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Would I bet the farm on it, no probably not, but for a mathematical exercise it works. I will concede that my 9% number was too aggressive and should have been 7.5% or 8%, but even then the NY Times calculator proved this scenario as better for renting at 7%.
The proper benchmark is to evaluate which choice leaves you with a better balance sheet today. The problem with your analysis is that you can't bank historical market returns today. You could argue that it frees up capital to make risky investments that historically have provided good returns. The historical return is a plausible scenario, but until you actually realize that return, you don't get to count it on your renters balance sheet (that's Enron-like accounting)
If you stop and think about it, you'll realize that according to your accounting methods, everyone should take out a HELOC and put the money into the stock market, as long as the borrowing rate is below 9% (don't laugh, pension plans have tried more or less exactly this! suffice it to say it didn't work very well)
What you can justifiably bank for the purpose of the analysis is risk-free returns.
That doesn't imply that the decision to buy a home instead of rent caused them to have higher net worth.
You are right it does not necessarily mean that it did, but it could have. As previously discussed owning a home is a forced savings vehicle so the decision to buy a home is a commitment to saving a large potion of your income over a very long period of time. So it does become a cause vehicle not just a correlated vehicle. It is also the only investment vehicle out there where someone will lend you a very large amount of money for a very low rate. What I'm saying here is that no one is going to give you a $400,000 loan at 4.6% interest to go and play the stock market. If market values increase, especially in the short term, above inflation rate and interest for the 30 year term you are making money on a larger principal than you would have otherwise. Now I'm starting to confuse myself so I'll just shut up I'm not trying to change anyone's mind here, or imply that my position is correct, I am simply giving what I feel is a logical and well supported case for why I feel the way I do.
am i the only one on here preaching that you can't assume the 7%? there are many others also.
that average return you're quoting is calculated assuming you daily cost average into the stock market over that 30-year period, never buy/sell on emotion or never need to pull money out at an innoprtune time, and it also is assuming you're parking all you're money in those types of investments over the next 30 years. so yes, if you invest perfectly over the next 30 years, completely disciplined, you have a reasonable chance at earning the historical rate of raturn (even though past performance doesn't guarantee future performance). it's widely accepted that the structure of the market in the future is going to look very different than the past. maybe that will prove untrue. bottom line is - you're assumptions are not based on safe, practical data. it's based on past performance of the market, and robot investment strategy that virtually no one follows.
it's great to look at computer models of what the avg return is over a period. but look at what the real return for real investors was over those same periods, and it drops dramatically.
Ok, we can agree to disagree. Do I expect to get 7, 8, 9 percent returns personally on my investments, no, but it isn't exactly a stretch either. What you are assuming is robot investment, really isn't. The return rate is based on the index. If I put one dollar into an index fund, I could expect to see those returns over time.
You bring up very valid points about making market blunders or needing money, etc. that can throw off the numbers and those are all normal mistakes a person makes. A homeowner can also experience these same things, causing them to draw down on equity in the home, having to face a major repair, making the decision to move or deciding that they really need to drop $70k on the latest designer influenced kitchen.
We are truly dealing in an "ideal" world on both ends (remember also that we assumed that property taxes and HOA fees would never go up for our buyer and that our buyer would never spend more than ~$65k in 30 years repairing the home). I don't personally think that renting is universally better than buying and I've said that many times. All I was trying to illustrate was that there are scenarios where renting may be the better option, even long term.
When it comes down to it, both sides have their advantages and it is not as slam dunk in the buy category as many people seem to think. My original point and one that bears repeating is that home ownership should not be viewed as an "investment" or prudent financial choice. It should be viewed as an emotional decision to buy a home because you like everything that home offers, want to make it yours and need the stability that it offers. People continue to preach buy, buy, buy and it is not always the right thing to do.
If you asked me why I bought my home I would tell you it's because I love the house, I love my town and I wanted my kids to grow up in the same house and have a stable environment. If you ask some of my friends, they'll tell you it's because it's a good investment and renting is just throwing your money away, which is not always true.
Ok, we can agree to disagree. Do I expect to get 7, 8, 9 percent returns personally on my investments, no, but it isn't exactly a stretch either. What you are assuming is robot investment, really isn't. The return rate is based on the index. If I put one dollar into an index fund, I could expect to see those returns over time.
You bring up very valid points about making market blunders or needing money, etc. that can throw off the numbers and those are all normal mistakes a person makes. A homeowner can also experience these same things, causing them to draw down on equity in the home, having to face a major repair, making the decision to move or deciding that they really need to drop $70k on the latest designer influenced kitchen.
We are truly dealing in an "ideal" world on both ends (remember also that we assumed that property taxes and HOA fees would never go up for our buyer and that our buyer would never spend more than ~$65k in 30 years repairing the home). I don't personally think that renting is universally better than buying and I've said that many times. All I was trying to illustrate was that there are scenarios where renting may be the better option, even long term.
When it comes down to it, both sides have their advantages and it is not as slam dunk in the buy category as many people seem to think. My original point and one that bears repeating is that home ownership should not be viewed as an "investment" or prudent financial choice. It should be viewed as an emotional decision to buy a home because you like everything that home offers, want to make it yours and need the stability that it offers. People continue to preach buy, buy, buy and it is not always the right thing to do.
If you asked me why I bought my home I would tell you it's because I love the house, I love my town and I wanted my kids to grow up in the same house and have a stable environment. If you ask some of my friends, they'll tell you it's because it's a good investment and renting is just throwing your money away, which is not always true.
the historical return you're using is in a vacuum. it's what people would have made if they put $1 into the market 30 years ago, and never touched it or moved it.
when you look at the actual returns of investors over the same period of time, it's significantly lower than the computer-modeled-calculated-historical-rate-of-return.
that's just a fact. it is quite a stretch to expect to get those returns. even the best mutual fund managers have off years. no one truly tracks an index. so i'm sorry, but it's just a false assumption. you can't go with anything more than a 4% assumption in an economic model like this. if you want to be aggressive, bump it up to 5 or 6%.
it's just a horribly false assumption to include that rate into any economic assumption. it's truly a best case scenarion assumption.
The proper benchmark is to evaluate which choice leaves you with a better balance sheet today. The problem with your analysis is that you can't bank historical market returns today. You could argue that it frees up capital to make risky investments that historically have provided good returns. The historical return is a plausible scenario, but until you actually realize that return, you don't get to count it on your renters balance sheet (that's Enron-like accounting)
If you stop and think about it, you'll realize that according to your accounting methods, everyone should take out a HELOC and put the money into the stock market, as long as the borrowing rate is below 9% (don't laugh, pension plans have tried more or less exactly this! suffice it to say it didn't work very well)
What you can justifiably bank for the purpose of the analysis is risk-free returns.
...risk free returns like the folks who bought a home in say 2006?
There is risk everywhere and nothing is a sure fire bet. For what it's worth I would also venture to say that it is poor accounting to add a home's equity to a balance sheet and our buyer's "worth" is entirely depedent on the equity in the home. Our renter may not realize their returns until they cash out their investment, but our buyer won't realize their return until they sell their home or finance out the equity.
If we can't count an investment as an asset, than you can't count a home's equity either. My "analysis" was based on starting at point "a" and having an ideal scenario for 30 years until we reach point "b" at which point we all cash out. I never said it was realistic, but I have yet to see anyone really argue with the numbers except on the rate of return to the renters investment, which I conceded were too high at 9%, but I am also not buying 4% either which is pretty much bond market territory.
the historical return you're using is in a vacuum. it's what people would have made if they put $1 into the market 30 years ago, and never touched it or moved it.
when you look at the actual returns of investors over the same period of time, it's significantly lower than the computer-modeled-calculated-historical-rate-of-return.
that's just a fact. it is quite a stretch to expect to get those returns. even the best mutual fund managers have off years. no one truly tracks an index. so i'm sorry, but it's just a false assumption. you can't go with anything more than a 4% assumption in an economic model like this. if you want to be aggressive, bump it up to 5 or 6%.
it's just a horribly false assumption to include that rate into any economic assumption. it's truly a best case scenarion assumption.
Like I said, the entire thing was based on a best case, perfect world scenario. I never said anything different. You are absolutely right that the rate of return is based on putting $1 into the market (in particular a S&P 500 index) and letting it sit there for 30 years. Not very realistic, but possible. What's also not realistic is our home owner never having to move, property taxes never increasing, the HOA never levying for community repairs, the owner never putting more than bare maintenance into the home, etc.
Even the NY Times calculator is really only geared to compute out to 6 years and is the mark they show the financial results, because anything beyond that is very speculative and the factors would be changing.
It's been a fun exercise, but I think people are trying to read more into it and make more of it than I intended.
Like I said, the entire thing was based on a best case, perfect world scenario. I never said anything different. You are absolutely right that the rate of return is based on putting $1 into the market (in particular a S&P 500 index) and letting it sit there for 30 years. Not very realistic, but possible. What's also not realistic is our home owner never having to move, property taxes never increasing, the HOA never levying for community repairs, the owner never putting more than bare maintenance into the home, etc.
Even the NY Times calculator is really only geared to compute out to 6 years and is the mark they show the financial results, because anything beyond that is very speculative and the factors would be changing.
It's been a fun exercise, but I think people are trying to read more into it and make more of it than I intended.
i think your condo association HOA variable helps tilt favor towards renting.
i'd much rather own a house and put that HOA amount in a savings account rather than let a communal fund have waste in it. renting a condo vs buying a condo seems like a different beast than renting a house vs buying a house. many more variables with a condo that seem further out of the owner's control.
property taxes may go up, but so does inflation - so that's assumed in most calcs.
i think it's a good discussion either way though! thanks!
i think your condo association HOA variable helps tilt favor towards renting.
i'd much rather own a house and put that HOA amount in a savings account rather than let a communal fund have waste in it. renting a condo vs buying a condo seems like a different beast than renting a house vs buying a house. many more variables with a condo that seem further out of the owner's control.
property taxes may go up, but so does inflation - so that's assumed in most calcs.
i think it's a good discussion either way though! thanks!
The HOA fees, were definitely the tipping point. However, the scenario was based on what the OP said the actual expenses were for the house he bought. Another poster stated that a comparable place would run $1,900 in rent, so that's where that one came from. Later another person stated that you could rent the exact same place in the same development for $2,400, so there's where that one came from.
We are also basing all of this on buying at a time when mortgage rates have never been cheaper, which also really helps out our home owner. Not even three months ago the buyer would be looking at 5.25% (+/-) instead of 4.6%. These low interest rates are also a big factor.
It was a fun exercise and was neat to see where the numbers fell. I go back to my original premise that buying is more about the desire to own a home and all that means, then it is about making a smart move financially.
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I'm not trying to change anyone's mind here, or imply that my position is correct, I am simply giving what I feel is a logical and well supported case for why I feel the way I do.
