I'd point out that the data for homes is averaged nationally. Historically, there have been Good Places and Bad Places to buy a home. Home price growth in in-demand coastal areas is very different than in rural areas. In the US, "Flyover states" I'm sure skew this number heavily.
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
I'd point out that while an asset, yes, it is a liability. Not in the typical financial sense, either!
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
I bought recently. Mortgage lenders seem to be much more willing to work with people who can't make their mortgage than landlords are. Deferred plans, interest only payments, and more. In Texas, landlords can evict you within three days of missing a rent payment. THREE. DAYS! I got hit with this letter when auto pay screwed up. It's pretty scary.
I've found landlords both more auditable and flexible than jobs or even lenders, sadly. I'll buy something when I can afford it (in more than one sense, too). That frees me to pick a place not tied to financing or any particular location.
All roads lead to uncertainty, I'd rather travel it with a heavy purse. Good for smacking away problems or making trades on the way.
If it becomes less fashionable to force people to relocate, maybe I'd find it wise to invest. Until then autonomy is valuable. Days? Cute! Three hours is no problem with a could-be down payment in your pocket and no attachments.
With RTO/AI/Actually-Indians... it's an arms race for those of us who 'survive'. I'd rather buy when it dips or with less competition. Not directly contribute to building Company Town 3.0 while my peers and I try to outbid each other and suckle from the same teet.
Game theory is telling me either I'm getting laid off or someone else is, there may be advantage in waiting. Costs nothing but opportunity, funny: provides that too.
A couple more tropes to close: accounting tricks all the way down, money plays.
Well if you have to move to take a new job then you can always sell your home or rent it out. You'll take a hit on transaction costs or property management fees but you're unlikely to lose all of your equity.
> Well if you have to move to take a new job then you can always sell your home or rent it out.
Right, that's 'forced out' with extra steps :) I'm buying a home to live in (and if we're honest, die). Not employment. It may not even pay!
> unlikely
Hence the hesitation [for certainty]. This is half a statement about the market and half about my capacity for it. If I lost my job - the more likely case - I don't want this burden, too.
To your/OPs point: this can be an opportunity... but so is that fat down payment! Losing the position with savings/options: video games and burn-out recovery for the next three years. Comfortably trying on the next fad.
Without savings/options but a house/debt: panic, hot potato, and paperwork with a much more urgent job search.
The ugly thing is that you're most likely to get laid off when the market is down. I've argued this with people so many times and I think some of them are finally starting to see what I was saying.
btw I don't think getting rid of at will employment will change that. These cycles are so long they'll certainly find a way to get rid of you during a down cycle if they want to.
Thank you, absolutely. Contrivances abound. I was wrong to stop with at-will employment; RTO policies are a notable miss.
Say I buy somewhere affordable and am now officially remote. No longer conveniently in the same city as the office, but at home... truly elsewhere. The calculus has changed!
Then we get into fuzzier topics like AI use. It's absolutely not just about productivity. The non-minded gap between my peers and I shows that to be irrelevant. I sandbag, they grind. It's a wash. In the end, a weird litmus/loyalty test that I can't quite articulate.
The mortgage interest deduction is incredibly over rated. For most people the last few years of high standard deduction + salt cap mean few people really get much benefit from it. At lower tax brackets it's a pretty minor discount on your interest to begin with.
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
> If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE.
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
People underappreciate how valuable access to leverage can be in terms of boosting returns from a home. Putting 5% down, claiming the interest on taxes, and keeping 100% of the price appreciation is a solid deal.
Furthermore, since they're a hard asset, homes generally scale with inflation and thus serve as a hedge.
The home value didn't triple. Their equity did. Put $60,000 down on a $300,000 home. Live in it three years. Sell it for $540,000. Just made $240,000 in three years by investing $60,000. Granted there's also costs associated with carrying the home and mortgage one needs to count against the full profit and return.
> its not nearly as fabulous an investment as you are suggesting
In case it wasn't clear, I'm not trying to give investment advice (my comment is very focused on what happened, not what will happen). I am however, implying that a lot of people made bad financial decisions by misapprehending their situation and consuming the wrong "content". I believe many people can be spared significant regret if they double-check, disbelieve, or replace much of what they’re told by the internet.
I had the double whammy of property taxes AND insurance increases on my last house. Budget was a bit tight, but that almost sent me over the edge. I learned my lesson on my next house purchase, and made sure there was a ton of leg room in the budget, along with things I could very quickly drop from the budget if needed.
Not for those of us who like our home and have made a life here.
What you're advocating for is treating potential club members better than current club members. It doesn't make that much sense.
If you really were advocating for sensible policies, you would be advocating for many many more multifamily dwellings and/or taxes being directly proportional to the cost of the infrastructure needed to support it--generally by linear feet of roadway taken instead of property square feet.
No I'm advocating for the prevention of feudalism where a permanent landed gentry can extract wealth in perpetuity through no contribution whatsoever than having a deed.
I agree that property square feet is a bad metric. The right way to do this is actually to tax based on the unimproved value of the land, which would in fact create many many more multifamily dwellings by virtue of increasing the carrying cost of land as the market demand for density increases.
In my opinion, a person should not be forced to move just because of economic circumstances outside their control. Unless you're a spry 20-something with no real connections, moving will be incredibly disruptive and potentially traumatic.
One person's "landed gentry" is another's "housing stability."
What's especially negative about population growth from immigration as compared to domestic population growth, or simply productivity growth from technological advancement?
All of these increase the value of land. Why are you singling out immigration?
(I suspect I know what's special, but curious to hear your answer anyway)
Getting kicked out of your house being necessary to support it is one big issue. This never seemed to make sense when we had domestic population growth and if we can't fit people without taking drastic measures like that maybe we're just out of room.
I've done the math on this many times, and it still puzzles me how anybody would choose to buy a house in the Bay Area today versus renting an equivalent one. When mortgages are over 2x rent, the calculation skews tremendously in favor of renting and investing the difference in an index fund. This considers all possible factors and even chooses favorable conditions for homeowners (high appreciation, low stock market returns, high rent increases y/y). The permanent costs of owning a home (property tax, insurance, HOA, maintenance) are typically around 40% of rent, but can be even higher for certain types of property.
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
This is my conclusion (and the path I've taken - basically max our index and retirement accounts).
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
If you're in a place with good tenant protections (rent control), then yes. And it's true that large swaths of the Bay Area fall in this category. But otherwise, the threat of arbitrary rent increases and/or eviction can be overwhelming if you're looking for long-term stability.
I would need to make $550k/year to afford to buy a home where I grew up in San Jose.
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
One very important thing to keep in mind with these kinds of comparisons: are you actually going to be investing the money you save by renting? I think for most people the answer is no, and that money will just be spent on stuff. In that sense, homeownership is more of a "life hack" that forces you to save rather than a superior investment.
I was always a little puzzled by this concept and I think it gets more silly every decade. How can someone routinely spend money on goods given how insanely cheap goods have become?
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
Maybe I should have used a word other than stuff, but it's easy to spend a lot of money on travel, pets, entertainment, etc. Some of these categories have infinite sinks - e.g. gambling or gatcha games for entertainment.
This whole argument assumes that the 1977-2024 period is a good basis for predicting the future, but that period is the height of globalization, a long stretch of stocks (almost) always beating commodities and land. Looking at much longer timescales however, the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
> the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
I think the downside of your analysis is you don’t consider the impact of leverage on rate of return. The amount of equity you actually put in is very small so even though the overall return is low, the actual return on investment is much higher than your analysis shows. Or put simply no one would buy stocks with a very small down payment and an enormous amount of leverage the way that they buy real estate and that’s what you’re missing
> crucially selling the appreciated home after XX years
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
They both also default to much lower increases in rent than the US average, so it's off on both ends of the equation. Over the last few decades, inflation-adjusted rent has increased by several percent per year: https://nowbam.com/rent-prices-vs-inflation-and-income-growt....
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
> most investors don't rent property out at a loss
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
That's usually called a negative cash flow, but it's not considered a loss. It's much riskier than owning a property with positive cash flow, so in areas where a mortgage payment would be larger than rent, it's much more common for investors to pay with cash, instead of borrowing against the property.
In theory it wouldn't have an effect on the rental market, but in practice cash buyers are much more likely to be corporate land owners, who tend to have higher margins than the casual investment property owner.
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
One thing this seems to ignore -- a mortgage gives you _leverage_ for an investment. Is any bank going to loan you hundreds of thousands of dollars to invest in the S&P?
The NYTimes/NerdWallet calculators implicitly account for that in their logic - they track money you gain/lose from down payment/mortgage/interest/taxes, then selling the house at the end.
On the renting side, they only assume investing the money that isn't going to down payment/monthly mortgage payments, not investing the full value of the house.
My blog post here is just giving an argument that 2 of their parameters should be updated, then showing the result of that update.
Usually these kinds of calculations take that into account. E.g. the up front investment in the stock market == the downpayment on the house. But remember that you're paying for that leverage with interest, which further eats into your gains on the house.
It feels really market by market. Where I live, the house I’ve been in is 50-75% mortgage cost vs rent on a comparable property. That mortgage is a bit over 10 years old, and has been below rent rates for nearly the whole time. Sure, I have upkeep, but I also get to make whatever modifications I want (and that’s a thing that’s appealing to me). And yes, I live in a major west coast city.
These broad numbers games feels like rationalizing a decision today. Maybe it’s true for a particular locale (I don’t live in the Bay Area), but these articles feel like they’re painting with too broad of a brush given I can’t maths out a negative for my situation.
I have both owned and rented. Having done this buy vs rent calculation many times and renting generally wins. Three factors not usually considered in the buy equation:
1) the house you’re willing to rent is less expensive than the one your willing to buy.
2) the value of the time you spend maintaining a home should be included in your return calculation
3) putting a lot of $ in any one investment asset (i.e. a single family residence) is riskier than a diversified portfolio of assets.
Sweeping generalization with bias toward the side of perpetual renting. It depends where and the ratio of housing:income. There are plenty of terrible housing economic choices, but these are all individual and required nuanced, personalized calculations from an unbiased, helpful source to determine if and where renting vs. owning makes sense. That would be a better than triumphantly declaring "owning is bad."
I have to be reading this wrong. Is it just tracking the value of the S&P 500 vs the value of an average house? Does it assume that unless you buy a house you have no housing costs?
Yes, you're reading it wrong. It is not just tracking S&P 500 vs the average house value. It does not assume that would ever have no housing costs. The calculators in question model housing costs, rental costs, mortgage rates, and all the rest of it.
It says it’s based on buying: mortgage, taxes, and income from selling the appreciated asset after XX years / renting: rent, and income from taking the difference from rent vs buy and putting it in the markets.
> "For those unfamiliar, these rent/buy calculators attempt to estimate the cash flow over XX years for renting vs buying a home. For buying, this is the down payment, mortgage, taxes, etc, and then crucially selling the appreciated home after XX years. For renting, this is mostly rent, but also crucially investment income from investing the money that would have gone into the mortgage/down payment. When I recalculate these numbers, all I'm doing is saying that the default home appreciation rate and the investment appreciation rate should be updated in the tool, and showing the result of that."
When you buy a home, you pay a down payment you counterfactually could have invested (and any difference in rent vs. mortgage can be invested). The article is just saying the calculators skew towards buying by underestimating investment growth and overestimating housing appreciation.
Nobody is going to challenge you on a 7.9% asset growth assumption in the SpY? That’s an incredibly ambitious assumption by any measure. You essentially have to assume you will see another couple decades of record growth in the us that will significantly outpace any global growth.
A major aspect of successful real estate investing involves understanding your particular market and doing the legwork to find value. You completely lose that signal when you assess the entire market in aggregate like this.
I’m paying far less on my mortgage than I would on rent in my nice neighborhood, based partly on luck, partly on finding a good opportunity, and partly on locking in my housing costs while the rent around me steadily increases.
Aggregate analyses aside, I have a hard time believing that a mortgage will generally be worse as an investment than renting in an era where algorithms are deployed to push rents as high as possible, as often as possible.
Okay, somebody help me out here. Maybe I'm missing something, but the basic equation is that you as tenant are paying the landlords costs plus their profit. How can renting ever be cheaper than buying?
In some housing markets, if you were to buy a home (using a mortgage, with current interest rates) and immediately rent it out at market rate, you’d be losing tons of money. The price-rent ratio varies dramatically from city to city and even between different types of properties.
Because you, as someone who is buying a $500k house with 20% down in 2025, are going to have much higher costs than your landlord, who bought it for $100k in 1995 and has already paid it off.
Bake in the fact that many rented houses today were either purchased or refinanced with the historic-low interest rates of ~2021, and there is really just a time difference between someone with pre-existing capital to invest years ago that you didn't have.
Eg. when you live in a premium apartment. For even moderately nice houses 20 years of rent would pay a third of the home's value at the start of the renting period. And rent will never increase as much as the property value, no taxes and maintenance. It's much cheaper AND simpler, especially if you are unsure how long you stay.
Rents go up but the landlords costs stay static. A lot of small landlords start out at something close to break even from a cash flow perspective. At this point the landlords “profit” is the appreciation.
That said the cash flow gets better over time as rents increase.
I suppose depends on the ownership structure of housing stock. If it is mostly repaid mortgages, eg. inherited housing or investment stock, then the rental need not be tied to mortgage costs, but rather investment yield, which may be lower.
That’s not true at all. Rent is determined by demand and supply—not by a landlord’s costs. Plenty of landlords operate at a loss; rent just helps make the loss more manageable.
1. Many small landlords are not very financially sophisticated and won't factor in all costs when setting rent prices. For example, maintenance costs are often treated as one-time events ("the water heater broke") and not something to build into the cost of owning the home. I have relatives like this, and they generally view the appreciation on the property as their profit.
2. It's not uncommon for "landlords" to be renting out part of the house they're still living in. In these cases the rent can be somewhat arbitrarily related to the cost of the mortgage.
3. More sophisticated landlords often still have to compete with rents set by (1) and (2). At least in some markets.
No, but the landlord has those too. Or at least, some landlords have them.
So, you have the landlord having mortgage costs, maintenance costs, insurance costs, and still wanting a profit. And you have the homeowner, having mortgage costs, maintenance costs, insurance costs, but getting to keep what would have been the landlord's profit.
I'd point out that the data for homes is averaged nationally. Historically, there have been Good Places and Bad Places to buy a home. Home price growth in in-demand coastal areas is very different than in rural areas. In the US, "Flyover states" I'm sure skew this number heavily.
Part of this is captured by the Volatility Index mentioned
> Individual houses are 4x the volatility of a housing index, close to the same volatility as the stock market.
But it bears calling out explicitly. Economically depressed areas will have very poor growth relative to inflation. Economically prosperous, desirable, growing areas will, by definition, have an increasing population and a finite area to accommodate that population. NIMBYism exacerbates this effect by reducing supply of new homes.
If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE. You can improve it, make modifications and tweaks to your liking, which renters cannot. And often times these improvements result in positive net positive return.
You'll never get forced out because your landlord wants to sell.
You'll never have to deal with toxic landlords at all.
You'll get to deduct all that mortgage interest from your taxes (if you itemize).
And in California, your monthly payments will never rise YoY more than $MONTHLY_TAX * .02
I'd point out that while an asset, yes, it is a liability. Not in the typical financial sense, either!
I'm hesitant on buying because I have next to no certainty in my role. If I be a good little Business Man and make someone else filthy rich, have all the make-up beers, and show up on time: at-will employment is still a thing. I may still be forced out by circumstance.
Equity might make the hit softer, I don't know. I do know a rainy day fund will be useful.
I bought recently. Mortgage lenders seem to be much more willing to work with people who can't make their mortgage than landlords are. Deferred plans, interest only payments, and more. In Texas, landlords can evict you within three days of missing a rent payment. THREE. DAYS! I got hit with this letter when auto pay screwed up. It's pretty scary.
I've found landlords both more auditable and flexible than jobs or even lenders, sadly. I'll buy something when I can afford it (in more than one sense, too). That frees me to pick a place not tied to financing or any particular location.
All roads lead to uncertainty, I'd rather travel it with a heavy purse. Good for smacking away problems or making trades on the way.
If it becomes less fashionable to force people to relocate, maybe I'd find it wise to invest. Until then autonomy is valuable. Days? Cute! Three hours is no problem with a could-be down payment in your pocket and no attachments.
With RTO/AI/Actually-Indians... it's an arms race for those of us who 'survive'. I'd rather buy when it dips or with less competition. Not directly contribute to building Company Town 3.0 while my peers and I try to outbid each other and suckle from the same teet.
Game theory is telling me either I'm getting laid off or someone else is, there may be advantage in waiting. Costs nothing but opportunity, funny: provides that too.
A couple more tropes to close: accounting tricks all the way down, money plays.
Well if you have to move to take a new job then you can always sell your home or rent it out. You'll take a hit on transaction costs or property management fees but you're unlikely to lose all of your equity.
> Well if you have to move to take a new job then you can always sell your home or rent it out.
Right, that's 'forced out' with extra steps :) I'm buying a home to live in (and if we're honest, die). Not employment. It may not even pay!
> unlikely
Hence the hesitation [for certainty]. This is half a statement about the market and half about my capacity for it. If I lost my job - the more likely case - I don't want this burden, too.
To your/OPs point: this can be an opportunity... but so is that fat down payment! Losing the position with savings/options: video games and burn-out recovery for the next three years. Comfortably trying on the next fad.
Without savings/options but a house/debt: panic, hot potato, and paperwork with a much more urgent job search.
The ugly thing is that you're most likely to get laid off when the market is down. I've argued this with people so many times and I think some of them are finally starting to see what I was saying.
btw I don't think getting rid of at will employment will change that. These cycles are so long they'll certainly find a way to get rid of you during a down cycle if they want to.
Thank you, absolutely. Contrivances abound. I was wrong to stop with at-will employment; RTO policies are a notable miss.
Say I buy somewhere affordable and am now officially remote. No longer conveniently in the same city as the office, but at home... truly elsewhere. The calculus has changed!
Then we get into fuzzier topics like AI use. It's absolutely not just about productivity. The non-minded gap between my peers and I shows that to be irrelevant. I sandbag, they grind. It's a wash. In the end, a weird litmus/loyalty test that I can't quite articulate.
The mortgage interest deduction is incredibly over rated. For most people the last few years of high standard deduction + salt cap mean few people really get much benefit from it. At lower tax brackets it's a pretty minor discount on your interest to begin with.
The much bigger tax thing this article doesn't consider is the $250k/$500k single/married capital gains exemption on sale of primary residence.
You can filter for SF/NYC home appreciation in the tool at the bottom of the post to see the difference between in-demand areas and overall.
> If you pick a good location, buying a home is a fantastic purchase. It ties up that investment money in an asset that you can actually USE.
Also: It's a leveraged investment for most people (mortgage). If you put in 20% and your house tripled in value over the last ten years (which is what happened in SF & Seattle afaict), you make an annualized return of 27% (for a whopping 1070% total, i.e. more than 10x), after accounting for your payments (with realtor fees the number is slightly less but not meaningfully). Meanwhile as a renter your rent would likely have at least doubled over the same period, doubling the size of the nonrecoupable leak in your financial hull.
That's 1070% as opposed to 224%, i.e. 10x vs. 2x in the S&P. This is the reality of what has happened over the past 10 years, by the way, I am not using hypotheticals. Do note that home values tripling in price over the last decade is not common, even among these expensive cities, you have to be looking at specific types of housing in "luxury" neighborhoods.
TL;DR: Location matters. A LOT.
100%!
People underappreciate how valuable access to leverage can be in terms of boosting returns from a home. Putting 5% down, claiming the interest on taxes, and keeping 100% of the price appreciation is a solid deal.
Furthermore, since they're a hard asset, homes generally scale with inflation and thus serve as a hedge.
I mean you can make any investment look great if you just make up the return.
What percentage of houses triples in value over 10 years? And home much are you spending in maintaining, insuring, and paying taxes in 10 years?
I think your point still stands but its not nearly as fabulous an investment as you are suggesting
The home value didn't triple. Their equity did. Put $60,000 down on a $300,000 home. Live in it three years. Sell it for $540,000. Just made $240,000 in three years by investing $60,000. Granted there's also costs associated with carrying the home and mortgage one needs to count against the full profit and return.
> I think your point still stands
Thanks.
> its not nearly as fabulous an investment as you are suggesting
In case it wasn't clear, I'm not trying to give investment advice (my comment is very focused on what happened, not what will happen). I am however, implying that a lot of people made bad financial decisions by misapprehending their situation and consuming the wrong "content". I believe many people can be spared significant regret if they double-check, disbelieve, or replace much of what they’re told by the internet.
"You'll never get forced out because your landlord wants to sell."
Where I live, the highest source of inflation for me has been property taxes. It's almost as if my landlord wants me to sell.
I had the double whammy of property taxes AND insurance increases on my last house. Budget was a bit tight, but that almost sent me over the edge. I learned my lesson on my next house purchase, and made sure there was a ton of leg room in the budget, along with things I could very quickly drop from the budget if needed.
Hot take: that’s actually desirable.
Sell and let someone who can make better use of it (i.e. more readily stomach the property tax) take possession.
Calcified landed gentry just sitting on dirt that appreciates due to the efforts and investments of everyone around them is Bad, Actually.
Not for those of us who like our home and have made a life here.
What you're advocating for is treating potential club members better than current club members. It doesn't make that much sense.
If you really were advocating for sensible policies, you would be advocating for many many more multifamily dwellings and/or taxes being directly proportional to the cost of the infrastructure needed to support it--generally by linear feet of roadway taken instead of property square feet.
No I'm advocating for the prevention of feudalism where a permanent landed gentry can extract wealth in perpetuity through no contribution whatsoever than having a deed.
I agree that property square feet is a bad metric. The right way to do this is actually to tax based on the unimproved value of the land, which would in fact create many many more multifamily dwellings by virtue of increasing the carrying cost of land as the market demand for density increases.
In my opinion, a person should not be forced to move just because of economic circumstances outside their control. Unless you're a spry 20-something with no real connections, moving will be incredibly disruptive and potentially traumatic.
One person's "landed gentry" is another's "housing stability."
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What's especially negative about population growth from immigration as compared to domestic population growth, or simply productivity growth from technological advancement?
All of these increase the value of land. Why are you singling out immigration?
(I suspect I know what's special, but curious to hear your answer anyway)
Getting kicked out of your house being necessary to support it is one big issue. This never seemed to make sense when we had domestic population growth and if we can't fit people without taking drastic measures like that maybe we're just out of room.
I've done the math on this many times, and it still puzzles me how anybody would choose to buy a house in the Bay Area today versus renting an equivalent one. When mortgages are over 2x rent, the calculation skews tremendously in favor of renting and investing the difference in an index fund. This considers all possible factors and even chooses favorable conditions for homeowners (high appreciation, low stock market returns, high rent increases y/y). The permanent costs of owning a home (property tax, insurance, HOA, maintenance) are typically around 40% of rent, but can be even higher for certain types of property.
My conclusion every time I've done this exercise is that you should only buy a house in the Bay if you have way more money than you know what to do with. The difference in opportunity cost is absolutely massive, on the order of half a million today-dollars or more for a 3-bedroom SFH. That's a huge price to pay for the "privileges" of homeownership.
This is my conclusion (and the path I've taken - basically max our index and retirement accounts).
I've explained this to people and been told I'm stupid and irrational. Another thing I saw was families moving from the. midwest to the bay area (to work for FAANG) and getting tons of pressure from their back-home families to buy a house, and then spend a miserable decade living in a Sunnyvale housing complex.
Our plan is to wait for kids to leave home, retire somewhat early and buy a modest house in an area with lower costs and a political climate I can tolerate.
If you're in a place with good tenant protections (rent control), then yes. And it's true that large swaths of the Bay Area fall in this category. But otherwise, the threat of arbitrary rent increases and/or eviction can be overwhelming if you're looking for long-term stability.
I would need to make $550k/year to afford to buy a home where I grew up in San Jose.
The conflagration of Prop 13 and an unregulated influx of rich people from all over the US and the world ultra-gentrified the Bay Area beyond the small crust of billionaires and marginal millionaires and a sea of middle class-ish people. There were no meaningful, comprehensive supply or demand protections post Prop 13.
One very important thing to keep in mind with these kinds of comparisons: are you actually going to be investing the money you save by renting? I think for most people the answer is no, and that money will just be spent on stuff. In that sense, homeownership is more of a "life hack" that forces you to save rather than a superior investment.
I was always a little puzzled by this concept and I think it gets more silly every decade. How can someone routinely spend money on goods given how insanely cheap goods have become?
There's maybe a small percentage of the population addicted to buying brands beyond what they could possibly use, but most people run out of the ability to buy a significant amount of stuff every year. I.e. even a thousand a month habit is insane to maintain and nothing compared to bad housing choices.
Maybe I should have used a word other than stuff, but it's easy to spend a lot of money on travel, pets, entertainment, etc. Some of these categories have infinite sinks - e.g. gambling or gatcha games for entertainment.
There's services too. Schools, universities, theatres and cinemas, going out to restaurants bars and clubs.
Also some goods are not at all cheap. Cars, clothes, shoes, hardware - you can spend as much as you like on these.
This whole argument assumes that the 1977-2024 period is a good basis for predicting the future, but that period is the height of globalization, a long stretch of stocks (almost) always beating commodities and land. Looking at much longer timescales however, the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
> the USA has periodic flips between commodity bear times and commodity boom times that line up with changes in DC's willingness to support the global trade of intermediate goods and services.
Could you explain a bit more here? What counts as a change in DC's willingness? And, out of boom or bust, which aligns with which kind of DC policy?
I think the downside of your analysis is you don’t consider the impact of leverage on rate of return. The amount of equity you actually put in is very small so even though the overall return is low, the actual return on investment is much higher than your analysis shows. Or put simply no one would buy stocks with a very small down payment and an enormous amount of leverage the way that they buy real estate and that’s what you’re missing
> crucially selling the appreciated home after XX years
Selling depends on demographics, the economy, and immigration. I'm in New Zealand where a lot of workers emigrate, and NZ patches that issue up with immigration. I read about €1 houses in Italy and ¥1 houses in Japan and then watch "South Korea is over" https://m.youtube.com/watch?v=Ufmu1WD2TSk
Modelling risks is the hardest part of any investment calculation.
Edit: the future value matters, and we get highly misled by looking at our experiences of historical results (especially don't expect to get the same results as your parent's generation).
Personally, thinking of your house purely as an investment is undesirable. You want to live there joyfully and not have to worry about pleasing the next investors.
The non financial upsides and downsides of your own home are more important than the investment. There are significant upsides and massive downsides: they are hard to balance.
I've rented a lot so I know that too has its advantages and disadvantages.
There are large financial upsides and downsides of your own home too. Geared lending is fantastic and dangerous, domicile taxation issues, regulations, yearly government fees that can screw your retirement. You don't really own your home, you have a license that you can sell. A home is really just a glorified longterm tenancy with two bigger landlords (the bank and your government).
In general unless you're married and likely to have kids you certainly shouldn't buy a home and probably should try to just live with your parents.
They both also default to much lower increases in rent than the US average, so it's off on both ends of the equation. Over the last few decades, inflation-adjusted rent has increased by several percent per year: https://nowbam.com/rent-prices-vs-inflation-and-income-growt....
The calculators are useless if the data going into them is useless, but even if it perfectly reflected past national averages, that doesn't make it a great predictor of future local results. If you're buying a bunch of properties spread throughout the country and over time, it could be useful, but for individual choices it's probably not. Here's a great read on the uselessness of comparing a bunch of averages to individuals: https://www.goodreads.com/book/show/24186666-the-end-of-aver...
From a broad perspective, most investors don't rent property out at a loss, so in general it's going to be more expensive to rent, unless you own a property for a short enough amount of time that closing costs play a significant role. Even then, occupancy rates aren't 100%, so average rent needs to make up for that. On the other hand, the margins aren't super wide, so rent is still in the general ballpark of the price of ownership.
In the end, if you want to rent then rent, and if you want to own than own. The pricing difference isn't enough to make an uncomfortable living situation worthwhile. Do you prefer the control and long-term stability of owning your property over the effort it takes to manage it yourself? Then buy! Do you prefer the freedom of moving often and the convenience of someone else managing and maintaining your property over the ability to live somewhere indefinitely or chose how your residence is remodeled? Then rent!
> most investors don't rent property out at a loss
I was under the impression that this was actually fairly common in places with rapid house price appreciation. Which includes a good portion of the places where people want to rent. The main source of profit for the landlord is the capital appreciation rather than the rent, so they're willing to rent at levels that wouldn't be profitable if they weren't also planning on profiting from the rising prices.
That's usually called a negative cash flow, but it's not considered a loss. It's much riskier than owning a property with positive cash flow, so in areas where a mortgage payment would be larger than rent, it's much more common for investors to pay with cash, instead of borrowing against the property.
In theory it wouldn't have an effect on the rental market, but in practice cash buyers are much more likely to be corporate land owners, who tend to have higher margins than the casual investment property owner.
I really like your point about rent growth. I quickly grabbed numbers from FRED on rent growth in the same period as analyzed in this blog:
https://fred.stlouisfed.org/graph/?g=1Kion
And then computed the annualized percentiles of growth over every 10 and 20 year period:
Percentiles 10 Year 20 Year
0.1 2.759994509 2.955813986
0.2 2.857204716 3.026836408
0.3 2.990680184 3.126358739
0.4 3.127881625 3.147020404
0.5 3.199826901 3.269223125
0.6 3.418119435 3.360219255
0.7 3.558537072 3.523213118
0.8 4.20459087 3.876319675
0.9 5.606452092 4.488515605
1 6.820735567 4.991026738
You're definitely right that they underestimate rent growth, at least if you're assuming that you should be making conservative estimates. Plugging some of these numbers in, I don't think this changes the overall conclusion of the post, but it does change the magnitude non-trivially so I think it's very worth considering. Thank you!
One thing this seems to ignore -- a mortgage gives you _leverage_ for an investment. Is any bank going to loan you hundreds of thousands of dollars to invest in the S&P?
The NYTimes/NerdWallet calculators implicitly account for that in their logic - they track money you gain/lose from down payment/mortgage/interest/taxes, then selling the house at the end.
On the renting side, they only assume investing the money that isn't going to down payment/monthly mortgage payments, not investing the full value of the house.
My blog post here is just giving an argument that 2 of their parameters should be updated, then showing the result of that update.
i stand corrected!
Usually these kinds of calculations take that into account. E.g. the up front investment in the stock market == the downpayment on the house. But remember that you're paying for that leverage with interest, which further eats into your gains on the house.
It feels really market by market. Where I live, the house I’ve been in is 50-75% mortgage cost vs rent on a comparable property. That mortgage is a bit over 10 years old, and has been below rent rates for nearly the whole time. Sure, I have upkeep, but I also get to make whatever modifications I want (and that’s a thing that’s appealing to me). And yes, I live in a major west coast city.
These broad numbers games feels like rationalizing a decision today. Maybe it’s true for a particular locale (I don’t live in the Bay Area), but these articles feel like they’re painting with too broad of a brush given I can’t maths out a negative for my situation.
I have both owned and rented. Having done this buy vs rent calculation many times and renting generally wins. Three factors not usually considered in the buy equation: 1) the house you’re willing to rent is less expensive than the one your willing to buy. 2) the value of the time you spend maintaining a home should be included in your return calculation 3) putting a lot of $ in any one investment asset (i.e. a single family residence) is riskier than a diversified portfolio of assets.
Sweeping generalization with bias toward the side of perpetual renting. It depends where and the ratio of housing:income. There are plenty of terrible housing economic choices, but these are all individual and required nuanced, personalized calculations from an unbiased, helpful source to determine if and where renting vs. owning makes sense. That would be a better than triumphantly declaring "owning is bad."
I have to be reading this wrong. Is it just tracking the value of the S&P 500 vs the value of an average house? Does it assume that unless you buy a house you have no housing costs?
Yes, you're reading it wrong. It is not just tracking S&P 500 vs the average house value. It does not assume that would ever have no housing costs. The calculators in question model housing costs, rental costs, mortgage rates, and all the rest of it.
It says it’s based on buying: mortgage, taxes, and income from selling the appreciated asset after XX years / renting: rent, and income from taking the difference from rent vs buy and putting it in the markets.
> "For those unfamiliar, these rent/buy calculators attempt to estimate the cash flow over XX years for renting vs buying a home. For buying, this is the down payment, mortgage, taxes, etc, and then crucially selling the appreciated home after XX years. For renting, this is mostly rent, but also crucially investment income from investing the money that would have gone into the mortgage/down payment. When I recalculate these numbers, all I'm doing is saying that the default home appreciation rate and the investment appreciation rate should be updated in the tool, and showing the result of that."
When you buy a home, you pay a down payment you counterfactually could have invested (and any difference in rent vs. mortgage can be invested). The article is just saying the calculators skew towards buying by underestimating investment growth and overestimating housing appreciation.
Nobody is going to challenge you on a 7.9% asset growth assumption in the SpY? That’s an incredibly ambitious assumption by any measure. You essentially have to assume you will see another couple decades of record growth in the us that will significantly outpace any global growth.
A major aspect of successful real estate investing involves understanding your particular market and doing the legwork to find value. You completely lose that signal when you assess the entire market in aggregate like this.
I’m paying far less on my mortgage than I would on rent in my nice neighborhood, based partly on luck, partly on finding a good opportunity, and partly on locking in my housing costs while the rent around me steadily increases.
Aggregate analyses aside, I have a hard time believing that a mortgage will generally be worse as an investment than renting in an era where algorithms are deployed to push rents as high as possible, as often as possible.
Okay, somebody help me out here. Maybe I'm missing something, but the basic equation is that you as tenant are paying the landlords costs plus their profit. How can renting ever be cheaper than buying?
In some housing markets, if you were to buy a home (using a mortgage, with current interest rates) and immediately rent it out at market rate, you’d be losing tons of money. The price-rent ratio varies dramatically from city to city and even between different types of properties.
Because you, as someone who is buying a $500k house with 20% down in 2025, are going to have much higher costs than your landlord, who bought it for $100k in 1995 and has already paid it off.
Bake in the fact that many rented houses today were either purchased or refinanced with the historic-low interest rates of ~2021, and there is really just a time difference between someone with pre-existing capital to invest years ago that you didn't have.
Eg. when you live in a premium apartment. For even moderately nice houses 20 years of rent would pay a third of the home's value at the start of the renting period. And rent will never increase as much as the property value, no taxes and maintenance. It's much cheaper AND simpler, especially if you are unsure how long you stay.
Rents go up but the landlords costs stay static. A lot of small landlords start out at something close to break even from a cash flow perspective. At this point the landlords “profit” is the appreciation.
That said the cash flow gets better over time as rents increase.
I suppose depends on the ownership structure of housing stock. If it is mostly repaid mortgages, eg. inherited housing or investment stock, then the rental need not be tied to mortgage costs, but rather investment yield, which may be lower.
That’s not true at all. Rent is determined by demand and supply—not by a landlord’s costs. Plenty of landlords operate at a loss; rent just helps make the loss more manageable.
And mortgage costs are somehow free? :)
The are not free, they are paid by the tenant.
I don't think this is always true.
1. Many small landlords are not very financially sophisticated and won't factor in all costs when setting rent prices. For example, maintenance costs are often treated as one-time events ("the water heater broke") and not something to build into the cost of owning the home. I have relatives like this, and they generally view the appreciation on the property as their profit.
2. It's not uncommon for "landlords" to be renting out part of the house they're still living in. In these cases the rent can be somewhat arbitrarily related to the cost of the mortgage.
3. More sophisticated landlords often still have to compete with rents set by (1) and (2). At least in some markets.
No, but the landlord has those too. Or at least, some landlords have them.
So, you have the landlord having mortgage costs, maintenance costs, insurance costs, and still wanting a profit. And you have the homeowner, having mortgage costs, maintenance costs, insurance costs, but getting to keep what would have been the landlord's profit.
So the GP still has a valid point.
This reads like an Elon Musk wetdream.. Don’t own property, rent it from me or my pals.
Is there any country where housing is not considered a primary asset?
In Japan, houses are presumed to have a limited lifespan and depreciate in value over time.