Author Topic: Homeownership doesn't build wealth - according to a study by universities  (Read 2792 times)

HawkeyeNFO

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https://www.cnbc.com/2017/11/16/homeownership-doesnt-build-wealth-study-finds.html

"On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation."
-Ken Johnson, study co-author

A common discussion here at these forums has now been looked at by academia.  As with anything else in real estate, it's location, location, location.  A few areas seem to have lots of price appreciation, but most of the country does not.  I am in a home that we bought with a VA loan, so we had a down payment that was minimal, yet just enough to reduce the VA funding fee.  That allows me extra money to invest in mutual funds.  I don't ever plan to pay off the mortgage, due to the low fixed rate I have.  Once the 3 kids are out of the house, we will sell.
« Last Edit: November 16, 2017, 05:42:01 PM by HawkeyeNFO »

Enigma

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #1 on: November 17, 2017, 01:52:39 AM »
I think it is interesting the article is pegged to the 'housing crash'.  Somehow the article left out both the banking credit crunch and the stock market's recession.  If you peg the housing market with today's rental prices and housing prices then I agree in the short term you bank more as a renter.  Right now in my opinion we are in a renter's market.  I do not predict that in the future.  Markets shift and are unpredictable.  If you are a home owner then you are sheltered from the fluctuations.

I foresee the rental market getting better for landlords for multiple factors.  First home ownership is out of grasp for individuals with lots of college debt, individuals with terrible credit, and individuals dependent on government handouts.  Millennials have been shown to be less likely to become homeowners leading to a decrease in rental inventory.

A better comparison would be a renter vs a home owner over 20 year period.  The metropolitan areas were affordable for owners 20 years ago.  Now they are becoming unaffordable $1mil+ houses.

nereo

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #2 on: November 17, 2017, 05:16:15 AM »
Hving a hard time finding the article referenced.  Johnson is too common a name for a google scholar search. 
Anyone?

SwordGuy

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Neo

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #4 on: November 17, 2017, 08:50:40 AM »
You can get lost in the math all day. Paying off a home is key to a lot of people's FIRE plans and there is more that goes into a rent/buy decision than raw numbers (stability, inflation, appreciation, on and on). I do, however, fully believe that renting is being seen more and more as a viable strategy compared to years ago when the greater public saw renting as a sign one was poor, bad credit, etc.

YttriumNitrate

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #5 on: November 18, 2017, 11:12:02 AM »
While I don't doubt that the math can certainly work out where renting is far better than owning a home, I would also wager a great deal that if 100 random people bought their houses and 100 random people rented for life, the 100 that were homeowners would be far richer 30 years from now. The advantages of forced savings should not be underestimated.

WhiteTrashCash

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #6 on: November 18, 2017, 11:14:22 AM »
I agree with this article 100%. In fact, why don't you give me your money in the form of rent and I will make the sacrifice of actually owning the property?

aasdfadsf

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #7 on: November 21, 2017, 12:08:01 AM »
Jebus, I have a sneaking suspicion that these guys failed take the imputed rent into account, which is virtually always the case when someone comes up with this "contrarian" advice. If so, that is unforgivable for university professors.

This bit does not engender confidence:

Quote
Real estate can still be a good investment, according to Johnson, but not necessarily living in the home you own.

This is nonsensical. Any property that cash flows is by definition one in which the rents exceed the costs, and therefore owning it and living in it must cost less than renting the same property from someone else. And this is without accounting for the fact that rental properties have far more costs associated with them than owner-occupied properties. All things being equal, the first investment property you should own is your own home.

This is not something that takes fancy math and modeling to understand, it's a matter of basic logic. Either residential property investors are a bunch of philanthropists, or they're earning a significant margin off their renters (and/or future buyers).

Kroaler

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #8 on: November 21, 2017, 06:26:13 AM »


A better comparison would be a renter vs a home owner over 20 year period.  The metropolitan areas were affordable for owners 20 years ago.  Now they are becoming unaffordable $1mil+ houses.


Isnt that the very process that creates crashes?   If nobody can afford to buy/own the properties then the price will need to fall to an amount where someone can afford it.       Or is my logic completely flawed?

SwordGuy

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #9 on: November 21, 2017, 10:16:02 AM »

This bit does not engender confidence:

Quote
Real estate can still be a good investment, according to Johnson, but not necessarily living in the home you own.

This is nonsensical. Any property that cash flows is by definition one in which the rents exceed the costs, and therefore owning it and living in it must cost less than renting the same property from someone else. And this is without accounting for the fact that rental properties have far more costs associated with them than owner-occupied properties. All things being equal, the first investment property you should own is your own home.

This is not something that takes fancy math and modeling to understand, it's a matter of basic logic. Either residential property investors are a bunch of philanthropists, or they're earning a significant margin off their renters (and/or future buyers).

The overpriced McMansion people choose to live in would rarely make a good rental property, so I think your criticism misses the mark.   If people instead typically lived in a simple home whose price-to-rent ratio made it a good rental, I would completely agree with you.

Yankuba

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #10 on: November 21, 2017, 11:28:31 AM »
I saw this CNBC article when it came out. It really depends on location.

Here is a NYT calculator:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

In my neighborhood, it would cost me $3,500 - $4,000 per month to rent what I purchased. But the breakeven point where renting is better than buying is $1,815. Renting is a terrible choice where I live

iris lily

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #11 on: November 21, 2017, 11:43:01 AM »
Funny, lack of home ownership is one major problem pegged to the poverty of African Americans.

The NPR story some time ago postulated that the Federal
Government’s interference in the free market, where the feds had policy to keep blacks out of white neighborhoods, not only was discriminatory vit resulted in generational poverty, especially on the East coast where real estate values are high.

This NPR stoey was highlighting someone’s research, but I cant remember who.

boarder42

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #12 on: November 21, 2017, 11:45:31 AM »
You can get lost in the math all day. Paying off a home is key to a lot of people's FIRE plans

it shouldn't be - most people here are in low fixed rate loans and paying off their home in most cases increases time to FIRE and decreases the length of time your money will last after FIREd.

you should start getting lost in the math of mortgage value.

afox

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #13 on: November 21, 2017, 02:41:00 PM »
I cant read the article but a couple of thoughts about rent and invest vs buy debate:

1.  buyers nearly always end up buying more house than they need, this is in part due to the il-liquidity of real estate and you cant blame them.  If you are planning to need more space in the future better to spend more now rather than buy properties twice mainly due to the very high transaction costs of RE.  Renting offers more flexibility in terms of home size and especially in terms of location.  Many job seekers do not move for a better job because they own a home or not moving results in long and costly commutes.  The affect of this on workers incomes and commuting expenses is very hard to quantify.

2.  Nearly all rental RE investors (landlords) do not account for all of their costs (in dollars and time) when calculating their returns.  As anyone who rents properties knows a lot of time and money is required to buy, manage, and sell properties.  I am a landlord and I know a lot of landlords and none can give me an accurate estimate of their actual costs.  If your RE investment is a part time or full time job it damn better well beat stock market returns!  The time and costs incurred are very hard to quantify. 

3.  Home prices are tied to incomes.  Home prices are high in NY and SFO areas because incomes are very high.  Banks and the federal government actually have hard limits for monthly housing payments (it is somewhere around 30% of income).  Thus, when people say things like housing is becoming unaffordable and if you dont buy now you will never be able to I am at the least skeptical. 

4.  In the long term and over large areas home prices increase at the same rate as inflation.  See #3 for part of the explanation of why this is so.  Also, understand that technology is continually making housing quality better and price to build cheaper. 

5.  Homes are consumable items that will crumble and become worthless if not continually maintained and rebuilt.  The IRS calculates the life span of residential real estate at 27 years.  That means that the value of the building will be worthless after 27 years without continued expense.  Land is a small part of residential real estate value.
 

 




boarder42

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #14 on: November 21, 2017, 04:45:59 PM »
I agree with everything except the land part. Land is a high cost part of residential real estate in some locations. My land is worth more than the cost to rebuild my house.

afox

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #15 on: November 22, 2017, 09:32:15 AM »
Sure, sometimes the land is worth more than the building.  This is not typical in most areas though.  Seems like it would be some peculiar situation like a run down building in a good area or a very large lot with a smaller/lower quality building. 

I think RE is a great investment, its a great way to diversify a portfolio and it has the "sweat equity" feature.  This does not apply just to equity but also to rental income.  Unlike investments like an S&P index fund a hard-working individual can improve the performance of their RE investment by making improvements to property or finding better tenants, better mortgages, etc.  If your S&P index fund is not performing you can't work on it on the weekends to improve its performance.  For some people the work (managing, improving, and maintaining properties) can pay as much or more than their "day job" and you are working for yourself.  If I could do it all over again I might have skipped the years and expense of university and gone straight into a career of RE investment.

aasdfadsf

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #16 on: November 22, 2017, 11:15:30 AM »
The overpriced McMansion people choose to live in would rarely make a good rental property, so I think your criticism misses the mark.

If their advice was, "don't buy an overpriced McMansion", that would be sound advice. But that wasn't their advice. Their advice was generalized onto all home buyers, even those who don't make stupid decisions.

SwordGuy

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #17 on: November 22, 2017, 12:10:44 PM »
Land is a small part of residential real estate value.

That statement is wrong.

In some places it is true, in other places it is thoroughly and completely false.     Therefore, the statement is wrong.


clarkfan1979

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #18 on: November 25, 2017, 07:46:51 AM »
I cant read the article but a couple of thoughts about rent and invest vs buy debate:

1.  buyers nearly always end up buying more house than they need, this is in part due to the il-liquidity of real estate and you cant blame them.  If you are planning to need more space in the future better to spend more now rather than buy properties twice mainly due to the very high transaction costs of RE.  Renting offers more flexibility in terms of home size and especially in terms of location.  Many job seekers do not move for a better job because they own a home or not moving results in long and costly commutes.  The affect of this on workers incomes and commuting expenses is very hard to quantify.

2.  Nearly all rental RE investors (landlords) do not account for all of their costs (in dollars and time) when calculating their returns.  As anyone who rents properties knows a lot of time and money is required to buy, manage, and sell properties.  I am a landlord and I know a lot of landlords and none can give me an accurate estimate of their actual costs.  If your RE investment is a part time or full time job it damn better well beat stock market returns!  The time and costs incurred are very hard to quantify. 

3.  Home prices are tied to incomes.  Home prices are high in NY and SFO areas because incomes are very high.  Banks and the federal government actually have hard limits for monthly housing payments (it is somewhere around 30% of income).  Thus, when people say things like housing is becoming unaffordable and if you dont buy now you will never be able to I am at the least skeptical. 

4.  In the long term and over large areas home prices increase at the same rate as inflation.  See #3 for part of the explanation of why this is so.  Also, understand that technology is continually making housing quality better and price to build cheaper. 

5.  Homes are consumable items that will crumble and become worthless if not continually maintained and rebuilt.  The IRS calculates the life span of residential real estate at 27 years.  That means that the value of the building will be worthless after 27 years without continued expense.  Land is a small part of residential real estate value.
 


1. It makes sense to buy a house that you can grow into. However, I have always lived in HCOL areas and people typically buy small starter homes including condos and townhouses first. After some healthy appreciation after 5 years, then they can afford to sell and buy a single family home.

I also partially agree with buying a home might limit your job prospects. However for me, when I moved for a new job, my primary residence became a rental. However, I agree that this is not normal.

2. I keep pretty good detailed notes on my time and repair costs of two rentals. However, in the beginning I did not. Once I started using Mint, my records got much better.

3. I live on Kauai and housing is unaffordable for the local people. The level of education is low and most people make $15/hour at a restaurant or hotel. Median single family home is 600K.

4. I think technology is making it easier to manage properties from long distance. I live on Kauai. I have one rental in Colorado and one rental in Florida. I have family in both areas, so I do one site visit at least once a year.

5. I think it depends on construction quality, weather and quality of tenants. My current tenants in my Colorado house take better care of it than I did when I lived there. A roof in Colorado can last 25-30 years. A roof in Florida lasts 15-20 and that's based on no hurricanes.

I moved to Fort Myers, FL in 2011. I ended up buying a single family home for 95K. My total mortgage payment with insurance taxes and PMI was $658. If I would have rented that house in 2011, it would have cost $1200/month. Many people lost their homes to foreclosure and could not qualify to buy another home when the housing market tanked. That house now rents for $1700/month. The total payment is now $614/month because I no longer pay PMI. I wish I could have bought 5 of them.

Dicey

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #19 on: November 25, 2017, 10:19:01 AM »
I take issue with their findings for a number of reasons, primarily that the results are theoretical. Most renters do not invest the difference with 100% consistency. Having the threat of losing your home if you don't make the mortgage payment is a damn fine motivator.

Anecdotally, we are FI and I am RE because each of us bought real estate. We still do. Not gonna change.

canuckystan

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Re: Homeownership doesn't build wealth - according to a study by universities
« Reply #20 on: February 14, 2018, 08:48:23 AM »
This probably works if a computer is renting vs. buying.  Humans don't act logically and make all kinds of emotional decisions with money.  Forced savings of home ownership is how people get wealthy with home ownership.