The NYT has a buy vs rent calculator that helps make some of these decisions:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Of course, you can't ever recognize the value of your house unless you sell it and move somewhere cheaper (or buy a 2nd house and rent out the first one, but that's just another side of the same coin).
Most people have negative savings every year. They have more debt. If one has bought a house, then it is very easy to go into more debt every year, when house prices are rising. Then they fall.
Since the beginning of written history (the first written records are records of debts) there are stories and parables about the evil of debt and the need for debt jubilees. Also the idea that lending with interest is immoral is found through out time. Having such easy access to debt/credit from strangers seems not to work well over the long term for human societies.
I mean, is it a good thing that one can get a "Rocket Mortgage" where you can "Get Approved Fast. Get an approval to buy a home or refinance your mortgage in minutes."? [1]
I suppose shrimp and pork and beef are also unquestionably evil... Debt didn't historically work because property rights were poorly recorded. This meant enforcing one's debt involved mafia tactics. Modern debt is cleaner and subject to bankruptcy, a process that occurs on a case-by-case basis when it's needed, a far better solution than randomly cancelling debt every so many years.
For example, businesses often need to borrow money in order to get started.
For another, "bridge" loans and "revolving lines of credit" allow a business to operate when the timing of receiving payments does not line up with the timing of when bills are due.
Forgiving debts means that interest rates must rise to cover those losses.
The figures mentioned use full salary, in reality you might get some 50% of that possible to allocate to paying off the debt. You still get to pay utilities, cost of life for the family, transportation, education and probably extras. Note I've even ignored any savings - and with high mortgage debt, you can be wiped out by any more expensive health problem.
Interest based credit is important for capitalism (use money to make more money), but certainly not for market economies (Use money as a tool to exchange goods you want/need). Both are distinct and can exist independently.
In the end it was basically just a workaround that was effectively the same as charging interest and that same Muslim family ended up taking a conventional loan when they moved instead of an "Islamic-compliant" mortgage because it was a lot easier.
[1] http://www.npr.org/sections/money/2016/05/13/477956675/episo...
Exactly. Interests rates are way too low at the moment.
Pensions are a Ponzi scheme, don't fall for it.
Pensions are mostly just highly tax advantaged wrappers for investments now. They are most definitely not ponzi schemes.
Your link is for a defined benefit pension, which is not typical anymore.
The problem is they bump up those benefits when their fund is doing well but when it isn't doing well there's little or no adjustment. It's so big it's fund is influential in the market and also in politics.
Large numbers of current retirees have been promised unaffordable pensions.
While public pensions like social security have certain features of a Ponzi scheme, they can be sustainable forever, unlike other Ponzi schemes. In fact, they can be more efficient than everyone saving and investing for retirement themselves: https://www.economist.com/news/economics-brief/21727877-fina...
Consider if you have a 5% chance to die at or before 65 who get's the money? Well what if you could get together with 10,000 people and split it with those who live. Now your investments are boosted by those who die and there is no downside as who cares what happens after you die.
Unfortunately, such schemes are illegal unless it's though a company. Because really the long tail is living to 120 which means you don't want to aim to be broke at say 95 then turn 95 and be in good health.
PS: Remember, returns after inflation can be <3% over 20 years. I want a hedge for that risk other than just having a massive amount of money I can't really spend.
However, social security and other government funded pensions are Ponzi schemes. The money you pay in is given to people who are retired at that time. The money you get out is paid by people who are working at that time.
So the real fight is what proportion of current output goes to old people. Private schemes try to ensure wealthy old people get the biggest slice. Public schemes are more vote driven. It doesn't make them Ponzi schemes.
It's also not just a pension fund as you can receive benefits well before 62. Death of spouse with under age children or permanent disability.
Now, this does not mean it's a great or even a good investment. But, the trade off of safety vs returns is not actually that bad assuming you live longer than average.
PS: Another way of looking at it is there are no 100% safe approaches to investing 10's of trillions of dollars. Your stuck leveraging GDP growth which is only slightly better than inflation and frankly that's what SS does.
Most pensions also will not be enough to cover long term care costs if you are unlucky enough to get some form of dementia.
Pensions as a concept were a great idea when life expectancy was shorter and most people could mostly look after themselves in old age.
I don't think they can survive large numbers of people living until 90 -100 with dementia and needing 24h care. Lets hope the Ai/robotics gamble pays out.
I read a great article at some point that advised people who wanted to be writers to just go do that while they were young and poor and not wait until they had saved up money to finance it. Because the reality is that once you have the fancy high paid job and the fancy house, car and clothes that not only go with it but are essentially required, the amount you thought you needed changes.
For certain jobs, expensive suits and other things you might think are frivolous luxuries are nearly impossible to do your job without. It can be nigh impossible to unhook your income from this treadmill where the faster you run, the further behind you fall in certain metrics.
Millionaires are sometimes like the guy who needed the cart to carry cart repair supplies: Once you are rich and famous, now you need that mansion, not for the space or prestige but for security purposes, and you may also need a bodyguard, a bullet proof limo, etc.
Does someone who makes bad choices deserve to be homeless and destitute later in life?
The rest of us don't deserve to pay for their bad choices.
It seems valuable to society to not have old, homeless people causing trouble. But that's just me.
Personally, I think people should pay the price for their stupidity. Subsidizing stupidity never works out in the end.
Ultimately, saying neither of these is worth spending communal government revenues on collapses down to "I'm okay with people dying on the street."
Which is not offered as a straw man, but because that's a very possible outcome. And given that, if we're not okay with that, then we're going to spend significant resources to keep that from happening (ER care, homeless programs).
Social security attempts to invest that earlier in a person's life, so that the money treating more dire circumstances can be saved.
... And also allows for some measure of human dignity for those who might not have been taught about compound interest at age 6.
Or just sell it to pay rent for the rest of your life. Either way it's a pretty big boon.
bare-ownership is a right of virtual ownership. For example, the bare owner of a property has no right to occupy it or rent it out. On the other hand, when the usufruct holder dies, full ownership of the property is carried over to the bare owner without any liability for inheritance tax. He can then dispose of it (by sale, gift, bequest, etc.) as he wishes.
The maximum duration of usufruct generally corresponds to the usufruct holder’s lifetime – in that case, it is called usufruit viager, or life usufruct. But it is possible to set a predefined term (10 years, for example), which is called temporary usufruct.
http://www.french-riviera-property.com/en/news-detail/4301-t...
http://bareownership.com/wp-content/uploads/2012/02/Property...
PARIS, Dec. 28— Andre-Francois Raffray thought he had a great deal 30 years ago: He would pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then move into her grand apartment in a town Vincent van Gogh once roamed.
But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent of more than $184,000 for an apartment he never got to live in.
(My actual goal with my current property is to sell it once I'm having trouble going up the 3 flight of stairs leading to my unit and using the money to live in a much smaller place as people mentionned already)
Consider Hong Kong as an (extreme) example, where leaving the city means emigrating to another country with another language etc. (yes, HK is technically a Special Administrative Region of China, but can be considered standalone in this respect).
The median apartment price/income ratio here is 18, compared to a US average of 3.9 (the highest cities in the linked article are 13) [1].
These ratios also don't consider what you actually get. The average size of new apartments sold this year in HK was 610 square feet at an average price of US$1.8m and one new development offers apartments the size of Tesla Model X for ~US$500,000 [0].
If you want to go larger, the per square foot cost goes up. At the extreme end, consider a 4000 square foot townhouse that costs US$21,190/square foot [2].
A more ridiculous example is perhaps the sale of a car park earlier this year for US$600,000.
For reference, the median household income is ~US$38k. [1]
Unfortunately those with the most housing affordability issues are those that are least capable of leaving.
[0] https://www.bloomberg.com/news/features/2017-06-14/you-can-b...
[1] http://www.demographia.com/dhi.pdf
[2]http://time.com/4752342/worlds-most-expensive-house-square-f...
What is worse, this cancer got exported to mainland China in the 1990s and it was systematically rolled out for all major cities there. $1.8m buys you an 80sqm new apartment in Shanghai in an below average location, when the median household income in Shanghai is definitely lower than US$20k.
It is lucky to be living in HK as there are still public housing options. In cities like Shanghai and Beijing, using the national household median income figure, a Chinese peasant needs to start saving the deposit from the Ming Dynasty (1368–1644) to be able to afford an average apartment there.
http://www.demographia.com/dhi.pdf
The top 10 least affordable with respect to median price/income ratios:
China Hong Kong 18.1
Australia Sydney, NSW, 12.2
Canada Vancouver, BC 11.8
N.Z. Auckland 10.0
U.S. San Jose, CA 9.6
Australia Melbourne, VIC 9.5
U.S. Honolulu, HI 9.4
U.S. Los Angeles, CA 9.3
U.S. San Francisco, CA 9.2
U.K. Bournemouth & Dorset 8.9For household who already own, their existing apartment also appreciated, so what matters is the cost of trading up. The hardest hit group are younger people between 20 and 35 who are stuck in their parents house for probably forever. 3 generations under 1 roof is pretty common.
I've lived in cheaper but boring places. The financial tradeoff is fair.
But lots of people are plenty happy in the "boonies". They just have different interests, like doing more outdoor-oriented activities like hunting, hiking, fishing, or building their own workshops from scratch. Or maybe they're more cerebral and like the peace and quiet so they can focus on writing.
It's worth pointing out that far more people live outside of San Fransisco and New York (sure, throw in LA and Chicago, too) than inside those metropolitan areas.
Each of those cities is unique in different things. So they are part of the fatter part of a long thin tail. But that's not the same as "everyone wants to live here!"
I don't disagree. Different people want different things. I'm just pointing out 1. why people like living in big metros and 2. the flaw of basing where you live entirely on the cost of living and real estate.
You can do all of those same things just living an hour east of SF.
I can't get a well-paying job, or access to any of the above without being close to the city.
No, an hour east of SF is deep in the Central Valley.
So the problem with living beyond Pleasanton is that you will spend most of your life sitting in traffic. Why do you need to sit in traffic? Because almost all the jobs are in the Bay Area. Maybe that won't be as big of a problem soon though once you have Level 4 autonomous driving. Personally I still wouldn't go for it with that.
For instance my girlfriend makes twice the money her parents ever did. She still couldn't have afforded the full down payment on her house without a 4% loan from her mother as they were entering retirement. This arrangement ends up being beneficial to all parties.
For reference, this is in southern New Jersey and I'm on the older end of the millennials.
If there is a recession can you easily find another job? Do you have a decent selection of local employers to ensure sufficient competition in terms of wages and benefits? Etc.
Living in a high CoL area seems to correlate with a healthier job market.
It took one of my coworkers a whole year to find another job during that period, even though he was in a high CoL area and initially had a "great selection" of jobs.
Now, I know my anecdote doesn't mean much, because supposedly unemployment went up. Traffic certainly got better. But my point is, the anecdotes aren't worth a ton. I'm not making mine up -- I'm dead serious. Nobody I know got laid off, nobody I know left the area.
I also know far more people who have moved TO California than out of it, and the only people I know who moved out were a couple of people in the past 3 years.
It costs much more than where I live, but it is still incredibly cheap compared to west coast.
And the more expensive homes will also be an income tap when you retire and sell the house (hint: anyone in the magenta can retire, sell and live out their lives anywhere in the green).
So if you pay X in state income taxes, you'd deduct X from your overall federally taxed income. You end up only saving your federal tax rate times X, not X in federal taxes. So if you're taxed at 13% state and 35% federally, you'd pay 13% to the state. Then you'd still pay (barring other deductions) your federal taxes on 87% of your income.
Federal taxes don't work as a bare percentage, though. You pay a lower percentage on everything up to some number, then progressively higher percentages on brackets of your income up to your maximum tax rate. https://taxfoundation.org/2017-tax-brackets/
Compared with most other states, California has lower property tax rate. Since Prop 13 passed in the 70s, the tax rate has been fixed at 1% of assessed value (with maximum yearly increments on the assessed value capped at 2%).
Ten years ago, I rented a small apartment for $350 per week. Now a literally identical apartment, 20km further from the CBD is going for $600 per week of rent. (I'm not in the US).
Mortgages don't consistently go up in a way that meets these sorts of increases.
You can't really buy a house in such a fashion though.
Yes, but what you can say is "If I move to this other place I can work ten fewer years for my house even if I make less money."
I could buy a really decent home here (Southern Missouri) for somewhere between 0.5 to 1.5 times my yearly salary. There are many factors affecting that price but there are some really decent houses at the low end of the price range. Extra bonus: property tax, income tax and sales tax are all relatively low. Unfortunately that doesn't apply to the entire region; some neighboring counties have ~8x higher property tax than where I live.
What is the white zone?
When you rent, your money is gone. When you buy, you normally get most or all of it back later. There's barely any economic comparison between renting and ownership. The tax write offs is the one of the least of your concerns.
People go completely and absolutely nuts when they end up "underwater" with mortgages, which means the sale price of the house at some point becomes less than what you bought it for, or worse, less than the remainder of what you owe. It's an utter and total disaster if you can only get back 80% of what you paid. And yet nobody blinks an eye about sending 100% of their money down the rental drain.
With ownership, you add to the value/legacy that you can pass to your family when you die. As a renter, you add nothing.
When renting, people often get priced out of their apartments, or evicted for circumstances beyond their control. With ownership, the sale price is once, and generally only rare major disasters can push you out. The risks to renting are greater than the risks for home ownership.
These things are why it's so incredibly important that home ownership is affordable across the country. If it goes out of reach, we will have a huge economic problem with large consequences.
Either way, we could debate a whole bunch of minor costs, and it's obviously not the same for everyone. But that would be missing the point completely.
If you sell your 500k house for a very very bad return of 125k, you will be 125k ahead of where a renter is. Renting returns nothing. Whether or not I get back 100% of what I put in, the point is when you rent you get nothing back.
Regarding the example of people losing money selling a house in Detroit, it seems to me that by renting and investing the money you would have been putting into the mortgage, you are better able to diversify the risk of your housing area depreciating in price. However, there are areas that experiencing housing price growth better than stock market return, so there are advantages and disadvantages to renting vs. buying a house. By no means is it as clear-cut as you portray.
[1] https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-...
The point I'm making is that buying a house is an investment, and renting is not.
I've done both, I've rented for long periods of my life. In San Francisco, among other places. I've also bought two houses.
I wish I had seen the economics of buying much sooner, because renting is throwing money away. When I was younger I was comparing mortgage payments to rent, and it didn't seem to make much difference. But if I'd realized that rent is gone and mortgage payments come back, I'd have tried to buy much sooner.
Renting is more expensive than buying in every county I've ever lived, including SF. So the argument that you could rent and invest instead of buying doesn't make sense to me. If you can rent and invest, then you can buy and invest. As long as you can afford the down payment, which is the main barrier to entry.
In your example, I could end up with 927k, but you have to subtract your rent. If your rent is 3k/mo, then you'd have spent 375k on rent for a net return of 550k. And you had to pay both the 3k/mo investment and 3k/mo rent at the same time.
Chances are pretty good in some places that if you buy a house for 350k, after 10 years it will sell for 550k, and you could still afford the side 3k investment per month and get the 927k on top of it, for a total of ~1.4M.
It still seems really clear cut to me.
Perhaps not - but you are deducting those from your taxes the entire time.
I have no comment to make about the appropriateness of the mortgage interest tax deduction. It exists and should be factored into your economic models.
Whoa! No, not even remotely close.
*keep in mind that "most" means better than 50%. Are you claiming that the average house sold in the US gets a worse than 50% return?
In your "example", if you're very lucky and both buy and sell at the right time during a housing bubble then relocate to an area not experiencing a bubble, then maybe. (I believe you are severely underestimating the carrying costs of a typical house though, it's not just the big stuff.)
However, that's not even remotely close to the typical case. House prices rising fast enough to cover all those costs is indication of an unsustainable bubble.
https://inflationdata.com/articles/inflation-adjusted-prices...
>We can see that if you had bought a house at the peak in 1980 you would have lost purchasing power if you had sold in 1985 (not to mention transaction costs). And then for a little while around 1990 you would have been slightly ahead, but then through most of the 1990’s you would actually be losing money once again. So you’ve paid off half of your 30 year mortgage, you’ve paid taxes, insurance, maintenance, etc. and your house has not kept up with inflation!
You also have to keep in mind the economy of most towns and some cities is very, very volatile and depends heavily on 1-2 employers or industries. Those go away and there's economic collapse. When there's large economic collapse then buy buy home value.
(It's personal preference but I disagree with the idea of leaving family [besides spouse] any significant amount of money/assets when you die - most of my estate is going to charity upon my death)
So which would you rather have? A 50k loss on your house after 10 or 20 years, or have spent 600k renting a place in San Francisco for 10 years and having 0 dollars back?
There are good reasons to rent, but the long term economic benefits are not one of them. There's just no comparison, and bringing up taxes and fees and repair costs and whether inflation matches, none of that makes a single bit of difference.
Not necessarily, the less you put into the downpayment the more you pay in interest, the less the calculation makes sense.
I'm not disagreeing that there are many scenarios, likely including the 6k/mo example, that buying makes sense. What I take issue with, and I imagine other commenters did as well, is the idea that "When you rent, your money is gone. When you buy, you normally get most or all of it back later." This is far too simple, and there are many cases where the two are equivalent or renting comes out on top. It's easy to find such scenarios in the NYT calculator [0], even when you assume your house goes up in value.
[0] https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
That being said, a better metric might be the time to save up for a down payment that brings the mortgage and fees into a reasonable range for your salary. However, that calculation is much more complicated.
Edit: I live in SF and I accept that I will never own a home free and clear here, unless I get exceptionally lucky. My plan is to get a mortgage in SF and eventually sell the place and use the equity to buy in a more affordable market.
My taxes are 75% of my mortgage, but it's still worth 1/3 the salary to pay 1/7 the cost vs living in The Bay Area.
I think what the alternative title to this blog post could be is: "How many years of life does that city cost?" What it's really comparing is the relative cost of having a roof over your head in different areas. Would you rather work 40 years and live in SF or work 30 years and live in rural Wisconsin? (I don't have an opinion on those two options. I'm sure there are many people in both of those places that are happy with their choices.)