this post was submitted on 11 Jul 2024
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Housing Bubble 2: Return of the Ugly
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What do you do? You sit in a house comfortably to ponder your future actions.
People who rent get kicked into the street to the searing heat or freezing cold and then they get criminalized for being homeless.
Not to diminish the woes of homeownership, but owning your own house already puts you in a tier of privilege that instantly disqualifies you from criticizing the people who are days away from sleeping in their car or under a bridge.
Captain clueless here never heard of a money pit.
Some homes aren't worth owning, dude get a clue.
It's more that some homes will make the average person to bankrupt. Hell, even with rental units it's not necessarily profitable to own. My friend calculated that he would be a million poorer after paying his mortgage if he bought a duplex and rented a unit instead of just continuing to rent and investing in an index fund.
Sounds like he's not factoring in the money saved after the mortgage is done. I'll be done in a little over a year then my housing costs drop to property tax and insurance. That'll come to a little under 15% of what rentals in my neighborhood go for. Even with an aggressive withdrawal schedule an extra million wouldn't make up the difference.
Edit: I also doubt his calculations. Maybe he's not taking inflation into account? When I bought my house the mortgage, property tax, and insurance was a little more than renting a house in my neighborhood. Almost 19 years later, the mortgage is the same, the property tax has gone up about 25%, and the insurance has increased about 50%. Since the mortgage is the largest part by far my total costs have gone down significantly adjusted for inflation and they are only around 50% the cost of rent. Even counting maintenance and remodel costs I would have paid much more in rent over the years.
Edit 2: If I had invested my 5% down payment in the s&p in August 2005, with reinvested dividends, before taxes, it would only be 13.7% of my current home equity. Your boy's math ain't mathin'.
His math takes everything but a maintenance budget on the duplex into consideration so he's underestimating his losses.
I'm talking taking the surplus he needs to pay for the duplex vs his rent and continuously investing it over the next 25 years even when taking the average rent increase into consideration, not just the downpayment.
Well then, he must be blessed to live somewhere with very reasonable rents, and generous rent control, if he thinks he can save money renting for 20-30 years instead of paying a fixed mortgage plus other expenses.
Like I said in my first edit, although my expenses started out a bit higher than rent for a comparable house, 19 years of rent increases while my mortgage stays the same means I'd have to move to a shoebox on meth street to pay less than my mortgage now.
And it still seems like he's not taking into account having a paid off asset with negligible housing expenses after the mortgage is paid off. In the case of a duplex, a money generating asset.
He's taking everything into account and comparing to what he would expect to have if he sold it once the mortgage was paid.
You're not taking into account that if he keeps it it appreciates at a slower rate than the average market return and that in the other scenario he's got close to two millions he's making interest on instead of having only an asset worth about 1 million at that point and no savings.
Ever heard of compound interest? 500$ in savings per month at 24 y.o. gets you 1.5m at 65, the same savings at 30 gets you 900k at 65 and 400k if you start at 40...
Lol, yes I'm very well aware of these things. I don't like dropping personal information breadcrumbs, and I don't find appeal to authority arguments convincing anyway so I'm just going to have to leave it at "trust me bro."
Outside of a few edge cases, like planning on moving every couple years for work, lifetime costs of renting dwarf lifetime ownership costs. Unless he's comparing an expensive house to a small, cheap apartment. An apples to apples comparison isn't even close. Even if month one he can save $500, that savings will shrink every year and eventually his rent will be more than the expenses of a neighbor that bought years ago and not only won't he have an extra $500 to save, he'll be saving even less than he was before.
My parents moved into a large home in a desirable neighborhood when I was six months old. When I went to college, my cheap one bedroom apartment in a city with similar costs of living was only about $25 (in 90s $) less than their mortgage, taxes, and insurance combined. A few years later their mortgage was paid and they've spent over two decades paying less for taxes and insurance than they do for utilities.
If that $500 savings continues for 41 years (it won't, see above), an extra 1.5mm, even with a ballsy withdrawal rate, adjusted for inflation 41 years from now (your example), wouldn't make up for that, not even close. Take inflation the other way: $500 today is the equivalent of a little less than $160 in 1983 which would give you less than 500k today using your growth numbers (this is leaving out a lot of important things, by the way, but I'm going with your example numbers to keep things simple for you.)
I don't know why you're so invested in "your friend" being so much smarter than every financial advisor, and frankly, this sounds like some "I didn't want to buy a house anyway" copium from someone that can't get their finances together enough to execute a plan, but on the off chance this "friend" is in a position to buy and they really think this, you should suggest they consult a professional for their own good.
"That saving will shrink every year"
Guess you're a finance genius that doesn't get an annual raise :)
Your parents have their house as their savings after 25 years, if they had rented and invested the difference instead, they would have money on the market, the difference being that the market returns 7%/annum long term while houses appreciate under 5%/annum long term and that's the increase in value vs initial cost, it doesn't take what was spent in taxes and maintenance over that period.
Actual return on investment from buying a house isn't that great long term, you spend the majority of your profit, you just don't realize it because when you sell it's a huge check you get an at once.
Christ dude do you think before you post, or do you think only renters get raises?
Let me try to make it simple enough for you to understand.
You and I have the same job, make the same money, and have the same non-housing expenses.
We moved into the same neighborhood, right next door, identical houses.
Accounting for mortgage, tax, insurance, amortized maintenance expenses, and tax breaks I pay 5k a month with nothing left over.
Your rent is 4.5k giving you an extra $500 to save.
$500 more than me.
Next year, we get the same raises and after inflation of non-housing expenses we have $200 extra.
My property taxes and insurance went up $100. Now I have $100 to save.
Your rent went up $300. Now you have $400 to save.
Only $300 more than me.
Do I really need to do every year for the next 20 years for you to get it?
Your extra savings will evaporate after just a few years and the tables will turn. And several years later, maybe a little over a decade, my brokerage balance will beat yours, even including capital gains and you investing what would have been a down payment. And that's without even mentioning equity. After 20 years I could light a match, burn the house to the ground, and walk away without a penny and still have a fatter brokerage account than you.
The guy two doors down from me is paying around $40k more in rent every year than my ownership expenses.
Next year when my mortgage is done it'll be closer to $90k and only go up from there for the rest of my life.
All because 19 years ago I put 5% down and spent 3-5 years paying a little more than my renting neighbors. Putting that money in my brokerage with the rest of my non-tax advantaged savings wouldn't even come close to the money I've already saved once rent exceed my expenses, forget about it paying the difference between rent and ownership expenses for the rest of my life.
Your missing the point when you talk about appreciation in home values. The paper value of a home with no mortgage is irrelevant to the person living in it. Unless they downsize, that only matters to their heirs. The value to the owner is spending the rest of their life paying peanuts for housing. And paying less than rent a few to several years after purchasing, depending on the specifics of the mortgage and the initial condition of the home.
I'm pretty sure you're engaging in an exercise in creative writing, possibly fueled by sour grapes. But just in case you're serious, I'll say one more thing. And I hope you take it in the spirit it's intended, sincere concern. I'm sorry, there's no nice way to say this.
You are financially illiterate.
Don't feel too bad, you have lots of company.
If you have any disposable income, or think you will in the future, please, for your own sake and for any impressionable ignorant people you talk to; stop googling for things to support your misconceptions and repeating things you read on Reddit written by some other clueless individual, and find a way to get a decent education in personal finance.
"I pay 5k, you pay 4.5k"
Lulz, if you start with nonsensical numbers then you're off to a bad start
Just using some nice round numbers in the hope that it would help you understand the concept and using your original $500 number. But you're right, given current interest rates a 10% difference the first year isn't likely without a large down payment.
Make it whatever you want. 2.5k vs. 3k, 6k vs. 7.5k, 10k vs. 13k, it doesn't matter. The only thing that matters is you understand that after a few years the monthly advantage to renting disappears, the tables turn, and the renter pays more for the rest of their lives, and a lot more when the owner is done with the mortgage. Or until they wise up.
You've been given bad information. Don't ruin your financial future by stubbornly clinging to it. The best time to learn about personal finance is yesterday. The second best time is today. It's never too late.
What if someone just wants to have a place to live and doesn't want to pour money into the global extraction machine that index funds are?
Also saving $500 a month?? Lots of people pay half their salary on rent and the rest on food and bills - good on your friend for having the privilege to afford that but like what are the rest of the population supposed to do?
First, the 500$ number is used for comparison sake, the point is that my friend getting 1m to dump in the market all at once in 25 years doesn't beat him investing the difference between a mortgage on the average duplex vs the price of the average apartment where he's at.
Second, if you're two people renting an apartment together and are unable to save 500$ a month then I'm sorry to tell you that you wouldn't be able to afford owning a house either.
Third, if you plan to retire someday then you should start making your plan while you're young and start investing. Even if you don't do it yourself because you've got a pension fund at work, that money is in the markets so you're not escaping it. If you plan to work until you die then have fun with that. If you don't invest, whatever you're saving under your pillow is just losing value over time.