This is why I don't buy the home I live in as an investment. It conflates two very important things:
* My home.
* A large financial investment.
Changing one affects the other. I'm skeptical that life circumstances will magically align so that when it's a good time for me financially to sell my home, it will also be a good time for me to change location (or vice versa).
I bought a duplex, live in one side, rent the other. First time owner 5% down. Obama gave me $8000 to live in it for 3 years. mortage+insurance+taxes - rental income == about 1/2 what I would pay to rent similar place. I get many tax benefits (rental 1/2 counts as business). My equity + 8k (which was a one time thing but you should have taken advantage of it) is already more than my downpayment after 2 years. In another year or two I'll move out and rental income will be paying everything including building equity and providing a $4-500 of profit (which I expect to mostly used up in maintenance).
Duplex living is great deal. Assuming of course you live in a non-suck market (realestate and job). If I had the money for 20% down payment I'd be buying more.
The counter argument is that the rent you are putting down is not being invested into your home. I think that is a very cogent argument, but it relies on your ability to sell (or willingness to sell later on).
I concur with your analysis though, and don't plan to buy for a long time (ie, when I am ready to put down roots for 10-20 years).
Roughly speaking, if you save the difference between the rent and mortgage price, you should end up with the same upside that a purchase would have netted (although if rent > mortgage, then renting only makes sense for a short term stay).
Many people think home buying is a good financial strategy because most people don't have the discipline to save this extra cash. It benefits the buyer in the same way a forced retirement savings plan would.
Roughly speaking, if you save the difference between the rent and mortgage price, you should end up with the same upside that a purchase would have netted (although if rent > mortgage, then renting only makes sense for a short term stay).
Roughly speaking you might wind up with the same upside. I consider rent+invest the more risky option even if you do have the discipline to do it, since there are lots of scenarios where you wind up behind.
What does winding up behind mean? It means being 85 years old, retired, and not having enough money to pay the rent. I think it's worth buying a house just to have the peace of mind of knowing you'll have somewhere to live once you're retired.
Yeah... Peeps I know in the Republic of I who bought are average 100K in negative equity, meaning, even if they sell, they still owe 100K. The risk depends on the market levels. 7% annual rent to price, or 3.5 times median income is the general long-term trend (OECD report), and if your house is way above that then worry.
I purchased a home due to mortgage payments (including taxes and insurance) being equal or less than renting somewhere reasonable. This is in Louisville, KY which may be an outlier.
An additional point is that in the US if you live in your home and owe money on it, your investment has significantly better leverage via the mortgage interest deduction.
True, but the MID will very possibly go away or be significantly reduced in the future. During the debt ceiling talks, the proposal by the Gang of Six would have significantly reduced the value of the MID to many people. Of course, the proposal wasn't passed, but I think it shows that the MID is no longer viewed as untouchable the way it once was (as recently as a year ago).
In the US, is all interest deductible? And since your taxes are spread across federal/state/municipal, is it deductible from the tax basis (don't know what the exact term is - the amount your net taxes are calculated on) for all of them?
Interest is deductible in various situations, but for typical filers only interest on their primary residence is deductible.
This is the case for federal taxes. State stuff is all over the map; I don't believe mortgage interest has been deductible in any of the states I've paid taxes in (MD, MA, CA, IL) but there may be some where it is. For the most part there are no municipal or county-level income taxes, so the whole issue is moot for those jurisdictions.
That's commonly said but frankly I don't see why, when you invest in an (index) fund (as you should if you're not a 'professional'). It takes about as much work and intelligence to choose one or a few funds as it does to choose a mortgage and do total-cost-of-ownership vs rent calculations.
This is missing an important point - if you buy, you are stuck there until you can sell it again. That loss of flexibility represents a significant cost of its own.
And therefore pre-supposes a stability that people are not currently finding -- whether in property values or in their life circumstances and those of their communities (U.S. centric perspective).
It might start that way, but 15 years down the line you will have invested a lot in that house. There is an ideal rate of home ownership relative to economic growth unfortunately the US is well pass the optimum with far to many people owning when it's a poor economic choice for them to do so.
PS: What's missing from much of this analysis is you can have positive home equity but the transaction costs of buying and selling a home put you into the red.
In most states, mortgages are non-recourse loans, meaning that in effect the bank has to eat any losses, if you choose to play hardball. If they foreclose on the house and repossess it, the loan is considered settled, and they can't attempt to collect the difference, even if the house is worth less than the value of the loan was.
Pfft. I thought that was just California. One would think that that would have encouraged them to underwrite a little better.,, And who the fuck would rate any tranche of non-recourse loans AAA?
How long does it stay on your credit history (officially)?
Yes, in many markets it is fairly easy. But in most it is not. In fact, anywhere you are, it's quite a hassle to find a good tenant, find new ones when the previous occupier leaves, fix the house etc...
"Only" 5%? That's more than the average margin on owning real estate. Meaning, that 5% makes the difference between a profit and a loss on owning the building. 5% is a lot when you look at the cost of the capital that is required.
(as a side note, I'm hard pressed to believe that for 5% everything is included (taxes, fees, ...) and that they do everything for you for that money. I'd pay 9% here in Europe, including tax, and for that money they'd put ads in the papers/internet, show the building to tenants, check if payments are made and put a lawyer on it when they're not (but I'd still have to pay the lawyer) and take the phone when something needs fixing. I'd still have to find, send and pay a repairman myself).
I live in a city in Canada that has a bit of a lacklustre tech scene. Unfortunately, I bought a condo 2 years ago.
Because of the size of the down payment I made (small), and the condo market right now (not awesome), I can't sell without taking a loss until probably about 2014. I also probably can't rent without taking a loss.
I'd like to move - but at the moment, short of foreclosure, there's no way to get this condo off my hands so that I'm free to move again without taking a significant-enough (~$15k) hit to make it cost prohibitive.
Are there more opportunities in other cities? Definitely. But because of my current living situation, I'm not flexible enough to take advantage of them.
How would your loss compare to two years' worth of rent for a similar apartment? I pay much more rent than $15k in two years, and that's in Montreal where rent is fairly cheap.
The Liquidity Premium Theory is an offshoot of the Pure Expectations Theory. The Liquidity Premium Theory asserts that long-term interest rates not only reflect investors’ assumptions about future interest rates but also include a premium for holding long-term bonds (investors prefer short term bonds to long term bonds), called the term premium or the liquidity premium. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward. Long term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long term. The market expectations hypothesis is combined with the liquidity premium theory:
I'm not sure I understand the prevailing view that renting is always better than buying.
I bought an apartment in San Francisco in 2001 and frankly, it was one of the best decisions I've ever made. Before I did so, I calculated out the cost difference of renting vs. buying. After taxes, my living expenses were only a few thousand dollars more a year to buy vs. renting.
If I want to move, I don't have to sell my place, I can simply rent it out. Given current rates, I can do so for more than my monthly mortgage payment. Not only that, but my property is worth about 40% more than what I paid for it. I can actually use my equity in my house to finance another home and flip one to a rental.
Maybe purchasing isn't for everyone, but it certainly is for some. In the end, it depends on your finance situation and location.
Yes, you're special because your home is in an area where people want to rent it. Every home-owner certainly does not have this advantage. In your case it makes more sense to buy than in others.
When calculating the cost of purchasing/ renting, are they including condo fees, property/school taxes. In some areas the tax/condo fees alone exceed typical rents.
This is one of the most overlooked cost for first-time home buyers, all the cost in condo fees and taxes are not going to contribute a cent to your equity either.
Though the taxes are tax deductible, unlike rent. I moved out of a 2br apartment to a large 4br home where my mortgage and taxes are slightly higher than my rent was, but after tax deductions, I'll end up paying less. Being self-employed, I need all the deductions I can get, anyway.
Also, utilities. I only pay for electricity at my apartment, and thanks to some 12" stone walls it's quite low. I talk to people my age who have bought homes and their utility bills can be as much as 40% of my rent.
Maybe it's different in your area, but most areas I have experience with, no utilities are included in the rent. Plus a lot depends on how the place is heated/insulated (or cooled/insulated).
The utility situation really depends on the area, yes.
For example, my experience renting in Chicago is that water, heat and hot water were typically included in the rent. That's most certainly not the case everywhere.
I tried pretty hard to find a house in the New York Metropolitan area this summer. Once you factor in the taxes, HOA fees and mortgage I would be paying roughly 2x in monthly payments to get an apartment similar to the one I rent. When I consider that my house will not return me more than 3-4% pa over a long term I decided it was not worth it to buy. Also houses have a end load of ~5% for agent fees.
> it’s cheaper to buy a home than to rent in 74% of America’s 50 largest cities
This "statistic" wouldn't happen to come from a company that earns its revenue primarily through the buying and selling of houses, would it?
Most Americans should rent, especially in today's dark economy. The average American is unskilled, has not saved for retirement and lives paycheck to paycheck. Such a person should avoid big purchases because accumulating debt is a gamble on future earnings.
When my wife got accepted to West Chester University in SE PA, we went looking for a place to rent in the nearby area. Coming from Harrisburg, where I could rent a house for $500/mo, I was blown away that a 2br apartment generally ran $1200/mo (Stop snickering, New Yorkers)
We decided to buy a 2br fixer-upper on the cheap and ended up with a mortgage of ~$600/mo. That was five years ago. We've since renovated the crap out of the house (it's now the nicest on the block), bought a second house in Philadelphia (wife's getting her PhD at Penn now, and I can now walk to work), and are about to put it out for rent. We'll be getting at least $1200/mo for it.
Renting's okay while you get your financial situation together. Maybe most people shouldn't live paycheck to paycheck. You don't have to be well off in order to make a budget. If you look at my social security statements, I was making jack squat while I lived in York PA, and still managed to squirrel money aside.
Some people's lifestyles are more conducive to renting. I quite like having a place I can mangle and customize as I see fit. Some people like not having to worry about maintaining their building and grounds. Maybe when I can't do things for myself, I'll go back to having a landlord, but especially given how low mortgage rates are right now, I feel fortunate to have bought a house or two.
You and your PhD wife do not sound average, which serves my point that buying a house is a gamble on future earnings. You both are investing in yourselves, improving your assets and generating wealth. The average American watches 4 hours of television a day, he isn't prudent.
> Maybe most people shouldn't live paycheck to paycheck.
More importantly, the "statistic" also seems to contradict recent scholarly research that indicates that areas with high home ownership are the last to return to full employment.
"Oswald showed a correlation between homeownership and unemployment both within and across countries. These results have been confirmed by Nickell and Layard (OECD countries) and Green and Hendershott (U.S. states). The present paper tests the hypothesis with an individual household data base. We track through time individual households with people who enter unemployment. We find some evidence that earners in homeowning households who become unemployed find work less quickly than do earners of renter households."
I agree with the last bit about big purchases, but surely it's not an absolute rule that applies to housing unquestioned. You will always have the cost of housing whether you rent or buy. There are more risks with buying, but if you are in a market where you pay a premium for renting, is there a point where that no longer makes financial sense? I think the real epidemic was that Americans were acquiring too much house, disguising the extravagance as an "investment." You can also rent too much house.
I can't speak for all houses in all cities, but when I left the Bay Area, it was shocking- you really could pay same as rent in a middling place on some of these houses.
The tricky bit then becomes not "can I afford it" but, "will I be moving again? If so, how soon?"
Gross Rent Multiplier (GRM) is used in evaluating rental property investment. One rule of the thumb ratio is 1% for monthly rent over purchase price. For ratio over 1%, you will most likely make money after finance cost and taxes.
It can be used to evaluate renting vs buying decision for home buyer. If the likely rent for the house you are buying is close to or over 1%, buying has more advantage. If it's far below 1%, renting costs less.
Good deals of course are not plentiful. The 1% is a high threshold filter to recognize the few good deals right the way.
Rule of the thumb is a rough guess, gut feeling kind of guess. For quick guess without detail analysis, you want to build lots of cushion into the decision. The 1% will "most likely make money" because it has lots of cushion built in.
You can do more detail analysis with CAP/IRR/interest rate for more marginal deals.
7% annual GRM has too little margin IMO. Assuming operating cost (expenses+taxes) is 40% of gross, that gives you about 4.2% CAP rate. You are making a tiny profit after paying a 4% mortgage. Any down turn at rent, increase at expenses, or vacancy would bleed it into red.
I find the cultural differences with respect to home ownership fascinating.
In the US, people often own their own homes. Rarely do they own homes that other people live in. Apartments are typically owned a single owner/landlord (condos are different). Owning is a common dream, less so in cities (particularly New York).
In the UK, home ownership and the property market is an obsession. It is a common topic of conversation. People are heavily invested in their properties and often seek to buy more of them. There is a strong attitude of "if I don't buy now I'll never be able to afford to live here", particularly in London and the Southeast (less so now I suspect). The North and West are somewhat different. The market is highly speculative.
In Switzerland, the property market is essentially controlled. There is little real estate speculation. Transaction costs are high. Capital gains taxes on properties can be brutal, which strongly discourages speculation. Renting is not frowned upon. For tax reasons, people often buy houses and never pay them off. In Switzerland you get a tax exemption for interest but you also get deemed income from the effective rent the property is worth.
In Australia, owning one's house is a cultural obsession. People often end up owning multiple properties. There are few apartment buildings owned by one owner (it's much more like the American condo system).
I think of all the systems I've personally experienced, I like the Swiss system the most. It treats property as something you need to live not a financial instrument to speculate on.
That system isn't applicable everywhere however. Switzerland is unique in that it is fairly affluent, has a small population and very restrictive immigration. So somewhere like the US has >40 times the population so even excluding immigration, domestic movements of people can be incredibly large creating market pressures in places like New York that Switzerland will simply never experience.
Some years ago I saw an article (I'm sadly unable to find but the topic is covered elsewhere in depth) in the UK which showed that the rate of home ownership was inversely proportional to economic growth. The idea was that home ownership reduces labour market flexibility (which it clearly does). I don't know if the trend still holds up.
In Australia for example a family home can easily cost $1 million in Sydney. If the household income is $200,000 and that family wishes to move to, say, Melbourne and buy a new house they'll pay $20-50,000 in realtor fees and $50,000+ in stamp duty on buying the new house so they need to make back nearly $100,000 of after-tax income just to break even.
Sadly stamp duty is a cash cow for state governments in Australia so isn't going anywhere anytime soon. Yet I think it's a real problem. Transaction costs need to be relatively low. Financing requirements need to be relatively to limit rampant speculation, particularly in overheated markets.
To offer another very diverging datapoint: In Germany, renting is the norm, though owning something you aspire to, either as a home you plan to spend the rest of your life in (thus protecting you against market troubles) or an inflation-safe part of an investment portfolio. Speculation on home prices is virtually unknown (and there was no housing bubble).
Somewhat off-topic, but what's the rental situation like in Australia for those moving to the country? Are there substantial obstacles to a non-citizen resident like there are in other countries like Japan? My wife and I are planning a move, and this is something I've not been able to Google up very well.
Renting is quite expensive. The rental markets in Perth, Melbourne, Sydney and Brisbane is very competitive. It is not uncommon for 50 people to show up to inspect an apartment before renting. However, it is still possible to find some real gems (for example, massive old houses and really quirky places). Price is often relative to access and services, if you can drive you can usually find somewhere cheaper that doesn't have access to public transport.
As for restrictions on foreigners, there is nothing like Japan's rules. Bond is usually 4 weeks rent and rent must be paid in advance in most states. Tenancy laws strongly favour tenants.
> Somewhat off-topic, but what's the rental situation like in Australia for those moving to the country? Are there substantial obstacles to a non-citizen resident like there are in other countries like Japan? My wife and I are planning a move, and this is something I've not been able to Google up very well.
Which city are you moving to? Perth is fairly competitive right now, and price will be heavily dependant on your proximity to the CBD and major transport routes. I'm about 7kms from the CBD and pay about $440/week* for a 3x1 '60's home. House is weatherboard with great floorboards throughout and a huge (as in, too big for me!) yard out back.
Took us a few months to find a place though, and it is pretty competitive. It's a sellers market right now so they can afford to be choosy with who they lease it out to, but the actual paperwork requirements are rarely very onerous (job references, rental references, holding deposit).
* To own a home like this, which sold for $600k to the current owner (or thereabouts), would cost me closer to $1000/week in mortgage repayments over 30 years.
Rental situation is quite decent - from memory Australia has one of the lowest rent to equity ratios in the developed world.
There is a huge rental market for temporary residents largely driven by international students. I've heard of international students living in poor rental conditions, but that is often the result of a willingness to live in cramped squalor. I've also heard of landlords demanding high bonds for temporary resident renters, however note that in most states bonds higher than 4 weeks' rent are illegal.
Provided you have a valid visa you should be able to find decent rental accomodation, I would also recommend having a reference from a landlord (and/or employer).
I have nothing to add to all the other comments on this subject, except personal experience: I'm an Australian landlord myself and have a non-citizen (a Pom, iirc) as a tenant. Legally there weren't any barriers, and I don't give a damn where he's from as long as he pays the rent.
I just went through this in January, and while I wouldn't say there are substantial obstacles for non-citizens, you need to make sure that you have enough documentation. The rental vacancy rate is pretty low in Sydney, so there's a fair amount of competition for the better places (as mentioned above). Not having the right paperwork can definitely lower your chances of getting a place. I wrote about our experience here and would be happy to share more: http://www.lifewithkandr.com/2011/05/first-hand-guide-rentin...
The rental market in the inner suburbs of Sydney is pretty expensive. It certainly helps to have employment and real estate agents will often ask for some kind of employment reference.
I don't know of any impediments for non-citizens in terms of renting. I've employed people on working holiday visas, short-stay business visa, permanent residency and citizens, and they all seem to be able to find rental accommodation in the inner suburbs of Sydney without too much problem. I've usually provided an employment reference either verbally or on paper.
This graphic only tells part of the story and the easiest part of the story. What the rental/some of the economic fundamentals are right now. When deciding to purchase for investment and to a lesser degree a personal residence, the decision to purchase or not should be driven by the future not the present.
I am more then willing to invest in any city on that chart if I know some or better, all of these:
- population is increasing
- employment is increasing
- income is increasing
- the neighbourhoods I'm buying show pride of ownership
- public transit improvements (highway, LRT, subway)
- supportive government (proactive business development office)
Though this infographic is very cool/informative, buyers should concentrate more on the future then the present. Just because it's cheap isn't sufficient reason to purchase. And if you want to live in an area with a negative outlook renting IMO is best.
For those of us (maybe just me) stuck on work computers in which we can't upgrade from IE7, is there any way to access the data in a plain text format?
It's really cool to see information like this laid out. I'm from Chicago, and even property downtown is not (as) expensive. I was always told that the bay was more expensive, but didn't believe it until I started living in San Francisco. We're planning on moving to San Jose, or somewhere a little further away to try and minimize that effect.
Chipotle is 50 cents more expensive across the board here. Damn.
A big component missing here is location within a city. Having been in DC and Boston, they're on the edge of buy/rent, but a big question is could I live in the same neighborhoods or areas as I rent. If I can't, it's worth renting even if buying might be better because it's closer to where I want to be.
Looking at the source, it seems to be built with jquery isotope plugin. I couldn't see any similar examples at isotope site. Any one else know more details on the implementation?
Also, the job growth numbers for each city look suspicious. Was there such a jump in growth rate in Jan '11?
The animations are done with JQuery's .animate method, and since the stats are all across different ranges we're using D3's .scale and .quantize methods to normalize our positions.
If you have more specific JS questions than that I can point you at @golike who wrote all the code for this :)
Surely buying is the safest long term scenario? I wouldn't want to be renting when I'm retired, as you become totally dependant on the rental market (i.e. if rents shoot up, you're screwed). Even if the housing market tanks and my house halves in value, at least I'll have somewhere to live.
If I look at my friends parents who live in some nice parts of London, there is zero chance they could afford to rent the houses they live in now, the ones they bought 30 years ago.
I've said this before but this looks like a new discussion so I'll say it again: If you can switch jobs safely without moving, then yeah, buy a house. If, however, a job switch will involve a move, you're daft to do so. Too much risk in today's job market.
I'm thinking of the US marketplace, but I suspect it will hold up in similar areas as well. Houses can/will be illiquid at times.
Viewing this from Australia, where the 1 BR flat next door sold for $370K ($388K USD) this is very attractive. The bottom few ones are priced $50-$150K. It's plausible to buy outright - no mortgage.
However, unemployment ranges from 9% to 17%... I'm not sure how pleasant or safe that would make the neighbourhood.
I just moved from Melbourne, AU to Las Vegas, and its incredible. I have a running joke with friends back in Australia that you can go out for lunch in Vegas and buy a house with the change.
Having said that, I wouldn't trade my place in Melbourne for any number of houses here :)
Another important point which makes buying cheap US houses unattractive is that being a landlord is a much less attractive prospect in the US.
Being a landlord in Australia is just a matter of wandering down to your local LJ Hooker, handing over the keys, and watching as money starts magically appearing in your bank account. If you buy a block full of cheap houses in Las Vegas you'll be lucky if you can find an agent willing to manage them. If you do, you'll be lucky if he can actually rent 'em out. And if you do rent 'em out you'll be lucky if your tenants don't rip all the wires out for the copper and vanish across the border.
The trouble is, you'd have an easier time selling the scraps of your lunch than you would a home in Vegas. Condos that were going for $180K in my old neighborhood are now at $30K and still going down. It's going to be a looong time before the city recovers.
Both San Francisco and San Jose are near the bottom in job growth. This surprises me, given the hiring market for engineers in the Bay Area. What gives?
There's a lot more to employment than engineers. This really goes to show just how vanishingly small our field/industry is compared to the overall economy.
Things are red hot for software engineers in the Bay Area, they are way less peachy for just about every other field.
I think it has to do with the number of tech jobs that are based in those cities. I'm from the midwest and am working out of an apartment in SF so I have no idea what I'm talking about it, but it seems like a lot of startups are based out of places that are "closer" to the tech scene.
Again, I'm still getting used to the whole scene, but the center of everything really seems to be further south.
* My home.
* A large financial investment.
Changing one affects the other. I'm skeptical that life circumstances will magically align so that when it's a good time for me financially to sell my home, it will also be a good time for me to change location (or vice versa).
So I rent.