One of the things that he's critically missed is that it's unfair to only compare the price of buying vs. the price of renting today. When you purchase a house, your mortgage is set for the term of the mortgage. Rent is usually only set for a year at a time and does go up.
The NY Times buy vs. rent calculator in the article that he links, uses 3% as a baseline rent increase per year. So, after 5 years, a $1500 rent could be expected to cost $1740. That's not too impressive if you assume it's a place worth $375k and at his 2% taxes and maintenance price, you'd have $625 in costs in addition to the mortgage - well over the $240 that the rent had risen. However, after 15 years, that theoretical rent would have risen to $2300 and eclipsed the cost of taxes and maintenance. Now, as home values rise, taxes would rise with it, but then you own something that you can sell for more money and have made a good investment so it isn't a good argument to say, "well, one's home could go up in value a lot every year which would mean more taxes."
It depends on what you're buying a property for. Frankly, the NY Times calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) is going to be a lot better than my crude calculations. However, if you're buying a property to stay in for a good while, it can be a better idea to buy. The costs of selling don't matter that much when you've stayed in a place for a long time. It also depends on your market. I've priced things out in the Boston area against rent (more urban than Greenspun), and it really depends on how long you're going to stay in that place. Most of the cities here offer you a homestead exemption on your property taxes if you live there and it's usually around 200k - meaning that if you buy a place for $400k to live in rather than rent, you're actually only paying half the property tax rate. The towns tend not to have that exemption. So, if you want to be in one place for a decade, the calculator shows that buying can be a nice option.
Buying a house isn't something to go in for like buying an iPhone and getting a two-year cell phone contract. It requires a careful look at the costs and that you're relatively settled in life. It isn't a panacea of money, but it can be cheaper and can be stabilizing. While it isn't everyone, there are people who really like an area, have a job that won't see them have to move, and would stay in that house for 20-30 years.
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Plus, if you look at Trulia's rent-vs-buy index (http://trulia.movity.com/rentvsbuy/), you'll see that Greenspun has cherry-picked the worst cities to buy to do his calculations. Trulia notes that in 36 out of its 50 cities studied, it is "much less expensive to buy than rent". That includes real cities like Chicago, Wahsington DC, San Diego, Minneapolis, Philadelphia, and Atlanta. He's used a buy-to-rent ratio of 30:1, but the average for the 50 cities shown is 14.22. So, we live in the Boston area and buying here is an expensive proposition that might not make sense. However, there are many places that have much more favorable ownership conditions. If you're in a market where the buy-to-rent ratio is below 15:1, the NY Times calculator will show you how favorable buying is. And, frankly, that's most of the country. Where Greenspun and I live seems to be the exception, not the rule and his calculations are based on data that doesn't apply to most people. It applies to him and it applies to me based on where we live, but it probably isn't something that one should generalize to the country.
It is also important to mention prediction regarding prices of real estate (which also influence rent).
For example, prices of real estate in Japan are still falling down - nearly 20 years of constant decline [1].
There were articles in 2007 [2], how Japan's real estate crash may finally end after 16 years, but oh well.. we know happen in 2008.
However, how many people stay in a place for the life of the mortgage? This is the flexibility part of the equation. If you lose your job in one area then while renting you can adapt quickly. If you own you have to sell (at a loss) or try to rent, at 3% of your cost. These are not features in times of economic instability. You say, "it isn't for everyone", but really there are very few who benefit from an illiquid housing market with low rents.
Actually, anybody can benefit from an illiquid housing market with low rents. Anyone that is smart enough not to buy and just wants to rent and invest their hard earned money elsewhere. In my affluent neighborhood I can rent a house for $2,000 a month that would cost $4,000 a month to pay a mortgage on, not counting maintenance, repairs, and upkeep. I could take that extra $2,000 a month and invest it in conservative financial instruments and make at least 6-7% return. Or I could be paying a $4,000 mortgage with only about $500 of that going towards equity and having to pay an additional $10,000 annually of maintenance and upkeep (generally considered to be 1.5% of total house price per year).
Which one would you do? The reason why _some_ people make money from housing is leverage. You take out a huge loan and if it goes up in value a few %, you made much more than your starting value. Leverage works exactly the same way when prices are declining. Your small $50,000 downpayment is quickly erased by a 5% decline in value.
I don't like leverage in my investments. I prefer to know that I can't lose more money than I invested in the first place. I diversify my risk so that I can never lose more than 10-25% of what I own with a single investment. Why would I put so much money in a single asset that is extremely illiquid and has so much leverage that I can lose more than my net worth?
Housing just doesn't make sense until the market returns to reality - and with federal subsidies including tax credits, Fannie Mae and Freddie Mac, it won't return to a fair market until _all_ government subsidies are removed, including mortgage interest tax credits, Fannie/Freddy backing mortgages, etc.
My thoughts, also. It used to be that you could reasonably argue the money you'd spend "investing" in a home would be better spent in the market, but that would not seem to be the case, these days. Not to mention, there is now a distinct value to having a roof over your head that is your own that is, perhaps, more emphasized than five years ago.
The key is, you can invest in real estate without owning a home and better still: be diversified into multiple kinds of real estate. A home is a very homogeneous investment vehicle. Think of it more like a savings account with a maintenance fee but you can live inside it.
In effect you may be owning a very small sliver of the loan the person renting the apartment to you is paying off. By giving them a tax break, their ability to repay the loan improves and as one of the many people who has invested in their success, you get a return on your investment for taking a risk in that market. It's not like that interest saved vanishes. Someone benefits from it. In this case it happens to be the financial system backing the loan as well as the person who took the loan.
Money flows, tax breaks can decrease the viscosity of that flow.
Young people? Probably not many anymore. Elderly, or people who've got a decade+ invested in a large company? Tons will stay put for 10-15 years or longer... (hah, self fulfilling prophecy - if you CANT sell, you'll stay longer too).
What happens when those companies downsize or outsource their jobs? They can't move and they don't want to learn new skills. If anyone thinks that because they've had the same job for 10 years they're going to have it for the next 10, I'd say they're crazy. (Having been through layoffs a couple times in the last decade.)
True. That's a big risk and that's one major reason to hold off on buying a home. However, at some point, you have to either decide that you're going to live somewhere or you have to decide you're going to spend your entire life as a nomad. I've been with the same company my entire adult life and my feeling of uncertainty made me delay buying a home by almost fifteen years. I eventually decided I can't just keep living my life (relationships, purchases, etc) based on a fear that I may or may not be in one spot long term.
Wrong. While one of the products Trulia offers is a subscription service for realtors, Trulia is independent and committed to providing the most accurate information to consumers (I'm YC founder from '06, and a am now a product lead at Trulia)
Additionally the 3% rent increase theory may be true in aggregate, but doesn't take into account the real world practices of landlords. It's exceedingly common to list a property for a low lease then jack it up after the first lease term. They understand the friction of moving puts them in a better bargaining position the second year vs. first move in.
As a whole rates may increase 3% per year, but individually it will look more like a 7-10% increase the first year followed by 3% increases thereafter, unless you move.
I've rented for most of my life, and never seen that happen. In fact most leases I've signed switch to month-to-month after the first year, thus decreasing the friction.
When I rented last, my lease switched to month-to-month if you didn't sign up for a new term, too. It went from (at the last number) $1,200/mo under lease to something like $1,900/mo without a lease.
Normally your renters agreement will have a clause saying that they can only increase the rent by X% a year. If they want to go above X then they need to give you one years notice. At least my rental agreements have looked like that.
In my experience, leases are exactly the opposite. You sign a lease for up to a year and are locked in at a certain price over that year and they do whatever the hell they want to when it comes time to renew your lease for the following year. Your option would be to switch from annual lease to monthly, but you're often looking at paying double the monthly rent, then.
Yeah my option is an annual lease, they can only change the rent @ the end of the lease (that's why the minimum when they go above the max is 1 year - basically you always have @ least a year at a predictable rate).
As someone pointed out further below, though, the mortgage "term" is not the time it will take you to pay off the loan but significantly shorter. So you can most definitely be hit by increased rates.
In the US, you have fixed-rate mortgages and adjustable-rate (ARMs). Fixed rates are usually 15 and 30 years. The longer the term, the lower your monthly commitment, of course. I believe a 30yr fixed rate is probably the most common type of mortgage. I don't know the details of the ARMs, but a lot of people were suckered into those which is why a lot of people are having huge problems, these last few years. If you get as much or more house than you can afford so that you're just getting by every month and a few years down the road, your rates jump, you're screwed.
My fixed mortgage is fixed for the life of the loan (until 2040), so over time, the percentage of my income dedicated to paying my mortgage will continue dropping.
As a European I'd give up a non-essential body part for a mortgage like that. Even 10 year fixes are rare in the UK and we're coming off of a 2 year fix later this year. While we have plenty of leeway with our budget, it's pretty annoying not knowing the exact amount I'll be paying until the very end of the mortgage. I wonder why this concept doesn't exist here.
There appears to be a lot of government involvement in the US mortgage market (e.g. providing guarantees for mortgage backed securities). We don't have anything like that in the UK.
The NY Times buy vs. rent calculator in the article that he links, uses 3% as a baseline rent increase per year. So, after 5 years, a $1500 rent could be expected to cost $1740. That's not too impressive if you assume it's a place worth $375k and at his 2% taxes and maintenance price, you'd have $625 in costs in addition to the mortgage - well over the $240 that the rent had risen. However, after 15 years, that theoretical rent would have risen to $2300 and eclipsed the cost of taxes and maintenance. Now, as home values rise, taxes would rise with it, but then you own something that you can sell for more money and have made a good investment so it isn't a good argument to say, "well, one's home could go up in value a lot every year which would mean more taxes."
It depends on what you're buying a property for. Frankly, the NY Times calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) is going to be a lot better than my crude calculations. However, if you're buying a property to stay in for a good while, it can be a better idea to buy. The costs of selling don't matter that much when you've stayed in a place for a long time. It also depends on your market. I've priced things out in the Boston area against rent (more urban than Greenspun), and it really depends on how long you're going to stay in that place. Most of the cities here offer you a homestead exemption on your property taxes if you live there and it's usually around 200k - meaning that if you buy a place for $400k to live in rather than rent, you're actually only paying half the property tax rate. The towns tend not to have that exemption. So, if you want to be in one place for a decade, the calculator shows that buying can be a nice option.
Buying a house isn't something to go in for like buying an iPhone and getting a two-year cell phone contract. It requires a careful look at the costs and that you're relatively settled in life. It isn't a panacea of money, but it can be cheaper and can be stabilizing. While it isn't everyone, there are people who really like an area, have a job that won't see them have to move, and would stay in that house for 20-30 years.
--
Plus, if you look at Trulia's rent-vs-buy index (http://trulia.movity.com/rentvsbuy/), you'll see that Greenspun has cherry-picked the worst cities to buy to do his calculations. Trulia notes that in 36 out of its 50 cities studied, it is "much less expensive to buy than rent". That includes real cities like Chicago, Wahsington DC, San Diego, Minneapolis, Philadelphia, and Atlanta. He's used a buy-to-rent ratio of 30:1, but the average for the 50 cities shown is 14.22. So, we live in the Boston area and buying here is an expensive proposition that might not make sense. However, there are many places that have much more favorable ownership conditions. If you're in a market where the buy-to-rent ratio is below 15:1, the NY Times calculator will show you how favorable buying is. And, frankly, that's most of the country. Where Greenspun and I live seems to be the exception, not the rule and his calculations are based on data that doesn't apply to most people. It applies to him and it applies to me based on where we live, but it probably isn't something that one should generalize to the country.