The Rise of the Rich Renter
citylab.com
citylab.com
“One of Aesop's best-known fables is “The Fox and the Grapes.” On its surface, or its literal level of meaning, the story tells of a fox who wants a bunch of grapes hanging above his head. The fox tries desperately to reach the grapes but cannot. He finally gives up, saying that the grapes are probably sour anyway.“
From experience, we’re closing on a house now and not paying much more than the previous owner 10 years ago. 5 years ago we could have probably could have bought for 50% lower.
I can't speak for the USA but in Germany - specifically where we live, home ownership is not/barely worth it financially speaking. The taxes alone for "owning property" i.e. renting it from the government until you die are extremely high. You pay 6.5% (varies by state) of the property value in "Grunderwerbsteuer" when you initially buy and then for a home valued at around 250k (fairly normal prices) you're looking at a 2-4k per year in taxes. Throw on top of that all your upkeep costs in time and money and it really doesn't look like such a nice deal.
That's why we haven't bought and I don't want to. Nowadays, "home ownership" is just another name for renting where the costs are slightly less and the upkeep to you in time and effort is more.
People in the US aren't paying outrageous rent for tiny spaces because they think it's a great way to live.
All of that is obviously bollocks, sort of.
As another ahem European, I'm more interested in a German's views on home ownership and why I'm commenting here.
You said: "That's why we haven't bought and I don't want to." implying it is all about tax. I'd be intrigued to explore this farther. You mentioned earlier "The taxes alone for "owning property" i.e. renting it from the government until you die are extremely high" - could you clarify that.
The way it seems to work in the Anglosphere is that house prices are mainly limited by the cost of money. When interest rates are low, long mortgages for enormous sums are affordable so people bid up the cost of desireable places to live. But it's a zero-sum game - increased property prices don't create more land in the desireable area, and due to planning laws and nimbyism they usually don't increase density much either. Everybody works harder and pays more for approximately the same distribution of physical assets - except for the windfall for people who got in early, who turn into a political support base for parties that then need to keep house prices propped up. And the cycle needs to continue, otherwise those mortgages would have negative equity.
https://www.redfin.com/NH/Amherst/47-Merrimack-Rd-03031/home...
For sale for: $284,900
Assessed at: $269,500
Taxes (2016) $6,764
(New Hampshire has no sales tax, and high property taxes, quite high in some towns...)
There are well-known possible positives to owning but the negatives are vast too, especially compared to investing in an ultra-low-fee index fund in lieu of a house.
Owning a house also made more sense in an era in which a single worker expected to work for a single company at a single site for decades. In an era when two workers may work for a myriad of companies for ranges of six months to ten years, it makes a lot less sense.
And if your rich diversifying from just a me to index fund makes a lot of sense hint if the Rothschild's and other mega rich families run actively managed funds its probably a good idea for you to - I have done very nicely out of RCP on the LSE
As opposed to you owning the houses directly
My point is that to "invest" that way in a high cost area is not the smartest move. It's better to buy conservative dividend paying stocks. But if one must "invest" in property it's better to buy 10 for $200k than 1 for $1M. I also didn't mention risk mitigation: the risk of loss on the former is lower.
I don't think that's strictly accurate, there's something for every budget in real estate investment world, from buying a small condo to rent out to sovereign-fund-level buildouts like Las Vegas CityCenter or LA Metropolis.
It's like saying that someone interested in stock investing would not be buying a few shares here and there, but instead go the Warren Buffett way and acquire entire companies to get synergies across industries.
There are income-oriented investors and multifamily income funds who buy primarily for cap rates.
This does not make much sense how the author derives the 6.2% figure and then says its 1.2%, nor does a 1.2% gain over a 3-year period seem like much.
My wife and I, despite being able to afford a home, have chosen not to buy one. Why? Because home prices in our area run at $2.7M for a 3BR [1], while we're paying $2600/month to rent a 2BR townhome. People we know who have bought are now paying $6-7K/month on housing, for something not much better than what we have (they have a yard and an extra bedroom, but we have a pool). Even with the mortgage interest tax deduction, you're still paying more on interest alone (let alone principal, property taxes, or maintenance) than we're paying in rent.
[1] This is perhaps an overestimate - it was a news story about a couple that were outbid 4 times and wanted a fairly nice property. But even so, minimum prices on a 2BR condo in the area now range around $1M+, so the math still doesn't work out.
As long as appreciation + inflation over the period you stay in a house you buy is greater than your interest rate, buying a house is effectively free (minus the downpayment). People bring up maintenance, however this is already taken into account with rental price increases, vs. a fixed 30 year mortgage. Maintenance is an overplayed expense, honestly.
EDIT:
I can't reply to the children comments, but I just want to say that the situation mention is absurd.
1. 2.7M worth of 1985 S.F. property would be entire neighborhoods and give you more than 6%. Forget houses, 2.7M in 1985 would buy you acres of prime real estate.
2. Even if it did not, it's not necessary to put down 20% on a house.
3. Investing and purchasing a house are not mutually exclusive strategies.
4. Overall, over 40 years buying will always be better.
I moved here in 2009 and there was a big drop in house prices then, enough that everyone who bought in the boom years of 2004-2007 went underwater and many were foreclosed upon. Yes, I'm kicking myself for not buying then - though honestly, the money was in Google stock options instead and Google stock has gone up a lot more than Silicon Valley housing prices, so I probably still ended up ahead.
It's not irrational to want to have some diversification, particularly when things work out fairly well anyway.
Buy scenario, free maintenance and no property taxes: Living in a $2.7M house means a downpayment of $540,000 plus $6.6k/month of mortgage (assuming 2% interest rate on ~$2.2M mortgage paid over 40 years). Your housing prices increase 6%/year on average (1985 - 2015 average, http://www.doctorhousingbubble.com/california-housing-histor...). You sell 40 years later your house for $22,628,579.
Rent scenario: You put your $540,000 plus $4400 per month into your average stock market. 1985 to 2015 the performance was more than 10% per year (http://www.moneychimp.com/features/market_cagr.htm). Let's say you're conservative and you go for 6%/year in growth. In 40 years your net worth is $77,737,237.02.
Renting is definitely better than buying in the scenari outlined in grandparent's comment.
Also, I was considering a number of tail risks in our decision. For example, I'd bet that the house in the Bay Area will be worth roughly $0 in 40 years, because:
1.) Tech will have run its course, leading to a Detroit-like situation where everybody moves out and you can't sell what you've got.
2.) The housing stock here is objectively terrible by the standards of anywhere else in the country - many were cheaply built in the 1950s to 1970s, and they need major repairs and upgrades now, let alone in 40 years. Friend of mine was recently buying and was like "I offered $279K over asking on a house that needs at least $100K of repairs", and he didn't get it anyway.
3.) Termites are endemic here. Every house has termites and few of them have concrete basements. There's a good bet that the house you just spend $2.7M on doesn't actually have a foundation.
4.) Earthquakes and wildfires. The big tech companies assume that there is a 100% chance that the Bay Area will be hit by a major earthquake in the next 30 years; I don't see why I should assume any differently.
1.) Prices change over time. Someone who paid $2.4M for a 13-unit apartment block (as our landlord did) collects over $400K/year in rent at $2600/unit/month. That's a 17% return, well above interest, taxes, and property management. That same building might sell for $10M now, which would be a 4% return, barely enough to cover interest, let alone taxes and management. Indeed, new luxury apartment blocks are often renting for $7600/month+ (and they tend to get filled by Googlers on corporate business or new to the area - see point 2).
2.) Different people want different things, and so the pool of buyers and renters are often completely disjoint, with different means. I was shocked to discover that the whole 13-unit complex I'm in sold for just $2.4M (granted, 2012, when prices weren't as insane; see point #1). That's less than some of my friends are paying for single-family homes. And you're right, it's not exactly equivalent: it's multi-family, so there are neighbors, and no real yard (but it does have a common-space lawn). But would I pay triple the housing costs to not have neighbors? No - they don't annoy me that much.
The thing is, by being willing to live in multi-family housing, you change the population of people who are competing with you for housing. Most of the neighbors here are Mexican immigrants, blue-collar workers, or tech-workers who are doing the same thing we're doing (sacrificing some standard of living to save money). We aren't competing with other folks who have Google or Apple stock options, we're competing with folks who are making minimum wage and packing 3-4 families into a unit to make ends meet. In other words, you can save a lot of money by not caring about status and appearance.
(Actually, after Zillowing nearby prices, it makes me wonder if we should just buy a small duplex or multi-family apartment block, live in one unit, and rent out the other ones. Rent often nearly covers the full mortgage, and with a large down payment, it starts getting profitable quickly. There's still the issue of the housing stock in California being pretty terrible, though.)
We're really in trouble as a society if essentials like education, healthcare and housing continue to eat an increasingly large portion of consumer income.
We are moving all around the country to find better and more affordable places to live. In fact now that my wife has her master's we're chasing clinics that provide loan repayment just so we can get our debt out from under us.
Another reason we keep renting - I've worked other industries that do poorly during a recession and tech feels no different. I'm highly predisposed to not being stuck with a huge mortgage when things get tough which means in a lot of cities I'd never feel comfortable buying a home (insinuating that we couldn't survive on one income).
High rises and elevators could compensate, but so far no city is contemplating adding downtown luxury condos at anywhere near the rate it’s divesting from sprawl.
I actually have been looking to buy a home in my high COL East Coast city this year, and here is why I'm holding off on it:
1. An actual 'home' like I grew up in with a few bedrooms, garage, yard, etc. within a one hour commute to most jobs would be $750K. Maybe I could get that down to $400K with a 2 hour each way commute. That's simply way too much money (taxes, insurance, upkeep) for a single guy, and the commute isn't worth it anyway.
2. I could buy the same type of tiny studio / one bedroom where I live for about $500K - way more than I'm paying for renting, all things remaining equal. In other words, renting is lower cost than owning at the moment.
3. I could buy the same tiny condo with an hour commute for $250K, but then I'm stuck there. The equity I gain is minimal since half the costs (about $1k / month) are HOAs, taxes, insurance, etc which will only go up over time.
When it's all said and done, there is almost no reason for someone like me to own. If I had a wife and kids, maybe. But as a single guy no way.
The low interest rates of the fed and lack of new construction ( NIMBY) have again pushed up prices to 5x-6x the median family income in my area - about as high as 2006. Mortgage interest deduction is worth almost nothing because rates are so low (contrary to the Realtor and mortgage industry), and it may be going away anyway.
Jobs aren't stable enough where I'm comfortable being tied to one area. In our industry, even if your company doesn't lay you off or go under or whatever every 3 years, it's a bad idea to get to comfortable with one way of doing things - one framework, language, stack, etc. You need to keep jumping jobs if you ever want a raise.
Nor do I feel like being tied to one locality or another when it's apparent many of them are woefully underfunded with their pensions / health insurance for retirees. Gouging home owners for higher property tax bills will be the main way they balance their books.
The only thing which would change this is if I had kids.
I’ve lived in a two bedroom rent controlled apartment in San Francisco for the last 7 years. I pay significantly below market rate for rent. I also have enough to afford a down payment on a house here.
Their is no incentive for me to purchase a house unless I lose my rent controlled apartment and even then I probably wouldn’t buy. I know many of my peers who are in similar situations. I’d say the same is true of NYC.
It's not the only way to unbundle it either. Consider the more traditional life estate, for example.
Well, unfortunately to have it all you have to pay. Paradoxically, those who want to live in the city will want to enjoy the amenities, which cost money. Money that will take them that much further from buying a house. Clearly, from the behavior they must not want a house that much.
We’ll stay here until it no longer makes financial sense. Until then I continue to rent while stashing money away for property not near the slowly rising oceans.