Do you agree owning your own home isn't always worth it?

[GuitarStv]

OMG, I'm Joe!

Did you buy your "forever" home at age 30?  I would say that's very Mustachian!

I'm Joe's younger sister. Bought in my first home in my early 20's. Paid it off in my early 40's.  A starter home makes a great 'downsize' home, as it happens.

Yeah, we bought our home in our late 20s, paid it off in our mid 30s, and expect to be living in it until our 50s at least.

[Retireatee1]

Well there was a bit of an oversight with my original simulations.  I didn't have the state tax set.  So the Joe's have moved to Florida.  There's no state income tax, but Joe the Buyer will have to shell out for property taxes.  This pushed his retirement back to December 2004.

Joe the Renter's equivalent monthly rent increased to $1000.  This really evens it out a bit more as I see it.

[Retireatee1]

Well I found another mistake, Joe the Owner was being awarded free equity on the house in 1970 from the down payment.  I've awarded a comparable lump sum to Joe the Renter.  Now the comparable rent is up to $1150.

[Retireatee1]

Here is the net worth chart for the renter in 2021 dollars including Social Security benefits:



And here is the owner.  You can see where part of the home equity ("other") was converted into an annuity from the reverse mortgage in 2003:



The owner had to take on some debt in the early years to offset that mortgage.  The renter was able to invest that instead and his portfolio value reflects that.

You can see how the owner saw less net worth drops from the dot com bubble, great recession, and epidemic.

[kite]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

Marrying well.    /s   
However Money Market rates in the early 80's were insane.

We're talking past each other.  You'll be able to FIRE because your housing costs are substantially reduced relative to market rate rents via your coop.  In parts of the world where there isn't a mechanism subsidizing rents or capping costs with rent control, there is a cross-over point at which buying via leverage and owning comes out ahead financially because future housing costs are substantially reduced relative to market rate rents. And the surest way to build wealth is to reduce expenses. Owning, if you buy early enough in life, enables that. Buyers (and lenders) can still manage to muck it up if they don't do their due diligence.  You can't just set it and forget it with real estate. And similarly, you can't really do that with index funds either. Past performance & all that. 

You're counting on the global equities market continuing to perform at the rate it has for the past 50 years. I can think of a few reasons why it won't.

[MilesTeg]

Buying is not always the best financial choice, but it provides a lot of financial security and diversification of your wealth.

If all your money is in the market and the market tanks (as it does every 10-15 years) and you lose your income source you might not even be able to get someone to rent to you. Landlords don't tent to rent to people who have no income.

If you have a paid off house and the market tanks, you still have some place to live (even if your home price plummets as well) and all you have to come up with is taxes and even that you have three years buffer before any serious consequences happen. Even if it's not paid off you won't be in the bad position of trying to convince someone to let you rent when you have no income.

Even without those types of catastrophes, owning property is one of the only forms of real wealth that exist. Land and a home have real, intrinsic, practical value that no other form of wealth has. Not fiat currency, not precious metals, not stocks.

[Zikoris]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

Marrying well.    /s   
However Money Market rates in the early 80's were insane.

We're talking past each other.  You'll be able to FIRE because your housing costs are substantially reduced relative to market rate rents via your coop.  In parts of the world where there isn't a mechanism subsidizing rents or capping costs with rent control, there is a cross-over point at which buying via leverage and owning comes out ahead financially because future housing costs are substantially reduced relative to market rate rents. And the surest way to build wealth is to reduce expenses. Owning, if you buy early enough in life, enables that. Buyers (and lenders) can still manage to muck it up if they don't do their due diligence.  You can't just set it and forget it with real estate. And similarly, you can't really do that with index funds either. Past performance & all that. 

You're counting on the global equities market continuing to perform at the rate it has for the past 50 years. I can think of a few reasons why it won't.

It's weird how people always bring up the co-op thing, despite me pointing out that they're wrong over and over again. Well, I can certainly do it one more time. Moving into our co-op was a lifestyle decision that came with a price INCREASE, which we were willing to pay because we liked the neighbourhood and amenities. If we were not here, we would be paying LESS, not more. The reason? Co-op rent is pegged at a certain % of the market rent spectrum. When we rented previously, we would rent places much lower in the spectrum, because as minimalists and very non-materialistic people, our standards for rentals are eye-wateringly low - I don't want a place that's infested with vermin or falling to pieces around me, but otherwise, anything goes - basement? Fine. 200 square feet? Fine. 4th story walkup? Fine. Ugly as fuck? Fine. No kitchen? Whatever, I can piece it together with hot plates. Etc etc. None of that stuff even bothers me.

So as a recap, living in a co-op does NOT save us money, it costs us money instead. Living in a co-op is one of many lower cost options for non-buyers, but not the cheapest by far, and there are many others. If you're a good tenant and the type of person landlords like renting to, and not picky, you can generally do better than co-op pricing on the regular rental market.

Re: Location. My experiences have been mainly focused on the most expensive city in Canada, but I think it's fair to say that if any city has lower-paid workers, the city also has some option for lower cost rent, unless 100% of your fast food workers live under a bridge. The specific options would differ depending where you were, but I would bet there's always something out there.

[Metalcat]

Safely ignore the means that rich people have used to store & generate wealth for centuries in favor of investment products whose prospectuses specifically state "Past performance is not indicative of future returns."  ???  mmmkay.

Okay, you tell me what sort of non-real-estate investment options would have been available to, say, an average income receptionist in the 1960s who did not win the lottery or receive any sort of windfall. And they have to be investments that would lead to that receptionist being about to retire in their 30s. Because we have that now, and as far as I know, did not back then.

Marrying well.    /s   
However Money Market rates in the early 80's were insane.

We're talking past each other.  You'll be able to FIRE because your housing costs are substantially reduced relative to market rate rents via your coop.  In parts of the world where there isn't a mechanism subsidizing rents or capping costs with rent control, there is a cross-over point at which buying via leverage and owning comes out ahead financially because future housing costs are substantially reduced relative to market rate rents. And the surest way to build wealth is to reduce expenses. Owning, if you buy early enough in life, enables that. Buyers (and lenders) can still manage to muck it up if they don't do their due diligence.  You can't just set it and forget it with real estate. And similarly, you can't really do that with index funds either. Past performance & all that. 

You're counting on the global equities market continuing to perform at the rate it has for the past 50 years. I can think of a few reasons why it won't.

It's weird how people always bring up the co-op thing, despite me pointing out that they're wrong over and over again. Well, I can certainly do it one more time. Moving into our co-op was a lifestyle decision that came with a price INCREASE, which we were willing to pay because we liked the neighbourhood and amenities. If we were not here, we would be paying LESS, not more. The reason? Co-op rent is pegged at a certain % of the market rent spectrum. When we rented previously, we would rent places much lower in the spectrum, because as minimalists and very non-materialistic people, our standards for rentals are eye-wateringly low - I don't want a place that's infested with vermin or falling to pieces around me, but otherwise, anything goes - basement? Fine. 200 square feet? Fine. 4th story walkup? Fine. Ugly as fuck? Fine. No kitchen? Whatever, I can piece it together with hot plates. Etc etc. None of that stuff even bothers me.

So as a recap, living in a co-op does NOT save us money, it costs us money instead. Living in a co-op is one of many lower cost options for non-buyers, but not the cheapest by far, and there are many others. If you're a good tenant and the type of person landlords like renting to, and not picky, you can generally do better than co-op pricing on the regular rental market.

Re: Location. My experiences have been mainly focused on the most expensive city in Canada, but I think it's fair to say that if any city has lower-paid workers, the city also has some option for lower cost rent, unless 100% of your fast food workers live under a bridge. The specific options would differ depending where you were, but I would bet there's always something out there.

This is another point that so often gets missed in the equation.

Renting makes you not care as much about the details of your home. Owning has a weird effect on most people of making home details matter a lot more than they do to renters.

Staying a renter really helps keep you out of the HGTV mentality about your space. What your home looks like doesn't weasel its way as much into your sense of identity. Which can save you A LOT of money.

[Zikoris]

This is another point that so often gets missed in the equation.

Renting makes you not care as much about the details of your home. Owning has a weird effect on most people of making home details matter a lot more than they do to renters.

Staying a renter really helps keep you out of the HGTV mentality about your space. What your home looks like doesn't weasel its way as much into your sense of identity. Which can save you A LOT of money.

Totally. The last company I worked for often had HGTV on in the lunchroom, and while I know that stuff is heavily staged, some of it was so baffling to me. I remember one where the guy was like "the bathroom doesn't have character" and I was like, whaaaaat? WTF does a character bathroom even look like?

[Zinsch]

Buying is not always the best financial choice, but it provides a lot of financial security and diversification of your wealth.

Not sure I agree that owning your home provides for great diversification. What if the house gets hit by a hurricane, flood, land slide? How many home owners have lost everything, in a way that the S&P 500 index never has?

[MilesTeg]

Buying is not always the best financial choice, but it provides a lot of financial security and diversification of your wealth.

Not sure I agree that owning your home provides for great diversification. What if the house gets hit by a hurricane, flood, land slide? How many home owners have lost everything, in a way that the S&P 500 index never has?

That's what homeowners insurance (and not buying at risk properties if no insurable) is for.

Good luck insuring your stock market losses.

[PDXTabs]

Buying is not always the best financial choice, but it provides a lot of financial security and diversification of your wealth.

Not sure I agree that owning your home provides for great diversification. What if the house gets hit by a hurricane, flood, land slide? How many home owners have lost everything, in a way that the S&P 500 index never has?

That's what homeowners insurance (and not buying at risk properties if no insurable) is for.

Good luck insuring your stock market losses.

I live in the northwest where eventually we are going to have a big quake that most people are not insured (many houses are uninsurable without retrofits) and deductibles are large and numerous:
https://content.naic.org/article/consumer_insight_understanding_earthquake_deductibles.htm

I've owned two houses in my life and on both occasions renting and investing the difference would have been a better financial and emotional move for me. But by all means, if you know that you are going to stay in a place for a really long time and you want to be a homeowner, buy. I plan to buy when I'm FIREed. In some ways it's a hedge, but you don't hedge for gains. You hedge to prevent losses.

[MilesTeg]

Buying is not always the best financial choice, but it provides a lot of financial security and diversification of your wealth.

Not sure I agree that owning your home provides for great diversification. What if the house gets hit by a hurricane, flood, land slide? How many home owners have lost everything, in a way that the S&P 500 index never has?

That's what homeowners insurance (and not buying at risk properties if no insurable) is for.

Good luck insuring your stock market losses.

I live in the northwest where eventually we are going to have a big quake that most people are not insured (many houses are uninsurable without retrofits) and deductibles are large and numerous:
https://content.naic.org/article/consumer_insight_understanding_earthquake_deductibles.htm

I've owned two houses in my life and on both occasions renting and investing the difference would have been a better financial and emotional move for me. But by all means, if you know that you are going to stay in a place for a really long time and you want to be a homeowner, buy. I plan to buy when I'm FIREed. In some ways it's a hedge, but you don't hedge for gains. You hedge to prevent losses.

Eventually the U.S. will have a major upheaval of some sort too and the markets will tank along with it.

Nothing is risk free.

A home purchase is a form of diversification of one's wealth which has other tangible benefits as well. That's all I'm saying.

[PDXTabs]

Eventually the U.S. will have a major upheaval of some sort too and the markets will tank along with it.

Nothing is risk free.

A home purchase is a form of diversification of one's wealth which has other tangible benefits as well. That's all I'm saying.

I completely agree, which is one of the reasons that I'm reluctant to own real estate here and 45% of my portfolio is ex-US. I'm not opposed to real estate investments, but owning one house has a ton of idiosyncratic risk. I'd rather invest with Fundrise or Iroquois Valley to have more diversification.

[Wrenchturner]

Here is the net worth chart for the renter in 2021 dollars including Social Security benefits:

<graphs>

The owner had to take on some debt in the early years to offset that mortgage.  The renter was able to invest that instead and his portfolio value reflects that.

You can see how the owner saw less net worth drops from the dot com bubble, great recession, and epidemic.

Those tiny little mortgage-debt bars are a complete joke by modern standards.

[Retireatee1]

Those tiny little mortgage-debt bars are a complete joke by modern standards.

Actually the "debt" bars are personal debt.  Mortgage debt doesn't appear as a negative on this graph, it is subtracted from the home value and the remainder is the equity which appears in the positive bar "other".  There are other graphs which show the mortgage details.

One trouble with simulating 60 years is expenses.  There is an "accumulation phase" and a "distribution phase", and expenses can be set differently.  Both of those are several decades here, and expenses change quite a bit during that amount of time.  In the Retireator they adjust based the consumer inflation rate, which is appropriate.  But households tend to increase their expenses more proportionally to their increase in income than the inflation rate.

So what happens with these long simulations is the expenses are too high at the beginning of the accumulation phase and too low at the end, so you get into personal debt at the beginning.

[elysianfields]

@Panly Thing is, though, in a FIRE context then speculating on the value of your own home doesn't make a lot of sense unless you have a specific plan to cash out and downsize. Otherwise, even if your home is "worth" £900k... how are you going to spend that money at the grocery store? Cashflow is more of an issue than own-home-included NW if you want to FIRE and move from accumulation to spending.

The easiest way (in the US at least) to access your home equity is to convince a bank to give you a mortgage or a Home Equity Line of Credit (HELOC).  We have one of each, and are about 9 years into a 30-year mortgage at 3.5%.  The property is rented, so we can fully deduct the interest.

Ideally, if our 2026 FIRE date is accurate, we'll re-start a 30-year mortgage just before pulling the plug, again, in order to maximize our access to our home equity.

YMMV, especially in the UK, I know little about how mortgages work there.

[elysianfields]

Own versus rent analyses often gloss over salient points.

Firstly -- It's not mere owning. It's buying on a margin, using a bank's money as leverage.

Agreed, buying on margin makes it easier to make money in RE, especially in the US, where mortgage interest is deductible in some cases.

Second -- Your age. The age at which you buy and comfortably pay off the mortgage relative to your life expectancy is a significant contributor to whether or not it is financially worthwhile.

I disagree, because I don't see how one's age has much to do with it, unless you simply cannot afford to buy something in retirement due to insufficient income.

Paying off one's mortgage is also irrelevant to one's ability to attain FIRE.  I'm on the "don't-pay-off-your-mortgage" side for a number of reasons that I've stated elsewhere and do not repeat here to avoid further thread derailment.

Third -- Racism. Racism in real estate and banking practices, enabled via redlining, prevented Black families from homeownership. Coates' The Case for Reparations, published in 2014 barely scratches the surface, but it's a good starting point. There is no understanding racial disparities in net worth without accounting for who was and was not allowed to buy.  The driver of the wealth gap and segregation and the resultant effects on generations of Black families is directly traceable to redlining.

Still, owning is not for everyone. Depending on your career, age & family situation you might already have passed the window where it makes long term financial sense to buy. 


Edited to correct spelling of Ta-Nehisi Coates

I've seen it quoted multiple times that access to mortgage and housing markets has historically enabled more white households to amass wealth vis-à-vis black households, and it makes sense to me.

I agree that owning isn't for everyone.  Wide variation in price, locality, law, and taxation make it impossible to generalize.  I do think homeownership makes sense for many families residing in the US, given how the tax code is tilted to benefit homeowners.  Of course, some markets are seeing price levels that make, in particular, SFHs a less probable bet for wealth accumulation than previously.

[Retireatee1]

Wide variation in price, locality, law, and taxation make it impossible to generalize.

I wouldn't say "impossible".   ;-)

In the Joe examples, Joe the Buyer didn't benefit tremendously from using leverage.  Note that the Retireator uses the 2021 tax brackets for all years, adjusted for inflation.  So for a median home owner, the large Trump standard deductions will prevent most from deducting mortgage interest.  Both Joes had the same starting cash balance.  Joe the Buyer put 100% of it to the down payment, while Joe the Renter invested it in the market.  Joe the Renter's expenses remained flat due to inflation, while Joe the Buyer's slowly decreased due to the fixed rate mortgage.  So Joe the Buyer is slowly catching up in terms of portfolio balance.  But he never quite catches him, Joe the Renter hits a slightly higher net worth peak.

The main generalization which I stand by is that for any size mortgage, there is a monthly rent amount which is equivalent for financial planning purposes.

To come up with that number takes some financial savviness.  The above simulations employ almost 100,000 Excel formulas each.

[elysianfields]

Wide variation in price, locality, law, and taxation make it impossible to generalize.

I wouldn't say "impossible".   ;-)

I'm thinking of our non-US readers here, whose situations simply will not equal either Joe's.

While your Joe example perhaps holds water for the US, remember also that the US tax cuts passed in 2017 will expire in 2026, once again making mortgage interest deductible for a larger number of US households.

[Retireatee1]

Wide variation in price, locality, law, and taxation make it impossible to generalize.

I wouldn't say "impossible".   ;-)

I'm thinking of our non-US readers here, whose situations simply will not equal either Joe's.

While your Joe example perhaps holds water for the US, remember also that the US tax cuts passed in 2017 will expire in 2026, once again making mortgage interest deductible for a larger number of US households.

Fair point.  We just need a generous volunteer to create a Retireator-UK fork!

https://www.retireator.org/develop/

[elysianfields]

Wide variation in price, locality, law, and taxation make it impossible to generalize.

I wouldn't say "impossible".   ;-)

I'm thinking of our non-US readers here, whose situations simply will not equal either Joe's.

While your Joe example perhaps holds water for the US, remember also that the US tax cuts passed in 2017 will expire in 2026, once again making mortgage interest deductible for a larger number of US households.

Fair point.  We just need a generous volunteer to create a Retireator-UK fork!

https://www.retireator.org/develop/

Not sure we should be talking about forking, this is a family forum!

Also, Canadians and Australians, in addition to Brits, have already posted in this thread.  That's a lot of forking around !

[Retireatee1]

Not sure we should be talking about forking, this is a family forum!

Also, Canadians and Australians, in addition to Brits, have already posted in this thread.  That's a lot of forking around !

Ha!  Good one!

[kite]

Second -- Your age. The age at which you buy and comfortably pay off the mortgage relative to your life expectancy is a significant contributor to whether or not it is financially worthwhile.

I disagree, because I don't see how one's age has much to do with it, unless you simply cannot afford to buy something in retirement due to insufficient income.

Paying off one's mortgage is also irrelevant to one's ability to attain FIRE.  I'm on the "don't-pay-off-your-mortgage" side for a number of reasons that I've stated elsewhere and do not repeat here to avoid further thread derailment.

FIRE and maximizing wealth don't always align.

I bought my first property in my early 20's, paid the mortgage off in my early 40's. Used conventional financing, no aggressive pre-payment.  Although we did refinance to lower the interest rate.  From the point of pay-off in my early 40's, I've had annual housing costs sharply reduced because I own. Market rate rent on the house I own & occupy exceeds my expenses for taxes, insurance & routine maintenance by $18000 annually.   If my life expectancy matches my mother's, I'll have 50+ years living with this level of savings over being a life-long renter. 
Purchasing the same home or any other at age 37, 47 or 57 would have a different metric because I'd have been a renter in all the years prior to buying.

[elysianfields]

Second -- Your age. The age at which you buy and comfortably pay off the mortgage relative to your life expectancy is a significant contributor to whether or not it is financially worthwhile.

I disagree, because I don't see how one's age has much to do with it, unless you simply cannot afford to buy something in retirement due to insufficient income.

Paying off one's mortgage is also irrelevant to one's ability to attain FIRE.  I'm on the "don't-pay-off-your-mortgage" side for a number of reasons that I've stated elsewhere and do not repeat here to avoid further thread derailment.

FIRE and maximizing wealth don't always align.

I bought my first property in my early 20's, paid the mortgage off in my early 40's. Used conventional financing, no aggressive pre-payment.  Although we did refinance to lower the interest rate.  From the point of pay-off in my early 40's, I've had annual housing costs sharply reduced because I own. Market rate rent on the house I own & occupy exceeds my expenses for taxes, insurance & routine maintenance by $18000 annually.   If my life expectancy matches my mother's, I'll have 50+ years living with this level of savings over being a life-long renter. 
Purchasing the same home or any other at age 37, 47 or 57 would have a different metric because I'd have been a renter in all the years prior to buying.

Makes sense, thanks for clarifying.