- owning a house may make it harder for you to decide to move and accept a job/opportunity elsewhere, or to travel -- the impact of which is unquantifiable
- for some people, by the time they'd finish paying off a house they'd already reasonably expect their parent's to have passed on and left wealth/property; for these people, particularly entrepreneurs, having free capital in the intervening period would turn out to be more rewarding so rental is a very sensible option
- not everybody is born where they want to end up; I've moved between 3 cities and 2 countries in my 12 years as an adult (each time increasing my earnings, opportunities and life experience significantly, like climbing rungs on a ladder), and I'm hoping to move a 4th time so that I can finally have access to the top-rung opportunities other people born in major cities and 1st world countries take for granted -- the idea of owning houses in each of these cities and somehow managing to rent them out as some propose here is absurd to me, I barely have enough time to take care of my basic needs, nevermind run a multi-national property empire, and besides which there a
Ultimately as nice as this calculator is, this is a very personal decision.
Why is it harder? Not sarcastic at all, by the way : it's just that I am in Hong Kong and it's actually quite common for expats here to buy a house, give it out for rent, and never come back to Hong Kong again! In fact, I know of some cases where people have bought flats without even looking at them! (In both cases, someone they know manages rent collection + maintenance, presumably for a small fees?). So I was wondering what is different about the US / wherever you are right now.
Yes, it's a very personal decision, those were the exact words I was looking for! I suppose hardcore economists would say that the Utility Function is very personal.
You can sell it or rent it to cover those costs, but both of those options take time and effort. To sell it, you need to market it, negotiate with a buyer, etc. To rent it, you need to market it, pick a good tenant, collect rent, do maintenance and repairs, probably deal with legal matters like eviction, etc.
I guess you could just give it away (but doesn't that still involve a bunch of title transfer fees?) or just stop paying taxes and let it get repossessed (but doesn't that destroy your credit?).
If you rent, you can just pack up and leave -- the only limits are any terms stated in the lease.
All of that said, I'm doing exactly what you mentioned -- I bought a house instead of renting, even though I don't plan to stay here very long (I'm actually thinking of moving again in a few months, once I've been here for a year). But I did it with the explicit intention of renting the house to make a profit once I move -- and I plan to do that with my next place, as well.
How Long Do You Plan to Stay: Max this.
Investment Rate of Return: Zero this. Because you seem to assume that the renter isn't investing the downpayment, principle payments and any other net savings and won't be able to trade the proceeds for 100% ownership in the home at the end of what would have been the mortgage period. Or set it to -10% (the max negative the calculator allows) if you assume the renter will squander rather than invest the money, with no commensurate happiness return.
The result with be buying is better than renting unless you can rent that home at an impossibly low price.
(Subject to the assumptions of returns and interest rates, etc etc.)
At the end of 30 years I will own my home. At the end of 30 years of renting I'd be in the exact same boat I'd be in day 1 renting.
The calculator makes a major assumption that if you rent you take your down payment money and invest it. Obviously the investment will be worth a lot after 30 years of interest. But this assumption is based on the false premise that you are sitting there with your down payment ready and it's just a choice of where to put it.
In reality, people don't usually save up a down payment until they've already decided to buy. So it's a false comparison.
It's also assuming that homes like the one you would buy are available to rent, so "everything else" is equal. Which is also a false assumption.
Basically this calculator is set up to make you feel good about paying a rent that's more than a mortgage payment would be.
Choosing to rent or buy shouldn't just be a purely financial decision. The real question is are you ready for the responsibility of being a home owner? Do you look forward to the prospect of having a permanent home and investing in it? Or do you just want a place to live and have someone else be responsible for maintenance?
Even given the first sentence is true, its not a false comparison, given the assumption the reason that people don't save up the money (or just invest it gradually, same thing) is that they have something more valuable than investing to do with the money (i.e., that the decision not to do so unless they are planning to buy a house is rational). If so, the investment value is the correct lower bound on useful use of the money to compare a home purchase to, because what they'd actually do is something else that has greater expected utility (even if that utility isn't in the form of a cash payout in the future.)
My point was that there's more to the decision than the simple "Will I make more money by investing in stocks than in real estate?" equation that pro-renting people usually point to. Of course stocks are a better return on your investment than real estate from a pure investment perspective.
There's more to choosing to buy than simply the pure financial motivation. If your motivation is purely financial then you shouldn't buy a house to live in but buy a house to rent out.
No, I'm not, I'm just excerpting the part that's most clear in explaining the focus of the response; we're in a medium where the whole context is preserved and directly accessible, so there is no reason to include the whole thing -- its already right here and available the reader.
> There's more to choosing to buy than simply the pure financial motivation.
That's true, and not a part of your comment that I have an issue with; its quite correct that looking only at the financials -- and even within the financials only the expected returns and not, e.g., the particular risks involved, since the disutility associated with risk is not consistent among individuals -- potentially understates the value of buying (but, that's true of renting, too). But that's irrelevant to the question of whether comparison to investing as an alternative is a false comparison based on the observation that people who aren't purchasing wouldn't often have the downpayment available immediately to invest.
In the end, the owner will likely recoup every dollar of principle they pay in the long term, while the renter has to find an investment opportunity that will not only return all of their loss (the rent they've thrown away) but then beat the increased valuation the housing market will provide the owner.
From here - http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html
What about stocks? Stocks are a medium to high risk investment with no guaranteed return on investment. It's actually pretty hard to make an educated guess what the return would be. But we can give it a go. According to this analysis,
the nominal compound annual return of the Dow from
year-end 1900 to year-end 2011, excluding dividends,
was 4.75%.
But that's also an upper bound.
However, the real compound annual growth was only
1.6%. That is, when we use constant dollars, we
discover that the purchasing power has only
increased 1.6% per year.
Let's get crazy, let's say I'm a fantastic stock picker and I can beat all this and I'm making about 12% per year. Running the compound interest calculator, I get $650,000. That's pretty amazing, but I still have about a million dollars to go to break even. I actually have to hit 16.5% every year, for 30 years, to break even.
This site lets us run another kind of calculation, the average rate of return for the S&P 500 over some date range. I picked the last 30 years and got 12.67% not adjusted for inflation and only 9.57% adjusted. Professional fund managers struggle to beat the S&P. So realistically, you aren't going to either over the long run.
edit: Just check interweb, only mortgage that being used to invest for more incomes are eligible for tax reduction in Canada, thus more trouble to convert a house mortgage to investment mortgage.
Intentional or oversight?
The interaction between down payment rate and mortgage insurance rate also reveals a limitation of our user interface: On the one hand, it’s nice to have all the variables decoupled so that you can set and explore them independently. On the other hand, many of the variables are not independent. If you change one variable, you may need to change other variables to maintain a realistic scenario.
Having the mortgage insurance rate tightly coupled to the down payment would probably be too limiting, but maybe there’s a still a way to better identify when certain variables (or combination of variables) are unrealistic.
Also: big fan. Thanks for d3.
And thank you!
Here's my favorite demo of the concept, discovered here on HN: http://worrydream.com/#!2/LadderOfAbstraction
I think I had seen the one on the future of interaction design, but I hadn't explored the site :) .
Well I'm not sure I'd call this a 'limitation' of your UI. This is actually a very common issue when designing user interfaces for models (I have been doing this for a living for almost 15 years). There is a continual tradeoff between the positives of the software ensuring internally consistent, and realistic, values - and allowing the user flexibility for edge case exploration. And then there are issues like discoverability, speed of use, technical limitations, etc. - as always.
One of my favorite mental toys in this area is: devise a way for a user to assign a fixed amount (call it a 'budget') to several categories. For a simple example, consider a budget of $100 over 5 expense categories. But it should also work for allocating a road maintenance budget across 25 districts, or for assigning a weighting to the importance of policy objectives (ecology, health, economic growth for example).
In the vast majority of cases, after several meetings about this, clients say 'fuck it, let them copy/paste their own values from Excel' (at this point I come in and broker a truce between the warring factions of several solutions and implement a meet-everybody-halfway solution :) ) It's one of those 'how hard can it be?' <2 weeks later> 'oops yeah pretty hard' things.
devise a way for a user to assign a fixed amount to several categories
(The above is a simple example of a personal budget which I always use to illustrate the point, my actual use case is usually something like 'spend more on nature protection and less on road maintenance, but don't change expenditure on social security'. It's easy to see how various political persuasions have some sliders they don't want to budge on, some they want to minimize, and others to maximize).
Usually you need some form of 'reserve' account in your UI; i.e., you're 'spending' from a certain total, and as you increase/decrease some items, that amount is taken from / added back to the reserve. But then how do you guarantee people always spend everything (in some cases that is needed) without introducing modality (i.e., a dialog that says 'you need to spend everything' when you click 'next' or whatever). And sometimes you need a way to move units between accounts, without using the reserve as an intermediate store; plus you usually need a way to move exact amounts, which is hard to do with sliders.
Another approach is something where you stick with the sliders you proposed, and add functionality to 'fix' certain ones, and optionally a way to indicate how much to increase/decrease the others. E.g., proportional to their current values, or distribute the amount equally, or something else, ... The problem with this approach is that it is natural for nerds, but almost instantly becomes unwieldy for 'normal' users. And in that case, the 'fuck it, let's do it in Excel' is better.
If you're interested in this sort of things, I'd love to hear your thoughts or see mockups on other ways you think this could be done. I have talked about this numerous times but usually not with people who know something about UX or even care, beyond their project in front of them.
You ONLY need mortgage insurance if you invest less than 20% down. Even then, you can often take a second, higher interest mortgage loan instead of paying for mortgage insurance.
A second mortgage is better for your tax return and equity and also offers better returns for the bank, which only sees a benefit from mortgage insurance if you default. Do you really want to give your bank any incentive to help you default?
The entire point of mortgage insurance is to protect the bank in the case you foreclose. It ensures the bank receives 20% of your property value so they can afford to take their time fixing and selling your house to its next owner. They don't need this risk mitigation if they have your downpayment.
Both renters and owners need a place to live in the future, assuming they're not dead. If we exclude those who live with mommy and daddy or mooch off of other people...
Well, then whether the debt is formal with a mortgage or not makes little difference. Even renters are on the hook to come up with $1000 for the month of October 2016. It's just not in writing.
The main advantage of owning one's own residence is tax and stability (the flip side of the illiquidity problem). Owner's equivalent rent is not a taxable income. Capital appreciation works in your favor rather than against you when you rent.
In short owning one's own home is both economically and psychologically rewarding if you have long term stable income.
Where are you getting these lease-free rental units?
True, you're less on the hook with a 12 month lease, and the liability is lower than a 30 year mortgage...
But this is a very mild difference. That job's not going to wait for you to sell your house or for your lease to end.
> If you own the transaction cost is much higher if you need to move.
If you own, then eventually you're not paying anything at all for a place to live. And don't bother to mention property tax... you're paying that if you rent, too, it's just hidden.
This is a manufactured debate, it's meant to appeal to twentysomethings' bohemian aspirations. Someone wants them mobile so they can herd them around like migrant workers.
It seems to me that the majority of this argument is that rents will not increase. That is a fallacy. All else being equal, each time you move from a place, you will likely be paying more rent because of the inevitable march of time.
A homeowner's monthly burden is either static or reducing (if they're paying down the principle early), and they have all kinds of things they can use to offset that monthly housing burden, like rent spare rooms out, or use part of their home for a business.
Renters do this too. they have strictly more options than owners.
But supposing your agreement explicitly allows sub let's without landlord arbitrary approval, the owner is still coming out on top because the activity is simply reducing their monthly outlay while still building equity, the renter is only reducing outlay, but still has zero equity at the end of the day.
More importantly, my mortgage payment will stay the same, fixed in dollars at the year I borrowed the money (in my case 2006 dollars). While rents will continue to increase. For example, at some point in the future, I'll theoretically even be able to rent a single bedroom out that will cover my entire mortgage payment simply because of this simple truth. I'll live "for free". But your base rent price will continue increasing such that you're monthly burden will stay a significant part of your monthly income. Even if you pass along as much as you can to a subletter, that percentage won't change much while mine will continuously reduce.
Because of this ease whenever I move jobs I always move house to be closer to work (after passing probation) because in my area changing jobs can easily add an hour a day to your commute.
The actual "manufactured debate" is the one manufactured by the massive housing complex that tries to tell people that rent is throwing away money and it's always better to buy. Buy now! If you don't like your home, you can always sell it for more, later!
This tale has been empowered by the fact that we just went through a global, disproportionate, 20 year rise in house prices and extremely low interest rates that created much wealth for one of the largest cohorts in history. Everyone under 40 (at least) is skewed by this happenstance. Some have even managed to become wealthy from it.
The fact is, in an economically efficient world people would be indifferent between buying and renting. So there are many individual factors to consider, many of which are covered by this calculator.
TISNTAFL. Buying a home isn't free wealth (nor is renting). There are always tradeoffs.
>Someone wants them mobile so they can herd them around like migrant workers.
And maybe someone wants them to buy homes so they can't easily switch jobs or relocate, and are pinned down like wage-slaves?
You'll always be a sharecropper, now that you've been taught to believe that anything else is foolish.
Once I can afford enough to do it, I'll buy another home myself and rent it out to someone like you. And I'll stand there with a sheepish grin while he laughs that he got one over on me, hoping that he never realizes otherwise.
Except I own my home...
I love people who have determined that they've found some trick to beat the market. "Oversized asset returns! All you need to do is buy real estate!". How many late-night TV seminars did you attend to to obtain this knowledge?
One day the cheap money will disappear, and the speculators (like you) will go bankrupt. Then they'll stiff their creditors, blame the banks, and the public will pick up the tab...again.
You also need to factor in the value of negative impacts of renting. When you have kids, school selection is driven by location -- and a lease is more ephemeral than a mortgage. You also always need to deal with landlords, who can be good or bad, and often cannot make changes to the property that you would like.
Ever get to know a military brat? It's a hard life.
One quick suggestion: it would be great to be able to save the numbers you've punched in so you can share a URL with someone (e.g., spouse, parents) next time the rent v. buy discussion comes up.
[1] http://www.nytimes.com/interactive/business/buy-rent-calcula...
(That’s in terms of buying being cheaper than renting; if you meant making an actual profit on your home, then the equivalent rent has to drop below $0. This typically only happens when the home price growth rate is high.)
But how long you stay is far from the only independent variable. The intent of the new calculator is not just to provide a single, definitive answer — which is essentially impossible given the fundamental uncertainty in predicting the future — but to demonstrate how the variables interact with each other and give you a feel for the space of possibilities. There are many other considerations besides timing.
One small addition I'd consider adding is estimated rental income if you buy and plan to rent out a portion of the property. I am in the process of buying a home right now and plan to do just that, but this factor seems to be missing from the chart.
The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.
Here's the problem I often run into - how valuable is this, really, compared to a good and much simpler heuristic. For instance - how well would this compare to a rule of "buy if you plan to be in the house more than [five/seven/ten] years?" One story they like to tell in operations research classes is about a couple of programmers discussing the implications of rounding when an input (viscosity) had been estimated by a field worker rubbing mud between his fingers and typing something in...
Another factor is that, in my "adult" life (adult being where I made enough money to squeak into the housing market if I so chose), housing has fluctuated wildly. I finished grad school in about 2000. Since then, housing has made a mocker of pretty much every financial decision I've made. The amount I saved was generally eclipsed by the amount San Francisco housing values increased between 2000 and 2007, dropped between 2007 and 2012, rocketed up again since then.
In spite of all that, I think that this is a very worthy tool, especially if it helps people really understand the factors that go into a decision. But considering how unpredictable everything is... do you think it really adds much as a true planning tool, beyond a vastly simpler heuristic?
Edit: Thanks!
I noticed that one of the biggest factors, unsurprisingly, is Home Price Growth Rate and rent price growth rates. Do you have any sources for the rates historically? Preferably by location.
I live in London. Unfortunately, as the calculator shows, change in house prices is overwhelmingly the most important consideration in buying if you're thinking of staying for much more than 2-3 years. Admittedly growth is completely unpredictable, (and also highly inequitable), but to a large extent a decision to buy is based on expected future house prices.
For instance, I have a friend who bought three years ago - a £250k flat which would cost around £1,300 to rent. According to Rightmove and Zoopla (and the price a similar flat next door sold for recently), the monthly gain in value has been around £3,000 (!!). I also note this gain is tax free, so equates to earning more like £5,000 a month pre tax.
Unfortunately these gains are only available to those who earn enough and save enough for a deposit, or more commonly, those who receive parental assistance in purchasing property.
It's important to have it separate from the price you pay to the owner because you shouldn't include them in the resell value of the house.
Edit: I see it is just a poor labeling, explanation mentions just the portion of utilities that not covered by landlord.
For example with the defaults, the down payment chart is flat. This means the total cost of buying is relatively unaffected by the size of your mortgage. Felix Salmon pointed out this demonstrates the Modigliani–Miller theorem:
http://en.wikipedia.org/wiki/Modigliani–Miller_theorem
Of course, there’s still a big intangible difference between having debt and not having debt, like your ability to respond to market or income changes. And in an inefficient market, loans can be more or less expensive.
Playing with the variables and seeing slopes change from positive to negative or vice versa is interesting, too, because these suggest different optimal decisions. Like as your investment return rate goes up, the down payment slope becomes increasingly positive — meaning when stocks are doing well (and assuming mortgage rates aren’t also going up), it’s better to have a smaller down payment and put more money into investments. To a lesser degree, your marginal tax rate changes the slope of the down payment as well, by discounting the mortgage interest payments.
The magnitude of the slope also gives a sense of your risk: you can see how sensitive the equivalent rent estimate is to small changes.