In late June’s post where I plotted the long-term trend of inflation-adjusted local home prices, there was some disagreement with my snarky insinuation that zero real appreciation over thirteen years (1999 to 2012) represents a lousy investment.
As one reader correctly pointed out, the stock market’s total non-inflation-adjusted return over the same time period is a paltry 5.1%, which turns into a loss of 26% after you adjust for inflation. Even if you ignore the leverage you get from your down payment and the additional principal you paid into the mortgage over that time period, zero growth in home prices still beats a 26% loss in the stock market, right?
Of course, home ownership is a complex financial commitment, and simple comparisons of purchase and sales prices don’t tell the whole story.
Five years ago I published a rent vs. purchase spreadsheet that takes into account interest rates, home appreciation, maintenance costs, insurance, income tax deductions, and as many other factors as I could fit into a single spreadsheet. I’ve maintained and updated that spreadsheet over the years, so let’s use it to run a few sample scenarios for various investments between Q2 1999 and Q2 2012.
I’m not going to get into every little detail of how I’m coming up with the numbers below. If you want to see the complete breakdown, just download the spreadsheet and play around with it yourself.1
For the purposes of this post, I’ll be comparing the purchase of a median-priced King County home in the second quarter of 1999 ($229,650) financed with a fixed-rate 30-year mortgage and 20% down ($45,930), with renting and using two possible alternative investment options for the down payment: Buying an S&P 500 stock index (average yearly gain of 0.38%) or buying 10-year Treasury bonds (average yearly gain of 4.2%).2 For the rent scenario we’ll be adding the renter’s monthly savings to the investment.
Here’s a table of the total net costs for each option at various points:
| Buy a Home | Rent+Stocks | Rent+Treas. | |
|---|---|---|---|
| Year 5 | ($76,080) | ($27,221) | ($20,128) |
| Year 10 | ($130,115) | ($67,736) | ($48,379) |
| Today | ($159,780) | ($98,914) | ($69,427) |
Buying a home in 1999 becomes the better financial choice than renting and investing in the stock market by year 22 (2021), while it takes until year 27 (2026) to beat investing in 10-year treasuries.
Here’s what the buy vs. rent scenario looks like in chart form out to 30 years if the renter had invested in treasury bonds.
20 years is a pretty long time by most people’s standards, and yet it isn’t long enough for buying with a mortgage to beat renting and investing your savings.
However, if you’re the kind of person that is pursuing actual home ownership instead of serial debtorship, the situation gets dramatically better for you once you finally pay off the mortgage:
Home ownership can be a good investment, but not the way most people do it. Buying a home and “trading up” or moving around every seven to ten years is not investing in real estate. It’s renting money from a bank so you can enjoy the perks of “ownership.”
Actually owning your home—debt free—is the only way to make your home an actual investment.
2 Note that for both investment options I’ve simplified the returns to a simple yearly average. In reality treasuries would return more than that over the 13-year period since most of the 10-year bonds you would have purchased would have been at rates closer to 5.5%, and stocks would have performed better since you would have continued investing as the market crashed in 2001 and 2008.
00
I’m glad I found this … because some of these numbers don’t take into account the sum-total experience of being a renter. Or even a property “mortgage renter”
We moved into our apartment 6 months after our landlord purchased this multi-family property. In 1994.
All these years we’ve had the benefit of easy access to city, job commute under 20min most days and quiet neighborhood. Low rent for tiny sq. ft apartment. Still low rent compared to others in area.
Downsides are MANY: plumbing floods basement nearly quarterly. Only got permission to paint one room in all these years and I had to do the labor and get his pre-approval on paint. Electrical scary. Deck rotted completely thru in places before he replaced…only half the deck. Wavy, WWII era glass in windows that seeps the marine air year-round which equals, you guessed it, massive electrical heat bills. We don’t average $200 a month for utilities, we beat that YEAR ROUND. And we’re conservative users. Toilet seat breaks, he tells me “just pick one up at home depot”. I could go on and on.
Yes, I am the idiot for staying and believe me it’s been hard. All these years of burgeoning economy (before the big kaput) and all my friends buying and selling homes like mad. Well meaning friends, who are in RE, tsk tsk’ing at us for never buying. And my boyfriend and I feeling like chumps for basically paying for our landlords mortgage all these years.
I saved like a fiend but now, thanks to the big kaput, I earn 1/10th of what I earned 5 years ago.
Here we are, 2012. Landlord finally decides to list his property and possibly sell in hopes of funding retirement. Doesn’t tell anyone. Just lets us discover a stranger roaming, taking pics.
Then today, as I do yardwork (to help it look nice instead of letting his renegade so-called landscaper decimate the plants) guess what happens:
Two unmarked double length vans pull up and block me in and out pile about 30 people w/ name tags. When I kindly ask what’s up, they simply say “a tour”. A “tour” of my alley? When I ask what kind, the photographer for the group (yes, this white-bread, generic-looking group had a photographer with them) he freaking ignored me. Cleared his throat and even though 3 ft away, ignored me. He and one driver exchanged snickers and walked away.
I follow this group down to the adjacent property, only to overhear the button-down RE guy giving his spiel: “here we have a building that sold in 1990 for $$$ and today it’s valued at……..”
So, let me guess, in exchange for a stay in a downtown condo, these idiots are being given a tour of the potential investment value in near-downtown Seattle multi-units. And to do this, they have to box me in, block an entire street with 3 vehicles, act rude and put numbers on the side of their vehicles using blue painters tape, so there’s no evidence what business they’re associated with. I guess they use the numbers to help herd their groups into the right car.
They missed getting towed by mere minutes; the neighbors and I rallied to get them identified but they sped off. They knew what they were doing and they call themselves legit?!
Trying to research on-line and identify these yahoos, I stumble on your site today. And believe me, it’s timely! Because if I could scrape together the pennies to “buy” my own 4 walls and be done with listening to my neighbors intimate moments, or never again have to come home and find out the neighboring property manager cut down my lilac or wait for my landlord to come clean the sewage out of my laundry room at his leisure, I’d do it.
I’ll read your site for education but you folks are tossing around numbers as if investment means only one thing; return on invested money over a certain %. And it doesn’t. It means if an idiot drives on my property, I can kick him off it.
GRRRRR ;-)
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RE: J @ 101 – Was there a point here?
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J apparently doesn’t know anything about HOAs, which provide most of the inconveniences of renting at a mortgage premium, with the bonus that they can seize your home if the idiot you kicked off your property is an HOA board member.
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Pegasus — The point is, value is in the eye of the beholder and if you all are going to discuss value only as a numbers game then you are just pushing peanut shells around and talking to each other in a self-made bubble.
I’ll learn from reading this sites content but if you can’t glean some info from what I shared, but instead what to debate which neighborhood should be razed next so you can fit in more aPODments, then, your loss.
Whee — And no, I don’t participate in a HOA living situation; this is a public neighborhood I live in, not one of our gated, measure-the-height-of-your-lawn communities. Thank god. Sounds like you know all too well about HOA.
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J, you already said you were a renter, not a home buyer. I was just pointing out that buying is not guaranteed to remove all the problems of renting, as HOAs and the like are quite common all over this region, in city and out, and for homes of all sizes, including condos and townhomes.
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RE: J @ 101 – You have rights. Enforce them.
“Electrical scary.” – call the city
“Deck rotted completely thru in places before he replaced…only half the deck.:” – call the city
“Landlord finally decides to list his property and possibly sell in hopes of funding retirement. Doesn’t tell anyone. Just lets us discover a stranger roaming, taking pics.” – get a lawyer and go over your lease. You should have “enjoyment” of your property, etc.
This is not legal advice, to forestall Kary.
Get some balls – this is also not legal advice, but geez, when do you stand up for yourself?
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By whee @ 3:
Total nonsense and ignorance.
If you complain about HOAs, chances are you’re the type of person others don’t want to live next to. HOAs protect people from people who show little or no consideration for other people. They shouldn’t be necessary, but some people are pigs.
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RE: J @ 104 – What I “gleaned” through your lengthy discourse was that you have been a renter by choice for 18 years in a small apartment while paying a below market rent. Now that the landlord is selling you are suddenly angry that you might lose your gravy train and now all you can think about are some of the unpleasantries that occurred over the years that obviously you were willing to endure until you were suddenly confronted with the reality that you may have to move or your rent may go up in the future. Having real estate agents suddenly appear in your neighborhood must be unbearable…..
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RE: ChrisM @ 6 – Standing up for yourself can often result in your getting thrown out, at least in low income housing where the conditions are bad.
Years ago I had a friend without much in the way of income who was renting an apartment for the first time. I tried to advise him before hand to avoid situations where the heat bill would be high. He apparently took that advice to heart, because he rented a ground floor apartment which didn’t have any heat! It also seemingly hadn’t been painted in over 10 years, and when we painted we found hypodermic needles lying around. Clearly the owner was what you would typically call a slumlord.
If my friend had complained, the owner might not have been able to do anything to bring heat to that unit. I don’t remember it’s electrical system (other than the fact the stove was mis-wired in such a way that you didn’t want to touch it while being grounded to something else). If it had not been possible for the unit to have heat, the city probably would have shut down that unit, forcing my friend to move.
But clearly the neighbor would have been kicked out. I never went inside her unit, but I’m pretty sure an apartment with only one door and no windows is not a legal apartment.
Anyway, my point is simply there are sometimes reasons people don’t complain. I’m sure there are other reasons too.
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RE: Pegasus @ 8 – That actually sounds like a fair assessment. To the extent he’s upset about the rent possibly increasing, that’s life. But some of the concerns are legitimate.
I would add that any time you rent that is a possibility that the owner will sell. Even if you rent a house, that is a possibility. You can demand 24 hour notice for trips inside your house or apartment, but that’s about it. If you live in multi-unit housing, there is no reason for the owner to notify you of their intention to sell prior to someone actually wanting to look. For houses though, the owner would typically list the house, which would entail a sign and the agent presumably contacting you to discuss showing terms.
Clearly J is upset about this, and to some extent I think those concerns are legitimate. It’s part of the reason I wouldn’t want to be a renter. I’m happy knowing that I’m not at the whim of some owner and their plans on whether or not to sell.
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RE: J @ 104 –
Yours is a typical story of some one who has had long term cheap rent. You must of known the day would come when the truck would back up and the Real Estate weasel would hop out.
Well that day has come, and the owner, who neglected the building, is going to sell, or is being forced to sell.
The good news is you can maybe ride out this transition because your land lord is also typical of what’s going on today.
Depending on the condition of the building it may be cheaper to tear the thing down, and start over. That would give you some time. If the new owner wants to come in and start charging higher rent, they have to improve the building.
For most new owners it’s better, and cheaper to make the numbers work in the easiest way possible.
When the property sells, check the public records to see what the sales price is. Call the City to have the property inspected. Express your concerns that the past land lord has promised to make repairs, and you want to ensure those repairs will be made. The City doesn’t disclose the source of the complaint.
If all settles out, you should be in a better place with a slight increase in rent. If it turns bad, and the new owner wants to play hard ball, well you have recourses, based on your loyalty.
You have been lied to and taken advantage of for over twenty years. You have rights that the new land lord, or property manager, has to honor. The worst thing that can happen is you have to move; well you are kind of at that point anyway.
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Bingo – Thank you ChrisM, Kary and David, your feedback is exactly what I was hoping to create from my expansive post. It’s appreciated immensely. However, I’m not genetically suited to have balls but grow them I must. HA
There has been some discussion with landlord that a renewed lease protects the renters, so that if a new owner wants to tear down or re-organize tenants, they need to “buy” out the remaining lease. Still researching the legality or truth of that….
Pegasus – I did take a risk by posting not only lengthy, but emotional info about what is technically a housing decision. This wasn’t a gravy train was my point and I’m sorry you missed that. But I chose to rip back the curtain, if you will, yesterday and just put all the ugly emotional details out there. I suppose I wanted to vent but also because I saw a lack of connection in some comments about rent vs. buy as to what constitutes VALUE. And given the recent upheaval in my hot RE neighborhood, I was feeling a little frustrated.
Good grief — I just had an epiphany. I come here looking for info, learn what steps I can take and see what RE educated people are talking about. And in getting so frustrated about the situation, I’m busy trying to tell YOU to stop talking statistics and numbers when in reality, that probably is exactly what I should be focusing on.
harumph. shoot, I have to give up feeling like a victim in this. Darn, I’d hoped to hang onto that longer….
Come on folks, I’m joking. Have a laugh already.
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By J @ 112:
Off the top of my head I don’t know why that wouldn’t be correct. Assuming a valid lease, that would typically apply to a new owner too.
Keep in mind though that new leases also benefit the seller. They would have a more firm income flow for the next year, and that would help the price in many markets, especially ones where conversion to condo is not a real option. Also keep in mind that the transfer of an apartment building can be a somewhat lengthy process compared to the transfer of a house, and when the parties have come to terms on price the buyer will typically limit what the seller can do if the plan is to make major changes. So for example, if condos or a tear down were contemplated, the buyer would request that leases be limited to six months, or some such thing.
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RE: J @ 112 – Now you got it….;^)
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I choose not to consider HOA properties because of the horror stories I’ve heard about things like hanging a clothesline or having a decorative tree and being threatened with massive fines. People who love HOAs tend to love being rude and invasive themselves, far more so than people who live in normal places without HOAs.
Plus out in the boonies, HOAs are often a way for people to pay extra to not socialize with each other on their 5 acres of woods nobody is allowed to trim or maintain or landscape. Seems more piggish than not, to me.
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RE: whee @ 115 – You shouldn’t believe what you read in newspaper articles. They try to make things sound sensational so that people get upset.
The most recent example of that in HOA land was our local Carriagewood, where an owner was violating the provisions of the covenants by running a daycare out of their home. Rather than making any attempt to get the rules changed, they sued the association and its board members (who were able to get the action quickly dismissed as to them), ratted out two other owners running daycares, and then ended up with a judgment against him for about $100,000 or so. But KOMO made it sound like the HOA was beating up on the guy. He brought it all upon himself, first by ignoring the rules, and second by taking the most aggressive stance possible when someone complained.
I would agree though you probably don’t need an HOA for a 5 acre parcel. Two acres and I would still want it, depending on the placement of the houses.
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RE: Kary L. Krismer @ 116 – Speaking of Carriagewood was there a specific prohibition of daycares or just operating a business out of your home, like two real estate agents selling real estate from their home?
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Kary, the HOA horror stories are from people I know, not news stories, and it is stuff like a decorative but edible tree, not a shade tree mechanic shop or illegal daycare.
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By Pegasus @ 17:
Thank you for your concern, but it’s perfectly fine. From our rules:
Seemingly we don’t impact any of those concerns.
Daycare and auto repair are specifically prohibited activities, as I believe was the case in Carriagewood.
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RE: Kary L. Krismer @ 119 – “Auto repair” ? Hahaha is that what they call some idiot parting out his old junker in his front yard? So you never have documents delivered to your home or client cars parked at your home? ;^)
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By Pegasus @ 120:
Nope.
It always amazes me how anonymous Internet posters can make such incredibly bad guesses about what I do. Documents delivered to my home? What century are you from?
FYI, you need to deliver documents to the designated broker’s office (the firm’s office) for the delivery to be effective. The best method for doing that is fax.
Clients get to ride in my 1989 Ranger, but they don’t come to my house. For that there’s the office.
BTW, the auto repair thing can be a big problem. It’s not repairing your own automobile that is prohibited, it’s repairing other peoples’ cars as part of a business. I had that activity going on when I lived in Skyway, and it was annoying to another neighbor. Without an HOA, apparently not much can be done about it, or at least that neighbor wasn’t successful in his efforts.
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From The Tim:
‘Home ownership can be a good investment, but not the way most people do it. Buying a home and “trading up” or moving around every seven to ten years is not investing in real estate. It’s renting money from a bank so you can enjoy the perks of “ownership.”’
I would just like to point out that “most people do it” probably is almost exclusively true in North America. In many countries (especially in Europe) buying a home is a lifetime decision and people only sell their homes when they either need to downsize late in their life due to health issues or when severe changes in the local economy create enough impetus for moving.
This can however also have bad consequences for the economy as a whole: I know quite a few people in Germany who refuse much better jobs and living conditions and instead scrape by or make crazy commutes as they do not want to sell their family home. In every single case this decision is up to the person but for a society as a whole this extreme lack of mobility is probably not desirable either.
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By Kary L. Krismer @ 21:
While I of course do not question your point it is amusing to me to read those two statements in one post. After all the unencrypted archaic technology that is known as foxing… uhm I mean faxing is about as outdated as giving smoke signals.
I can not understand why so many people still rely on this even though the fact that the communication is unencrypted should mean that it is an absolute no go for anything of importance. I am also aware that with some alternatives there are legal issues which keep up this archaic approach, but that simply should be changes and should not serve to defend a legacy system.
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By Daniel @ 123:
Yep, legal issues keep it in place. Faxing has the advantage of having a built in system for acknowledging receipt of pages. Email is problematic in that regard because transmission of emails with attachments is often delayed, and receipt requests are optional responses. For time critical documents neither is a good thing.
My practice is to create a PDF, fax that from my computer & multi-function machine, then scan the fax confirmation document into the PDF, then email that to the other agent representing to them that’s the document which was faxed, with the confirmation attached. That way they have a clean copy to work with. I’d also note that only time critical documents need to be faxed, so you don’t have to fax back and forth repeatedly.
I’ll note though that Pegasus was talking about physical delivery of documents. One wonders whether he was envisioning the document copy being created by use of carbon paper or a mimeograph. Don’t assume when I asked what century I was limiting him to either the 20th or 21st. ;-)
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RE: Kary L. Krismer @ 124 – Actually Kary I was thinking that you might require an actual signature on an offer and an actual check for the money down. Have you stopped requiring a signature on a listing agreement? Using your home to collect those would, it appears, violate the HOA agreement that you cited as would having clients come to your home, etc. which as you probably don’t recall was the reason I posed some questions about two real estate agents operating a business from their home and questioned whether that would be legal under the HOA for Carriagewood. You tried to deflect those questions with your typical nonsensical responses that had little if anything to do with my original questions and since I appear to have hit close to home, you can’t let it go….
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The New York Times have a pretty fantastic interactive graph that I used when making the rent vs buy decision: http://www.nytimes.com/interactive/business/buy-rent-calculator.html
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RE: Rob @ 126 – I agree, that’s the best online rent vs. buy calculator out there. That’s why I linked to it right in the footnote of this post…
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[...] happen to have a convenient spreadsheet I designed to tackle nearly this exact same problem. I last posted data generated by this spreadsheet in July. Here’s a link to the spreadsheet so you can download it yourself. Let’s plug in some [...]
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