I recently won the IPO lottery--went from nearly zero net wealth to a solid seven figure net wealth. I could buy a house in the bay area and give up > 50% of my cash for it, or I could give up 15-25% of my net wealth with a down payment on a a mortgage and pay (PITI) 110% or more of what I could pay in rent for a similar home.
Or I could continue renting and put that 15% - > 50% of my net worth in appreciating assets and income producing investments. Even better: I could move my family to a place where people aren't paying $2M for a home that's worth $250k.
The housing market here is suited best for people with absolutely no money sense at all, or those VHNWI and UHNWI who can buy into genuine investment grade real estate out here. It makes zero sense for the vast majority of people to buy here, especially people who more or less win a lottery with some options from a company that makes an exit. In almost every case their money would be put to better use renting here and investing elsewhere (assuming they're tied down here, e.g., due to work).
Or people who've put down roots here. Some people value family, friends, and community more than economic maximization. The Bay Area has excellent schools, being nerdy makes you cool, immigrants and people with different skin colors are accepted, there are a wide variety of cultural attractions, the weather is always nice, and you can get out in nature quickly.
If I were still a single guy I probably would've moved back home after winning the stock option lottery, but my wife's family is all here, my friends are here, my kid won't get bullied for being nerdy, etc. That's really why people stay, and they pay a premium to do it.
All of the cultural items can be had by renting here, too, as my family does, and deploying the rest of the capital in ways that aren't financially illiterate. The decision to buy in the bay area, for the vast majority of people, is damaging to their financial health.
That was basically my reasoning when I first came here as well, and so I didn't buy. (Elsewhere in this subthread, I'm arguing exactly that point.)
The part that I didn't factor in was rents basically tripling while I was here, which apparently is not an uncommon occurrence in the Bay Area. In 2010 I was a genius for paying $1400/month in rent rather than $4000/month to buy a condo. In 2017, when rents were $4500/month but that condo payment would've still been $4000 (for a bigger place!) and the condo's value had gone up from $400K to $1M, I was less of a genius.
YMMV. I'm expecting very significant inflation and I've watched firsthand as a lot of my friends got priced out of the Bay Area, so I bought as a way to ensure that my kid will be able to stay in the same school district and remain near family. Time will tell whether that's a fiscally brilliant or fiscally idiotic decision.
> All of the cultural items can be had by renting here, too
I have a few older retired friends that thought this, then the area started gentrifying, prices went up and they've had to move out of the area they've lived in all there lives.
Purely economically motivated decisions are rare. We all have reasons beyond the financial to live wherever, including something as simple as our wife/husband wants to live there.
There is also an inertia bias. Life has to get pretty expensive for many people to want to undergo the hassle of moving cities / states, which includes leaving behind loved ones, and learning everything new (including leisure things like where you like to eat).
Going meta, NYC and California/The Bay Area make the bulk of their tax revenue from very few industries. The tipping point at which they lose a financially significant portion of their tax base, and the flow on affects of that for government workers and the multiplier downstream, has likely been reached.
> Or I could continue renting and put that 15% - > 50% of my net worth in appreciating assets and income producing investments.
Property is a leveraged investment (as well as the loan being a hedge against inflation, depending on the rate you negotiate - with a 7 figure NW you should never have to use market rate). Unless you're using a large amount of margin on these "appreciating assets", the appreciation should be compared at a 1:5 rate.
Be careful not to become one of those people who "win the lottery" and then lose it all in their hubris. I'd stop saying things like "people with absolutely no money sense at all" - for all we know, that's you.
Buying has costs too. Mortgages are an obvious example, but even if you could afford the house without debt the money could also have been invested in something that yields income like stocks or bonds. If the amount you'd receive in income from investing the house price can cover the rent of an equivalent house, it can make sense to rent as you come out ahead overall. It does not surprise me at all that rich people (who can take the time to shop around because they are not at risk of getting evicted) manage to get a better deal than someone who represents more credit risk for the landlord.
Of course pulling this type of thing off requires that you can find investments that will yield more than the rent price, which may not be easy to do in the long term as high yielding investments can often carry unforeseen risks. Also because a significant amount of people already know this, when renting is "cheap" enough compared to buying the demand for renting will increase and prices will rise. This means that the condition is unstable and will often disappear on its own.
Still, there are sometimes very valid monetary reasons to rent instead of buy. Then there are nonmonetary reasons to rent instead of buy that make sense even for quite rich people. If you're a NYC banker and you get seconded to London for 2 years to set up some new division, it is probably not worth the hassle to buy a house there.
I am with you. There is a huge lobby to make people buy houses. Not enough people question if it is a good investment. The opportunity cost to buy vs rent is huge.
"What sort of rich person rents a house, except whilst between selling old and new?"
There are quite a few techies who move to SF, work for the hot unicorn for 4 years, and live extremely cheaply. They don't buy housing because they don't intend to stay in SF (and besides, who wants to buy a house in SF?), but when they "retire" they've got a few million in stock options. They can buy a house, they just don't want to, because their living situation is temporary.
I suspect that a lot of the housing boom going on around the country now is because the rich techies in SF no longer have to stay in SF.
I don't really buy this. if you're going to be at a hot startup for 4 years and can easily afford a house the way the SF bay market has been for the past 2 decades is such that you would've made money in any 4 year period just buying and selling. covid might be the single exception.
I think the issue is more that sf people are rich for the country but not rich for the bay area so they just rent.
Opportunity cost. Housing in the Bay Area goes up an average of about 7%/year, roughly inline with the S&P 500. Google stock has increased 13x in the last 11 years, for an average annualized return of about 25%. If you were at AirBnB or Stripe your return is about 100x, making over 100%/year.
With leverage the computation gets a bit more complex, but basically you're paying 4.5% interest on 7% appreciation, and not needing to pay rent, so you may get 4-5% real returns. Lever up 5x with a 20% down payment and you get about 25% returns - competitive with Google, but in the same ballpark, and you've taken on the risk of foreclosure or being underwater if there's a housing bust (which happen periodically in the Bay Area and take prices down 10-40%).
The stock is a lot more liquid, you can take it anywhere, you can sell it whenever you want, you can move in with a girlfriend and keep it. If you haven't made a conscious decision to stay in the Bay Area, the stock performs much better.
Low rates just mean you pay more to the seller for the asset, and financing costs less. If rates were 5%, you’d pay less for the asset but more in financing costs. The monthly payment probably wouldn’t change substantially. You’d have substantially higher price risk buying at low interest rates.
Sort of how a bond’s value moves inverse to yields.
I'm comparing it to historical returns over the last decade, though. Mortgage rates were about 4.5% in 2010, so that's the figure I'm using.
I honestly don't know what the next decade will bring. I would personally bet on high inflation, so that 2.5% mortgage rate will likely be a negative real interest rate. (Hence, I bought.) Stock returns may or may not equal the previous decade's, as well.
Being long on a leveraged ETF is... possible... but unless you know what you are doing it is highly risky. No, the problem isn't the drift causing losses. When the price tanks 33% in a day on a 3x leveraged ETF you lose everything.
"Just" buying and selling also has a higher bar now than ever before -- Median sales prices are around $1.5M for peninsula / SF locations. Even on extremely generous tech salaries, it'll take some time to build up enough savings to get a loan.
I completely agree, my point though is if you are legit rich, even for the bay area, it makes no sense to ever rent. someone with a net worth upwards of 20M isn't going to save any money renting even if they stay a paltry 5 years (though covid and WFH might change things of course, but this pattern has held up decently for the past couple decades).
from my experience, prior to covid, it really hasn't been if you're capable of buying.
look at the 2012 to 2016 period for example of rent vs purchase. if you just bought an average condo and sold it you basically could've ended up staying for free vs. renting.
You're neglecting to mention opportunity cost. That money could've been invested in stocks, crypto, etc. and you would've made out a lot better (and avoided the headaches that come with owning property)
And for the same cash commitment you could have bought 2 - 3 multifamily homes in sane real estate markets that produce $60k - $80k (or more!) net income (rents less management and taxes). You would have diversified your portfolio, lived "free" (i.e. the net is likely about the same as or more than total annual rent in a decent home in the bay area), appreciated somewhat, and positioned yourself for handsome tax deferrals or savings due to depreciation and other strategies.
Ones good at math and likely to move in a few years?
Buying a house has really high transaction costs. ~6% commission, plus more in fees and taxes. And then once you have the house, you've taken on all the maintenance and price risk. That can make sense if you're staying a long time and want the benefits of ownership. But plenty of people with high-flying jobs know that they may move soon enough that the math doesn't work out.
Personally, I could afford to buy a house, but I never have. I like the freedom, and I really like never having to worry about maintenance, taxes, renovations, and the like.
> Buying a house has really high transaction costs. ~6% commission, plus more in fees and taxes. And then once you have the house, you've taken on all the maintenance and price risk. That can make sense if you're staying a long time and want the benefits of ownership. But plenty of people with high-flying jobs know that they may move soon enough that the math doesn't work out.
Interestingly, most of the transaction costs hit you when you sell, not when you buy, which is one of the ways the US favors landlordism and sequentially acquiring more and more properties instead of just renting forever, or even just buying one primary residence and sticking with just one.
Exactly. I'm sure the hidden fees have some effect on people. But anybody who is thinking about buying now and possibly moving in a few years should be thinking about the round-trip costs.
That's a weird comment. Plenty of people are rich by your definition (could easily buy a house) but don't do it because it makes no sense financially.
Most good investors are better off renting and getting higher returns in the stock market.
Renting also allows you to move very quickly and you don't spend your time fixing things (i let my landlord handle it all)
You can't get the same leverage nearly as safely or as easily in the stock market, which is why so many people start to play landlord with second, third, etc, properties that they finance.
What changed in the last year is that people want a lot more space which is pulling them out of the "expensive apartment" market and into the "house" market, while also being less concerned about commute distance. So the expensive apartments fall in demand while the houses go through the roof, without effecting the lower end of the rental market at all.
Even with the leverage, it is in most cases still not a good investment. There are a lot of calculator out there that shows you the break even point between renting and buying.
You forget all the horrible fees that come with owning a place (HOA, maintenance, property taxes, 6% lost to agents at every transaction)
For me, those calculators tell me I'm better off buying if I'm gonna stay for at least 5-7 years. Which is... not a terribly long amount of time, honestly. If I'd made the buying decision 5 years ago, I would've actually been much better off by then, because my rent went up way more than predicted. So of course there's a lot of uncertainty there. Maybe purchase prices will crash soon. Or maybe we hit a new normal and individual homes or spacious townhomes never come back down in price, due to shifts in demand.
My rent means that there are tens of thousands of dollars a year that I'll never be able to invest in anything. So even if I had a better investment option than taking a 5x (or more!) leverage multiplier on a downpayment, it would still have to overcome a pretty big disadvantage right there to come out ahead in the long run.
I did this math recently for a real estate investment. We're in a pretty hot market, but not growing at anywhere near the pace of Atlanta or Austin. Suffice it to say that if the property appreciates at merely the inflation rate, it will have the same return as a typical index fund, with a better tax disposition.
One who doesn't want to bother with maintenance, insurance, taxes, etc. One who wants to leave whenever they feel like it, instead of having to go through months of a sale process.
In the very short term, that can be true. If you intend to move in a year or two, sure.
Rents only ever go up, whereas a mortgage can only go down (in a refinance). A mortgage ends and so do the payments, but a renter will pay ever increasing rents forever. It gets particularly painful after retirement on a fixed income.
There are probably also ways of justifying a rental through a business expense vs personal assets. I know a few businesses that pay for living expenses for some of their top level corporate staff under certain circumstances.
I've seen it done as a job perk for certain positions which seems like a way of indirectly increasing total comp without increasing taxable income. I'm not rich enough to know all the tax laws and loopholes around this area though.
What sort of rich person rents a house, except whilst between selling old and new?
Properly rich people do. The people for whom buying and leasing and renting a house is the background noise that the staff works out.
If a properly rich person wants to be able to live in London and Tokyo and Paris and New York and a bunch of other places, where they will just turn up depending on how they feel and what's going on in town that week, buying and leasing and renting are just noise (although being properly rich, it's usually not the kind of renting where an individual landlord is posted a cheque each month). If they want a new place somewhere, they get shown some and they just buy one. Or lease it. Rent it for six months. Whatever. Six figures for six months? Pocket change, talk to the staff. Often leasing or renting is easier and more convenient than buying. These are fairly inconsequential sums of money for these people; just whatever's easiest, the staff will handle it.
I did some work for a Russian feller in the global top 500 richest a while ago. He took us all to lunch. Drove a smart car (of the garage full of luxury cars, it was the one he liked to drive most - it was just the most convenient for him; if I was an economist, I might estimate the price he put on his personal convenience was six figures an hour, at which point buying a house somewhere is the more convenient option compared to having to get a floor in a hotel on arrival) and clipped a pillar driving out of his Swiss estate. Money for him below the level of tens of millions was just not something he bothered about. Rent? Own? For something like a luxury apartment in New York (not that he can travel to New York anymore, I understand) it would be like me spending time deciding whether to rent or own a movie.
What sort of rich person rents a house, except whilst between selling old and new?
These people you mention who only own one house because they can't afford more than one at a time; these are not the properly rich of whom I speak. Many properly rich people are unobtrusive and inconspicuous.
I have met people who find it incredible (even unbelievable) that rich people own houses that sit empty for long periods and that these rich people don't rent them out. These are rich people; they don't think like poor people. Not everything is a money-making investment, and if they decided to get into real-estate they don't mix the houses they live in with it.
> What sort of rich person rents a house, except whilst between selling old and new?
The kind that reads Robert Schiller and says “why would I want to concentrate my assets in a non productive asset class with high transactional costs?”
Some poor people just build houses slowly over several years in less than ideal places ofcourse. If the world decides to spit me out, I'll have a pretty big hiding hole.
What sort of rich person rents a house, except whilst between selling old and new?
It’s a strange question to ask .... who doesn’t see this as self evident?