“I think that, overall, renting is a better solution for a person with a strong sense of internal financial discipline that is willing to choose to invest hundreds of dollars each month. However, if you’re likely to dip into that investing money on a regular basis, you are lacking the financial discipline it takes to make renting more cost-effective than home ownership. The author of this article assumes financial discipline from the reader, which is a very big assumption in this day and age when the savings rate is negative and many American households are carrying stupendous debt loads.”

As MossySF notes, the real return for stocks over the long run (30 year periods) is several times that of residential real estate.

Home ownership has become essentially another form of forced saving for retirement.

Unfortunately, the dollar amount realized when you sell a home (often several hundred thousand) tends to distract people from that relatively poor real rate of return.

If you financed the entire 40K house, your payments would have been 489/mo. Then you would have had another 166/mo in property tax/maintenance/insurance/etc. No mortgage interest deduction benefit as this would have been less than standard deduction. Over 9.5 years, you would have paid 72K — more than TWICE your rent!

Of course, you would not have been able to finance 100% 10 years ago. Housing had just hit bottom after the 1991 mini-bubble and creditors demanded 10% down for new homeowners, 20% down for everybody else.

The real questions become:
(1) did you have 15K for down+closing
(2) could you afford 2X your rent in 1997
(3) what did you do with the own-rent difference of nearly 32K
(4) what did you do with the theoretical down+closing

I know if I had invested 15K in 1997 and then another 3300 a year after that, it would have grown to about 96K now — yes, this is even with the dotbomb period of 2000-2002.

So back to your original words of “Tell me where I can invest $ that has more than double return in about 10 yrs?” Huh, just about anybody who put money in the stock market in 97 has doubled their market since then. You would have doubled your money if you had approached your housing as $total X if either invested the difference or bought the house. Both would have returned the same results.

Except the stock market did it with a huge drop in 2000-2002 while real estate had the biggest runup in in the last 150 years.

Do you seriously, honestly not understand that what happened in the past ten years was a fluke? That the return on residential real estate over the long run actually usually runs closer to just inflation? That you could just as easily have bought in near the top and made nothing?

There are many good reasons to buy a house if you are so inclined. But saying buying a house is a great way to double your money is like saying that because you once bought an old piano and it happened to have a Vermeer stuck inside it, the best investment is the purchase of old pianos. It’s nonsense.

There are many things to consider when figuring the cost of owning but I still don’t know why anyone would want to throw money at someone and have nothing to show for it at the end of the month, regardless of how much one might save by renting.

I honestly wish I had bought a house almost 10 years ago (9.5 to be exact). I figured out that I have spent about $30,256 in rent in 9.5 years. When I factor in the $1028 I’ve lost in security deposits that comes out to $31,284 That’s profound, given the fact that I could have bought a decent house a decade ago for $30 or $40K.

I could be well on my way to owning a house by now. Yes, the other factors of repairs, insurance, etc. etc. must be considered, but that’s just what I’ve handed over to jerks that let me freeze in the winter, live with leaky roofs, and a heap of other things. They didn’t care about fixing things, they just want the $$.

Considering that a decent house for $40K is now worth $100,000 or more, that’s an insane return on your profit. Tell me where I can invest $ that has more than double return in about 10 yrs?

That is why everyone should do their own calculation based on their specific situation, and now blindly follow champions of either end of the spectrum.

Thanks.

The rest of this is admittedly over my head, and at this point in time, I don’t make enough to own anyhow. Woo!

But the problem is you’re talking to a rather huge target of audience. There are some of us who have diligently invested the difference between renting and owning and seen our portfolio grow to rather big amounts due to not buying an overpriced house. So yes, you will get challenges when you make general statements when in your mind, you are thinking about more specific conditions.

Your off the cuff 1973-2002 numbers are off in some aspects. The S&P500 returned 10.6% during that period. (An even mix of large+small+international would have returned 12.2% but since I don’t have numbers for those classes before 1972, I won’t go into that.) On the otherhand, inflation – using a proxy of T-Bonds @ 85% – also was underestimated at 7.2% as it includes the high inflation years of the 70s-80s. The actual 10.6%-7.2% gap is pretty close to your guess of 7%-4%. How often has gaps this low happened? To find out, I calculated all rolling 30 year periods from 1928-2006 to get a sense of how stocks did compared to inflation (and by inference, real estate). Here’s the count of number of 30 periods based on real return:

3%-4%: 1
4%-5%: 9
5%-6%: 12
6%-7%: 5
7%-8%: 5
8%-9%: 6
9%-10%: 3
10%-11%: 9

The large number of periods in the 10%-11% range is a artifact of data only starting in 1928 which skews the numbers. Buying shares after the huge 1929 crash buys a lot of cheap shares and inflation was at all time low during the Great Depression. If we toss out those numbers, the distribution looks more like so:

4%-5%: 9
5%-6%: 12
6%-8%: 10
8%-10%: 9

+6% is the median, +6.5% is the average real return. The absolute worse period for real return is 1973-2002 because that includes 3 ending years of bear markets. However, it’s sandwiched between periods of high outperformance so it looks like just a market anomaly when looked at from a long-term view. Ie, if you’ve been saving up for 30 years, you probably can afford to wait 1-2 more years for a market recovery before drawing down your portfolio.

1970-1999: 6.7%
1971-2000: 6.2%
1972-2001: 5.3%
1973-2002: 3.4%

the rent versus home ownership is also contingent upon you being able to get a home in the area you are living. if you have to do an hour commute in order to buy a house, you are also talking about extras like gas, car wear and tear etc.

you can’t count on the home equity once paid off, b/c it doesn’t account for the fact you still need a home if you sell yours. if housing appreciates in your area, can you really afford to sell? there are plenty of people sitting on houses that are worth more than they can afford to sell.

If you look at a 7% annual return in the market along with a 4% annual growth in the value of the home, Brian, I believe your numbers will look a bit different – slightly in favor of the homeowner, in fact, and that doesn’t include the thousands each month that the homeowner will have free in their budget.

Also, everyone here is forgetting the biggest risk of all: the investor. That was a big part of the original article. A renter investing all of his housing cost surplus is a risk because there’s no real collateral on this payment – if he doesn’t make the payment and instead buys something else, then it’s no big deal. On the other hand, the homeowner is forced to be disciplined because his home is collateral to the investment.

I think that before you even think about analyzing whether to buy or rent, you have to decide how much dwelling is the “right amount” as well as your likelihood of changing cities, family situation, etc. I think that these are major factors. Buying “too much” house, at least, is relatively unlikely to be financially useful, however tempting.

I believe that Trent himself is in our most arrogant age group (indeed, perhaps that is how he has managed to advise so many people on such short experience), so I really get a chuckle out of Wayne’s comment.

Bottom line. We expect to have it paid off within the next three years. We have $240k in equity (about twice the total money we’ve paid against the loan). We could’ve seen $240k from $1000/mo investment at 8% after about 12 years (we’ve always paid $1k/month or less, so I’m being generous), but we still would’ve had to pay rent all those 12 years. We could rent this house out today for about 2-1/4 to 2-1/2 times the house payment.

I can appreciate that renting might make sense at times, but I’d always have my eyes set on when I could get the home purchase thing cooking.

You’re arguing to a deaf crowd – the countless anecdotes of people making massive amounts of money in principal appreciation on housing in the last 5-7 years are still strong, even as real prices continue to decline. The argument that ‘buying is always better than renting’ is strong within our people.

The fact is, we are far away from the long trend price to income level of housing prices (3x median income nationwide), and this is a ratio that has stayed more or less stable, until recently, for over 100 years. Based on such a ratio, housing prices will either have to drop, or income will have to rise (or a more likely combination of both) through inflation and real increases until we get to this level.

Trent, I like many of your posts, but every time I read about your decision to buy b/c it makes sense financially I cringe – overall you are saving pennies (many of your intelligent ways of saving money) but ignore the dollars that are about to slip out of your fingers.

Contrary to what most people would like to believe, when you buy your house has an incredibly large influence on your future financial well being. I’ll buy in 4-5 years when prices have gotten a lot closer to their long term trend of (nationally) 3x median price to median income, thank you very much.

There actually is a good aticle on the Motley Fool website that does the anaylsis you are looking for. They compared two houses (granted, just outside of Seattle- an expensive housing market) that were two streets away from each other. Similar size, same # of bedrooms, etc. By their calculations the renter still came out ahead.

I don’t have a link, but definately search for it and check it out.

Sure, in most places, people can rent smaller and cheaper, but that’s “costing” you in terms of lost utility. In most cities, if you want to live in a 1-bedroom apartment, you have the ability to rent or buy; same with houses. So if you want to argue for value in terms of living in a smaller or less expensive space, you can do that all the way down to a studio/efficiency condo.

So. Let’s say our 3-bedroom rented house has all the same costs as a house I might buy: roofs, appliances, pest control, property taxes, interest on his own mortgage on the property, etc. These costs would be paid by the landlord, but, to make money, he would then pass those costs on to the renter. He would also (in terms of appreciation, tax deductions, or straight mark-up) collect some kind of profit.

So in my mind, there is no possibility in that scenario, when comparing “apples to apples” in terms of the houses or apartments rented or bought, of the renter coming out ahead. Otherwise, there would be no incentive– no profit– for the landlord.

Depending on the market, a buyer can expect an appreciation on his house that meets or beats a decent index fund. I have some friends in DC that have “made” a ridiculous amount of money off of their townhouse, purchased just five or six years ago.

Have you ever seen those scenarios where there are two investers, and one gets a head start on investing? They are often used to illustrate the importance of saving and investing ASAP. Person A is 25 and invests $100 a month until they turn 30 (5 years of payments) and then they stop- leaving the money invested and rolling the interest back in. Person B is 30 and invests $100 a month until they turn 60 (30 years of payments). At age 60, person A’s investment will be worth a lot more, even though they put in less money.

This is just a model, and like any model has some assumptions based in it. However, it is illustrative of why renting tends to come out ahead in these situations. Even though a fixed mortgage payment will eventually be lower than the cost of renting (due to inflation) the renter, if they invest the difference, comes out ahead due to the extra years of compounding. This is to say nothing of the impact of closing costs, selling commissions, etc. if the home owner wants to move instead of remain in the same house, under the same mortgage. Although a renter generally has some deposits and fees to move, they are significantly lower than those the homeowner experiences.

Additionally- please keep in mind that the recent increase in home values is most definately -not- the norm. Historically, the value of a home has risen close-to or just above inflation. (Yes, even when you add in the recent run-up in home prices.)

There are benefits to home ownership, however. And considering the impact of either decision on your life style, I think this is one area where you should consider the non-financial aspects at least as much as the financial ones before making your decision.

It’s nice to have all the facts from both sides of the fence.

First, the interest rate climate (most economists believe it’s headed up long-term due to global growth) may influence the decision in favor of purchasing to cap some portion of housing expenses.

Second, if you own be prepared for the strong temptation to indulge in expensive upgrades and remodelings on top of the necessary repairs. If you swear you can live with formica countertops, make sure your spouse isn’t secretly planning on granite.

If you choose to own and you pay AMT, figure that you may lose deductions for state and local taxes. Possibly your property tax. Ouch, that’s several thousand dollars lost per year.

I own 3 houses and upkeep is a huge stress and expense, but I agree with PJA that this is a lifestyle decision, not an investment. In my case, the dread of having to live beneath a drummer or dancer pushed me into owning in each location where I spend some part of my work time.

Here’s a real-life scenario that illustrates why buying is better than renting. In 1999, I bought a house while a coworker (similar income, etc.) said “why would you want to do yard work?” and he continued to rent at $1,000 per month for a one bedroom apartment. My mortgage payment was probably somewhat higher (but tax deductible) for a 3 bedroom townhouse.

In 5 years, he spent about $60k on rent and I spent more than $60k on mortgage payments and maintenance, etc. However, my house went up in value something like $150,000. So I had quite a bit of equity after 5 years of mortgage payments, and he had no assets to show after paying rent for 5 years. I could extend the case study further (my house has gone up even more since then), but my friend eventually bought a house a year or two ago (missing out on the real estate boom).

Timing may have had a lot to do with my fortunate situation, but most real estate is going to appreciate over time (even in the short term of a few years, unless you overpaid during a bubble, like in 2005). And once you have equity in a house, you can start to do interesting things like refinance to take money out (to pay off a car loan, for example).