1eyedjack, on Feb 26 2008, 08:55 AM, said:
hrothgar, on Feb 25 2008, 09:18 PM, said:
Comment 2: I just did a fairly serious cost / benefit analysis studying whether or not it makes sense to buy a house or continue to rent an apartment. Rent turned out to be the overwhelming favorite.
Rent now, I'm renting a very nice two bedroom apartment for about 1200 a month. I have plenty of space in a nice town and I'm walking distance to work and the commuter rail lines. I always heard that you shouldn't buy unless the home price is roughly 100 times your monthly rent. I'd have to pay 500K for anything comperable.
Maybe rental prices in the Boston market are still artifically low compared to home prices; however, even with all the various savings associated with home ownership its still a lot better to sock away 50 grand a year into mutual funds rather than paying down a mortgage, paying real estate taxes, homeowner's insurance, and either (condo fees or maintenance). I rather be making interest than paying it to someone else.
Yes, houses are nice. Yes its nice not to worry about capital gains. Even so, over 25 years the stock market will typically outperform the Real Estate market 4:1. Moreover, if I do decide that the real estate market has bottomed out, I can always start investing cash into real estate funds...
I have no information from which to dispute what you say, but I find it surprising (I find lots of things surprising, mind), and it is at odds with my understanding of the general perception, although my general perception may be coloured by local property market trends. I expect that you calculated the expected return on the stock market by the rise in the index, akin to sticking a pin on the dartboard as an investment policy. Likewise I expect that you calculated the expected return on real estate by a rise in global property prices over a period. A particular individual who is considering this equation in relation to his personal affairs is unlikely to apply so random a policy to either medium. The attitude of the consumer to risk may also be a factor. Traditionally the equity market is regarded as a higher risk investment medium than the property market. If you limit the population of equity products to those with a comparable degree of risk you may find that the expected return drops to something more closely resembling that of the property market.
I look at it in possibly overly simplistic terms: In any financial transaction, cutting out the middle-man is usually the winning option for the purchaser and vendor alike, the only loser being the middle-man excluded from the transaction whose profit foregone can then be shared between the remaining end parties. Taking this analogy to the property market, in order for a tenancy to exist there has to be a landlord. The landlord expects a return on his investment, which will come in part from an expected rise in property prices and in part from rental income. The landlord will have done his own sums to determine that the expected return is sufficient to make it worthwhile for him to be a landlord. That return is at least in part at the expense of the tenant. In this regard the landlord is akin to the middle-man, the exclusion of which would be of benefit to the prospective freeholder. Without doing any sums or market analysis, therefore, I would expect the outright purchase to be the winning option.
Robert Shiller did a study on historical US home price appreciation, and found in constant dollars, over the last 100 years, homes have appreciated in value at 1%/year. The S&P on the other hand has been appreciating at more like 7%/year in constant dollars. Thus homes are not great as a pure investment.
(Constant dollars means adjusting for inflation)
The nice thing about owning a home is that its an asset that you can
a. use (you get value from living there)
and
b. borrow against
Its hard to understate the importance of b. Since its hard to move a home, it provides very good colateral for a loan. I read recently, that 70% of all business are started with a 2nd mortgage against their home. (
http://www.amazon.co...d_sim_b_title_1)
P.S. Wow, $1200/month for a 2 bedroom in the boston area!
For Comparison here is a sample claculation:
If you put 100K down on a 500K property
Your mothnly Mortgage payment (@6%) would be $2400 which works out (initially) as $2000/month in interest and $400/month in principle. there is also tax and insurance which I will estimate at $600/month and maintance of $200/month (I am probably underestimating this).
the principle amount you are basically paying to yourself, and you get about 1/3 of the interest, tax and insurance back as a tax break, so your net monthly costs are:
2/3*$2600+$200=$2000
Now if you rent, you didn't have to make the $100K down payment. Assuming that you make 6% a year on this money, you are earning $500/month. So your rental net is $1200-$500=$700
So in this scenario, buying requires almost 3 times the monthly spending, even after taking into account the tax credits.
In order to make up for the $1300/month the home needs to appreciate at a rate of 12*1300/500000=3.1%/year just to break even. (Actually its a bit more than this, since the principle portion could have been invested at a higher yield rather than going into the house, but thats a second order effect).
Over time, this required % will go down, since rents will go up, and the % of money you pay as principle also goes up.