Home Ownership Doesn't Build Wealth

[Joe Splitrock]

A new study that was a collaboration of three universities concluded that in the nations 24 largest markets, only 4 showed median price increases between 2010 and 2016. (Three of four were in Northern California and the fourth was Miami). The study concluded that in most markets, renting and investing the money-saved would get a bigger return that buying a home.

This is an interesting study because it challenges the notion that "a home is your best investment". It also indicates there are very few markets where "appreciation only" strategies work. Here is a summary of the study from CNBC:

https://www.cnbc.com/2017/11/16/homeownership-does...

I originally saw this study reported on Nightly Business Report, where they also made reference to multi-family housing starts being up 37% in October from September. They analyzed this as a continuing trend away from ownership towards renting. Here is a report talking about October building starts and permits:

http://usblogs.pwc.com/industrialinsights/2017/11/...

[Ben Zimmerman]

I was a math major in college.  My statistics teacher said something on the first day of class that has stuck with me to this day, "Statistics can be used to prove any argument as being true, you just have to carefully choose which statistics to use."

The article references how only 4 out of 24 metro areas had higher average appreciation rates than the stock market returns during that timeframe. Which means if the stock market went up by 7% annually, home appreciation would have to be at least 8%. The problem is I don't know of many people who simply purchase a home with cash and let it ride. If you are like the average American and purchase with 20% down payment, that 8% appreciation turns into a 40% CoC return. Historically the stock market averages roughly 10% once you factor in dividend reinvestments. This means a home at 20% down only needs to average roughly 2% appreciation to initially keep pace.

We can argue about whether a home is an investment, or a liability, the answer is really a matter of how you choose to define the terms.  But one thing is for certain, renting is an economic liability.  Money that is spent on renting is simply gone, never to be seen again.  Where as owning you may eventually see some of that money again when you sell.  Generally speaking owning has much lower monthly payments which will more than cover any repairs.  As @Mike H. pointed out his mortgage is 1k, and rents the property out at 1400.  This leaves a yearly difference of 4800, and nobody is going to have 5k a year capex/repairs on a property of this value.  Which means it is not only cheaper to own that property, but you also get debt paydown.

@Joe Splitrock While the numbers on the surface of your example would tend to say that the stock market wins, (200k worth of stocks versus roughly 151k for the home (190*.93)-25) there is still more to it than that.  Stocks would likely be subject to at least 15% tax rate unless you like waiting until retirement to see your money with a Roth, while the sale of the home would be tax free, changing the numbers to 170 vs 151.  Additionally that 9% mortgage would have been refinanced out of to something much lower a long time ago lowering the monthly payments.  And while 700 may have been a good rental price in 1987 and a good mortgage payment amount, the price of a rental today would probably be double that at 1400.  Meaning that there is a growing gap between what a current renter pays, versus what your parents pay because they have locked in their rate 30 years ago.  This ever growing gap of money can be reinvested at a rate of 700*12 = 8400 a year that a renter would not have which quickly shifts things in favor of owning, rather than renting.  Fun Fact:  if you take a purely hypothetical 'break even' property at 100k with 20% down, where the rents equal the mortgage plus expenses, and assume that rents rise at the same level as inflation then after the first year your break even property will start to turn a small profit since rent went up, and while your expenses went up, they did not go up as fast because your biggest expense (debt service) stays constant.  Each year your profits go up a tiny bit more and more as inflation hits.  If you take this profit and put it into the stock market you will actually have more money in the stock market at the end of 30 years this way, than if you had simply put the whole 20k into the market in the first place assuming 9% returns and 4% inflation.  This seems funny since in the case of buying the house you start with 0 money in the market, versus starting with 20k in the market, and because putting the entire amount into the market immediately maximizes the number of years that it is allowed to compound, but with the house you start to have regular ADDITIONAL deposits into the market since you start slowly making yearly profits from the house.  These additional deposits are trivial at first, and grow to the point where they end up very significant.  Not to mention you also own the house free and clear.  Given these hypothetical numbers, buying the house and slowly investing the rental profits into the market is slightly over double the economic gain than simply buying the stocks would have been.

The only time that renting is better than owning, is if you plan on constantly buying and selling every couple of years as you move around the country searching for a better job as those realtor fees add up quick.

But for anyone that continues to believe that renting is that pathway to economic success, I currently have a vacant SFR in phoenix and it would tickle me to death to be able to 'help' you achieve financial independence by allowing you to pay me rent.