Renting and Buying Compared

By James Kwak

Loyal readers already know what I think of housing as an investment. The main issue, in my mind, is that it’s extremely risky as an investment: not only are most middle-class families putting more than their total net worth in a single asset class (and one with low average real returns compared to the stock market), but they are putting it into a single asset, which violates the most fundamental principle of investing.

That said, on a pure expectation basis (not considering risk), buying is probably better than renting. It’s not as simple as saying that “renting is throwing money away while paying a mortgage is building equity” because (a) homeowners usually pay more cash than renters on an ongoing basis (mortgage, homeowner’s insurance, maintenance, etc.) and (b) you have to consider the returns you could get by investing your capital (down payment and principal payments) in another asset class. But the tax deduction for mortgage interest probably tilts the scale toward buying.

So if you’re thinking about buying or renting, I recommend that you read “The Effectiveness of Homeownership in Building Household Wealth” by Jordan Rappaport, an economist at the Kansas City Fed (hat tip David Leonhardt). The most valuable part of the paper is that it clearly outlines the financial tradeoffs between owning and renting. Rappaport creates a model that estimates the cash flows from buying a house and selling it ten years later and renting for ten years, assuming that you invest all the money you save by renting. He then looks at historical ten-year periods beginning from the 1970s through the 1990s to see which strategy would have been preferable.

It turns out that, of those ten-year periods, owning was better in about half, renting was better in about a quarter, and in the other quarter it’s hard to tell. The ten-year periods that began around 2001 will probably favor owning, but when you get to 2003-2006 they will probably favor renting (because of the housing decline since 2006).

So, in short, owning does better than renting somewhat more often than renting does better than owning. Does that mean that buying a house is a good investment? It depends. First of all, Rappaport’s model assumes a ten-year holding period; as your expected holding period decreases, owning becomes less attractive because you have less time over which to amortize the transaction costs.

More importantly, Rappaport’s conclusions are based on averages — in particular, average house price appreciation. This goes back to my original point: housing is a lot riskier. Your house’s price appreciation could deviate wildly from the average in your neighborhood, let alone your Metropolitan Statistical Area, let alone the country, for any number of reasons. So the question is how much investment risk you want to take on. Sure, rental prices could go up faster than the national average. But over the ten years, an owner will be more sensitive to a fall in housing prices than a renter is to a rise in rental prices of the same annual percentage. (And that leaves aside the fact that a renter can adapt to unfriendly price changes — by moving — more easily than an owner can.) For a good discussion of the specific risks of owning, see Rappaport’s discussion on pages 45-46.

So if you are making the decision for real, the tradeoff is this: historically, on average, owning has beaten renting more often than the converse (if you have a ten-year holding period), but owning is riskier. You can’t tell now what is going to happen to house prices over the next ten years. But there is one thing you can sort of estimate: the current ratio of house prices to annual renting costs. David Leonhardt‘s rule of thumb is that if the ratio is below fifteen, owning will probably work out better than renting, and if the ratio is above twenty, renting will probably work out better than owning. (That is roughly borne out by Rappaport’s chart on page 51, but I think the chart implies that the “owning” threshold should be somewhat lower than fifteen.)

Now for the usual caveat: Everything above discusses buying a house as an investment. Most people get more consumption value from owning a house than from renting an equivalent house because most people get utility from living in a place that they own. They like the security, the ability to make modifications to the house (even though most of those modifications are probably money-losers), and so on. Also, in many markets you just don’t have a choice. I live in a small college town, and the rental market here is primarily geared toward students, so it’s hard to find a nice house for rent (especially one that will let you have a dog, which we did when we moved here). So there are plenty of good reasons to buy a house other than the idea that it’s a good investment. Those are valid reasons why you might buy a house even while thinking that it’s a bad investment. Except for scale, it’s no different from, say, eating at a nice restaurant now and then. Buying an expensive dinner is a lousy investment, but it gives me consumption value.

As Rappaport says,

“Homeownership, at least until recently, was often described as a great investment that also includes a place to live. More accurately, homeownership should have been described as a place to live that also includes an expected investment benefit.”

There is an expected benefit there, but remember that it’s not that big and it comes with greater financial risk.

58 responses to “Renting and Buying Compared

  1. Rappaport’s analysis seems to ignore the opportunity costs of mobility associated with homeownership. Those who own homes are much less likely to look for more desirable jobs outside their communities. For those underwater on a mortgage, moving can be nearly impossible without substantial net assets other than the house.

  2. One item I often see ignored in rent-vs-buy is that with owning the risks are not evenly distributed. That is, 1 in 20 (say) will be subject to some low probability high severity event (the “long tail” risks) that, in aggregate, will make home ownership worse as an investment. Most owners will not account for this and look only at headline analysis. From that point of view, owning is worse than renting without a discount, even if it’s not the case for 95% of the population!

  3. All the points James Kwak mentions are true.

    But one catch — one that adds to the utility of owning — is that many of the risks of the owner, of the landlord, in a rental are passed on to tenants anyway — at least in absurdly overpriced markets like New York or Boston or San Francisco.

    The New York City government goes to considerable lengths to prop up the housing market, trying to keep the housing bubble inflated, insulating landlords from competition, packing supposedly impartial agencies (like New York’s Rent Guidelines Board) with predominantly pro-landlord decision-makers.

    Housing prices decline, landlords raise rents. Fuel costs go up 5%, landlords raise rents 10%. Unit is rent-stabilized, landlord paints and sands, calls unit remodeled and takes it off rent-stabilization. Asymmetries in information abound. Landlords, especially larger ones (and by that I mean any landlord large enough to make a living off renting), will likely (if they are rational) put in a good deal of effort to be informed both about the specifics of his or her property and about the general market. Tenants must devote their resources elsewhere. Landlords are comparatively organized and concentrated in their lobbying power.

    Years ago, Harvard law professor Duncan Kennedy suggested Boston institute a housing ombudsman to allow tenants to appeal rent increases that often exceeded 10%. Great idea, went nowhere.

    I’ve been a tenant for over 20 years. I’ve had perhaps two good landlords in that time (out of over 15). Admittedly, I’ve been a tenant in two terrible markets most of that time — Boston and New York. People I know in other regions have better tales.

    My conviction is that landlords make a business of taking advantage of less-informed, less-advantaged tenants.

    The term “landlord” has feudal roots — it’s a feudal institution.

  4. In the long run wont buying and renting give roughly similar returns? After all, if buying was better, prices would rise to the point where renting was better and vice versa.
    The tax deduction on interest is a big gimmick. The seller knows about it too and will price it in. To me the deduction seems to be a giveaway to builders and not buyers. If it were stopped, prices would fall (in theory by the present value of all expected future deductions) thus benefiting buyers.

  5. Kwak notes that “Rappaport’s model assumes a ten-year holding period; as your expected holding period decreases, owning becomes less attractive because you have less time over which to amortize the transaction costs.”

    However, it is equally true that if your expected holding period is MORE than 10 years, owning becomes even more attractive. (I’ve been in my house 18 years now and expect to remain indefinitely.) Given the real advantages of owning — such as the ability to have animals and to control the property — the blog post may provide a better argument against frequently moving than against owning a house.

    For a while I enjoyed renting, but even when I had a decent management at the apartments I lived in, the property would get sold or the company would go bankrupt and in either case it changed hands, so the landlord problem is very real. It’s worth quite a bit to avoid the flimsy not-sound-proof walls, restrictions on renters, and constantly-changing managements.

    None of that is intrinsic to renting of course — I understand that in other countries renting is often a far more stable situation than it is here. But if you DO factor in the non-financial factors, owning is still a no-brainer in THIS country mostly unless you are very mobile or have other special reasons to rent not buy.

  6. One possible oversight of the rental vs. ownership comparison is the effect that owning has on “saving” through the form of forced payment. Much like an LBO forces corporate management to focus investment, so too does a personal mortgage. It is not necessarily accurate to assume that all the capital invested in the house would be invested in the market under the rental scenario. I, for one, tailor to my saving to the amount of discretionary income that I perceive I have available. When renting, the “cushion” was greater and I would spend more on depreciating assets (eating out, clothes, fishing rods, televisions, etc…).

  7. CBS from the West

    @Hugh Sansom

    I, too, lived in New York City for many years, both as owner and as renter. Apart from the government’s propping up the housing industry, I think the rise of the financial services industry had a severe impact on the housing market in New York.

    Before around 1980, financial services was just one sector in the NYC economy, important, but not dominant. Thereafter, it grew rapidly and came to dominate the city’s economy. As the salaries and bonuses in that industry exploded, so, too, did housing prices (punctuated by periodic crashses). I have always believed that the rising population and incomes of Wall Streeters, who have money out of proportion to brains, indiscriminately bid up the prices in the housing market. They just had too much money to care about what they paid for housing, and the rest of us got clobbered as a result.

    I know, the Wall Streeters were bidding in the upscale segment of that market. But there is a very soft, blurry boundary between upscale and midscale housing in New York: a modest amount of renovation can change a unit from one to the other. So the bubbling of upscale prices dragged up the prices of midscale housing with it. The result: NYC is pretty much unaffordable to middle class families now.

  8. Hi James Kwak,
    Please address the system’s “Deception by omission” seen in this May 1 OpEd.
    PAGE 1

    http://homepage.mac.com/ttsmyf/the_durango_herald_20110501_E01.pdf

    PAGE 3, continuation

    http://homepage.mac.com/ttsmyf/the_durango_herald_20110501_E03.pdf

  9. Austin Kelly

    It’s a good article, but the part on which Kwak focuses is not exactly original to Rappaport. The own vs. rent cash flow calculations are all in Shelton’s 1968 Land Economics paper.

    http://www.jstor.org/stable/3159610

  10. The old future volatility and “forced savings” arguments are questionable. Real estate moves in such a long time scale there aren’t much statistically significant data to validate with a high degree of certainty that future volatility will allow a “safe exit” to those who bought at high prices (witness Japan).

    “Forced savings” are no more true with a car than with a home. Do people think that borrowing money for, say, a car or a concrete mixer is a forced savings plan too?

  11. dilbert dogbert

    The California real estate ponzi has been a winner for me since my first house purchase in 1960. All moves were paid for by appreciation and all moves were move ups. That said, it was location, location, location and pure dumb luck. I don’t think young folks starting out now will have the same luck. How can anyone predict their career trajectory as well as the economic trajectory of the nation, state or city over a 50 year span?
    Best of luck to all.

  12. @Hugh Sansom

    What you say may be true about New York and Boston, but my experience renting in San Francisco is that they have very strong rent control/renters rights counseling/etc, particularly for longer term residents. This is probably why they’re at the top of the list on the rent/buy ratio:

    http://economix.blogs.nytimes.com/2011/05/10/rent-vs-buy-a-longer-list/

    San Francisco is at 27, Boston is at 18, New York is at 15.

  13. James Kwak “There is an expected benefit there, but remember that it’s not that big and it comes with greater financial risk”

    Yes, but our illuminated bank regulators, those who you so stubbornly never criticize, they thought different and, already in Basel I, assigned a risk-weight of only 35% to mortgages… which meant, 8% times 35%, a capital requirement of only 2.8 percent which means an allowed leverage of 35.7 to 1. And this calculated based on a very gently defined capital, which allowed much wishy-washy 8 percent capital. In Basel II, if they on top of that could hustle up a triple-A rating, then they could leverage 62.5 to 1.

  14. Does anyone know if the comparison takes into consideration the typical 6% sales commission on the appreciated value?

  15. Moses Herzog

    I hope James Kwak will forgive me for once again breaking off topic of this post and the general thread. I’m sorry James, I just can’t resist. Just consider this an extension of your continuous, life-long law education after much hard-work at Yale.

    Within the last few days Republican Senator John Ensign finally paid some price for cheating on his wife with a member of his own staff. Well, it was shown in the investigation that Senator Tom Coburn (Republican, Oklahoma) of “family values” and C Street fame, tried to negotiate the financial details of the cover-up of Republican Senator Ensign’s philandering (among other things).

    Some of you may have forgotten Republican Senator Tom Coburn’s tasteless and backwoods humor he used during Sonia Sotomayor’s confirmation hearings to become Supreme Court Justice. After Sotomayor gave an articulate answer to a question on the Second Amendment, Tom Coburn said in response “You’ll have lots of ‘splainin’ to do.” Of course, “Dr.” Tom Coburn thought he was just too funny. You can watch the Youtube clip here

    However, with this latest news on Republican Senator Coburn’s hard work trying to cover up and negotiate the financial details for his C Street buddy John Ensign’s philandering (not to mention other law-breaking activities by Ensign), some average Americans and even maybe some Oklahoma voters might say “Senator Coburn, you’ve got lots of ‘splainin’ to do.” Is that line funny now Dr. Coburn?????

    After a 30 second advertisement you can see the slimy, disgusting details at these two links:

    http://www.msnbc.msn.com/id/26315908/vp/43025241#43025241

    and here:

    http://www.msnbc.msn.com/id/3096434/vp/43029119#43029119

  16. Back in the day (1929) grandfather lost the house, the vacation house etc. He was a broker and was heavily leveraged. The trauma of the event was significant such that they never owned again even though the family recovered financially and were relatively well off.

    My father and his sisters had it instilled in them that home ownership was risky and renting was better, none of them ever owned (though my aunt finally purchased a small house later in her life). When we moved to Canada and bought our first home my father was dead set against it believing that renting was the more prudent approach. As it has turned out our purchase in the mid-eighties has, in terms of resale value, increased almost seven fold. The Canadian real estate market (think Toronto/Vancouver) is sizzling hot right now. I have watched the doomsayers for more than two years call for a correction and in fact I figured that the market here had peaked back in 2008, I was wrong. A friend thought like I did and he cashed out in early ’08, at this point he has left a sizable amount of money on the table. Other people we know just sold and are waiting things out in a lux condo they have rented.

    My guess today is that the Canadian real estate market doesn’t have much life left in it and we are seriously thinking about cashing out by Thanksgiving. Having lived through the ’89-’95 peak to bust it is not unreasonable to expect a 30%-40% decline.

  17. Stephen A. Boyko

    @ James Kwack

    Good post.

    “I’ve been telling my friends for a decade that housing is a bad investment.” Agreed

    Like Agatha Christie’s mystery “Murder on the Orient Express,” there were no innocents in the subprime bubble for housing. Investors, issuers, and intermediaries speculated and then scrambled to stay ahead of the impending tsunami of bad debt. This was not so much the perfect economic storm as the search for the ultimate free ride. The act of giving property rights to renters via no-money down, NINJA mortgages was exacerbated by investment banks given regulatory impunity to become highly leveraged casinos. Societal subsidies such as the tax deductibility of mortgage interest that had been a form of forced savings became a form of forced speculation for teaser-rate mortgages that became wasting assets. Conflating risk and uncertainty enabled the financial contagion to be systemically spread by mischaracterized AAA-rated securities that had unknown cash flow and unknown mark-to-model valuations. What remains in the crash aftermath is deciding the timing and sequence of where to start—will ineffectiveness or inefficiency be the independent variable for restructuring or reform?

  18. Mary Sue Schmaltz

    Beyond the pros and cons of the personal investment benefits or drawbacks, is the promotion of expansive home ownership a worthwhile national goal? Viewing this from a systemic perspective – what would be the overall repercussions of a nation of renters vs. a nation of owners? A sense of ownership does compel people to better care for property and neighborhoods.

  19. maynardGkeynes

    The imputed income aspect of home ownership — the rent you ‘pay’ yourself is not recognized as income – is actually more valuable than the mortgage interest deduction. Although rarely considered in the calculators, it makes buying a no-brainer on an after tax basis.

  20. And what about the risks of renting? Can you predict your rent in ten years time and/or the return of investing in another asset? What about all the costs linked to renting unless it’s a house?

  21. Hugh Sansom says: “My conviction is that landlords make a business of taking advantage of less-informed, less-advantaged tenants.

    The term “landlord” has feudal roots — it’s a feudal institution.”

    Hugh, I agree with you: I have been a tenant and I have been a homeowner, and the latter has been better for me, not really because of exploitive landlords, but just the uncertainty (and on one occasion, the roaches).

    However, if the following was addressed in this post or the comments, I somehow missed it: hasn’t it been widely reported that the traditional mortgage is going away, to be replaced by short-term adjustable-rate mortgages that will have to be rolled over every five years?

    Want to talk feudalism? I foresee a near-term future in which only the very wealthy will ever really “own” their homes. The bottom 90-95% of the population could, in fact, be forced to perpetually rent their homes from the banks. But unlike other renters, they will have to pay property taxes, upkeep, homeowner’s insurance, etc.

    What a DEAL!

    What a DEAL!

  22. You are all missing the point of home ownership and that is control over your life. Landlords can put you and your family out on the street with 30 day notice. We bought a house so all three of our sons could graduate from Laguna Beach high school (which they did).

    By the way, the house we bought for $31,000 we eventually sold for $1,200,000 (after a lot of improvements and upgrades) thirty years later, so that part of home ownership worked pretty well in the end.

  23. CBS from the West

    A couple of commenters have related their experiences of profiting substantially when selling a home they owned. Yes, that can happen. But it can work the other way–particularly if career or other circumstances necessitate moving at a time when the housing market is in a trough. That has happened to me, twice. And between the two occasions I lost a total of $250,000.

    FWIW, I now live in a house that I inherited at the height of the real estate bubble. It is probably worth about $300,000 less than it was when I got it.

    It is the luck of the draw!

  24. Bet Hillary wishes she had just let her land sit instead of selling it for a mere 100K profit – live and learn…

    But that whole *investigation* sure was a learning experience for all the people involved in it – created *insiders* who used technology to give birth to MERS and nanosecond foreclosures on every single *bin* of USA society….the technological contribution to architecture by The Wrecking Crew…

  25. I’ve heard Americans move, on average, every 5 years. So, the 10 year horizon used in this analysis should probably be cut in half. Then we’d see even less benefit to owning, especially when adding in transaction costs.

    My parents’ NJ house is worth, in nominal dollars, 10 times what it was 40 years ago when they bought it ($65k, $650k). I’ve calculated they have spent nearly the entire current value in mortgage, tax, utility, and maintenance payments. And most of those dollars spent were years ago in more expensive dollars.

  26. @Joe

    Thanks for the bottom line :-) You can always count on someone from NJ to do the math – so now Mr. Kwak and Gen X, Y and Z have been shown the door to the way out of the maze…money lenders always get it back with interest…except now it’s at nanosecond speed…so every two years a *bin* of mortgages have to be emptied to support the ME…betcha MERS doesn’t even have a division that sends out the official announcement that the mortgage was paid off because they know no one is going to manage to do it anymore because they have the math formula for how much unemployment needs to be created to push them out…

    Jumping ahead to a *perception is reality* state of mind – first step is a national Energy Policy from which everything else INTELLIGENT can flow – like USA having an energy efficient architectural plan to go with it…

    Recent history is worth a look – pictures of Pennsylvania Train Station in NYC before and after the *rent seekers* put in their Madison Square Garden…pretty much the end of architecture as a sign of real *national* progress…

    “…not everyone *deserves to own a home….” is akin to saying not everyone deserves to live – which is pretty much the bottom line if you factor in the Wrecking Crew going after education and health care and housing all at once…eugenics, part deux…

  27. All deriviative ‘money’ has expodentially increased prices in the big cities. Again, time to pull out your ’90’s textbook, the 1890’s that is.

  28. Already Basel I held that banks when they financed houses needed to hold only 35 percent of the capital they needed to hold when financing small businesses and entrepreneurs who were those most likely to create the jobs those living in the houses needed… and you all know by now what I thought about that! Of course, with Basel II, the banks needed to hold only 20%of that in capital if the mortgages got linked to a triple-A rating.

    But you don’t seem to mind!

  29. The very first comment from Greg is prescient, and I’m surprised it’s not included in more analyses. Those of us currently under 30 just don’t see the appeal in owning homes, even if ownership slightly beats renting in direct comparisons. With employer loyalty nonexistent and our generation switching careers and places more often than ever, why tie ourselves to one place? We look around and see our friends who bought houses and then got laid off falling underwater, declaring bankruptcy, and just staying handcuffed to a massive illiquid asset.

    We place MUCH more value on being able to seamlessly relocate if necessary than we do on the mythical pride that comes with ownership.

  30. Ryan… you are absolutely correct! The others are just some baby-boomers who never were able to break loose from Doris Day´s days

  31. Bob Kaplan

    As no one responded to my query on 5/13 as to whether Rappaport’s comparison included the typical 6% sales commission on a home’s appreciated value, I took the trouble to read the study. In reading the study I find no indication that Rappaport took inro consideration the 6% sales commission. If the 6% sales commission is factored into the comparison, the result would be far more favorable to renting.

  32. ezra abrams

    soph moronic, in the literal sense.

    Even without thinking about it, one should be able to see that such an analytical framework, so typical of economists, is both to complex and to simple to be of use.
    To complex, because it doesn’t give the avg person clear guidance, and to complex, because it neglects many factors – for instance, what about school costs ?
    What about the joy or not of gardening and lawn maintenence ?
    What about the risks of stock market fees for small, unwary investors ?
    Rather then an economic decision, home buying should be something that you and your spouse or partner want

  33. CBS from the West

    @Ryan

    Yes, but as Hugh Sansom pointed out among the earliest comments on this post, at least in certain markets, renting entails putting up with abusive landlords.

    When all is said and done, it’s a decision that involves a lot more than just the economics of it. I’ve personally experienced the upsides and downsides of both sides. I can’t say that there’s anything that makes either generically preferable to the other. It really all depends on the totality of your circumstances–and the money is just one little piece of it.

  34. Mixed reviews on which is better: owning or renting.

    It seems to me the underlying problem is the housing bubble created by the “AAA-rated” bond factories of the past decade. Housing prices appreciated astronomically, then tanked, then TARP, and now a Recession the world is struggling to emerge from.

    If you took out the free-market excesses of housing speculation … life would be easier for both renters and owners.

  35. As to where the idea of home ownership as the American dream came from, let me suggest its the urban version of the yeoman farmer that Jefferson was so enamored of. In addition it may be a left over from the federalist point of view that only those who own things should have any say in how things are run. (I know conflating the political opposites but…) Interestingly the stability argument that is made in favor of home ownership is as pointed out inconsistent with modern life and its frenetic pace. If people move on the average every 7 years, then clearly the numbers are not in favor. Perhaps home ownership should be marketed the way preachers used to buy homes, only when the retired, since before then the job provided housing.

  36. What I was trying to say is renting vs home ownership is neither good nor bad. The underlying problem is excessive free-market speculation that created havoc in the housing market.

    Very mixed reviews on whether the global financial system can be regulated to prevent excessive speculation.

  37. @tippygolden press “If you took out the free-market excesses of housing speculation … life would be easier for both renters and owners.”

    And what about starting with taking out the regulatory favoritisms of housing that impede the functioning of a free-market?

  38. tippygolden press

    @Per

    Perhaps curbing excessive speculation as well as regulatory favoritism are both needed.

  39. Stephen A. Boyko

    @ tippygolden press “Mixed reviews on which is better: owning or renting.”

    Which are worse, the abuses of rent control(s) or the abuses from home ownership subsidies?

    While the landlords (suppliers) abuse their customers, the renters a full of tricks themselves. It’s just ugly from every angle. See: the joy of rent control:

    http://www.nypost.com/p/news/local/last_tenants_standing_TPu5wISOT7w7GUZSSCJptI

    In the subprime homeowner crash investors, issuers, and intermediaries speculated and then scrambled to stay ahead of the impending tsunami of bad debt. This was not so much the perfect economic storm as the search for the ultimate free ride. The act of giving property rights to renters via no-money down, NINJA mortgages was exacerbated by investment banks given regulatory impunity to become highly leveraged casinos. Societal subsidies such as the tax deductibility of mortgage interest that had been a form of forced savings became a form of forced speculation for teaser-rate mortgages that became wasting assets.

    It is a reflexive proposition that needs a systematic approach to address both sides of the abuse equation.

  40. Do you have a Facebook page or Twitter? Would love to follow you there, I’m on my iPhone and love reading your stuff!

  41. @tippygolden press: “Perhaps curbing excessive speculation as well as regulatory favoritism are both needed”

    It is easier to identify regulatory favoritism than excessive speculation.

  42. Stephen A. Boyko

    @ walmart gift card giveaway 2010 “Do you have a Facebook page or Twitter? Would love to follow you there, I’m on my iPhone and love reading your stuff!”

    Thanx

    See blog: How to Create a Technology Based Company

    And posts

    “The Engine of Economic” http://t.co/f1bISzK

    “Beyond Rumsfeld,”

    http://taffywilliams.blogspot.com/2011/04/beyond-rumsfeld-by-stephen-boyko-and.html

    Post entitled “Parallel Paper Economy” coming later this week to further discuss the concept of randomness and differentiating predictable, risky and uncertain domains to segment the legacy OSFA governance.

  43. What about British housing? (I don’t think the mortgage interest deduction is as significant.)

  44. Stephen A. Boyko

    @ walmart gift card giveaway 2010

    “Do you have a Facebook page or Twitter? Would love to follow you there, I’m on my iPhone and love reading your stuff!”

    On linkedin and twitter for business.
    @twilli2861 for Twitter.

  45. @Joe: it’s an bit unfair to include utility costs in the long-term price of ownership: I’ve never had a lease off of a college campus that included more than heat and water. Whether that would change your overall conclusion presumably depends on things like how well insulated your parents’ home is.

    This does bring me to one benefit of ownership, however: it is really only viable to make capital investments to reduce utility costs if you own your home.

  46. @Per Kurowski

    Yes the misguided 1:62 capital ratio for AAA rated bonds.

  47. I am selling my house a week from today (knock on wood) and I can’t wait. I had no idea how much owning a house would stress me out. How much I’d agonize over things I found to be wrong. All that.

    It’s the fact that it’s a leveraged investment. I’ve studied economics, but it never occurred to me to say that way till a little while ago. Housing is investing on leverage (as you said in your previous post) which ads a lot of stress.

    In fact, there was a story on NPR weekend this weekend (or maybe it was Marketplace) about a researcher who found that homeowners were less happy and less healthy than renters.

    I am going back to renting and I can’t wait. Yes, it’s all lost money, but I know precisely what my downside is.

  48. billy bishop

    The theory of cognitive dissonance might explain how the benefits of home ownership can be inflated by home owners. According to the Effort-Justification paradigm, dissonance is “aroused whenever individuals voluntarily engage in an unpleasant activity to achieve some desired goal. Dissonance can be reduced by exaggerating the desirability of the goal.” (please excuse the source: http://en.wikipedia.org/wiki/Cognitive_dissonance#The_Effort-Justification_Paradigm). So if you have to work and save much harder in order to cover mortgage payments, etc. for a home as compared to a similar rental, you might be easily exaggerate the benefits home ownership in order to dispel the discomfort associated with the unpleasant feeling that all that extra work was not really worth it.

    On the other hand, for us renters, perhaps there is also some cognitive dissonance going on to justify missing out on the 100% increase in home prices (which are still going up in Canada).

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  50. Housing is not an investment. It is speculation on the future value of land beneath the house, incomes (your own and other peoples’ as well) and credit availability. Every house deteriorates over time and most become outdated and unfashionable. What makes home ownership attractive has always been steady monetary inflation, the availability of mortgage credit plus a tax deduction for interest and real estate taxes, but looking at past results to determine future prospects is just the kind of idiocy for which economists are justly famous.

  51. Stephen A. Boyko

    @ jake chase

    Not so much “speculation on the future value of land” but proximity to nearby revenue generation opportunities (e.g., San Francisco to Silicon Valley) that lead to the vapor value of NINJA MBSs. See “Parallel Paper Economy” by Stephen A. Boyko and Willard C. Rappleye Jr. http://taffywilliams.blogspot.com/2011/05/parallel-paper-economy-by-sa-boyko-and.html as to why use cash flow and mark valuations as brightline differentiators for indeterminate and determinate domains?.

  52. The assumption that the average person would actually save the additional money is where this breaks down. If possible it would be nice to be able to look at the savings rates of middle income people who own vs.rent to see if those who rent and have the ability to save actually do or if they just spend more in other areas. My suspicion is that most people don’t save more of their income if they are renting. This might be a case of you can lead a horse to water, but it might also be a case of reality vs. the efficient markets stuff.

  53. billy bishop

    @ Austin Kelly

    It was surprising to read, in the first paragraph of Shelton’s 1968 Land Economics paper, that occupancy costs amounted to 20-25% of a typical family’s budget at that time. That’s a far cry from today’s situation, where occupancy costs can amount to 30-35% of a family’s budget and, in some high-priced areas, around 50%.

  54. I am convinced that the study misses one essential point. The best return from home ownership is the money which does not flow through one’s hands. Home owners are forced to put the money aside to meet payments, while tenants might spend more money instead of investing it in other assets.

  55. Harry Tsui

    The choice of renting vs. owning is really based on timing. I bought houses in San Francisco back at the beginning of 1980 and sold them in 1989. Each time I sell, I got more than what I put in. So, owning was good for me. What I said is really based on timing rather than a set of straight rule.

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  57. Hugh Sansom mentions San Francisco as “absurdly overpriced” where all manner of expenses “are passed on to tenants”. San Francisco, like a handful of other major U.S. cities has strict rent control laws (*). This can provide a real option to the renter. If we were to have deflation the renter could see rents decline, but if there is a bout of inflation, the renter sees the real rent decline. This is similar to the inflation hedge provided by a fixed mortgage, but with no obligation to pay increased nominal maintenance expenses and property taxes.

    * Each city with rent control is different, some have absolute annual percentage increases, in others city officials declare a maximum which in theory takes into account general price inflation. Also, not all units are covered in all cities.

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