The math fails to account for mortgage interest deduction on income taxes, and for increases in rent prices. Let's look at scenario 2 again. Alice, who can afford a $700k house, probably makes $100k+ per year and therefore her income is taxed by the federal government at the 24% marginal level. Her monthly payment on a 30-year loan principal of $562k at 7% is $3742. Over 18 years, she pays over $600k in mortgage interest. If this is deducted from her taxable income, she pays ~$150k less in taxes over those 18 years. This is a lot more than "a few tens of thousand dollars" over 18 years, rather it makes her save nearly $10k more per year. Her savings would increase even more if we account for higher earnings, increases in rent over 18 years, and state tax benefits.

I'd be more persuaded to read the rest of the article if the math added up, but unfortunately it's not realistic. You paint a worse picture for home ownership than it deserves.

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Apr 12, 2023·edited Apr 12, 2023Author

I wrote a post highlighting and responding to comments on this article: https://goodreason.substack.com/p/highlights-from-the-comments-on-housing. The second section discusses the rent-or-buy logic and mentions your comment in particular. Long story short, the rent-or-buy logic does, in fact, take into account all the factors you're concerned about, and more.

More generally, this post uses the NYT rent-or-buy calculator. Determining “which is better, renting or buying?” is a big, complicated financial question that depends on tax deductions, maintenance fees, capital gains taxes, how frantic Jerome Powell sounds, and a dozen other factors. That’s why this post relies on the hard work of the New York Times, rather than back-of-the-envelope calculations.

Based on your comment below, I would actually say you're underrating how complicated rent-vs-buy is. On the buying side, there's the cost of buying the home, selling the home, maintenance; on the renting side, there's renter's insurance and the rent growth rate. The NYT calculator takes into account all of these things, in addition to everything you mention.

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Apr 12, 2023·edited Apr 12, 2023

I looked at that article, and at the NYT calculator. The NYT calculator is heavily flawed if you accept default values. It defaults to assuming a low marginal income tax rate, which is only true if the buyer is making far less money than they’d need to afford a mortgage in today’s home market. That’s a pretty significant flaw if you ask me. If the NYT calculator had more realistic defaults, or if you adjust them to be more realistic, then it more heavily favors buying. My back-of-the-envelope calculations rely heavily on the tax benefits of home ownership, and the NYT calculator heavily underestimates these benefits by starting with an unrealistic assumption.

I encourage people to use the calculator, because it is useful after it’s customized to reflect reality. And that reality is that home ownership still makes sense in a lot of situations.

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I fully agree that home ownership makes sense in many situations. As I mention in the follow-up post, the point isn't "buying a house is a dumb financial decision". It often is a smart decision, but mainly because housing prices rise so much.

Looking at the NYT calculator, the slider that makes the biggest impact on buying vs. renting (besides the price and mortgage rate) is the house price growth rate. If that drops below 4% to 'only' grow at the average inflation rate of 2.5%, the math looks much shakier for buying. There are still scenarios where it's good, depending on other factors, but renting often looks preferable then.

Again, none of this is to say "home prices won't grow at 4% a year!" It's to say for owning a house to make sense, home prices often need to outpace wages and inflation at 4% a year. Home prices need to continually become more unaffordable in order to justify buying homes, and that's kinda perverse.

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Yeah it’s a simplification. It leaves a lot of reasons against home ownership too, like insurance costs, property taxes, maintenance costs, and most importantly the opportunity costs you pay on the downpayment, which could otherwise go into other investments. Buying a home (from an abstract, financial sense) is basically a bet that the price of the home will appreciate more than the same investment in an index fund or etf, which historically have had higher returns than the average real estate returns. But like the article says, it depends largely on the location (and the other fine details of the home). I think what’s interesting is that it’s also a bet on policy: when you buy a home as an investment, you implicitly rely on restricted housing supply in the US. IF (big if) the housing crisis reaches such a pitch that we reform the market and supply is not longer restricted by policy, what happens to the many Americans whose houses are their primary (or only) investments?

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> Buying a home (from an abstract, financial sense) is basically a bet that the price of the home will appreciate more than the same investment in an index fund or etf, which historically have had higher returns than the average real estate returns.

This is another simplification, and one that makes very little sense if we're talking about primary homeownership. You're assuming that by forgoing a home purchase and putting money into the stock market, that your monthly expense for a shelter goes to $0? That's not how it works.

I totally agree that on average, stocks do better than real estate in the long term.

However, if I financed a $1,000,000 home at today's 30-year-fixed interest rates and factored in the property taxes and insurance costs, and I put down 20%, my cost is roughly $6,000 per month. Renting the same home would likely cost $3500/mo minimum, so my opportunity cost of the ETF investment becomes $200k + $2500/mo, minus rent increases year-over-year. I'm going to pay long-term capital gains taxes on the ETF investment, but not on home value appreciation, and for the duration of my 30-year mortgage I am reducing my taxable income by the mortgage interest amount in each given year.

In the scenario where I don't buy the home, and the market returns 8% YoY, my ETF investment is worth $476k after 5 years (200k + 2500/mo + interest). If I sell now, I pay at least 15% long-term gains taxes, on $126k gains, so after taxes I now have $457k.

If I had bought the home and sold it after 5 years, the remaining loan balance is ~$750k, and let's say the home has gained 4% per year in value to become worth $1,216,000. I've saved at least 25% on $285k in mortgage interest tax deductions, which leaves me an additional $71k in my bank account (that I could've been investing, or whatever) I end up pocketing $537k minus closing costs.

Using pretty realistic math, without hypothetical outcome arguments, it's very, very clear that the outcome of home ownership is better than renting, after just 5 years, even at today's crazy prices and rates.

(for those with keen eyes - I know that only $750k, not all $800k, of the mortgage can be used for this deduction but my point gets proven by a huge margin regardless)

Owning a primary home still pays off, although at today's prices it's hard to see the benefit unless you consider the whole picture of ownership over multiple years. Owning a secondary home becomes a scenario where I'm likely to agree with you that you're better off putting money into an ETF.

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Yeah, um, the mortgage interest deduction on income taxes got gutted during the previous administration and my cost of homeowning went WAY UP. I can't imagine I'm alone in this.

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The deduction only got gutted if you're financing more than $750,000. At 20% down, that translates to a home price of $937,500, or more. So, you're certainly not alone, but you're also not having the same experience as most homeowners in the country. According to the National Association of Realtors, the median price for a home in the US in February was $363,000.

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Great post!

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Feb 28, 2023Liked by Andre Cooper

Loved the article. But it’s not just a pyramid scheme. It is a retirement plan. As American get older, we know our income can’t keep pace with ever rising rental prices, so we better get in the game while we still can. I am glad I have a house, as the current rent increases aren’t hurting me. But if I tried to retire and rent, I’d be stuck living in a closet or shady oaks. And the half of my generation that didn’t get in the game are so screwed at this point. Their wages aren’t going up, they are maxed out in what they can earn and can’t get into a higher paying job in their 40s and 50s, and they are going to retire in a bit. I think that investors really drive the prices up too. They know what kind of scheme it is, but they are fine with that.

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This was really well done. I quoted at length from it in my most recent Substack post. https://brinklindsey.substack.com/p/the-next-level-of-rich

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Most hopeful scenario: upzoning/increased density increases land value (benefiting existing homeowners), and reduces rent (benefiting renters). Big losers there are existing condo owners though.

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So, if you ask any realtor, the value of a house doesn't increase much because of fancy countertops or sweaty equity. There is one, singular dominate factor, location. The closer the house is to major services, corporations, and good school districts dominates. Its the scarcity of large dwellings in those places that pushes rents to sky high values.

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Enjoyed your reasoned analysis. There’s an important emotional element to owning a house too. I rented all my life till 52 then bought one in a cheaper but not bad area and it feels so much better than renting. I don’t regret renting as I liked the flexibility, but I was paying someone else’s mortgage.

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Owning a home is much more than a coldly calculated ROI. Should need to know why, don't bother to ask.

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Agree with Chris - math doesn't fully account for home ownership; 7% interest is historically high for the past 20 years, but that's good in a sense that at 1-2% interest money was 'free' which allowed housing prices to be speculatively bid up.

Programs like FHA loans allow 3% down, which again inflated prices.

Overall, the reason to 'own' a house is at some point you, in fact, 'own' it. You no longer have the expense, and the house is yours. Gains when you sell are tax free up to $500K.

But more importantly, fixed location is critical to all sorts of life goals: building a stable community, raising a family, and making a place yours: you will never be fully in control of that if you rent.

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I've always assumed that current rental prices *price in* the cost of a mortgage and maintenance and a small profit for the owner. No one rents their house if they are losing $$ on it (or at least they shouldn't!)

If I need flexibility, then I pay the premium to rent. If I can stay put for a long time, I buy and get the benefits of holding the asset for a long time. It's not really a pyramid scheme in the sense that the houses are tangible, real assets. People will definitely pay more to live in Littleton CO than an hour farther away from work. Everything in life is like that. Early stock purchasers, or inventors. You get there first and there is a benefit. Not that it's "fair", but... If it's a pyramid scheme, then all of life is a pyramid scheme, and to label it as such is meaningless.

For me I think I've tended to assume that I should have a home because my parents did. But looking back, my parents had the house, but very very little disposable income - life seemed (from my recollection) much simpler and fewer expenses. You don't eat out, you don't go out, you have a house and hang around there. They poured their $$ into the house. Sometimes I think the future generation is stuck between two sets of expectations - they expect to have a stable house and own it like their parents did, but are also sold on 'living their best life right now' which involves a fair number of expenses. I still cringe at a $40 cell phone bill, but I know younger people who are fine paying DoorDash a $10 delivery fee on a $5 starbucks drink, when starbucks is a 2 minute walk away! Something has to give there, but is a painful place to be :( And our consumer society is going to continue to tell everyone "you need this latest convenience" -- I'd say that is the bigger pyramid scheme - "you'll be happy if you do X"! When, everyone knows deep inside, that isn't true. But we still play the game.

If Littleton CO is *really* median rent of 2k / mo and a mortgage with 20% down is 2950 / mo, that's would seem stupid to buy. It would appear to be an upside down market. In every place I've considered living, things are flipped. The rent would be about 3k / mo, a mortgage would run about 2k / mo. At that point you are weighing

fixed costs for a long time + maintenance + customization potential + lump investment + illiquid assets


flexible costs + no maint + no customization + flexibility + no lump investment + liquid assets

I believe that no matter the environment, things will adjust to where there is a benefit to holding an asset longer and having less liquidity. There isn't an alternative. If renting was *more* liquid assets + flexibility + no risk, then rents would just rise to capture that benefit until it was more of a balance like I mention above. If renting was a terrible investment, the rates would trend downward. If I owned a house and was losing money renting it out, and renters were "making" a ton of money, I would be crazy not to adjust rent upwards until I (who are holding risk, long term debt, maintenance, etc) would get *some* benefit... Right? Or I'd have to sell the house, and that would make houses cheaper which could make rents cheaper. It all hinges on what people want to pay. But in the end, it probably settles on rent = higher upfront + lower long term entanglement vs buy = lower up front + longer entanglement. Is there another way it could possibly work?

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There could be a number of sensible reasons why housing prices are likely to increase faster than inflation. Increasing population and GDP per capita mean the total number of people who are capable of buying a home will increase, while the number of desirable locations which are nearby jobs and everything else people want are not necessarily on the same trajectory. Intangible assets and intellectual capital can expand at a much faster rate than property, so as long as our education system and overall economic growth continue raising the bar it seems reasonable to expect property prices to increase.

Furthermore, urbanization and the non-linear fluctuations in supply and demand across different locales will no doubt impact prices. Littleton is a burgeoning aerospace hub near Denver, a fairly rapidly growing and safe city. People can telecommute but zoom doesn't cut it for going to concerts, skiing, or meeting friends at a restaurant. Littleton is nearby the slopes, Red Rocks, and a hip food scene, all more reasons for property price increases.

Median income for college graduates in their late 20s is around $52,000, so a married couple should be able to afford a $500,000 home after saving for a few years. Many people I know, myself included, rented to roommates to help cover the mortgage for the first few years after buying a house earlier than most. With many jobs available across the economy more expensive housing should incentivize people to continuing learning and increase their own value, and to me a sensible policy would be to encourage and subsidize higher education in specifically the areas where there is the most demand.

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I wonder if it would work to construct a package deal with:

* YIMBYist construction in major cities

* Mortgage relief for anybody who already bought a house in those areas (the state could evaluate the net impact on house-prices of building each new unit and the developer would pay some fraction of that amount into the mortgage relief fund, which would be proportionally distributed to all the mortgage holders.)

My hope is that a coalition containing both the renters and the owners who are still paying down substantial mortgages would be large enough to win, most of the construction would happen (though with somewhat higher rents/prices to pay to unwind the system) while also not leaving any of the most vulnerable homeowners underwater. (Of course, this might still be politically impossible. I imagine pushback like: "Why should *I* not get payed for my house to decrease in value? I already payed down my mortgage like a responsible person!")

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Good post, however I would modify your take a bit. You're thinking of housing not as an investment but as a speculation.

Things like paintings, comic books, etc. are speculations. You buy them today and hope tomorrow you can sell them at a higher price. There's no wealth creation, only transfer. You use a little wealth today to buy them and you hope tomorrow people will transfer a lot of their wealth to you for that, say, first edition Watchman issue #1. It is a zero-sum game. Watchman fanboy of tomorrow will become poorer after he transfers his wealth to you for the comic book.

Investment, however, should be thought of more as a capital good. Consider a pizza oven. It makes pizzas. You sell the pizzas. That's a stream of income to you. You mix your labor with the capital and produce more income than if you tried to make food to sell with no oven. The oven grows old, will need to be fixed now and then, will need replacement parts and so on. That's sometimes called depreciation but more often people think of depreciation as it is treated by the tax and accounting system. But if you imagine your pizza oven makes 1,000 pizzas a month, it maybe you have to set aside the income of, say, 25 pizzas, to cover the repairs that will ultimately happen someday...or in the case of some types of capital goods completely replacing it with a new one.

Felix Salmon, financial journalist, likes to say "we are born short on housing and have to cover that". What he means is you don't have to eat pizza in your life but you do have to live somewhere. So it's like just by existing, you've borrowed some pizzas and you have to cover that...except its a place to live. Just like with pizza, you can 'cover your short' by making the good yourself or paying someone else to do it for you. If you own a home, you're making the good yourself. If you own two homes, you can cover yourself and someone else (by being a landlord...or if you're the 'cool uncle' letting nephews crash for free for a bit).

So I would look at a house like this:

1. You will consume a lot of pizza in your life, a special pizza called 'living somewhere'. You can either make that pizza yourself or pay someone else to make it for you.

2. Your home is a capital good. It produces every month a 'place to live pizza pie'. Like any other machine, it can work for a while totally on its own but you'll have to at some point be faced with repairs and the like. You also run the risk of complete disaster (like it burning down, an earthquak flattens it, asteroid lands on it etc).

3. The speculative asset of it should be considered a seperate element. Yes 100 year old Coka-Cola vending machines have some value on the antique markets, but back in 1923 when a gas station brought the soda vending machine, they were probably thinking of it as a capital asset. With a bit of labor and some periodic fixes, the machine makes a bit more money than goes into it. Sure it would be nice if in 100 years some collector will pay ten times more than its original cost, but even if it ends up at the scrap metal yard in a decade, it's worth it if it produced more than it consumed.

You should buy your home the way the gas station brought a vending machine a century ago. You need to cover your 'housing short' and on top of that you may want to consume certain things that come with it (a particular place, so many bedrooms, a style, etc.). Beyond that you're playing with speculation. If you want to spend $700K instead of $500K because you want to speculate with $200K, feel free. But why? Would you balk if I said spend $500K on a house and borrow $200K to buy comic books? If you would, maybe you aren't quite clear on what you're doing.

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Mar 6, 2023·edited Mar 6, 2023

The mental gymnastics is insane and needs to stop. Your post, summarized:

1. "You're looking at it wrong" (as a speculative asset to use in a zero-sum game).

2. "It's actually an 'investment'" (implying there are meaningful differences, but not clear what yet.

readers hope and assume you will explain next).

3. Next we have a half-assed explanation of a basic scenario, condescendingly explaining what "depreciation" means in a very unclear and ambiguous way. Doesn't quite fully cover the important points either, but ok. Maybe there's a reason, let's keep reading...

4. Next statement: "You're born without a house!" (No shit sherlock) A famous EconErmiSt Said So therefore it must be true and any attempts at refuting this point will be automatically considered naive and incorrect, unless you have a PhD in the same bullshit he does!

5. You don't have to eat pizza! ok...?

6. You exist therefore you owe us, erhmm, not me, no no I totally meant the world at large. Not some greedy group of people who have zero foresight and bring net negative value to our society and culture, that's not what I meant at all nope. This is a moral issue - you should be greatful for having a home that you don't have and therefore owe a debt! (The mental gymnastics event has gone into full swing).

7. "If you own a home, you're making the good yourself." I believe that just by owning property I am providing value to society. My mother's last name was NOT Deville. I promise. I am very smart, and smarter than me economists believe that this is also true. Excuse me while I completely fail to mention retirement, which is just about the only thing that would begin to even justify my position (but it still doesn't because it's all a zero-sum game to you, even if unwittingly).

8. "If you own two homes, you can cover yourself and someone else". How it reads: "The cost of a home requires two homes to cover the cost of, and on top of it you get to be a REALLY GREAT PROVIDER OF VALUE BECAUSE YOU GET TO DO IT FOR SOMEONE ELSE TOO WOW ARENT WE GREAT PEOPLE? SHEEEEESH! High fives all around for LAAAAaand lordes! Hyuck!"

9. Next few lines.... How they come across: "You consume pizza just like you would a house! DELICIOUS! Houses depreciate the same way and at the same rate! So, like, bro, you've totally gotta have that debt you were born into covered man! Indentured servitude? Slavery? What? That's toxic bro do not speak to me, okay? Wow. What the hell is wrong with you?"

10. "You also run the risk of complete disaster (like it burning down, an earthquak flattens it, asteroid lands on it etc.)." How you sound: "You run a RISK OF IT BURNING DOWN OH MY GOOOOOOOD." So... isn't that like, what insurance is for Mr. Big Brain Econermist Landlord Advocacy Center of the Scam Artists Guild?

11. "3. The speculative asset of it should be considered a separate element" How you sound: "So you know how earlier I said to not look at it like a speculative? Well, we're going to go ahead and scrap that and go back to looking at it like a speculative. God I'm so smart I bet they didn't even notice or were too tired and overworked and pissed off to care! I totally convinced them with that bit about how 'it's worth it'."

12. "You should buy your home the way the gas station brought a vending machine a century ago." How you sound: "Here let me just throw in some more random bullshit suggestions to hopefully make the reader feel stupid and overwhelmed and confused while leaving out any sort of proper explanation, or even meaning in any of my words."

Housing shouldn't cost hardly anything at all, and traditionally doesn't once you own the property. Only greedy, personality-disorder having parasitic personalities would ever try to go that route, much less try to get others to believe the absolute nonsense you put out. The funny part to me is that if you're a real person, and even if you're not a landlord... you're literally working against your own best interests here with the positions you're defending and false paradigms you're pushing onto people. A part of me hopes people like you will have your way :) It would be poetic justice, if nothing else.

With your "logic" I could just as easily say that everyone who has a house loses 25 pizzas every time someone is born, because that person is a massive liability and requires tons of resources and time and energy even if you have nothing to do with them to make sure they don't crap on your pizza oven.

Economists are NOT the way forward and their logic and system are WEAK and PARASITIC / zero-sum, and the hilarious part about it all is that they've grown such massive egos they actually believe they can keep it rigged while avoiding the consequences! You eat a cake, it goes in your belly, it does not stay on the table, ok? Capiche?

Housing for our fellow human beings is a win-win, unless you make it a parasitic deal like they all are now - benefiting a few rich pathetic parasitic people who do nothing but take take take take take and worse than that - are currently holding us all back from a VERY nice, peaceful, powerful, awesome, adventure-filled present-day.

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"With your "logic" I could just as easily say that everyone who has a house loses 25 pizzas every time someone is born, because that person is a massive liability and requires tons of resources and time and energy even if you have nothing to do with them to make sure they don't crap on your pizza oven."

If you have a child, I think you have to budget more than 25 pizzas per year.

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Investment - you buy a house that provides a service over a period of time. This service is one you can sell to someone else for revenue (you're a landlord) or you sell to yourself since you gotta live somewhere.

Speculative asset - Is not an investment in this sense. You're buying something hoping someday someone pays you more for it.

A house has BOTH aspects tied together. A lot of the talk about your house as an 'investment' in this sense is misguided.

After you lived in your house for 30 years, you will sell it to someone who will pay you for the potential living that house can provide over the next 30 years. Investment. If you think houses in general or that area in particular will be booming, there maybe a premium on top of that, that's speculation.

Maybe that sums it up in less words.

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Not in the US but feel the same hopelessness for the situation. I own and have margins on my side (reasonable mortgage) but feel bad for those outside the system.

Given the current high rates and most people in my country on flexible rates, we might be in for a rough couple of years. No one can pay 80% of their income on hosting for too long.

The mountain of suddenly risky personal debt is staggering

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It's felt like the past 10 years there simply aren't enough good places to invest money or maybe there is too much money that needs to be invested due to wealth inequality. That's why you see private equity buying up the most random things and the creation of the crypto bubble. Housing is simply another part of that.

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For the antidote I recommend the book "Progress and Poverty" by Henry George but it will never be implemented because all governments are corrupt.

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this is great. i was thinking about this a lot more than i had before after digging into data back in December looking at how little we pay teachers and their lack of ability to afford a home on what we pay them (https://indytelegraph.com/objects/bc5e47fa-0a2b-46e2-b1d3-8dba3e94f162). even rent (i added more data to the chart later) which artificially keeps up with home prices.

it's wild that people don't seem understand this and perhaps it's because we can't make a good soundbite out of it.

in the end i think we should do a property/rent reset - devaluing them all where they belong (and of course adjusting mortgages to reflect the new value) and taxing people heavily for owning > N houses (not sure what N should be) as well as landlords that charge an exorbitant rate.

more to it than that, but i'm down here in the comments section. :)

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