The Nonsense of “Rent Vs. Buy Myths That Ruined the Housing Market”

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Earlier today, I ran across an article at eFinanceDirectory entitled Rent vs. Buy Myths That Ruined the Housing Market. Amazingly, this article was being linked to by a number of reputable blogs – apparently ones who haven’t actually done the research and investigated the real scoop behind the issues in the housing market.

First of all, the problems in the housing market are not due to home ownership. They’re due to lenders lending out ridiculous amounts of money to borrowers who couldn’t afford it, and borrowers agreeing to loans far beyond their realistic level to pay. That has nothing to do with the value of home ownership – it has to do with greed, both on the part of the lenders and the borrowers.

I’m going to deconstruct this article carefully for you guys, so that there’s a clear point-counterpoint to the major issues raised in this article. I’m not stating that the original article is strictly wrong, but that it presents an extremely one-sided viewpoint that deserves some counterbalance.

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes or maintenance fees. They pay rent.

First of all, buyers are not “throwing their money away” for the first five years of home ownership. Their monthly payments do consist of primarily interest on their mortgage, but a portion of that payment goes towards the value of the home itself, and that portion grows larger with each payment.

Second, buyers have the option of making additional mortgage payments. These payments go wholly against the principal and make a dramatic difference in the interest paid over the life of a mortgage. Even $100 extra a month not only shaves years off of the repayment period, it also goes straight towards the value of your home.

Third, the “first five years” period is the only period where there is a perceived advantage in renting over homeownership. After that, the dual forces of progress on the payments plus the progress of rental inflation swing the advantage around towards the homeowners – but we’ll talk about that later.

Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.

That’s nice, in theory, but people in rental situations rarely do this and if they do, it’s so they can make a down payment on a home.

Let’s look at reality: the savings rate in America is negative, yet this article is using the argument that people might save and invest as a reason why rentals are more cost-effective? They might be more cost-effective for someone with their financial head on straight, but those people are homeowners who see the long-term losing strategy that is renting.

Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents. Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone–including renters–is allowed to take.

For most people, income tax deductions aren’t a consideration when buying. They’re merely a perk if you qualify for them. In my area of the country, very few homeowners would even qualify for any deduction when it comes to their homes, and even in expensive areas, the deduction amount is seen as a perk because the tax rules (including the standard deduction amount) is subject to change.

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the ‘tax benefits’ of owning into a buying decision.

You do in fact pay property taxes when you rent – property taxes are a part of the calculation that comes up with the amount of rent you’re charged. Just because you don’t see the bill doesn’t mean that it does not exist.

When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent ‘investment’ ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.

These costs mentioned above, in most modern homeowner transactions (particularly in a buyer’s market), are paid for by the seller, not the buyer. We did not pay a dime of any of these when we bought our house and the price we paid was roughly equal to the assessed value.

Even in a seller’s market, the real estate agent commission is covered by the seller and, while some of that is figured into the price of the home, the market in an area will end up being the factor that determines the value of the home, not the commission.

Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.

Unless you’re living in an extremely run-down area and enjoy living in slovenliness, there are maintenance costs for renting, too. Also, any rational renter will purchase renter’s insurance in order to protect the value of their property – the same logic by which a homeowner would purchase homeowner’s insurance. Plus, renters also have to actually pay the rent, which is akin to the mortgage interest discussed above.

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.

Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the ‘investment’ they made through mortgage payments is gone–dried up virtually overnight through no fault of their own.

This would be true if we were going through the Great Depression, but it’s not. Depreciation in even the worst markets in the country is scarcely up to 20% and in many markets, it’s nonexistent. In fact, based on home sales in my area, prices have held steady (or perhaps gone up slightly) in the last year.

In other words, if you pay attention only to a handful of overheated housing markets, the quoted statement might have some semblance of truth, but once you open your eyes a bit and look at the nation outside of these markets, it’s not as bad as doomsayers want you to think.

Renters may not co-own a home with a lender, but this doesn’t mean that they don’t have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven’t been paying a lender to ‘rent’ money so that they could pretend like they own an asset.

I’m actually scratching my head here as to what the point is, honestly.

First of all, there seems to be some sort of implication that a renter is better off because they may have assets of some sort, which apparently include Star Wars collectibles. This is true of homeowners as well – anyone with stuff can liquidate that stuff if need be.

Second of all, homeowners are quite free to sell their home if they so choose and use the proceeds from that sale to eliminate their mortgage. It is the homeowners’ decision as to whether or not to sell, not the mortgage lender’s decision. Once you’ve signed the papers, it’s basically your asset to do with what you see fit – the only catch is that it’s collateral on a loan. But under that logic, you should always lease a car instead of buying it so that you don’t have to pay a lender to “rent” money so that they could pretend to own that car, even though it’s theirs free and clear in a few years.

During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.

The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.

Let’s completely ignore the fact that you get a valuable asset at the end of a mortgage and look at the money you pay into the mortgage as rent. I live in an area where you can easily get a decent apartment for $600 right now. Otherwise, you could get a house with a $150,000 mortgage at 5.5% for about $850 a month.

Right now, the advantage goes to the renter because they’re paying in $250 less a month. But let’s move down the road ten years.

In ten years, with inflation at 4%, that $600 monthly rent has gone up to $888 a month. At the same time, the mortgage hasn’t changed a bit – you’re still paying $850 a month for your home mortgage. At this point, the renter might argue that they’re saving in other areas, like on property taxes and such, so we’ll still say that the renter is ahead here. Let’s roll ahead ten more years.

At the twenty year mark, with that inflation still at a steady 4%, that $600 monthly rent is now $1,315 a month, while that homeowner is still only paying $850 a month. It’s pretty tough for the ol’ renter to argue that the deal is better, but the delusion might still happen.

Let’s jump ahead to the thirty year mark. The homeowner sends in his last mortgage payment and now has to pay $0 a month. The renter, on the other hand, has seen his rent go from $600 a month to $1,950 a month. Not only that, the renter will have to continue paying that rent in perpetuity – and it’ll keep going up with inflation. The homeowner is done with that game.

This doesn’t even include the asset value of the home. Even strictly ignoring the asset value of the home, the homeowner is in a better situation at the end than the renter is.

Normally, I don’t get frustrated by articles like this, but when I see things like this posted on sites that are presumed to be respectable, I feel a deep need to respond and offer up a balance to the perspective.

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175 thoughts on “The Nonsense of “Rent Vs. Buy Myths That Ruined the Housing Market”

  1. Trent, let me guess: you’re a home owner?

    I’m a renter. I ran the numbers and over here where I live it is not a financially wise decision to buy. It could be a wise decision in other ways, but with regards to money it isn’t.

    YYMV.

  2. In an area with $600 rent and $150,000 buy prices, it doesn’t take as long for buying to catch up.

    In an area with $1200 rent and $500,000 buy prices, it takes a long time and/or a lot of appreciation to make buying the better financial choice.

    I disagree with what you were saying about the seller paying the 11% selling costs. Once you buy, you are now the (future) seller; or the other way around, the sales price is inflated to include these prices, the same way that a renter does still pay property taxes.

    And furthermore, these costs being paid by the seller are paid as a percentage of the future sale price; so if it goes up, you have to pay these costs based on the larger price.

  3. I am a homeowner, but I do recognize that there are two sides to this coin. The original article was written with such blatant onesidedness that I felt a response was needed, especially since the original article was being linked in a lot of places.

  4. WOW…I’ve never seen an article so biased against homeownership. It almost seems ridiculous.

    In our neck of the desert, houses rent for a little less than our monthly payment. I figure that extra we pay is for the privilege of being able to do whatever we want to the property.

  5. Sibling: that assumes, of course, that you’re looking to flip the house, and the original article wasn’t looking at that at all.

  6. This article is nonsense, it assumes no one owns the rental unit. My experience as a landlord – the rent covers the mortgage, insurance, taxes, fees, utilities, maintenance and repairs to the building. The rent payment actually purchases the property for the owner, why would renting be better than owning?

  7. THANK YOU! This article is a breathe of fresh air. I’ll be starting a new job soon, and we’ve been shopping for a home. We’ve heard nothing but “Oh, it’s a bad time to buy” and such from all our friends. The way I see it, provided I get a mortgage I can afford (ARM or not), I’ll be okay.

    Plus, there are more things to consider about buying a home than just the difference between mortgage and rent. We’ll see an extra $400/mo go to a mortgage than we are paying now for rent. I see that $400 as opportunity cost that means that I can make this home mine by painting, adding wood floors, have a garden, etc. I get to customize it to my own likings (probably more like my wife’s likings), and that is worth it to me.

    Paul

  8. I am a renter, who will probably buy in three yrs or so.

    I know in the long run the house will pay off, right now its a wash so I wait.

    I’ll only buy when I can afford the mortgage, on a house I like, on one income. That’s what my Dad taught me. My dream is to have a fund set up to also pay the taxes on interest earned. But I don’t think that’ll happen.

  9. Trent, I am always intrigued by this issue. People always seem to be so one-sided with. I am a renter and I encourage people to buy (especially those who aren’t very sharp with their finances). I do this because I agree with you that MOST in renting situations DON’T save the extra few hundreds of dollars. If they are not going to save that extra cash and invest it, they should buy. Buying would be like an automatic savings plan for them.

    I on the other hand, DO save the difference and from the numbers that I have crunched am doing quite well. I am renting now, so that I can OWN my home sooner than if I bought now. By me saving the extra few hundred dollars a month and investing it , it is going to grow a lot faster than if it were in real estate. Who knows maybe I will buy my first house with cash in a few years ;)

  10. Trent…

    I think you missed a point in the article. You are assuming that the 250 saved every month by the renter is spent for nothing. Now go back to ur spreedsheet and say he invests that in S&P in a tax deferred account and see what you would get. Assume just 6-7% annual return and compound it for 30 yrs. Also you ignored the property taxes and maintenance cost of owning a home.

    >>>>I’m actually scratching my head here as to what the point is, honestly.

    I think the article was talking abt liquidity. It is “easier” to liquidate a CD or StarWars collectible compared to a house. It is just cash in hand. If you need I can send you an excel shhet with the calculation with the numbers you used.

  11. I live in the San Francisco Bay Area — and I hear this all the time… and right now — I agree. But for here. I can’t say about other places. We are still overvalued, and a house you buy right now, your mortgage will still be at least double what your rent on it would be.

    But — I’ve lived in my home for 20 years, and I haven’t used my house like an ATM. My mortgage payment is 642.50. I couldn’t rent anything decent in a nice area for less that 1500. All that extra cash and more I can stuff away…

    Am I losing equity? Yeah — but snce I didn’t use my house like an ATM, it was unrealized equity. I don’t have to pay it back, because I didn’t really lose it.

    I don’t like the fact that 2 years ago my house was worth 500K, and today it’s worth 350K (and truth be told — it wouldn’t sell for over 250K)… but in five years when I’m ready to sell, I’ll still get over what I paid for it. — I’ll get my money back — because if I don’t, I’ll keep it and turn it into a rental.

  12. Trent, this is a great article. I really think people should consider the long road more when making the comparison. For example, my parents stretched to buy and pay $650 a month for their mortgage. It’s nearly paid off now. My rent is nearly three times that and I have nothing to show for it! That’s why we’ll be buying as soon as the prices level off here in Los Angeles.

  13. Trent, I think the reason the article is so one sided is everyone ALREADY thinks buying is the best option. In Iowa, perhaps renters never can get ahead but in other markets, buyers won’t be able to get ahead either.

    Also, I think renters DO invest the extra money, at least ones who are researching the rent/buy choice. I know I do.

    It really depends on where you live, what rent is costing, and what houses are costing. In your example, the home owner may come out ahead in the end, but what did you do with that $250/mo the renter wasn’t paying in those initial years? It is opportunity cost. Also, is 5.5% the going rate these days?

    Please run your numbers with this: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

    Much more accurate calculations, and just TRY to make it come out ahead for a buyer in a large city.

  14. Although the rent is going to go up with inflation over the years while the mortgage is not, the renter will have a nice sum of money from investments(down payment money) if they decided not to buy the house and instead invested it. But most people do not buy houses because they cannot afford it. For those who can, they need to due their due diligence and buy at opportune times and not at outrageous prices.

  15. I think the article does a good job of dealing with the “Renting is throwing your money away” argument, if a bit overdone Renting is often (but not even close to always) the better fiscal decision, but that comes down to individual situation.

  16. I agree wholeheartedly with your assessment of that article – it’s very one-sided towards renting. I’ve been in situations where I’ve rented and owning my own home has trumped it in every single sense. Paint the walls whatever color I want? Yes. Be able to keep my pets and not have to worry about paying for them to stay with me (or giving them away because they can’t stay at my place)? Yes. I think those two options alone are enough for me to consider ownership over renting.

    In my area, to rent the same exact type of place, we would be paying twice as much – so my fiance and I have saved significantly by buying.

    I also agree that the entire mess with the mortgage industry right now is all due to greed and lack of common sense.

  17. I’d have to agree with Comment #1. You sound like this article personally attacked you. With buying v. renting, each side is looking for validation that they have made the right decision. The fact of the matter is, home ownership is right for some people and renting is right for others, and it often has little to do with finances. I believe I read once that your money should reflect your values. You are pretty much attacking the values of everyone who choses to rent. Don’t be so harsh.

    I hate that the general consensus is that renters are idiots and that if you can afford to, you should buy. If you calculate amount of time spent working on a home at, say, your billed rate at work vs the amount it appreciates and then adjust for interest paid, you would find that the total invested value of a house isn’t really so huge that it makes it a SUPER EASY decision. I hate that it’s sold like that. IT’S NOT THAT EASY.

    Also, how come no one ever addresses the fact that renting is usually a temporary thing, done while young and unable to afford or commit to a long term mortgage? I mean let’s face it, most people who rent do so because they can’t afford to buy or haven’t settled down or what have you. The situation is so monumentally different, that I find it laughable that finance advisers feel the need to hit it over our heads that hello! you should be buying! It’s like yelling at a baby for not being able to walk.

    So it was just refreshing to see an article that said otherwise. It was annoying that you felt the need to so easily poop on it.

  18. This seems to be a bit of an over-reaction.

    “They might be more cost-effective for someone with their financial head on straight, but those people are homeowners who see the long-term losing strategy that is renting.”

    Perhaps I’m mis-interpreting this, but it sounds like you’re saying everyone who has their financial head on straight are homeowners. Surely, you don’t actually think that? Owning vs. renting is a personal decision with more factors than just “can we afford this?”

    I certainly don’t agree with the entire “Rent vs. Buy” article, but I think some of the points have a grain of truth. I believe many of these myths may have contributed to convincing some people to borrow amounts of money that were excessive. Ideally these bad loans would have been prevented by the system, but they weren’t. It makes sense to look into why these borrowers made poor decisions. Understanding this can give ideas for preventive measures in the future.

  19. Trent, thanks for responding to this article. I saw it linked to on kottke today and I immediately thought of sending it to you to comment on!

  20. I’m glad you wrote this. I’m in the process of looking for my own place right now and your article makes me feel like I’m making the right decision. It’s daunting to look at what my monthly payment will be and wonder if its worth it. You’ve just reinforced my thoughts that it will all be worth it in the end. I’ve never put enough into savings, I tend to spend the extra I don’t use for rent and other bills. Having to pay a mortgage will make me be more frugal and help me build assets. Thank you.

  21. Lurker Carl:

    The “Myths” article is definitely nonsense, but there are plenty of markets where renting is currently better than owning.

    I live in the California Central Valley (which is considered one of the least expensive parts of the state) and rent a 4/2.5 house built 2 years ago for $1200/month. Even with the declining real estate market in California, that home would sell for $375,000 (I know this because this is the price identical homes in the subdivision have sold for during the past few months).

    That means that if I were to purchase the home with a 20% down payment, I would have a mortgage payment of approximately $1600. Property taxes will add another $400 or so per month to that total, and in California, new construction generally means HOA or Mello-Roos fees, which can be as much as property taxes.

    So if I were to purchase my home instead of renting it, I would be paying $2,000/month instead of $1,200/month. Property values have declined significantly since my landlord purchased the home, so his net loss on the home is probably greater than the $800/month disparity I would be facing if I purchased the home.

    My community is hardly unique in California, and California is hardly the only state where real estate prices became disconnected with economic fundamentals during the “housing bubble.”

    What you say about investment property has been historically true, but in many parts of the Country, it isn’t true for investment property purchased during the last five years.

  22. For those who are interested, the NY times has a very robust “Rent vs. Buy” calculator available. Plug in your numbers and… poof – it will tell you at which point buying becomes better than renting (if at all). Here’s the link for those interested…

    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=3&ref=patrick.net&oref=slogin&oref=slogin&oref=slogin#

    I’m in Houston, home of some of the nations highest property taxes. As a result, I’ve actually modeled scenarios where buying can be better say for 10-20 years into the future, but after that renting becomes better again. Very strange!

  23. I am currently a Midwest homeowner (2750 sq. ft., 3800 sq. ft. if you include the finished part of the basement) who is looking forward to becoming an apartment (~1200 sq. ft.) renter soon. From that perspective, I have few comments.

    Given that a landlord needs to make money, I think there is an implicit assumption in rent vs. buy comparisons that the rental property is going to be SMALLER than the purchased property. Otherwise the landlord still needs to pay for the mortgage, property taxes, dwelling insurance, maintenance, etc. Otherwise I don’t see how an equivalent home could be rented for less than you’d pay yourself for these things.

    That being said, there are a lot of implicit advantages to renting a place, assuming you’re willing to give up some square footage. You’re able to afford to live in a more desirable area (think: safety, schools, amenities) without having to pay more money and/or for more space than you really need to be able to live in that area. For example, the size of my house (see above) is typical for the houses in my area. In other words, you’re not going to be able to find a < 2200 sq. ft. house AT ALL in my neighborhood. But there are a few apartment complexes nearby where you can get a much smaller space that may be more suitable for your living needs. This more appropriately sized space, in addition to being cheaper in regards to a housing payment, offers many other advantages — some easily monetized, some not quite so easily monetized: less space = less $$$ to heat and cool, less space = less time spent cleaning, etc. Not to mention that in an apartment, there is no yard to mow, pool to fuss with, gutters to clean, or any number of the normal maintenance tasks that need to be done when you own a house.

    I am personally tired of having to take care of my house and land and I am eager to trade a little bit of income in the form of equity appreciation for an increase in the amount of time I have to pursue more interesting things. As stated in the referred-to article, I will be investing my house cost savings which should offset the loss of equity appreciation that I might have if I were to buy another house.

    Another advantage is that when a provided appliance (heating, cooling, fridge, washer, dryer, etc.) needs to be replaced, it’s not coming out of the renter’s pocket.

    I’m confused regarding your comment “Unless you’re living in an extremely run-down area and enjoy living in slovenliness, there are maintenance costs for renting, too.” What maintenance costs does a renter have to pay out of pocket? There shouldn’t be any.

    You are correct Trent, a renter should also have insurance, but it will only be on his/her possessions. And it will be a lot cheaper, given that the bulk of a homeowner’s insurance payment goes to insuring the most expensive part of the mix: the structure. Especially if you’re in a floodplain, earthquake zone, and so on.

    Also, you are in my opinion dismissing the significant costs of loan fees and real estate agent fees. Unless you know for gosh-darn certain you are going to live the next 30 years in the house you just bought, these fees greatly undermine the equity income you will be getting back from your house when you decide to move.

  24. I’ve seen several articles like this recently. I can understand both sides of the argument. What it comes down to, however, is quality of life.

    Do you want to live in an apartment with neighbors on 4 sides and all the potential headaches that go along with that, or do you want to live in a house that you own, on land that you own, with more privacy, space, flexibility and freedom? Do you want to live in a metropolitan area and take a train/bus/bike/walk to work, or do you want to live in the suburbs and have to drive and sit in traffic? Do you want shops, restaurants and mass transportation within walking distance, or do you want to have to drive everywhere?

    Obviously, there are pros and cons to both sides, not even looking at the financial aspects (though I can understand the focus on that considering that this is a personal finance blog). I’m also cognizant of the fact that you could own a condo in a city (and have some of the benefits/drawbacks of both apartment and home ownership), but it seems like many of these articles try to compare a tiny apartment in a city with a McMansion in the ‘burbs, which doesn’t make a lot of sense to me.

  25. As a renter (who hopes to buy someday, but not right now) I feel compelled to defend the renting side of the coin:

    Yes, renters and owners can both pay insurance, but their insurance obligations are very different. Renters’ insurance is on the contents only – homeowners’ insurance is on the contents and the structure.

    Yes, renters and owners both have maintenance responsibilities, but those responsibilities are very different. Right now I’m living in a self-contained apartment within an owner-occupied home, and it’s a VERY interesting lesson in renting versus homeownership. When my kitchen faucet broke, I didn’t spend the time and money running to Home Depot and back to get the parts to replace it – my landlord did. If my shower springs a leak, that’s not my responsibility – it’s my landlord’s. If he postpones fixing it and the water does damage to the house, that’s his problem, not mine (unless the damage was somehow my fault, and even if we have a dispute over that, the worst he can do is keep my security deposit). That’s an advantage for me not only in terms of money but in terms of time and stress.

    Another advantage of renting is that more modest accommodations are available to rent than to buy. In my area there are many, many more one-bedroom apartments for rent than there are one-bedroom condos for sale. You can rent a room in a four-bedroom house, but you can’t buy a room in a four-bedroom house. As a single person looking to house only myself, I’m not comparing the costs of renting a big house and buying a big house – I’m comparing the costs of renting a little apartment and buying a big house.

  26. Not to mention one of the advantages of renting – the landlord takes care of anything that breaks down. My heating unit broke down yesterday, and my landlord immediately took care of it which set him back a cool $1,000.

  27. I’m another renter who saves the difference (and in my case it’s quite a large difference between my rent and what my mortgage would be for the same place). I agree that this article makes it seem that renters don’t have their financial heads on straight, and rarely save money.

    I’ve crunched the numbers, and it would take a miracle for the housing market to change in such a way that it makes sense for me to pay interest just to own a home. In most cases, borrowing is a losing proposition, because you’re often paying 3 times what the property costs just to be able to own it, when you factor in interest.

    Of course, it might be different for you, but that’s the case in my market.

    At any rate, my goal is to buy my first house on cash, and not pay a dime in interest. It’ll take me a few years to get there, but at the rate I’m investing, it’ll definitely happen.

  28. This is an emotional issue for people on both sides of the fence. Those who bought and are now seeing home prices decline, and homes harder to sell/sitting on the market longer, and worrying that they put a lot of their financial resources into one basket. Those who didn’t buy a few years ago while the home market was still ramping up are looking at all the money people made on housing and regretting that they didn’t get their share of it. Either way, buying or not buying a house is on of the biggest, least easily reversible decisions people make in their lives; once the decision is made there seems to be a natural tendency to justify the decision as the right one. This rationalization sometimes seems to include looking down on those who made the other choice.

  29. I think you did a great job ripping apart this article. I don’t know what intern wrote it, but they are using some of the worst logic I have ever seen for their arguments. I think the point you are making is that this was a horribly written article and shouldn’t be read as a serious view into the rent vs. buy debate and I agree.
    I have more Star wars collectibles because I rent and therefore I should never buy a house?
    Seriously people! Whether you rent or buy is up to you, but I can’t imagine someone even published this article in an effort to help you make that decision. And I can’t imagine anyone else trying to back it up!

  30. I’m not really biased one way or another on this. I was recently a renter and I’m now a homeowner. There are advantages both ways. I think that in the short term, renting usually has the advantage and in the rather long term, homeownership wins out. I was just very annoyed by the onesidedness of the article and wanted to present a passionate view presenting the opposite side of it.

  31. I’m so sick of this stupid argument. Just use this calculator from the NYTimes. http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin#

    It takes into account return on investments assuming you invest the difference and also you can change other assumptions like home price appreciation, rent inflation, property taxes, etc.

    Using my situation and assumptions buying would only pay off after 28 years so buying is definitely not worth it to me.

  32. I equate having your financial head on straight to spending significantly less than you earn. People who do this usually are looking at the long term and often are homeowners or become one quickly.

  33. @Joe and Johanna:

    That insurance on the structure and that heating unit both come out of your rent. You’re paying for them, otherwise the rentee would be losing money, and they aren’t.

    You have to realize that in most cases, your rent payment is paying for ALL of the ownership costs, plus making it worth while for the owner.

    For me though the ownership versus rent question isn’t “is the the best possible financial decision?” it’s “Sweet! I can put a lift in my garage! and I can run Cat 6 through all the walls, and put a hot tub in my kitchen” :)

  34. Good arguments in favor of home ownership. I am very glad I own a home rather than renting an apartment. My home has gone up 70% since 2003 and the mortgage interest and property taxes make my itemized deduction significantly more than my standard deduction. The greatest argument for home ownership is that one day if you stay in the home, it will be paid off. Only property taxes and condo or homeowners association fees (if you have those) to contend with.

  35. I am selling my home and investing in the more profitable and highly liquid Star Wars collectibles market.

  36. Re: “Grant” — who said: “Do you want to live in an apartment with neighbors on 4 sides and all the potential headaches that go along with that, or do you want to live in a house that you own, on land that you own, with more privacy, space, flexibility and freedom?”

    This doesn’t have to be your choice. I live in a duplex with a garage and a nice back yard. I have only one neighbor. And I pay HALF of what it would cost to own a comparable place. I am a happy renter, have lived here for 3 1/2 years, and have no plans to move until house prices drop significantly.

    Trent, I think what you are missing is that a lot of people in the US don’t live in a place where $150K can buy them a home. Probably more than 50% of the population lives in high-cost areas like I do here in CA. I rent this duplex for $1650/month. An equivalent-sized house in my zip code would set me back $525,000. At those rates, there is no comparison. That’s why prices will drop 30% or more here (they’re already down 12-15% from their peak…we have a long way to go!)

    I wrote an enormously popular post about this called “The Real American Dream (Hint: It’s NOT Owning A House!”

    http://www.erica.biz/2008/the-real-american-dream-hint-its-not-owning-a-house/

    It received over 10,000 pageviews and 78 comments, so clearly this is a hot-button issue. If I lived somewhere where $150K bought a decent house, I would have a paid-off mortgage now. But I choose not to… so instead, I rent. It’s the only sane choice when taking into account current housing prices here in CA.

  37. One of the points that I rarely see addressed in this argument is location. In buying a home you are locked into the area, for better or for worse. Your progression of 10, 20, 30 years only applies if one plans on staying in the same place for that long. I, for one, am not even close to settling on a single location for that long period of time. If a job calls me elsewhere, where I will continue to rent, I won’t be locked into a mortgage and be forced to sell or eat the living expenses of two residences or deal with the hassles of being a landlord.

  38. Bought our house a year before the crash. 5.5% 15 year fixed year mortgage.

    Glad we bought when we did because we are young (22 and 25) and didn’t have a lot of credit history. We would not have been able to get as good of a mortgage in todays environment.

    The value of our house has gone down slightly, but my mutual funds have taken a greater % hit than our house value. House will be paid off before we are 40. We are hoping to make extra payments to have house paid off by the time I am 30, so it would be super easy for me to quit my job and be a stay at home mom.

  39. Trent, I agree that this article absolutely needed a response, and your post makes sense: A biased article needs a biased response.

    One thing that bothers me about the way you look at homeownership: You seem to continue to refuse to look at the resale value of the house. While one may not be intending to flip the house, what gives it any sort of useful value is the cashflow stream (or lack thereof) that it generates. You can’t say that after you complete a mortgage you have a “valuable” asset without admitting that selling the asset is part of its value.

    While you can argue that you have the value of forgoing the perpetuity of rental payments, this would make all houses equal (at least in a given region). What makes House A more valuable than B and less than C in a given location is what another would be willing to pay for it should you need to sell. As such, the 11% sellers fees and such still come back into play.

    Just food for thought. I have my own issues, I get queasy just thinking about having a loan over me the size of a mortgage, but that’s a different issue!

  40. @Mo-Town – There will always be specific locations and times when renting is cheaper than owning but it is the exception rather than the rule. $1200 per month does not cover the owner’s expenses for your unit unless the purchase price was less than 1/2 the current appraised value. For a 2 year old building, that is a losing investment for the owner. If the building was purchased during California’s last housing bust in the early 1990′s, it would be a different story.

    @David – You aren’t providing enough information about your intentions for anyone to advise you. Mortgages currently are at an historically low interest rate, why wouldn’t you want to lock in that rate for 30 years?

  41. Mary Hunt advises to pay off your home mortgage as quickly as possible. She says that once your unsecured debts are paid, tackle the home mortgage with a vengeance. This is the only assurance you will ever have for a rent-free retirement. (And I have to agree). The value of your stock investment could drop literally to zero, whereas your real estate investment is never going to be without value, because ultimately people need a place to live.

  42. One-bedroom condos here cost 400k-700k, and people are still buying them. The HOA fees are nearly what you’d pay in rent for such a building. Also, my understanding is that the property taxes are much higher for me than they would be for my landlord. My landlord has owned the property forever, and here property taxes can only go up by a small amount every year if the owner is the same; taxes are recalculated every time the building is sold. If I rent from a landlord that has been there 10+ years, his property taxes, and thus my share of the rent going to property taxes is much, much, much lower than my property taxes would be if I bought a similar unit.

  43. David:

    Mortgage interest rates are more likely to increase over the next seven years, and even if rates were to decrease, there isn’t much room for them to drop. Because of this, I don’t think there’s much advantage to an ARM in this market.

    On a related note, when I purchased my first house years ago, I chose to go with a 30 year fixed instead of a shorter 15 year fixed, even though I intended to pay the house off in 10 years. The 15 year had a lower rate, but I liked the fact that with the 30 year, if I ever lost my job or otherwise ran into financial trouble, I could make a much smaller payment and stay current on my mortgage.

    I think it’s tough to answer a general question like “which is better, an ARM or a fixed?” It really depends on your individual financial situation, your comfort with risk, etc…

    Just my $.02.

  44. Great rebuttal on all the other points except this one: I think, in one place, you come across with the same weakness that your opponent suffered from. See the following two paras quoted below. In the first, you seem to mention your area trends as an example to buttress your point while in the second you accuse your opponent of not looking from a broader perspective.

    Quotes:

    “In fact, based on home sales in my area, prices have held steady (or perhaps gone up slightly) in the last year.”

    “In other words, if you pay attention only to a handful of overheated housing markets, the quoted statement might have some semblance of truth, but once you open your eyes a bit and look at the nation outside of these markets”

  45. Housing prices have far outpaced rents here, and with current conditions renting is better indefinitely. So I rent and save a lot of money by doing so. A LOT. My rent is less than property tax, insurance, and maintenance, nevermind the actual mortgage payment and interest. For every dollar I spend on housing I save almost 3, and no, I’m not saving for a down payment.

    Anyway. The “renting is better!” “No, owning is better” arguments are useless. What would be useful: a) recognizing that it is different for each person, not only depending on where you want to live and in what sort of building and neighbourhood, but also with the housing prices/rents wherever you happen to be; b) learning how to figure out which is better *for you* depending on those circumstances. For example I looked up mortgage terms from a bunch of banks, looked at the MLS listings for my city, compared average rents on Craigslist, made a spreadsheet, etc. I think a tutorial of sorts in that vein would really help a lot of people.

  46. Not sure that this was mentioned already, but here goes. True, although your mortgage payment during the first 5 years typically goes towards paying interest vs. paying down the principal, any such homeowner would be still building equity in most cases (in a normal market) due to home appreciation during that period. The renter winds up with nothing.

  47. The articles that compare two options mostly do a bad job especially in the personal finance blogs. When the author says X is better than Y (be it rent/own or oil change by owner/autoshop) s/he is already biased and will not put much thought into supporting details.
    The rent/own option is really a personal choice and it depends on a zillion things. The RE market is so localized that a few miles can make a big difference in the cost of renting/owning. So there is no one solution that fits everyone. Some markets are still hot and others may never recover. People should go with the best choice for their situation.
    And seeing how stocks can collapse over a weekend, should we be really putting all our $ in stocks ? What if my apt has a leak that stains my Star wars collectibles? ;-) The best thing is to diversify and yes that should include some sort of RE imo.

  48. I live in New York City. I’ve been struggling with feeling like I will never, ever be able to own property (an apartment) here because of the prices and low salaries in my chosen field. I almost feel like it IS a better deal for me to rent, simply because to think that I might not be able to even qualify for a mortgage until I’m in my 40s is awfully depressing. Plus I’m surrounded by a culture of renters.

    On the other hand, my rent is exorbitant (double all of your figures, and then add some change) and will only go up from here. How does this article and your advice apply to those of us in different situations than Middle America?

  49. You forgot that the renter is investing the monthly difference (and makes at least 10% a year on that).

    You forgot that many people sell their house because they have to (job, disease, divorce, etc.), which means at a time which is not necessarily at their advantage.

    You forgot that when you rent you regularly adapt your house to your needs (size of family, location, etc.)

    I know that I won’t stay more than 2 years at the same place, and it’s clear that buying/selling every other year is nonsense.

  50. I bought my home last year and believe that it would have been better for me to continue renting. In the Seattle area my mortgage is almost double the cost of renting an equivalent place and prices have not yet come down.

    Before buying, I actually did save money every month and invested conservatively. With my mortgage payment, maintenance costs, HOA insurance and taxes, the couple of hundred I save a month only go towards extra principal.

    I too bought the argument that renters throw money down the drain.

  51. @Elaine:

    I did nuch the same thing last year when I moved and had to decide whether to rent or buy in my new town. There are a lot of good “rent vs. buy” calculators on the net, but I sat down with a pencil and paper and did the comparrison by hand. Like you, I found that it was A LOT cheaper to rent than to own where I lived.

    @Sandy E:

    I’m familiar with the “pay off your mortgage as quickly as possible” argument (though I’m not familiar with Mary Hunt), and I think the argument is a bit oversimplified. Reducing a living expense is always a good thing, but doing so at the expense of fully funding one’s 401k/IRA or otherwise investing for retirement is just as dangerous as investing all your money in a single stock.

    The argument about stocks being able to drop to $0 in value strikes me as an unrealistic fear. Yes, individual stocks can and often do become worthless, but if you have a properly diversified portfolio, the chance of losing everything is negligible. And let’s face it, if our market got so bad that even well diversified portfolios become worthless, we’d have bigger things to worry about than our nest eggs.

    Of course, when I bought my old house years ago, I paid down the mortgage quickly, so maybe I’m not the best person to speak on this issue. But I also fully funded my retirement accounts, and I still put 10% of my take home pay into savings. I guess I just think the whole “pay down your mortgage as fast as possible argument” needs to be tempered with reason and balance.

  52. I really liked this post. I have to say that what I find odd or unusual is the modern thinking of viewing a person’s home as his/her investment. Whatever became of the idea that we view our homes as just that – homes. Once the mortgage is paid, with the exception of insurance, taxes and upkeep, you have a “free” place to live – for the rest of your life. We live in So Cal and of course it is ridiculously expensive – we couldn’t afford the home we live in now, if we had to buy it at today’s prices, however it seems that rent is just as outrageous and when you walk away from that rental what do you have? Nothing. We rented a house for 5 1/2 years before buying and I added up the money we threw away on it – a huge sum, so we threw ourselves into the house hunt and within three months had a home. That was about ten years ago. Now, in less than six years, we will have it paid off. I find the peace-of-mind that comes with no mortgage/rent to be priceless.

  53. “Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes or maintenance fees. They pay rent.”

    Nuts to the savings/costs of owningvs/renting in the first five years – the author makes a very good point.

    When you rent you get precisely one thing: SHELTER. That’s it.

    When you buy you immediately get the enjoyment of the home – you get to put in a decking, a vegie patch, an air conditioner. You get to plant plants or let them die. You get to have a pet. You get to damage the carpet and the walls and it’s NOBODY’S BUSINESS BUT YOUR OWN. You can smoke and have parties inside. You can just go straight ahead and get stuff fixed up around the house without waiting for the bored real estate agent to get around to it.

    … you get a HOME.

    … and in the meantime the renter is stuck trying to make a life around their mere SHELTER.

  54. The only rent/buy myth I *really* wish someone would explode is the myth that one’s mortgage payment never changes. Mine changes every year because it includes taxes, which of course keep going up. I have been a homeowner for three years now; my payment started at $775 and is now at $885. Though the insurance, interest and principal are predetermined and that total amount never varies, the taxes are likely to keep creeping upwards infinitely. (They are also likely to rise dramatically in the near future, because my town is undergoing reassessment.) No rent/buy discussions ever seem to take this into account. All we ever hear is that the mortgage payment is fixed (vs. the rent payment, which keeps going up). WRONG, at least in my experience.

    Much, much more than half the monthly amount I pay goes to interest and taxes. It’s true that I am putting about $140 a month towards equity, and I’m OK with the idea of that money as an investment, but when I think of what I could be doing with the other $700 a month, which I will never, ever see again, I often wonder why in the world I ever bought a house.

    KAD

  55. I thought it was significant that the myth article wasn’t attributed to anyone; might that be because it was mostly hogwash? LOL

    Another factor in the rent/buy decision is stability. People with high levels of wanderlust might want to be renters; the costs of selling/moving/buying can be high and likely are more than any equity increases if the cycle is fast.

    I bought my house in 1979 for $23K, paid it off, tore it down, and built a better one on the same spot in 1985 for $45K. The last property tax statement says it’s worth $290K. That’s a fair chunk of equity that I wouldn’t have if I’d rented all these years.

  56. I’m a home owner, located in NZ. Over the past ten years or so, I’ve built up over (NZ$)200K equity in my home. I agree that renting *can* be an astute choice for a certain types of people. But I also know that I personally would not have saved or generated through investments $200K, had I rented instead.

    I’m not a stupid person, but I grew up in a middle-class family where talking about money was frowned upon, so I went into adulthood lacking any financial skills. Worse, I had a worldview that being rich was immoral.

    Firstly, my mortgage is not that much more expensive than renting a house in my area. Renting is cheaper if you rent a room in a house with others. But I like my privacy, so teaming up with others in a flatmate situaton is not for me. And I didn’t really internalise the necessity of saving until I was in my 30′s. The “savings” from renting throughout my 20′s would have disappeared straight to local businesses.

    But my biggest objection to that article is that it is titled “Rent vs. Buy Myths that *Ruined* the Housing Market”. Yet Myths 4 & 5 depend upon an already ruined market. The most important thing to get right in an article is the flipping title!

  57. don’t forget that renting buys you geographic freedom to some degree. if you own a house, you may get stuck in the area where you bought the house because it is difficult to sell. especially in a market where the home value drops.

    a renter can pick up and leave with a few months notice (or even immediately with a fee, depending on the lease). there is definitely some value to that.

  58. @Brent:

    I think it’s a bit silly to imply that one has to own their house for it to be a “home.”

    As to your other comments, my wife and I rent a home, and we have our own garden, we have a pet, we have people over for dinner parties all the time, and we can do whatever we want with the paint, carpet, etc… so long as we clean it up when we leave (which is something a homeowner would likely have to do if they wanted to sell the house).

    I don’t mean to be harsh, but if you truly think one has to own a house to have a “home” as opposed to “mere shelter,” then I think you have a very shallow concept of what a home is.

    Just my $.02.

  59. I did a post on this called How Much Should You Pay for a House. Strictly speaking you should rent rather than own, but my post explains why OWNING is actually the ONLY way to true financial freedom for most people.

  60. Trent,

    I completely lost faith in you on this one. As an accountant I find fault in a lot of your assumptions. This is a purely mathematical exercise and in most major cities (NYC, Boston, Chicago, DC, most of California, Florida, etc.) it is still significantly better to rent than buy. Of course there are exceptions like Pittsburgh, Cleveland, Detroit and small towns (not near major cities).

    Quit falling for the real estate industries propaganda. A house is a home, not an investment. Making less than 2-3% a year on the principal is not a good investment. Don’t expect to see the price increases of the last 5-7 years again in our lifetimes. If you do…run.

  61. Trent,

    You’ve said before that you don’t believe in real estate investing, because it is risky. So leave it to the experts.

  62. “I equate having your financial head on straight to spending significantly less than you earn. People who do this usually are looking at the long term and often are homeowners or become one quickly.” – Trent

    Seriously?!! All those people in foreclosure definitely have there head on straight. Owning or renting has nothing to do with your financial acumen if you don’t take the local market into account.

    General statements supporting renting or buying are uneducated and misleading statements.

    Here is a decent calculator please make your own decisions.
    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

  63. Given the wave of foreclosures and all the resultant chaos to the financial markets — and mind you, we’re in year TWO of what will be a multi-year affair, I’d say the referenced myths article more accurately describes the past decade than Trent’s rebuttal. After all, the proof is in the pudding.

  64. Wow — lots of misunderstanding about Trent’s post, even though he took pains to explain it at least twice. Let me make a third attempt for those with ADD:

    Trent isn’t saying that it is always better to own; he’s saying that it is better IN MANY SITUATIONS, and presented his own example illustrating his point. Yes, you can show that renting is sometimes better (particularly in the short term and in certain areas), and Trent readily acknowledges this (TWICE!)

    Pretty basic, really.

    Thanks, Trent.

  65. Go run the numbers for yourself, in your area, with the figures you have… that’s the only reasonable answer. For me, 20% down on a 15-yr mortgage below 5% meant buying was better than renting after a mere 2-3 years depending on expense unless I could guarantee a 10% investment return after taxes.

    By the way, I wonder how those people funding their rented domiciles are doing the past few months… market index is down about 15%, isn’t it? Hmm?

    Oh, one more thing. If you’ve got $160k-180k, it’s possible to find some decent 2000 sq ft houses that you could purchase outright. Check the following towns in Oregon: Coos Bay, Coquille, & Roseburg.

  66. @MossySF – the “wave of foreclosures” affect 1 mortgage in 172. Problematic for the banks and for the overall economy, but hardly a the “wave” that the press has made it out to be.

    Personally, my house (in Las Vegas) has gained 35% since I bought it in 2002. Not typical, but then, I did my homework before buying. I expect Trent did the same.

  67. “That’s nice, in theory, but people in rental situations rarely do this and if they do, it’s so they can make a down payment on a home.”

    Maybe it’s “rare” to invest savings from renting, but I’m doing it, and I don’t really care what other renters are doing. Also, I’m certainly not saving for the purpose of a down payment. In the event that I do ever purchase property it will be with cash.

    “You do in fact pay property taxes when you rent – property taxes are a part of the calculation that comes up with the amount of rent you’re charged.”

    In my neighborhood the property taxes alone on a home exceed what I’m paying for rent.

    “Let’s jump ahead to the thirty year mark.”

    Within the next thirty years, I hope to have lived and worked in maybe 12-15 different countries. Staying in the same nation for that long – not to mention the same house – sounds like a prison sentence to me.

  68. @ Mo-Town: let me try that again– Mary Hunt is the author of the debtproofliving.com website.

  69. I agree with you Trent, and Lurker… The idea is to have something to show for the money you put out!! The housing market may fluctuate, but the majority of homeowners will certainly come out ahead in the long run. Just as you can’t look at the stock market in short term windows, home ownership is to be seen as a longer term investment. Home ownership offers a security and a future that simply cannot be attained by renting. My observation has been that those who perpetually rent do not attain the level of financial security in order to buy and own their own home. They live more on the fringes and would buy if they could. I realize this doesn’t apply to every single renter out there; I’m speaking generally here. Historically, housing values go up and are beyond a doubt a sound financial (and psychological!) investment.

  70. @Frugal Bachelor – you are mistaken if you think you have to stay in the same house for 30 years to pay it off, and of course that might feel like a death sentence to many. My current house is paid off, but I’ve bought and sold 6 of them, each time transferring the equity to the next house. Not only did each house show a nice appreciation, but I got back all my monthly payments too. For example, the house that I’m living in now I bought in 2005 and paid it off last October. (not 30 years)

  71. The truth of both these articles is that home ownership, from a *financial* perspective, is mostly a forced savings plan with little real return.

    Upside: at the end of 30 years, substantial value

    Downsides: very illiquid asset, with significant maintenance (1% of value annually), and significant transaction costs (closing costs, Realtor commission)

    The real return on residential real estate is very low – 1 to 1.5%, so real estate should be viewed as an inflation hedge/store of value, rather than as an investment such as mutual funds

  72. The original author’s point about a home being a SHELTER and not an INVESTMENT is extremely valid and I think overlooked in recent times. Double-digit growth is unsustainable, and I think there was a bit of over exuberance going on. That plus people assuming that owning is better than renting simply because you’re making payments toward a principle rather than just throwing away dollars each month.

    The New York Times had an excellent rent vs. buy calculator awhile back: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

    I’m biased because in my area buying is never better than renting over 30 years, even if appreciation is at 5%. So that supports my cabin fever and I can just move somewhere else in a couple of years and not be tied down.

  73. If people are going to pull out the argument “renters rarely save the difference”, I could also point out a good number of homeowners don’t live within their means. The average homeowner has roughly borrowed an extra $30K against their house in this decade. Not only has the average homeowner not paid down any principle but have increased their debt with household equity percentage has dropped an all-time low of 47%.

    The reality is that Trent’s rebuttal only applies to that small 20% of American homeowners living within their means. Just like the counter argument for renters saving the difference only applies to that small 20% of renters living within their means.

  74. And just want to point out that the type of person who would invest the money they save from renting is likely the same person who would make additional mortgage payments to pay down the principal, so it’s a moot point either way you spin it ;)

  75. If you look at paying 65000 in interest on a home over 15 years (as I will be doing on my 138k loan), or even more than that on a 30 year note, you’d have to recoup that in your calculations as well to count the “asset” part of it.

    Where I live though, renting isn’t saving much over buying – maybe an apartment of comparable space and quality would be a couple of hundred dollars cheaper a month than a 15 year loan. It would be about even on a 30 year loan.

    As Trent and at least one of the commenters above pointed out though, people don’t rent out homes and apartments to lose money. You’re still paying for all that stuff.

    If it’s a big business, they may take a loss in the short term to keep the complex full and remain competitive with owners whose property is paid in full and who can afford to go cheaper. However, I would be surprised if that’s the general case when renting a home.

    Trent – in your mortgage calculation of 850 a month, you could make that a little more clear that it’s a 30 year loan at the beginning of the argument. I was puzzled until I got to your overall point 30 years down the line.

    Even considering that, it sounds a bit low – like you are not including things like property tax, homeowners dues, etc, etc. In my case, the mortgage company quoted me a monthly payment quite a bit higher than that, for a little smaller loan at around the same interest rate, for all costs included (on 30 yr fixed).

    Still, you’re point remains. Now if you can pay that off in 15 years you’re really looking pretty at the 30 year mark versus renting.

    I don’t understand why anyone would rent, unless it’s in the short term and they’re putting tons of money away to buy a house in a few years with a large down payment.

  76. This is very much a matter of perspective… silicon valley is a much different housing market than Iowa. From the title of the article in question, I suspect the target audience were those living in the bubble markets where house prices are completely out of whack relative to incomes and comparable rental rates. With this in mind I think the article makes some excellent points and I tend to agree.

    Approximate monthly carrying costs in silicon valley:
    1. rent 2 bdrm apt – $1300
    2. rent 3 bdrm house – $2200
    3. buy 3 bdrm house – $5000*

    *Assuming you came up with 100-200k down payment, which is about to totally wiped out by price correction (bet that stings).

    Renting is an absolute no-brainer here, and is contrary to what 90% of people seem to think, who are spewing all the stupid ideas (myths) referred to in the article.

  77. I am a single mom of two girls. I don’t want the hassle OR the unexpected expenses that buying a home could bring. Let’s face it, a house is made out of mostly wood and there are bugs in this country that love to EAT wood. It’s enough to keep one awake at night listening for the munching. ;-)

    I have co-workers that are disdainful of my renting. MossySF is right, though, in pointing out that many of them are living paycheck to paycheck. Whatever equity they manage to build up in their homes disappears each time they tap into it to pay off credit cards or to take care of needed repairs. Most people (not all) will not diligently work to pay off their homes like our parents did. They either buy a bigger home or tap into the equity so often that they’ll have payments long into retirement. Again, I know there are exceptions, but tapping into home equity is a pretty common method for avid HGTV watchers to update the look of their homes. And we all know from watching, that those “outdated appliances” bring down the value of a home. (Yeah, I love their shows!)

  78. patrick.net and doctorhousingbubble.com are two excellent sites to check out for info on the housing bubble.

  79. George, please don’t tell people about the small towns on the Oregon coast, I want them to still be hidden in 30 years when I retire.

  80. Thank you. It’s good to see gobbledygook like this countered with some common sense.

    There are a lot of good reasons to rent, but this guy doesn’t seem to touch on any of them. And most of his reasons not to buy are all wet.

    BTW, about the last argument that you quoted from the scribbler: The house my son & I are copurchasing as an investment just appraised (for a refinance at a lower fixed interest rate) for $20,000 more than the appraised value of 16 months ago–$35,000 more than we paid for it. Yes, this is in one of the nation’s formerly “overheated,” now deflating markets.

    In the deflation department, the other day a Realtor estimated my own residence is worth about $25,000 less than it was a couple of years ago…that would still be $67,000 more than I paid for it (in cash) four years ago, an increase of about 6.5% p.a. True, I would have done better in the stock market — at higher risk. Unless I miss my guess, you couldn’t earn 6.5% in a savings account or a CD. And they won’t let you live in the bank. :-)

  81. A good article should point out the pros and cons of the different options…from the sounds of it the original article only pointed out the cons of buying and followed it with the pros of renting. Every issue has a positive and negative side, I just think Trent wanted to clarify that buying isn’t all gloom and doom.

    Every situation is different, which is why its so important to have both sides of an issue. Only then can you evaluate your situation and decide which side will work for you.

  82. I don’t agree with the logic of the linked article. However, I will say that renting was a good move for me instead of being a homeowner in the past few years. The prices were too high, my income and savings too low. Bottom line: I couldn’t afford it. Will I be a renter forever? No, I will save for a downpayment and get a reasonable 30 year fixed mortgage that I can afford. Which is exactly what people caught up in this mess should have done, except they got caught up in the credit/lender frenzy of “you must have it now!” I’m afraid I’m not very sympathetic though – my own savings and job outlook are in potential danger here because of the irresponsibility of lenders and borrowers who got into this mess. I guess as a responsible renter/saver, I am collateral damage with crappy interest on my savings accounts and facing a potential layoff.

  83. I guess I’ll repeat this for a third time here. Renting IS better in the short term and also in some specific markets. The original article, however, made a very broad statement that renting is ALWAYS better, and that’s flat-out wrong. I wrote this to present the counterargument, and I left the original argument in place so that there would be a point-counterpoint.

  84. One demographic in the Rent/Buy grudge match that is often ignored is the large family.
    We rented for years till our 4th child was on the way.
    I didn’t want to own a home. I’m fairly lazy when it comes to doing repairs and the like. I hate mowing the lawn, and even though she said she wanted one, my wife isn’t much of a gardener.:)

    But in order to Rent someplace with enough space for all the kids and my then starting business I would have paid 800 more a month than what my mortgage is. So really buying was our only option.

  85. I’m sorry I must have missed the “new” economics 101, doesn’t supply and demand determine the markets in the USA? Shortage of housing (owned/rented) increased demand (owned/rented) causes over production, excess capacity and excess supply. Then a correction. Usually its the renting that starts the snowball rolling.

  86. I’ve been reading your blog for a couple of months now, and this is my absolute favorite article of yours that I’ve read so far. I applaud your ability to analyze the other article so coolly and rationally. Keep up the great work!

  87. My father told me over an over again “own where you live.” It was so ingrained in me, I really had no other option! ha ha. Not really, but the advice has held up over the years. Thanks, Dad.

    Lisa

  88. Trent,
    Thanks so much for summing up this mortgage mess. So many people bought homes and were given mortgages that were waaayyyyyyy over their head. I don’t know what came over people. When we took a loan out for a home 17 years ago for 85,000.00, I could hardly sleep at night trying to go over the figures in my head to make sure that under all circumstances, we could make our house note. We have since sold and moved and no longer have a mortgage. We could easily afford to build or buy a bigger home, but are content to keep our small home till we can pay cash for something bigger. Having no rent or no mortgage is such a great feeling. This whole mess could have been avoided if people would live at or below their means. It takes great control, but it is something that needs to be learned. Thanks for your articles. I love getting your emails. It is a breath of fresh air to read/listen to someone else that lives like we do. I wish everyone would read your articles. It is a much better quality of life than living beyond your means.

  89. You must’ve struck a nerve, Trent.

    In addition to bad math, the article completely ignores the social benefits of home ownership — community, schools, crime, etc. All of these are impacted by stable neighborhoods of home owners who will not, at the drop of a hat, pick up and move.

    Homeowners also tend to me more politically involved (i.e., they vote).

    It also ignores the real maintenance costs renters assume from uninvolved landlords. Sure, it’s great to be able to call the landlord when you need a plumber or electrician and have them pick up the tab (since it’s already calculated into you rent whether you use it or not). What if the landlord is a little lax about getting the plumber or electrician out to your rental unit? How long do you wait until you call one and pay for one yourself or try and go through the red tape to get the government to protect you.

    One last thing: In many parts of the country, if you bought a home before 2000 you probably saw the value of your home double (if not more). Even if it drops back 50% you’re ahead of the deal.

  90. I see people pointing to the referred article about how one-sided for renting it is. Step back and look at the title. That article is neither advice nor analysis nor comparison. That article is assignation of blame for the screwed up housing and financial markets. In that context, the good parts of buying/bad parts of renting are irrelevant since American homeowners went on a binge of overpaying, serial refinancing, living beyond their means.

    Now you might say “this was not the case for me!” Not unexpected. Whether people talk about X, Y or Z, it’s usually implicit that there are outliers that don’t fit the generalization. Otherwise, every other sentence will be filled with conditionals and who wants to read nonstop wishy-washy verbiage like “X does/is Y except where Z”? So give yourself a pat on the back for being fiscally smart and mentally remove yourself from the general class of average homeowners. But don’t draw conclusions from your own situation and apply them to others — especially when the actual numbers say it’s not the case.

  91. Trent,

    I still do not understand the true collapse of the housing market. Everyone is blaming banks and people who bought homes they could not afford. I know here in NJ – every loan has PMI (mortgage insurance) paid by the lender, whenever the loan exceeds 80% of the value of the home. If all these loans went bad, I could see the insurance companies facing ruin – not the banks! Why isn’t all this mess covered by the insurance? Any bankers out there that can provide answers?

  92. The one point I would add is that the comparison of mortgage interest alone to the standard deduction is crap. I’ve owned my home for over 15 years and I have never, ever, taken the standard deduction. Keep in mind there are multiple things you can itemize, to include the mortgage interest, property taxes, charitable contributions, etc. which add to the deduction. But I don’t consider myself any kind of whiz kid tax guru and I feel I’ve got a pretty standard situation and I’ve always been better off itemizing. I’m sure it’s very dependant on your state and local taxes etc., but since this broad brush approach is apparently based on markets where the housing crisis is suffering the most, it should not ignore that those are the places most likely to have the higher mortgage interest payments, property taxes, local school taxes, etc since these are the areas where people stretched the most to get into homes. So that would mean itemized deductions are nearly a given for most folks in those areas. Also if the point was getting 30 cents on every dollar spent on mortgage and property taxes and how it’s still a losing proposition, that would need to be compared to losing all your money to rent and getting nothing back for a more apples to apples comparison.

    With respect to the overall debate of rent versus buy, there are many advantages to either path dependant on a person’s situation. A single individual or a couple is much more likely to find a decent one bedroom or efficieny apartment for a lot less than paying a mortgage and associated home ownership costs in most areas of the country. If you move a lot because of the job, or because you just want to, it’s probably better to rent in most cases as well.

    Finally, there are calculators out there to help with the decision based on where you live, what rents are going for, how much you’re willing to invest as a difference, etc.. You should review the information and see if it makes financial as well as emotional sense for you and your situation, and not just blindly rush out to buy a home, or for that matter a car, or anything without at least considering alternatives.

  93. Trent,
    Great analysis. Just one thing I wanted to point out:

    At the 30 year mark, a homeowner will NOT be paying $0. Since many homeowners have their property taxes and insurance in escrow (and part of their payment), once their payments are finished, they will have to make plans to pay their taxes and insurance on their own. Your point is still valid, since taxes+insurance at a monthly rate should be much less than the previous mortgage payments (which included taxes, insurance, principal, and interest).

  94. I’ve seen this rent vs. buy debate shifting heavily towards rent lately, and I think it’s absurd. Even though it is a problem, it’s a small percentage of homeowners that have landed themselves into mortgage crisis by buying too much home. The important think people need to be educated on is that both realtors and lenders alike will try and put you into a home that’s out of your reach. The pricier the house, the more they make on the transaction. It’s up to the buyer to do their homework and no how much they can afford to buy before house shopping. Don’t take your real estate agent’s word for it on what you can afford. If we had listened to ours we would have been shopping for 600,000 houses instead of the 350,000 that we could actually afford.

    That being said, the pro rent argument has never held water for. It seems that most of the people writing these articles rent due to other factors, like constantly moving, lack of job stability, etc and try to justify their position financially. Even in areas where there is a large gap between morgage payments and rents, the rents catch up quickly. We purchased our house a year and a half ago, and already we are hearing about friends who pay nearly as much in rent as we pay for our mortgage.

    Thanks for pointing out the absurdity in some of these arguments. And just for the record, it’s possible to have both a house, and Star Wars collection!

  95. Sorry, wrong.

    “Let’s jump ahead to the thirty year mark. The homeowner sends in his last mortgage payment and now has to pay $0 a month. The renter, on the other hand, has seen his rent go from $600 a month to $1,950 a month. Not only that, the renter will have to continue paying that rent in perpetuity – and it’ll keep going up with inflation. The homeowner is done with that game.”

    No a homeowner NEVER pays $0 for the entire time they own the home. NEVER. You have maintenance costs that a renter NEVER pays. You have taxes that a (residential) renter never has to pay. Sorry, but if you use the NY Times rent vs buy calculator, almost no scenario in which a home is purchased rather than rented does the homeowner come out ahead. The scenarios in which the homeowner does come out ahead are those in which the homeowner buys AND HOLDS the house for THIRTY YEARS. I defy you to find someone nowadays who buys a house and holds it for 30 years. Most sell and move to a different one within 5-8 years. Because each time you take out a mortgage you are hit with lending fees, points, etc. the renter will almost always come out ahead because they are not hit with the costs to rent money that “homeowners” are. Also, these calculations do not factor in depreciation. Houses are depreciable assets, fact, you can look it up. LAND is an asset that will almost never decrease in inflation-adjusted value, but houses depreciate. So if you paid 300K for a house and land in 2008 but twenty years later tried to sell it, you would find that the percentage of the appraisal allocated to land vs improvements (think buildings) has increased dramatically. Inflation adjusted, that improvement has DECREASED in value. Sorry, I really like your blog and read it every day, but renting IS (for the most part) economically a better decision than buying, especially in heavily populated areas.

  96. I’d also like to point out that in your mortgage example, the total money sent in by the renter during the 30 mortgage term is $403,800 opposed to the total $306,600 that the borrower sent in. The latter can be decreased by prepayment too, and yes we could ignore the asset and still have a great argument.

    To get a better handle on this situation you could also look at the converse scenario. You own a property that you are renting. A renter comes to you and wants to rent the place for a contracted 30 years. What kind of price would you put on the property for that term? I guarantee that the apartment you can find right now for $600/month will cost much more than that if contracted on a 30 year term, probably significantly more than the corresponding PITI payment the landlord is paying.

  97. This is Scott Adams succinct and brillant financial advice. Look in particular at # 6.
    That pretty much sums it up.

    “Dilbert and the Way of the Weasels.”
    1. Make a will
    2. Pay off your credit cards
    3. Get term life insurance if you have a family to support
    4. Fund your 401k to the maximum
    5. Fund your IRA to the maximum
    6. Buy a house if you want to live in a house and can afford it
    7. Put six months worth of expenses in a money-market account
    8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
    9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

  98. Let me explain why buying a home is a bad decision.

    I was paying $900 total for my previous apartment.

    I bought a home for $185,000 with a 6.5% fixed APR for 30 years. The payment was originally $1400 total, including insurance and taxes.

    Now, a year later, the property taxes and insurance have reset themselves and my $185,000 modest home is costing me $1800 a month.

    -I also must pay to make repairs on my modest home that is 40 years old.
    -I will need to buy a roof when that comes up.
    -I will need to replace an air conditioner when that comes up.
    -I will need to rebuy all appliances when they die out.
    -I will need to fix plumbing if it goes bad.
    -I will need to spend time and money providing lawn care.
    -I will need to buy the lawn mower and gas to perform the lawn care.
    -I will need to pay 6% of the selling cost when I leave.
    -If I have jerk neighbors (which I do), I can not just leave when the lease is up.
    -Defaulting on a rental agreement is not nearly as bad as defaulting on a mortgage.
    -etc etc etc. I could go on forever.

    Come on. Add everything up. Owning a home is NOT worth it.

    I live in Florida, btw.

  99. Trent, this is the first article of yours that I was disappointed in.

    I strongly disagree that a one-sided article requires a one-sided rebuttal. If you consider the original article to be hogwash, you are then lowering your level of discourse to that in a post like this.

    I’d much rather a reasoned, balanced approach; yet I feel you’ve already got your bias and would not approach it objectively.

    I think the core problem in your post is you are making disingenuous comparisons. You are balancing the best, ideal behavior of homeowners such as paying off mortgages early versus the worst, non-deal behavior of renters such as squandering all of the extra money.

    Finally I’d like to say there is an appeal in paying for Shelter versus a Home. I’ll quote from Phillip Greenspun: “People who rent talk about the books that they’ve read, the trips that they’ve taken, the skills that they are learning, the friends whose company they are enjoying. Property owners complain about the local politicians, the high rate of property tax, the difficulty of finding competent tradespeople, the high value of their own (very likely crummy) house or condo, and what kinds of furniture and kitchen appliances they are contemplating buying.”

  100. Thank you for this informative article. I think it really all depends on where you live. My parents are on the losing end in Florida right now. However, here in LA, with every city fee-we get a rent increase. Maybe it’s a one time $25 or only $12 more a month, but it adds up. Also, as homes fail, rents are going up because the demand for rentals is up.

    BTW- A friend of mine just bought her son a two brm two bath house in the ghetto where I teach. The house was formerly a crack/prostitute den and had been locked up by the city. The water had been totally disconnected and the wires cut. CUT! So no electricity, no water, urine soaked carpets, tagging on every wall. $350,000! There have been two shootings on the block in the last two weeks.

    New electricity, new floors, new dry wall, some new appliances, new paint, new windows and best of all new locks! Now her little house in the ghetto appraised at $500,000!

    Really, if you live in an area where you can get a
    “modest home for $185,000″ please count your blessings!

  101. Trent,

    Thanks for this article. We rented the first few years of marriage and have are buying our home. I found it interesting that someone assumes a homebuyer doesn’t have funds to invest or cannot afford to buy things. The absurdity of that aside, we’ve had our home for 13 years and it’s a HUGE cost saving to us. The rent/mortgage payments in our area have doubled since we bought our home. I hear people talking about $1500 mortgage and rent and I smile because our house payment is $650 and has gone up very little over the years. The value of our home has increased. When looking at the costs of owning, I have to figure in that increase in equity over time. If I have to buy a new roof, air conditioning etc, those costs have been covered because the value of my home has gone up.

    I will say that I can see the other side of this coin. We’ve been toying with buying a bigger house and right now, that would be a bad move. The houses in the area are large. Because they’re selling “more space” alot of the homes are being mass built, cheaper materials – huge profit. These are the homes people are having a hard time getting rid of. Builders are building and gaining a huge profit based on space (not costs of building necessarily). So, instead of homebuyers being able to sit on increasing equity and the demand for homes growing.. the builders are filling the need and pocketing the money. Why would someone buy a $300K used home when they can have a builder custom build one for them tomm at the same cost? Maybe this is just the trend in our area, but it’s disturbing. We could sell our smaller house quickly to someone who can’t afford the large mortgage, but are leary of getting stuck with a larger home we won’t be able to sell if we need to. I’d say it’s become a builders market around here. Land is cheap, people want their brand new luxury home and mortgage companies are granting risky loans. When the bottom falls out there are gonna be a lot of large homes going for a song. Good for future buyers, but a disaster for the current homeowners.

  102. Overall, I agree more with the article than with Trent, except for the claim that renters don’t have to pay taxes. As everyone has noted, landlords figure all that into your rent payment. Also the seller usually pays broker’s fees when you buy.

    My experience is pretty well aligned with the article. I bought a condo in the Washington DC area in 2002 for 92.500 and sold it in Aug 2007 for 182,000. It was my first home. I did have several thousand in closing costs, I admire you Trent for not having any!

    Before selling I totaled what I had spent on the house over the 5 years- closing costs, mortgage, interest, new furniture, maintenance, condo fees, and property taxes. It came to about $90,000. Now I did pay extra on the mortgage so the cost is higher than it would have been had I not. Rent in my area on a 1BR over those 5 years would have been about $60,000.

    Yes, the work I did on the house was optional. But so far I don’t know anyone who’s bought a house and NOT bought any new furnishings, appliances or painted, etc.

    I cleared $113,000 from the sale of my condo. Keep in mind that I bought at the beginning of the housing boom and sold just before it burst. My house doubled over 5 years. That is very atypical.

    If I had put $90,000 in the Vanguard 500 index fund from 2002-2007 I would have $153,000 according to their website, compared to the $113,000 I got after selling. Now I didnt have a lump sum of 90,000 in 2002 so that figure is too high. But you get the idea.

    One more point, sorry if someone already pointed this out above. When you’ve paid off your mortgage, remember you still have to pay property taxes each year!

    So your housing costs are not $0 when you’ve paid off the mortgage. And property taxes go up each year.

    The thing I really like about owning is that I can decorate the house the way I want, have a garden, have pets, and if something needs fixing I don’t have to cajole the landlord into getting it done. But I no longer think buying a house is financially much better than renting.

  103. I too live in the ridiculously expensive SF Bay Area. Now that my boyfriend has moved into my studio (cleverly converted into a 1br) apartment, my rent is $475. In a great neighborhood in Oakland. No kidding.

    Still, I want to buy!

    I am putting 40-50% of my net income each month towards debt reduction (first car loan and then student loans.) The goal is to be debt free in 3 years and spend a couple years socking away money for a down-payment.

    Even though I pay a pittance for my housing, I can’t imagine anything more satisfying than having an appreciating (yes – it will eventually appreciate!) asset that will be mine. Even though my housing costs are small, I would still rather be putting that $ towards something I will eventually own outright. Plus my property management company is terrible and I don’t want to give them another dime…

  104. I notice that everyone that agrees with the article lives in NY, California, DC, etc. Everyone who agrees with Trent lives elsewhere.

  105. @Ryan: And your point is what? People who live in cities also have different opinions on gun control than people who live in rural areas. It is natural to think differently about a problem that directly affects you than one that doesn’t.

    I thought the article was kind of dopey, myself (and I live just outside of DC). There are many myths about the Rent vs. Buy decision, but they are not all responsible for ruining the housing market. It seems to me that the housing market was ruined by one myth in particular: the myth that house values will increase forever at a rate that far exceeds inflation. It boggles my mind that people actually believed this, because it makes no sense.

  106. Three years ago I was renting an apartment ($500). I suddenly found myself needing 3 bedrooms. After checking rental prices ($900), I decided to purchase a home ($800). What was I thinking! Obviously I wasn’t thinking. The home I bought and thought I could afford was 25 years old, and came with appliances. I knew I’d have to replace everything eventually, but I wasn’t counting on it being right away. Stove, Dishwasher, Fridge, Washer/Dryer, and the entire Heating & A/C system. So, now I have a home equity loan (another $300) because there was no way I could handle these expenses out of my paycheck. It is only this month that I’ve finally been able to breathe financially (I got a good raise). I know I made my own bed, but now I hate this house. I can’t sell it though, because I owe more than it’s worth. I should’ve rented the $900 apartment. I would be debt free.

  107. People REALLY love to cloud the “rent v buy” issue.

    The simple answer is this:

    Renting, done correctly is an excellent option. Buying, done correctly, is an excellent option.

    “That’s nice, in theory, but people in rental situations rarely do this and if they do, it’s so they can make a down payment on a home.”

    Come on now. This is nothing more than a sweeping stereotype. And yet:

    “buyers have the option of making additional mortgage payments. These payments go wholly against the principal and make a dramatic difference in the interest paid over the life of a mortgage. Even $100 extra a month not only shaves years off of the repayment period, it also goes straight towards the value of your home.”

    Why no mention of the fact that people also rarely do this?

    I’m sorry, but based on this comparison alone, it shows a STRONG bias in your article.

  108. I live in Arizona and can afford a home if I want one, however I choose to rent because I do not think a home is really that good of an investment. Right now my rent is $710 a month a comparable house would cost me abot $1200 or more a month, not including taxes, insurance etc. I do diligently invest the difference in an index fund. In 20 years I can have a house that appreciated at 3-5% or a fat bank account from $500+ per month at 8-9% interest. I think that will more than cover the increases in rent, since I will not have to pay increases in inusrance, taxes etc.

  109. I’m guessing that #63 is a poor accountant … else, he should know:

    1. Mortgage payments are fixed (if the rate is locked in) but rents will increase over time, and

    2.that real-estate is leveraged, so even a 2% – 3% return on the whole property translates to a 10% – 15% compund return on the cash you put in (i.e. your 20% deposit).

    3. A good accountant would know that, an even better one would also realise that you can use that extra equity to fund more / better returning income-producing real-estate to help you get financially free while the accountant is still working on tax returns.

  110. “I equate having your financial head on straight to spending significantly less than you earn. People who do this usually are looking at the long term and often are homeowners or become one quickly.” – Trent

    This is a total generalization, and pretty insulting to level-headed, financially saavy renters, like myself and my spouse. My homeowner friends currently cannot boast a net worth higher than mine, and we’ve never owned a home; just built up our savings the old-fashioned way by spending way less than we earn, and we a completely debt-free. Oh, and we are not planning on being homeowners anytime soon because we like the flexibility of being able to move anywhere at anytime. There are a lot of great places to live in this country (and the world), and I’d like to try a good lot of them before I go.

  111. I continue to rent despite having considerable savings which some would consider a fine down payment. As long as I invest my savings I will be out WAY ahead. I programmed a Rent. Vs. Buy Calculator, which given my housing market and rent costs, tells me renting is by far the better option.

  112. @Brent (comment 56):

    I’m a renter, and I find this breakdown of home vs. shelter very limited. Having a home is not just about what you can do with the property. To me, much more important is the location.

    I rent because it allows me to live flexibly in the heart of the city, walking/subway distance from my job, my social life, and community features like libraries, coffeeshops, and co-op markets.

    These are the components that make up the feeling of “home” in my life. My friends who purchase homes are forced by prices to look in the suburbs, where there is nothing social within walking distance and they have to drive at least fifteen minutes to get to anything.

    I feel a bit insulted by people who claim that I get “nothing” for renting. I get the wonderful quality of life that I have now – a dense urban social network and simple access to all kinds of community resources.

  113. Hey Trent, great article. You make some great points. Besides the greed, irresponsibility, etc. of lenders and borrowers, the realtors are partially responsible for this mess. Many of them would rather sell a house that is within the person’s maximum price range instead of what they can afford. This is one thing I have been dealing with myself. If I qualify for a $300,000 mortgage but I can only afford $150,000 they still push me to look at the more expensive homes.

    I’m sure there are markets where it’s better to rent but in the area I live, you can’t touch a 1 bdrm for under $600. I’m lucky to be paying a little less but I’m scared to even think of moving. I kick myself for not buying 10 years ago. Instead, I’ve spent $40,000 on rent during this time. And my landlord could care less about repairs. I went almost a whole month without hot warer, I’ve gone for days at a time w/o heat in the winter, just to name a few. I don;t think most landlords are in it to provide housing as a self-serving act of kindness. They are making a profit. And if the only purpose of housing is to provide shelter, why not just pitch a tent somewhere? I’ve never been able to save by being a renter.

  114. Kudos Trent on the excellent article!

    I, too, live in California’s Central Valley where, at the moment, renting is cheaper than buying. But it won’t be forever. The advice to rent rather than own in the big cities i.e. San Francisco, has usually been right on. But in other areas of the country, if you want to buy a home as a “purchase” and live in it a long, long time, buying will beat renting. I paid off my home after 15 years. The $800 I don’t have to pay every month to my mortgage is part of my “imputed income” allowing me to save or spend more of my current salary. And I can always sell my home or, after I turn 62, take out a reverse mortgage if I need the money.

    The old rules that I was taught 25 years ago, I think, still apply: Only buy a home that consumes 30 percent of your income (so you aren’t overextended. If you can’t do that, don’t buy.), don’t buy a home unless you want to live there a long time because you’ll lose money if you sell it (typically 5-7 years is the cutoff), and don’t expect your home to be a gold mine because real estate historically rises in pace with inflation. The past few years have been abnormal and now it is correcting.

  115. To all the people who claim their situation is different due to living in a city like LA, DC, or NY, their pro-rent argument still doesn’t hold up, because in these areas, rental prices catch up with mortgage payments on otherwise equal properties very quickly.

    A real life example.

    2 Bedroom townhouse purchased for 355,000 in 2006. Mortgage = 2,400 including taxes, insurance, and HOA fee. At the same time a 2 bedroom apt. friends were living in was 1800. When they moved out a year later, their rent was 2,200 and our mortgage payment was still 2,400. That’s what happened in just 1 year. Imagine what those numbers will look like 10 years from now. With any luck my mortgage will be paid off and rents will have climbed to the 3,000 range.

  116. @AJC

    that’s more than a little condescending considering unlike a business or rental real estate (with a positive cash flow), using leverage to speculate that the price of a particular house would go higher is a very high risk strategy in the bubble areas he mentioned.

    I know plenty of businessmen who are now stuck with multiple units in beach condo developments whose buyers have walked away from their deposits.

    Unlike the strategy you outlined, the big problem remains that people who see large unearned increases in equity tend to siphon that off for consumer goods purchases, not for investment capital.

  117. I agree with all points in this post with the exception of the closing costs. We did end up paying about $5000 when we bought our house in these unrecoverable fees, but we have already made up for that in less than 2 years of ownership.

    We bought a 4 BR house in a much more desirable area, and our total mortgage payment is $897 (including property tax). A 2 BR townhome in this area runs $930/mo. I am just amazed at people who say they can’t afford a house when you make this comparison (I realize this is not true everywhere). Granted, it does take a good credit score and a little discipline to save up 20% in order to get that interest rate, but it is more than worth it in my opinion. Just think of not having a housing payment in retirement (and maybe by the time your kids are in college)

  118. My fiance are in the process of purchasing our very first home. Our mortgage, interest, tax and insurance are going to end up costing us about $300 more a month then our current rent. But, we are getting a much nicer house. Also, I have been shopping for insurance and because we will put our cars on the policy with the same insurance company our car insurance is going down by about $600 a year. This almost covers the cost of the homeowners insurance. Therefore we can look at our total costs only increasing by about $200 a month. We also are looking at it as a place we can live at for a long time. Not just 5 years. Over the long run we will be better off. I should note that we live in the Kansas City area so the housing market isn’t ridiculous like California or Florida. In the midwest it makes more sense to purchase a home then rent.

  119. Both the original and your article are missing one very important point: once you can afford to do both, the choice to rent versus buy is only vaguely a financial decision. It’s much more a decision based on mobility versus security, demographics, personality, other individual needs.

    When we buy we’ll be spending about $600 more a month. We were planning on renting another year and socking away the difference… but then the owner decided to return from Europe and move in here. Now our family (with a young child about to start school) is being forced to move — either to another rental or to a house. But what’s to keep this from happening again? We can’t afford that kind of insecurity for the sake of our little one.

    I know people whose landlords foreclosed… the renters had no notice whatsoever. I know people whose property managers refused to replace or upgrade anything beyond absolutely necessary maintenance… until the person moved out.

    It’s really not about the money.

  120. One thing I didn’t see mentioned was the concept of leverage. This may affect what decision a potential buyer makes. As soon as a property is bought, any appreciation on that property is essentially bought at a discount. Hypothetical: If you were to put 20% down on a $1,000,000 property, and the property appreciates 4%, (which is realistic in the long run if we assume long run inflation continues at 3% and property appreciates at 1% greater than inflation rate) then an initial $200,000 investment nets $40,000, which is really a 20% gain in one year. Given the abnormal market conditions, my assumptions will most likely be innacurate. However, the concept remains true.

  121. Trent, good article. But I felt what most of the readers don’t understand is that everyone has to analyze their situation and not try to judge others because they do something different.

    I’m an owner/landlord and a renter. I own property that I’m renting out to others for fair prices, and my job keeps me moving around every 4-5 years. I’m currently renting an apartment and re-investing the difference. I don’t buy a home in every city/country I go to; keeping up with the maintenance just isn’t worth my time.

    I’m also secure enough with my financial decisions that I don’t need to force my views on everyone about rent-vs-own, credit-vs-cash, diy-vs-hire_it_out et al.

  122. Sorry Tony but 355K is a laughable example. When people in NY or SF talk about the price differences, they’re comparing $2500 rentals versus 1M houses because that’s the ratios we saw back in 2006. It’s gotten a bit better where it’s now $2500 rentals versus $800K houses but at this rate, it’ll be another 10-15 years before it makes any sense to buy.

    I’ve been tracking similar units for sale in the building I rent since I moved in so here are my real life numbers (includes both extra costs and mortgage deduction):

    2003 — rent $1500/mo, buy $2600/mo (350K)
    2004 — rent $1500/mo, buy $3100/mo (450K)
    2005 — rent $1500/mo, buy $3700/mo (550K)
    2006 — rent $1500/mo, buy $3700/mo (550K)
    2007 — rent $1650/mo, buy $3300/mo (475K)
    2008 — rent $1650/mo, buy $2900/mo (400K)

    If the two numbers meet in the future, there are two possible scenarios for it to happen:

    1) Housing prices have reached their bottom — it ain’t going down a single dollar anymore and rents will go up 5% a year to catch up. If this is the case, it will be 2020 before the two meet and I will have pocketed $450K+ from investing difference between buying & renting. What that means is in 10 years, I will be able to buy this place in cash versus having another 15 years of mortgage payments left.

    2) Housing prices will continue to fall while rents continue to go up. In this scenario, graphing the trend says 2013 is when the two numbers meet. I will have pocketed $200K+ from renting during 2003-2012. During that time, this unit will have fallen in price to $275K which means I’d only have to borrow $75K and have a tiny mortgage payment.

    So I agree some time in the future when house prices return to fundamentals, it will be a good idea to buy instead of rent. But again, in the context of the article — belief in the home appreciation fairy has this country in an uncertain situation.

  123. Another thing to consider in this dicussion is that I notice in the posts, some people are comparing the costs of owning a 2000+ square foot house with 4 bedrooms/2.5 baths on a 1/4 to 1/2 acre lot vs. renting a 1 or 2 bedroom apartment. Obviously the 1 or 2 bedroom apartment is not going to meet the needs of a family the same way the house would. Let’s compare apples to apples here.

  124. @Bob:

    Your comparisson to which you refer sounds a lot like the one I presented (comment 23). I made it pretty clear that I was comparring the cost of renting my 4/2.5 house vs. purchasing it. When those of us in California (and a lot of other markets that experienced big run-ups during the bubble) we ARE comparing “apples to apples” when we say it’s significantly cheaper for us to rent.

    I’m not trying to criticize home ownership. I’ve owned in the past, and I fully intent to buy a home in a year or two when prices in my part of California settle back down to earth. But I think it’s important to emphasize that the financial benefits of home ownership diminish or disappear altogether if you purchase a home at an inflated price.

  125. Oops. It must be Friday. That last post should have said “When those of us in California (and a lot of other markets that experienced big run-ups during the bubble) say it’s cheaper for us to rent than own, we ARE comparring apples to apples.”

  126. @Bob: The thing is, I don’t HAVE a family. My housing has to meet the needs of just one person: myself. In my area, I can buy a 3BR or 4BR house, or I can rent a 1BR apartment. There are some 1BR condos around, but not many, and most of them are owned by people who just rent them out anyway. The argument that “you get a lot more space for only a little more money” is moot with me, because I don’t need more space, and I don’t want more space. If a 500-square-foot apartment meets your needs, it is not a good deal to pay twice as much for a house that’s four times as big.

  127. Trent, Thanks for the rebuttal! My husband and I were in the military a combine 30 years, and never lived anywhere long enough to make a worthwhile investment in a home. We always had to rent or live in base housing. All those years, we couldn’t even choose paint colours for our walls, or plant a tree that we could watch grow. It was discouraging to have never owned anything for so many years. However, just 18 months ago, we bought our first home and love it! It was $150,000, and I can vouch that it’s hard to find rent anywhere for less than our monthly payment. There are certainly situations when renting is the best, or perhaps only alternative, but having been-there-done-that, it’s nice to be investing in something just for us. Funny, most people at our age (mid-50s) are looking for something small like a condo..just call us late bloomers!

  128. @Tony: 355K doesn’t get you much house in LA. Probably a condo in “the hood” or a far suburb. Even with the sinking market. The rents follow the house prices, and, in a year, the rents will drop too. Rents generally move more fluidly than house prices, because they are a more dynamic market. (This housing bubble was different.)

    The fixed payment argument, higher up, was applicable in the 1970s, when mortgages were 10 and 15-year affairs. Today, people are likely to sell well before the 30 year mortgage is up, so, find themselves in the market again.

    Ownership generally *does* make sense for families and people with high incomes. However, today, it’s not good you’re in a declining market in a big city, today. This will eventually change and the cost to buy will get closer to the cost to rent, and thing will be back to normal.

  129. I cannot believe people are arguing the merits of an article that suggests owning Star Wars collectibles rather than a home. Screw it, Countrywide, I’m cashing in for a life-sized R2D2.

  130. i read the article you responded to and had about the same reaction. it is so so misleading. it got me wondering why anyone would have an anti-homeownership agenda, so i googled the article and found your response. anyway, i’m still not sure why the author is so biased against homeownership (recent foreclosure? making himself feel better?). homeownership isnt for everyone, but this guy makes it look like putting your money in a blender and making a lava-money smoothie that you pour out on your lawn to help the your new money grow better.

  131. While I do think that the article is a bit over the top, I do see one overriding assumption in your counterarguments that can’t go without adressing.

    The assumption is that people will buy a house on a 30 year mortgage and essentially live in that same house for ever (or at least 31 years). And yet everything I read on the subject says that just isn’t the case. The overwhelming majority of americans move at least every 7 years if not more often. From 1990 – 2005 that was ok because houses were bubbling and you could usually count on enough appreciation to cover closing costs, taxes, maintenance (which costs far more than most people realize) etc. That strategy would be a foolish one to try today.

    All the established wisdom on home ownership is essentially bunk, becuase of the reality of dollar inflation. Easy credit was extended in ever increasing amounts (while salaries stayed largely flat) which caused home prices to go up accordingly. Most american “homeowners” don’t own much at all. They own a big pile of debt.

    Homeownership makes all the sense in the world if you are financially stable otherwise, and can afford a 15 year or a 10 year mortgage that you pay extra on. That way you will get to enjoy the house for a reasonable number of years once its paid for. With a 30 year mortgage started in your late 20s or early 30s it is unlikely that you will even need a house that size by the time you have it paid for. You might also be sick of the area by then.

    All I am saying is homeownership is no longer the great bet we have been programmed all our lives to believe it is.

    I have refinanced to a 15 year and plan to pay it off in 5. And honestly after thats done I hope to never get another mortgage for anything. They are called death contracts for a reason…

  132. I love this thread. I’m printing this and reading every single comment.

    Why? this is a real-world snapshot of how intelligent people on both sides of the buy/rent divide feel right about now.

    And, as we know, people’s feelings (i.e. expectations) guide their future behavior, in turn shaping the future.

    Priceless information. Thanks everyone!

  133. Another reason for the trouble in the industry is that a large number of buyers during the boom were investors looking to flip a house. But they were not investors with a bankroll. They were everyday working people who took the equity out of their primary residence and bought another home with the money never thinking that the market would turn in the other direction. Then add oil and gas prices and there is little, if any, left over cash to pay these mortgages. Result is foreclosures. I was a mortgage underwriter at the time of the boom and a large majority of the loans were for second homes.

    Rosemary
    http://her-home-blog.com

  134. Nice rebuttal! I have developed my own theory on this topic to help individuals decide whether or not to rent or buy as I have struggled with this decision for several years. I am interested what you think about my theory of “The Three Fives” or 555 theory.

  135. It all depends on the market. I live in Hong Kong, where the same flat I pay $900 (US) per month for would cost me $200k (US). Even with a 20% down payment (30% is the standard here) I’d be looking at doubling my monthly payment. Do the math: that’s $40k turned illiquid and not available for other investments– and though it’s supposedly “my” $40k, I can never access it without paying a bank a hefty fee for the privilege– and then that’s $900 per month I don’t get to invest.

    No, not all of that money is being “thrown away”– but the amount going to interest (which is HUGE) IS being thrown away. As are all maintenance and repair expenditure– and even some “improvements” because study after study shows that most improvements cost more than you get back when you sell.

    Even if, over time, the gap between what I’m paying in rent (which will go up) and what I’m paying in mortgage payment (which doesn’t), it is still VERY significant that the gap is huge at the beginning, when anything I invest has the most opportunity for compounding. So the gap is gone in 20 years… but the $900 I am saving every month right now will STILL be compounding.

    As for the argument about Americans’ negative savings rates: why should that be relevant to someone calculating returns? The person who doesn’t have the discipline to invest the savings generated by renting is not exactly our problem.

    On the other hand, I did once own a house in small-town Alabama. When I bought, my last month of rent was $480 and my first month of mortgage was only $530– and that’s with a mere 3% down payment, a 30-year fixed mortgage, and including PMI. That “gap” was narrow enough to convince me that I’d come out better in the long run by buying.

    For anyone who is looking at a gap similar to the one I would face in HK. Does that mean I certainly WON’T buy a flat? No. There are lifestyle reasons for wanting to buy, and I plan to buy in the next year. There, my cards are on the table: my bias is “pro-buy”. But in spite of my “pro-buy” bias, I’m not going to kid myself on the numbers. The amount I can invest per month WILL drop by at least $900, and $40k or more WILL stop generating dividends, and these things WILL result in a substantially smaller liquid nest egg 25 years from now than what I would have if I kept renting.

    But then, even if I’m “throwing away” better investment opportunities by buying, I’m getting them back by not owning a car. Car ownership: hmmm, talk about “throwing away” your money.

  136. It’s arrogant to think that one can stay in one place for 30 years. Every time you are forced to move you lose 10% of the value of the house to the realtors. If you use a 7 year time horizon, it makes no sense to buy in Silicon Valley.

    Congress (no tax on home sale gains) and the realtors have turned housing into a pyramid scheme.
    The last guys to get in got screwed. Then the taxpaying renters got screwed.

  137. Another problem with owning: even in “decent suburbs” these days you are surrounded by barking dogs. In a rental you can move, in a house you are stuck. I wonder how many homes will hit the market when baby-boomers start downsizing in five years… this demographic will drive prices lower as the burbs empty out, or become multi-family hovels. Notice the trailers, motor homes, and extended families filling the suburbs now as the middle class struggles to get by.

  138. There are some misconceptions I think in these calculations… it’s true that renters have to pay effectively whatever taxes that the landlord has to pay, however the price of the rent is all the price it is. Often, taxes are glossed over in buying, particularly by those trying to sell the loan.

    Also, it’s claimed that the renter must be coming out on the short end of the stick because the landlord is merely passing on their own costs. Well, if they bought it many years ago, they might already have it paid for, or the price at the time might have been half or less what it is now. They also can’t charge more than what the local market will bear no matter how much it’s costing them.

  139. Also it appears to me that rents are actually falling in the Brentwood, Los Angeles area I am in. Not surprising considering how many condo units have been coming online.

  140. Renting is often financially BETTER and homes have been way overpriced.
    Based on many years experience in buying I see that there are always some examples where buying averaged better than renting for SOME people. But in general, because of all the costs (much of it lost forever) when a home is bought, and sold, and the upkeep (which really adds up) renters often can at least break even or do better vs. buying (and that is INCLUDING the tax advantages to buying, which are not very impressive). When you own, your so-called tax advantage often is lost somewhere else. Also, real estate taxes often rise when rents rise. Finally, your major tax advantage is only the NET difference (if any at all) between your standard deduction federally (which you CANNOT use if you want to itemize the interest) and even then, a buyer only gets back about 30 percent of that, but, the buyer lost the use of the standard deduction in the process, so the net difference is not enough to create a good, all important…bottom line. Selling a home for $75,000 MORE than you bought it for could EASILY mean you LOST MONEY ! Homeonwners often don’t add everything up correctly and completely.

  141. I’m curious whether your opinion has changed at all since March? I currently own a home and we’re looking to move and weighing the options of buying again vs renting. One issue that wasn’t touched on was the risk involved. If someone can’t pay their rent, they lose their housing. If someone can’t pay their house they lose their housing and get stuck with debt.

    You mention inflation in the article, but what happens when things go the other way like we are beginning to see? Suddenly people are paying higher mortgages than their houses are worth.

    I’m not writing this as a troll or I told you so (I would have agreed with your opinion at the time), but things have certainly changed.

  142. There are a few absolutes!
    If you want to make money renting or buying & live in Southern California, you should contact my Realtor. He made me more than $1M in the past 5 years.
    Making money and investing money is easy when you implement the correct formulas.
    You must have discipline and use the conservative approach.
    No magic, just do what works!
    To buy or rent you should contact lagunacastles@cox.net

  143. I think the main point of the eFinanceDirectory article is that there is a fantasy behind home ownership that has contributed to people agreeing to pay outlandish amounts for overpriced homes. I do believe that perhaps the article went overboard but they have a valid point.
    Both home ownership and renting have their advantages and disadvantages. But the bottom line is if you plan on staying in the same place for at least 5 years, the mortgage payment is not outlandishly more then you would pay to rent, and you can afford the payment then 95% of the time it is better to buy. However, if you dont meet that criteria then you can loose everything you have on a bad mortagage. So be careful.

  144. It seems obvious that the intent of the article being referenced wasn’t to say that buying a home is foolish, but to point out that the “Renters throw their money away” argument is overly simplistic and essentially wrong. There are obviously situations where renting or owning are the best decision, but the whole point of the article was to say that renting can be a very wise financial decision.

    If you live in the same location for 40 years and rent, then yes, you are throwing money away. However, if you are 25 and in your first years in Corporate America, with a solid chance of being transferred to a new location, it isn’t a moral shortcoming that you rent. In my humble opinion, the biggest determination on rent v. buy is how permanent the location is to you, and a good proxy for this is “Do I have kids?” and “Am I over 30?” If you’re over 30 and have kids, it’s more likely to be time to find a place and settle down. If you’re single and 25, it might not be your time to buy.

    They key is to remember that renting vs. buying is a decision that can only be made on a unique, case by case basis. Neither decision is inherently superior, and either can potentially be the prudent financial choice.

  145. There are far too many assumptions in both articles for them to be considered reasonable. Buying a house vs. renting should be based completely on individual life choices, expectations, and goals. I used to be a big proponent of buying/owning. I sold at the height and began renting at half of what it would cost to own. I invest so I am not “throwing my money away”. I have no debt and a fair amount of savings as well.

    I think the main difference (financially) between renting and buying is that with buying, you are putting a lot of eggs into one basket, a house. You are betting that your house (a box exposed to the elements) will increase in value (generally a good bet if maintained properly which many don’t do). One house vs. spreading money around into a variety of stocks, funds, bonds and other investment vehicles. I can decide to sell any of my investments immediately, anytime. With a house, you have to wade through a system that is very much slow and stacked against you. No contest for me, other people, not so much.

    Otherwise, buying a place is an emotional perk. Being able to paint a color of choice, have a pet without someone’s permission, etc. Also, I don’t think that having kids automatically means you should run out and buy a house. Kids really don’t need 3K sq. feet to be happy, but many parents feel that they need it to be perceived as “good parents”. Goes along with the perception that “renters are losers”.

    All in all, its a personal decision that should be made for personal and financial reasons and not based on the expectations of society at large.

  146. There are far too many assumptions in both articles for them to be considered reasonable. Buying a house vs. renting should be based completely on individual life choices, expectations, and goals. I used to be a big proponent of buying/owning. I sold at the height and began renting at half of what it would cost to own. I invest so I am not “throwing my money away”. I have no debt and a fair amount of savings as well.

    I think the main difference (financially) between renting and buying is that with buying, you are putting a lot of eggs into one basket, a house. You are betting that your house (a box exposed to the elements) will increase in value (generally a good bet if maintained properly which many don’t do). One house vs. spreading money around into a variety of stocks, funds, bonds and other investment vehicles. I can decide to sell any of my investments immediately, anytime. With a house, you have to wade through a system that is very much slow and stacked against you. No contest for me, other people, not so much.

    Otherwise, buying a place is an emotional perk. Being able to paint a color of choice, have a pet without someone’s permission, etc. Also, I don’t think that having kids automatically means you should run out and buy a house. Kids really don’t need 3K sq. feet to be happy, but many parents feel that they need it to be perceived as “good parents”. Goes along with the perception that “renters are losers”.

    All in all, its a personal decision that should be made for personal and financial reasons and not based on the expectations of society at large.

  147. Don’t know if this is covered in the many comments I skipped: When we speak of renting versus buying, are we really comparing the same house? Is it the same size with the same amenities, and condition and in a comparable neighborhood? I suspect it is not.

  148. Here’s a simple rule that might benefit some of you on here:

    “IF YOU CAN’T AFFORD TO BUY IT OUTRIGHT, YOU SHOULDN’T HAVE IT!”

    That goes for clothes, cars, AND homes. Stop giving huge chunks of your wealth away to loan sharks (banks) and just have the discipline to live within your means, save, and make purchases outright…you don’t need the middle-man.

    To recap:
    Savings = GOOD
    Debt = BAD

    I hope this helps.

    -Jeremy Scott

  149. Hey this blog is excellent! I have been a renter for many years on short term leases and I’ve owned 2 homes. I’m now divorced with no kids and in my 40′s and renting again. I live in a studio unit of a big farm house just outside Philly in a quaint environment and pay about$1000/month rent for everything includes cable/elec/heat/ac and is fully furnished.I love the place but I have been wavering back and forth about wether to buy again
    and pay into an investment rather than paying someone’s mortgage. My sister is a realtor and I’ve got great credit/a nice savings and IRA/CD’s and been pre-approved for a new mortgage but in reading these heelpful discussions I am torn about what I want to do. My big picture is I can retire in under 20 years/ have a small pension and social security and if my present savings gains just 4% interest over the next 20 years with not 1$ more additional I would have in excess of $450k plus my retirement benefits. I have lived in Philly all my life but like to travel and do things I enjoy. I just need a few words of wisdom from some of you out there as to what you would do if in my case with no kids. The home my wife and I previuosly owned is paid off.
    All your suggestions will be appreciated! Thanks

  150. Quote: “Let’s jump ahead to the thirty year mark. The homeowner sends in his last mortgage payment and now has to pay $0 a month. The renter, on the other hand, has seen his rent go from $600 a month to $1,950 a month”

    oh, how nice of you to first notice that the renter pays taxes as part of monthly payment, then to say that the owner does not pay a dime after the last mortgage payment.

    Consider this: monthly property tax is modest $200. Renter already pays it as part of monthly payment. Owner should pay $200 on top of $850. More over $200 is most probably will grow at least with inflation rate. In your example $200 will become $650 at the time of last mortgage payment. Don’t forget maintenance costs growing with inflation too. In fact not only maintenance cost grows at inflation rate, its base is expanding too due to aging of the house.

    I think that the renting and owning expenses are about the same on 30-40 years run and buy vs rent decision should be based more on one’s lifestyle than on pure financial reasons.

  151. Trent,

    You’re an idiot. I have never seen a mortgage + taxes + insurance + repairs + basic upkeep price on a house come anywhere close to the equivalent rental. When you’re saving and investing 100s of dollars each month, you will always come out ahead. It doesn’t even matter if your rent goes up each year (your salary should be going up by the same percentage each year anyways). By the time you hit retirement, your net worth will be so valuable that the interest alone will more than cover any rental price. If you want to buy a house then, go for it and pay it off in cash with pleanty of money to spare I might add.

    You sound like the typically fool who gets duped into buying a house. “Just pay more every month to get more equity”…can you hear yourself? You’re already paying more just to live in the house. Now you’re going to pay even more (which means less to invest in something that actually has a decent return)? Houses return a pathetic percentage after inflation. You could buy a CD that does better.

    You also can’t get any of your “equity” without selling the house. Sorry, no equity loans – taking on more debt does not count as wealth. If you use a house as an investment tool, you will never actually have a liquid investment.

    The best investments are liquid, have low expense ratios, and good returns. A house has none of these. Talk to someone with some education instead some fool trying to make money off of you buy selling you a house. I’m sure a salt salesmen will tell you how great salt is too…they’re trying to sell it. Use your head.

    Nowhere in your rambling did you say anything that even comes close to a rational thought. I award you no points, and may God have mercy on your soul.

    Jay, Ph.D
    Financial Accountant

  152. I see some of your points but I don’t agree with most of them.

    I am a renter who does invest a substantial portion of my money. Yes we have a negative savings as Americans but there are still some like me that do save. Granted our whole system seems to be set up as a big disadvantage to savers so I’m not surprised most people don’t save.

    Not all costs can be passed on to renters as you say. They have to charge what the market will bear. My rent has stayed flat this year and I will be finding a cheaper place next year. So the 4% increase per year is not true.

    Also I’ve run the numbers for me. I am better off since I rented from 2002 (when I started looking) to the present. I almost bought a home that is now worth 50K less than what I offered. That pays for many years of ‘free’ rent and I don’t see it re gaining it’s value any time soon.

    In my many years of renting I have missed out on having a nice quiet home with plenty of room. But I have gained not having to mow a lawn or fix things and in my case I’ve also saved a lot of money!

  153. Hmm. I do not agree with this article;
    1. I know what’s like owning liquid assets vs home. Yes, deicison is with buyers to sell the home when they choose to; tell me the response time, turaround time, sleppless nights one needs to go through to sell this home. StarWars Collectible- Go eBay- get the best price while you watch StarWarsin your HD. It’s not that simple- click a button and sell your home.

    2. Argument on 650 vs 850 vs 888 etc .. it’s just flawed. For the first 15 years or so, I do have an edge of $ 200 per month + taxes and other maintenance headache- I don’t need to take. If I put all that amount in inflation adjusted treasury securities, I can get handsome return that helps me payoff my perpetually increasing return. And remember, this home owner is not done after 30 years. When’s the last tiem you considered living in a home built in 1980- old fashioned model and waiting for that snow to break your damaged ceiling. You need to keep pouring 10000s of dollars to maintain that home.

  154. Above: Should have gotten your home inspected or perhaps done a little research before purchasing your home.

    Further Above: If the couple $100/mo, taxes (oh no!) and maintenance is the deciding factor to becoming a homeowner, then please stay where you are. An industry thrives off of people like you…. oh an cover those holes before you move out too!

    Plus, if you cannot pay those awful taxes, maintain your property, become foreclosed…etc. others property values would take a hint. So, just stay where you are until your contract is up and leave with a year of your investible life gone and probably your deposit.

  155. As a person who has rented for many years, I find the arguments that renting is better amusing. Several people have said that when they had something break, it was the landlords problem and the landlord fixed it. I have rented from both companies and from individuals, and I would love to know where you people are renting who don’t have greedy landlords who will turn the blame on everything to you. I have time and time again had landlords force me to fix or pay to fix stuff that was supposed to be covered by them in the lease. Why? Because they know they have the bully pulpit in the situation. Landlords have the money, the time, and more legal widgets on their side than renters… so they can get away with screwing over renters. Heck I am in a debate with my current landlord over fixing a blade on a vertical blind. They even acknowledged it was normal wear and tear as stated in the lease… but they have refused to fix it until I move out, and they want to take it out of my security deposit.

    With other landlords, I have gone weeks or months without repairs on wiring and appliances. I have even had the heat go out and had to actually threaten getting the state involved since that is a legal thing the apartment was required to have to get the landlord to fix it… but boy did they take their sweet time. Again, you people who get things replaced the next day are very very very lucky. You might consider taking some of that good fortune and cashing in at the local casino…

    If I am going to have to pay for repairs, I would rather do so on my own property. Which, if things go well with the paperwork, I will start doing on the 19th of this month. Yes… the market finally got low enough and I am buying a home. I look forward to home ownership and my (hopefully) last dealing with landlords when my lease ends at the end of the month.

    When I own my new house, it is mine to do what I want with. I have dreams of changing ceiling fans and doing painting. And I can do all that. I will not have a landlord coming in four times a year to do a “maintainer inspection” and poking around in my stuff, then not actually fixing anything that is broken.

    When I own my home, I see lots of positives… and I do not see myself as being tied down. I don’t get where people think there is so much freedom to renting. The pain in the butt paperwork and all the deposits and money you have to spend, not to mention the hunt for a decent apartment itself, either on your own or with an management company that just sees you as another cog in the machine and treats you as the disposable commodity that you are as a renter. A home does not tie you down. If I want to move or have to move, I can sell it. If it doesn’t sell, I can rent it. And if I go into that world of being a landlord, I will do my best to not be the money hungry corner cutting scumbags most landlords and property management companies I have seen seem to be.

    I do not see what I am buying as an investment or as an ATM in the future. I see my new home as that… my home. Mine. Not the property management home, not the landlords investment income stream… it is my home. And that is a good feeling. I have to live somewhere anyway… it may as well be mine, not belong to someone else. Returns on investments or financial calculators or other financial mumbo jumbo be damned.

  156. Rent vs. own? There are pros and cons to each scenario. It depends on your lifestyle, circumstances, location, job security, economic status, and a host of other issues. It isn’t a black-and-white issue.

  157. There is nothing you’ve really said in this commentary that wouldn’t have been better said in a spreadsheet format. If I build a mathematical model based on your commentary it clearly indicates that I’m an idiot for having bought my home, which is odd, considering that it is the inverse of your conclusion. Perhaps I built my spreadsheet wrong – please post your own so I can compare.

  158. I just wanted to add that, with plummeting home prices and thousands of forelosed properties sitting on banks’ balance sheets, it is now possible to buy an entry-level fixer-upper in a decent area for less than the price of a new car -often wih corresponding drops in property taxes, to boot. Rents, however, have not followed suite
    at nearly the same pace. Given these new dynamics, why would anyone pay $400-500 a month to rent a home they could buy for $15-20k or so, and be able to pay off within 3-5 years at about the same or even lower monthly cost than renting?

  159. I have owned and rented. I plan to buy again, but most people I know who buy really do delude themselves about cost. As long as people are realistic and realize that they will pay close to twice the sticker price on a 30 year mortgage (which most people take 30 years to pay.) You also have to factor in new roofing, A/C’s, fences, toilets, plumbing, lawnmowers appliances, new flooring when the old is gross or unstylish, any redecorating or remodeling etc… Even on a modest home, in 30 years with only repairs and maintenance, you could easily spend $30,000- $50,000 dollars.

    The article was one sided, but there is so much rental and apartment bashing in the U.S. that maybe a little exaggeration is needed to teach people it’s not trashy or evil.

  160. When you rent you get precisely one thing: SHELTER. That’s it.

    When you buy you immediately get the enjoyment of the home – you get to put in a decking, a vegie patch, an air conditioner. You get to plant plants or let them die. You get to have a pet. “You get to damage the carpet and the walls and it’s NOBODY’S BUSINESS BUT YOUR OWN. You can smoke and have parties inside. You can just go straight ahead and get stuff fixed up around the house without waiting for the bored real estate agent to get around to it.

    … you get a HOME.

    … and in the meantime the renter is stuck trying to make a life around their mere SHELTER.”

    Again, another falsehood homeowners tell themselves about renting.

    My rental apartment is far more than shelter. I can paint it and make it my own. It is beautiful and updated and is everything I want in a home. The landscaping is pristine. We have swimming pools and wonderful neighbors who are far more friendly than in our snotty old neighborhood. My husband and I like it far more than the home we owned, which was actually bigger and was in quite a nice neighborhood. We do plan on buying again in a couple of years (so we can have a place for my parents to live with us, a good , etc…)and I will be sad to move from our beloved home that we RENT.

  161. Trent you miss the point…renters never pay maintenance expense on rental units. the Landlord has to fix everything and replace appliances that break ie stoves refrigerators, heating systems ect. maybe some are duped into lease agreements that make them pay maintenance, but this is not the case in the majority of the circumstances. remember if the landlord refused to fix the problems, you can always move and rent somewhere else. ;)

    Also the rent vs buy argument is an interesting one and the one force the drives weather its better to buy then rent is appreciation or depreciation of the housing price. everyone seems to assume that houses go up, and can never go down, that in its self is a flawed argument. housing prices just like all other supply/demand based commodities can go up and down, only threw govt intervention have housing prices rose artificially for the last ten years, now the bubble has burst and prices will get cut in half or more. right now renting in the majority of the country is better than buying. in the near future buying will be better, when housing drops much more. that will happen when qualified buyers (ones with 20% down) and income to justify loans they can afford. when houses drop to reasonable “FREE market” prices buying houses will be LESS then the cost of renting the same structure. the 20% down is key to understanding why renting SHOULD cost more than owning. right now RENTING is the way to go in the majority of the country, but in the comming years i’d say about 3-5 buying will once again be king and much cheaper than renting by 30-40% i can’t get into why on this forum, but do some research on housing buying/vs renting in 1970. you could buy a house for about 20k (usd) adj. for inflation that’s 115k in today’s dollars that is a payment under 500 a month, but then you needed a down payment of 20% rent in 1970 for a similar residence was about 800+ go figure. :)

  162. I just wanted to add that I don’t buy the arguement that renters don’t have to pay for repairs, landscaping etc. First, it depends. There are plenty of rented houses in which the renter is expected to keep up the yard, in which washer/dryer and possibly other appliances aren’t supplied so the renter is responsible for aquiring and repairing them.
    Also, even if it’s included, your landlord isn’t just some benevolent soul and he wasn’t set back $1000 at all. Who do you think supplies his paycheck and keeps the maintenance and repair account full and overflowing? YOUR RENT.
    Yes we pay interest to the bank and the bank makes money off of that, but landlords and rental companies take a chunk out of your rent for their profit as well, and for maintening the properties. If anything at least when buying, your payments are itemized, even if you choose to make one lump payment/month–usually containing the following items: Mortgage(principle, interest), Insurance, taxes—even with all of these my mortgage is $300 LESS than the average rent of smaller properties in the same area. With that said, there are definitely places that it is better to rent, usually the coastal areas.

  163. I am wondering how the scenario plays out with very high property taxes. A small house in my area has taxes around $6000 (or more!). And a comparable rent is around the same price as the mortgage payment without the taxes. And certainly the taxes will be going up, forever.. Also, as soon as my kids are grown, I will want to downsize to a more managable size house/apt. Does it pay to buy a house I only need for another 11 years or so when I would be just as happy in a studio or one bedroom apt? And because I rent, someone mows my lawn and even clears the snow. I have always though I wanted to buy a house, but I must say I am enjoying the freedom of not owning as well. And when the kids are grown I will be considering moving to a community where my needs are better met as well. Of course, all this is as long as I stay single. I see alot of people putting lots of time and money into their house asset and maybe it does pay off in the end. But the freedom of renting has some advantages as well.

  164. Dear Lord, please send Jay a lifetime’s supply of Prozac, and have mercy on his soul while you’re at it. Thank you.

    Trent, you’re a saint. If I had written a post with these many people getting emotional at me, I’d probably have started leaving comments with multiple exclamation points. All you did was calmly state, three times, the point you were trying to make.

    One thing this post and all the contradictory (and cranky) comments shows is that choosing a residence is a highly emotional issue and cannot be resolved by talking about dollars alone. Good for you for trying to make calm, rational sense of the subject.

  165. Here’s a thought.. The person that OWNS the property that you’re renting is getting your money and either paying off debt, or livin’ the good life.. :P

  166. I sometimes think those who attack renters so ardently, do so because they feel defensive of their greed to buy a house on time that they cannot afford. If you buy a house, or anything by going into debt, you are living beyond your means and not being content with what God has provided you. There is no such thing as a house you can afford, unless you buy it outright, because the very act of going into debt is evidence that you don’t have the money to just buy it. I find for Christians especially, they have to make excuses if they want to take out loans because it is clear from the bible that debt is also spiritual bondage. I will maybe one day buy a house, maybe not, but if I do, it will be in cash. America has gotten so backwards that we no longer consider it shameful to go into debt and so have forgotten that for some, choosing not to go into debt is a moral decision, not just a financial one. That being said, I do invest the money I don’t spend on interest and so have a chance to come out ahead of
    Trent, who just had to buy a house now, until waiting until he could afford one. Keep in mind, that I don’t consider making morgage payments on time, being able to afford one, because you had to borrow money you didn’t have. I also don’t buy my stocks on margin :P and so consequently, don’t need a bail out like so many banks and so many people whose morgages are under water. Guess what? You chose to take the risk of borrowing money and buying an asset. It isn’t your lender’s fault that you chose to buy something with the money you borrowed which then went down in price. I am sick of my tax dollars paying for the middle class greed and irresponsibility of others! So, there! I don’t ask for government run programs to bail out my stocks if I make a bad investment and so I am sick of paying off your loans for you. Buy your own house, I and the rest of the tax payers are not your mommy, and I take exception to the fact that you think renters are not financially sensible, because, you and the rest of
    America feels that way, thus causing the housing bubble and this bad economy. It is not the banks’ faults for wanting to make money as much as it is America’s fault for thinking it is fine to go into debt for the greed of the American Dream, AKA, home ownership.
    I know you pay your morgage based on what you say in your blog, but you are a risk to me as a tax payer, because there is no sure bet that you will always be able to do so since you never know beyond a shadow of a doubt what a day will bring in this life.

  167. I must be lucky because my rent in a beautiful home covers maintenance (even if it is a little bit slow) plus all of these other expenses (as many people have said) of taxes, etc. But I only pay $450 a month. I could never in a million years pay for as nice a home (2 br in a decent neighborhood) for anywhere near that amount. And yes, I’m paying for maintenance, but at least it’s included in the rental price, not in addition to the mortgage payment. Our landlord can make money because the one house is split into 4 apartments which is something I couldn’t afford to buy. And, we still have 1100 sq. feet. And yes, it is our home, we can plant plants, paint the walls, do almost anything we want with the place. Our neighbors aren’t bad, either. Regardless of the long-term financial benefits, I’m living in a place I love at a price I can afford. If I bought a house now, it would be very old, in need of lots of repairs, and still cost me at least $200 more a month (but that’s likely a low estimate) before paying for the remodeling that would be required! I don’t appreciate the comments that people make about renting being just “shelter” and not a “home.” My apartment is a much nicer home than a comparable house I could buy. And, I’m in a small city in Tennessee.

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