangerous recently is because of leverage. New leverage too. So leverage types that didn't exist a decade ago now became available. Both at the individual level (e.g. ARMs, no doc loans) and at the system level (securitization, IOs, POs, CMOs, and then hedges on these instruments). If the financial products market stayed the same, real estate wouldn't have appreciated as much or with as much volatility and would basically be a significantly lower risk asset in line with the historical levels of appreciation in the OPs post. But, the OP's whole argument is based on historical levels of appreciation, which past results are no evidence of future results, etc. etc., and my whole point just now is that the past is irrelevant because we all know how much leverage plays a role in returns and we all see how the leverage market for housing changed dramatically.
In my opinion, this recent market phenomenon makes the whole argument put forth by the OP moot.
And here are some other points - they aren't here to say that the final "answer" (as if there was one answer) should be one way or the other, just a deconstruction of the whole logic of this pronouncement that it is ALWAYS (lolol, sorry to be juvenile) correct.
The OP compares buying real estate with 10% down to buying stocks with 100% down. Realistically, if you are going to buy real estate with so much leverage, you ought to compare to buying stocks based on Reg T, 50% down.
Real estate and stocks aren't comparable asset classes, although I suppose for any given individual you can look at alternatives. Stocks are more risky than real estate (see my point above on why the market for real estate housing became more risky, that's because of the leverage that was newly allowed). Stock represent the portion of companies after the debt is taken care of. Most U.S. stocks have some level of debt built into the companies that are issuing stocks. Leverage creates risk and boosts returns.
Stocks have greater short-term volatility, which means, that if you are buying with Reg-T, you have a greater risk of hitting maximum margin and being forced to sell portions of your ownership - U.S. equity markets were down 40% last year, meaning anyone originally at 50% margin (Reg T) would likely have been hit in some portion of their portfolio. This is a feature that isn't present in the housing market - there, the risk is actually that you lose your ability to pay the interest and principal (e.g. lose your job). Also, with stocks with leverage, you don't have to amortize your principal.
In fact, that brings another distinction between equities and housing because over your 30 year ownership, your duration (simple measure of average leverage) is probably more like 20 years, and in equities, your 50% leverage, if you neither borrow more and re-lever or use income from elsewhere to pay down leverage, diminishes substantially.
ok I have to truncate, this looks like a good place to stop for now. Rhino86, I'll echo your recent point about bumpiness/volatility. And I'll finish with my final thought: the original argument is poorly constructed and overly simplistic, sorry Peter. But I do think that today's NYC real estate market, despite being down, is still unsustainable. As for equities, I don't really know, there are so many factors, maybe the new Japanese administration will help turn that country's long-term prospects around.
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Response by Rhino86
over 16 years ago
Posts: 4925
Member since: Sep 2006
The run from 2002 to 2008 in Manhattan was all about leverage. Leverage made banks and hedge funds more profitable per person, and made loans easy to get. Manhattan is still overvalued, but that doesn't mean stocks are always better than real estate... That is pathetically oversimplified. The problem this correction is leverage also drove share prices through uses of debt to good equity returns. Neither was appropriately valued over the always underappreciated alternative of cash.
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btw, p09, my comment was bizarre. but you should shoot me an e-mail.
Im not trying to sound like anyone. Can two people say horseshit?
Why is peterxx taking stevejhx's EXACT mistaken arguments and reposting them?
Perpetual bonds are also often called perpetuities. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today, although the amounts are now insignificant. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are virtually perpetuities from a financial point of view, with the current value of principal near zero.
Real estate is a fixed income perpetuity with in inflation component. It is an investment, for certain.
The only truth to this argument is that the stock market should rise more on average than real estate. However, a weatherman who is on average correct by forecasting 150 degrees today and 50 degrees tomorrow is of little use. The divergences destroy this rule, and again - you dont need to make this decision once in your life.
"IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride."
The bumpiness of the ride is what ruins this lame argument entirely.
You can't set all of the inputs you want in your model absolutely, allow for no variability, and then reach a conclusion that that has any applicability outside of the strictly limited confines of the model.
This argument works well if you invest once in either stock or a home, live forever and can't use leverage to buy a home.
AR: you have mail
p09, i just sent you the worst e-mails. take the good, ignore the bad. and not even detailed. just horrible.
http://www.collegehumor.com/video:1918771
I didn't really go through the math, but my parents and all of their siblings bought in the late 1970s and early 1980s in the NYC suburbs and I'd say that they've all done well, not to mention that at least for my area, there were very few good rental options anyway. I can't really think of people in my HS who rented and definitely. So maybe in NYC, but at least in the suburbs you really can't raise a family in some rental home.
S&P500's CAGR adjusted for inflation from 1871 to is only 6.56%...a far cry from 15%.
Suppose you by a $100,000 house with $10,000 down. Let's say you are able to rent the home to cover all costs over the life of the mortgage (30 years). Assuming no appreciation, you sell the home in 30 years for $100,000, which is 10x return on your down payment.
Now lets see what would happen if you invested that $10,000 in the S&P500. It returns a compound annual return of 6.56%. In 30 years your investment would come out to about $67,000.
The reason housing became volatile and dangerous recently is because of leverage. New leverage too. So leverage types that didn't exist a decade ago now became available. Both at the individual level (e.g. ARMs, no doc loans) and at the system level (securitization, IOs, POs, CMOs, and then hedges on these instruments). If the financial products market stayed the same, real estate wouldn't have appreciated as much or with as much volatility and would basically be a significantly lower risk asset in line with the historical levels of appreciation in the OPs post. But, the OP's whole argument is based on historical levels of appreciation, which past results are no evidence of future results, etc. etc., and my whole point just now is that the past is irrelevant because we all know how much leverage plays a role in returns and we all see how the leverage market for housing changed dramatically.
In my opinion, this recent market phenomenon makes the whole argument put forth by the OP moot.
And here are some other points - they aren't here to say that the final "answer" (as if there was one answer) should be one way or the other, just a deconstruction of the whole logic of this pronouncement that it is ALWAYS (lolol, sorry to be juvenile) correct.
The OP compares buying real estate with 10% down to buying stocks with 100% down. Realistically, if you are going to buy real estate with so much leverage, you ought to compare to buying stocks based on Reg T, 50% down.
Real estate and stocks aren't comparable asset classes, although I suppose for any given individual you can look at alternatives. Stocks are more risky than real estate (see my point above on why the market for real estate housing became more risky, that's because of the leverage that was newly allowed). Stock represent the portion of companies after the debt is taken care of. Most U.S. stocks have some level of debt built into the companies that are issuing stocks. Leverage creates risk and boosts returns.
Stocks have greater short-term volatility, which means, that if you are buying with Reg-T, you have a greater risk of hitting maximum margin and being forced to sell portions of your ownership - U.S. equity markets were down 40% last year, meaning anyone originally at 50% margin (Reg T) would likely have been hit in some portion of their portfolio. This is a feature that isn't present in the housing market - there, the risk is actually that you lose your ability to pay the interest and principal (e.g. lose your job). Also, with stocks with leverage, you don't have to amortize your principal.
In fact, that brings another distinction between equities and housing because over your 30 year ownership, your duration (simple measure of average leverage) is probably more like 20 years, and in equities, your 50% leverage, if you neither borrow more and re-lever or use income from elsewhere to pay down leverage, diminishes substantially.
ok I have to truncate, this looks like a good place to stop for now. Rhino86, I'll echo your recent point about bumpiness/volatility. And I'll finish with my final thought: the original argument is poorly constructed and overly simplistic, sorry Peter. But I do think that today's NYC real estate market, despite being down, is still unsustainable. As for equities, I don't really know, there are so many factors, maybe the new Japanese administration will help turn that country's long-term prospects around.
The run from 2002 to 2008 in Manhattan was all about leverage. Leverage made banks and hedge funds more profitable per person, and made loans easy to get. Manhattan is still overvalued, but that doesn't mean stocks are always better than real estate... That is pathetically oversimplified. The problem this correction is leverage also drove share prices through uses of debt to good equity returns. Neither was appropriately valued over the always underappreciated alternative of cash.
Somebody needs to be introduced to Broker Ivan.