Every renter I know has been scolded for “throwing money away” by not buying a house. But is buying a house still good advice?
We know that houses bought in the 1980s and held until now amassed a tremendous amount of wealth for the owners. But does that mean housing is a good investment or that a family rich enough to buy a house in the 80s and never sell is already rich? Also, can we really look at decisions made in the 1980s as good advice for 2021? If we look at current data about housing, renting is better than owning. Send this article to anyone who says renting is a waste because the numbers do not support that.
What Counts as a “Good” Investment?
For an investment to pay off, it has to be timed and priced correctly. There are no investments where timing and price do not matter. You can buy Amazon stock and sell at a loss. You could buy into a Ponzi scheme and make money.
Your results don’t mean that investing in Amazon is bad or investing in a Ponzi scheme is good. It just means that a broken clock is right twice a day and sometimes you can do everything right and still get bad results. Timing and pricing are crucial. This is not controversial.
Yet people often say “good debt” like housing and college are investments that ALWAYS make good sense. I mean marketing is necessary when the numbers make no sense whatsoever and we all know someone burned by a money pit or graduated into a recession.
Whether anything is a good investment depends on what you’re buying, what you pay for it, when you buy and sell, and also, the opportunities you miss out on by choosing your particular investments instead of others.
The Losers – Who Regrets Buying a House?
Owning a home is like marriage: the unhappiest people are those who chose wrong.
A single person might meet the love of her life the next day and get married, but the unhappy married person won’t wake up one day magically in a better situation. A renter can find her dream home and buy it tomorrow. An unhappy owner has to figure out how to stay in her house to recoup her costs.
Of course there are people who are happily married and happily single, renting happily or owning happily. We’d like to think that we won’t be the unhappy married or the unhappy homeowner. But everyone goes in thinking they’ll be happy. How do you know what your results are going to be? And what are you going to do if you chose wrong?
Short Sales, Evictions, and Foreclosures are a Reason to Rent
It’s not guaranteed or even likely that prices will continue to go up at the same rate in the future for anything. It’s also not guaranteed that you will be able to afford your mortgage while you’re paying it.
Yes, you face some risks by renting and not owning – namely that you could have missed your dream house or missed a hot market. The worst that can happen is disappointment and lost profit.
The risk for buying though, is financial ruin. If you miss a few mortgage payments because you fall on hard times, you could get evicted, lose your down payment and your house, and ruin your credit. If your house value decreased, you could lose even more to your lender.
1% of buyers are foreclosed upon by their lenders. 5% of sellers sell their homes because they cannot afford the mortgage and/or the other expenses of owning a home. These aren’t high percentages, but remember that this is the worst case scenario and the consequences are dire. There are 83 million owner-occupied households in the country. That means potentially 5 million households belong to this group of people who suffer the worst case owning scenario. How do you know you won’t be in this group?
Sellers who Don’t Recoup Their Cost
When home sellers brag about their profits, it sounds impressive, but it’s never the whole story. It’s like only budgeting for the retail price but not for management and upkeep of an item – you could ruin your investment or your finances with this error. With buying a house home, there are so many additional costs in buying and maintaining a home besides the sale price.
On average, it takes 4 years for sellers to recoup their costs from buying a house. So generally, someone should aim to live in their house between 5-7 years before selling.
Most of the data on making money when selling a home is skewed upwards because of people in their 60s and 70s selling homes they bought in the 80s. But home sales for younger people is a much more relevant demographic to the question of whether buying a home makes sense now.
Young people bought their homes recently, bought at close to the high prices we have now, and have a lot of flux in their lives whether it be starting new jobs and families or pursuing job opportunities. They are thus, more likely to be swayed by the rent/buy decision.
The data show that 88% of 22-29 year old sell their homes in 5 years or less; 51% of 30-39 year olds sell by the five year anniversary. Those are solid majorities who likely won’t recoup their costs. I could hang my hat here, but there’s more!
Homeowners Who Buy Where It’s Cheaper to Rent
There’s a formula to help you determine whether you should rent or buy. If you divide the median home price by the median annual rent, a ratio of 15 or under favors buying; over 16 favors renting. The rent-to-buy ratio in my area is 28. So yes, renting works better.
Another cost for homeowners is avoiding the allure of home renovations. Home renovations is another expensive piece of financial advice that doesn’t seem to pay off. In fact, in a national study from 2019, 0% of home renovations paid off. At best, a homeowner was able to nearly recoup the cost of the renovation, but it din’t increase the selling price of the home. Sure, renovate a place if you want it to be nicer for you, but that money is not an investment. Luckily for renters, they don’t even have the option to throw their money away on renovations.
Homeowners Who Want to Sell But Can’t Find a Purchaser
7% of sellers wanted to sell earlier but didn’t because their homes were worth less than their mortgage. Note that this information comes from a survey of home sales – it doesn’t include owners who never found purchasers for their homes. The number who want to sell a house but couldn’t make this statistic much greater than 7%.
Who knows what waiting for a purchaser meant for the sellers’ lives? Maybe they missed out on family time or job opportunities. Maybe they incurred incredible costs maintaining two households. While 1% of these sellers waiting for buyers were able to rent their homes, their renters may have been bad renters, or they may not have paid enough in rent to maintain the mortgage and/or the cost of maintaining two residences.
People who own seem to think that rents rise directly with house prices, but of course it’s more complicated than that. The rents are going down in my area, even as housing prices increase. As more renters leave to buy houses, or as people leave the area for cheaper ones while they work remotely, renting companies and homeowners have to reduce prices to entice the existing renters. So if you want to rent out your house, you can’t necessarily charge your mortgage price because good renters can find much better deals on apartments. Further, it’s just a lot of stress to do these things on short notice.
Also when selling a home, you’re not in charge. You’re at the mercy of supply and demand in the housing market too. 40% of successful home sellers reduced their asking price at least once. That number jumps to more than 60% for those younger than 54, which suggests that the numbers are skewed by those living in homes for 30 years. 34% of all sellers offered incentives to attract buyers. You spent your life savings on this house- and now you have to throw in extra bonuses to get some schmuck to want to purchase it.
Homeowners Who Delay Their Lives Because of Their Mortgages
When people sell their homes, 16% want to move closer to friends or family, 13% want a bigger place, and 11% move for a job relocation. Sellers typically lived in their homes for 10 years before selling.
But how likely was it that it took 10 years for people to want to move closer to their families or want a bigger place? People sold at 10 years because that’s when the economic benefit would be best. It skews the investment because people are changing their lives in order to get the best financial gain. When people have children, for instance, the time to move near to your parents is in those early years when you need childcare – not 10 years down the line. I’m not even factoring in childcare costs lost by not selling because that would too easily put the win in the renters’ column.
More than half, 54%, of sellers’ houses were on the market for more than 3 weeks. 15% of home sellers needed to sell their homes urgently and 41% had a set time frame for their sale. That means these sellers are unlikely to get a great price and just imagine the stress of seeing if your life’s investment would pan out for weeks or months. Also imagine the stress of wondering if you can live the life you want to live based on if you can sell your home.
Homeowners Who Regret Their Purchases (Apart from Costs)
71% of homebuyers reported some concession when buying a home – with the most common concessions being price, condition, size, style, and distance.
Buying a more expensive home than you wanted could mean forfeiting other desires, like vacations or more children. Buying an older place may mean more costly repairs. Compromising on style might mean waking up every day annoyed at the appearance of your environment. Conceding on distance takes time out of your life commuting, missing time for yourself or losing time with friends and family.
Conceding on neighborhood could also have other negative externalities. You get more bang for your buck living in a gentrifying area but the new people change the neighborhood culture and push poorer people out.
Even if you buy in a desirable neighborhood, there’s no guarantee that it’ll stay desirable. 14% of home sellers sell their homes because the neighborhood and schools became less desirable. You can’t control who’s moving in and who’s moving out. And when you buy, you don’t have as much freedom to leave.
A Case Study: My Costs Didn’t Add Up
81% of buyers consider a home purchase a good investment. But I don’t think most comparisons give the purchase a fair shake. These calculations compare mortgage payments with rent payments, as if down payments and other costs of ownership don’t exist. You save a lot of money upfront if you don’t purchase a house, and if you invested that money, as I did, over 10 years, that would yield an incredible savings.
I just saw a condo listed that is very similar to the apartment where I live. Comparable location, similar square footage and amenities. Yes, I could have picked a cheaper condo, but then I could have also picked a cheaper apartment to live in. I think this is a fair estimate comparing apples to apples with actual numbers.
|Condo purchased at $322,400 compared to Renting Similar||Rent||Own|
|Utilization of difference between mortgage and rent ($588/month saved in renting v. owning, considering returns of 13%, the average rate of return from 2011-2021)||$68,390||$0|
|Down Payment (20%, one time)||0||-$65,000|
|Down Payment Utilization (the growth the $65k down payment experiences if invested in the stock market for 10 years)||+$155,646||$0|
|Closing Costs for Buying (2% of purchase price)||$0||$-6,448|
|Closing Cost Utilization||$15,440|
|Insurance (10 years)||-$1,000||-$14,830|
|Maintenance (1% of purchase price each year for 10 years)||$0||-$32,400|
|Tax Deductions (10 years)||$0||$44,811|
|Tax Deduction Utilization (Tax deductions invested in stock market)||$0||$33,747|
|Total Cost (10 Years)||$22,476||– $80,697|
Costs Most People Forget
Most rent/own calculators assume that the owner puts her down payment in an investment (a house) while the renter just doesn’t have any money. If you’re including the down payment only on the owner side, the owner has a considerable (but erroneous) advantage over the renter. But that’s like saying, the person who invests $60k is better off than the person who never had $60k. That’s not a judgement on the investment. I’ve never seen a calculator include any investment earnings for the renter in their rent/own comparison. But given that most buyers have closing costs including a considerable down payment, that’s money the renter could invest.
In my calculation, the renter invests the money that would have gone into a home purchase into the stock market instead. Some people estimate that it could take 14 years to save for a down payment in major metro areas. I think that’s probably a little high. But let’s say you save for 7 years, all the while believing you’ll buy a house soon. Instead of putting it in the stock market, you’re probably putting it in a savings account. For my calculations, I’m not even including the lost compound interest while you save for a house, but I’m including putting your down payment in an index fund at the time of purchase. That growth is a huge contributor to the growth of your net worth. I am also including the savings from closing costs and mortgage/rent differential.
The Best Case Scenario for Owning is Still Worse than The Worst Case for Renting
I should add that this is the best case scenario for owning and the worst case scenario for renting. Prices have appreciated A LOT in my area. I assumed a 10-year stay and I’m assuming that the condo sells for the price listed (it hasn’t sold yet). I’m also assuming average maintenance costs even though both condo and apartment are about the same age (~50 years old). The condo certainly could have steep maintenance or renovation costs over those 10 years, and I didn’t include that.
I just rented a new apartment. I didn’t do a lot of research but worse to worse, I only live here for a year. The housing market is so hot right now that people are waiving inspections. That could easily mean you sink your life savings into something that has gone through less vetting than my apartment and you just promised the next 10 years of your life there.
If you’re buying a house, you don’t even know what you don’t know. And there are things you can’t know. Like what if the neighbors are really terrible and now you’ve bought the place. Maybe the neighborhood dissolves into gang violence. Most likely you end up thinking, I shouldn’t have waived that inspection. . .
The costs didn’t add up for me to own rather than rent. In fact, my rent went down considerably this year (down 20% from when I first started renting in this area 10 years ago).
When homeowners think of renting, they erroneously think of renting the same apartment for decades instead of moving. But that’s not realistic. Average renters stay in their place for 2 years. Then they move for a job, for a different location, for cheaper rent, to a better apartment. All these factors mean that renters have a lot of choices. And that even if the area’s median rent increases, that doesn’t mean a specific renter’s cost increases. In fact, the increasing costs could very well mean that the renter’s cost decrease because she moves out of that area. Renters have a lot of options – they don’t have to stay in their crappy expensive San Francisco apartment just watching the rent increase. They could move to Texas, like everyone else did during the pandemic.
A lot of millennials have debt – student loan, medical, credit card debt. Adding a mortgage doesn’t reduce the stress – it only adds to it. I know when I was paying back my student loan debt, I had anxiety about losing my job and not being able to pay back my debt. It didn’t worry me at all about paying my expenses – I could always get a lower-paying job and seriously pare back – but without my job, there was no way I could pay back my loans. The higher the debt, the higher the stress.
And then there’s the stress of things breaking down. I knew a partner who, in one year, had to spend multiple days at home because of things that broke down. She had to wait for the plumber or the electrician and mitigate the damage. She was making a high-six-figure salary, but she still couldn’t contract out the time- expense of home maintenance. (Technically, she could have hired someone to wait for the worker, but I know lots of people who would be wary of having a rando wait in their house). But as a renter, I can let maintenance take care of stuff and I can take care of work.
When I was looking for new jobs, I was really pleased to be able to have complete optionality in terms of location. I can take a new job anywhere. When I took a career break, so many people told me that they wish they could, but they were tied to their mortgage.
I know a lot of people who could afford to take time off from their jobs because they rent. They packed their stuff in storage and went where the wind took them.
If you want to pick up and move somewhere, renting allows you to do that with minimal hassle. Housing is an investment that impacts your whole life.
A friend bought a house, got married, had a kid. They never wanted to live in this house, but it was underwater. Still, they lived there for years hoping the market would change. But that’s years of their married life, and years of his kid’s life that were spent hostage to his housing investment. Eventually they just sold the house and moved to their dream city. They wanted to live their lives. And good for them because lots of people can sacrifice their lives for a bad house trying to make this “good investment” work.
In contrast, I sold a losing stock yesterday. The transaction was quick and easy and it didn’t affect my life at all.
16% of 2020 homebuyers are single females.
A few years ago, a creepy guy I went on one date with emailed me periodically, noting when he saw me around our neighborhood. And you know what? I moved (not because of him, but I did move). And I can continue to move if someone follows me or figures out my address. That peace of mind is priceless.
I have a friend whose neighbor complained about every noise they made. They complained about her husband’s weightlifting in the morning or the notifications they would get on their phones. Owning a house doesn’t guarantee soundproofing or privacy.
If I purchased a place 10 years ago, I would have picked a very different place than where I live now. It would have been in a different neighborhood and I would have picked the cheapest place I could find. Perhaps that would have worked, but I’m not sure I would have lasted 10 years in the place.
70% of home sellers move to another place in the same state, on average 20 miles away, so it’s likely that they just wanted a different house, not required to move.
10% of home sellers sell because of a change in family situation. Buying a house is difficult because most of us are not great at predicting what a 10-year older version of us would want, let alone a 30-year older version. Renting allows for us to change our minds. Housing does not.
If you Still Decide to Buy
Buy for some reason other than costs, such as stability for your children or finding the perfect house. Buy in a place that you would live in for forever no matter what happens to the neighborhood or the area. Factor in all costs when deciding which house to buy and figure out if that’s feasible and likely given your career and life.
Then think, if the house was not a good financial investment, would you still get enough value out of living here that it would be worth it?
Conclusion: Send This Article to Anyone that Says Renting is a Waste
I think there’s a lot of vitriol thrown at renters. But really, why does where I live or how I pay for it matter to you? It makes sense for my life and my finances. I literally ran the numbers on my particular circumstances and it didn’t work out. I’m happy for you it if worked out for you, but I can’t go back in time and, even if I could, I’m not sure I want to.
Whether renting or housing makes better financial sense depends on so many individual factors that no one can know but you. So let’s all cool it on which one is better – neither renting nor housing is better. What matters is what’s best for you.