Another flood at the Link today

"Building Wealth Through Renting
By DAVID LEONHARDT

I replied:

Yes, building equity is a good thing. But the advantages of it are exaggerated.

For one thing, how do you know you’ll be building equity, as opposed to making an investment that will lose money? People who bought in Florida, Las Vegas, Phoenix and much of inland California in 2006 thought they would be building equity. I interviewed some of them. But they did not. In many cases, they lost all of their equity. There is definitely some downside risk in the New York market today.

Second, by buying a house, you’re making a decision to tie up your capital in a specific sector — real estate. It’s entirely possible that the money you spent on a down payment would have earned more money in the stock market, for instance.

Finally, buying also involves throwing thousands of dollars down a hole: in mortgage fees and interest, in property taxes, in repairs and renovations, in tens of thousands of dollars of closing costs. Renting doesn’t involve the huge up-front costs that buying does. Owning also involves some continuing costs (e.g. repairs) that renting does not.

Living somewhere is always going to involve costs, just as education, health care and food involve costs. Financially, the decision to buy is basically a decision that your investment will increase in value by an amount sufficient to make up for all the additional costs of buying. (Put it this way: you’d never buy an apartment if you were staying in a city for just a week, in an effort to build equity. You’d rent — a hotel room.)

Sometimes — often — the decision to buy works out. But it does not work out far more often than is commonly understood."