Importance of locking in housing costs?

[Romer]

That may be true but even with a paid off house there are monthly costs that (and it's all dependent on location, of course) that can be close to what rent would be. Furnace, roof, HW tank...eventually they all have to be replaced. Plus with a house you have to allocate X hours per week for maintenance, yard work, etc.

Owning a house is as much a lifestyle decision as a financial one and it's not for everyone.

This is not always true. For most of the past 10 years here, the housing market was depressed or static. My liquid investments have done far better. For the first 9 of those 10 years, I was in an apartment that cost less per month than taxes and insurance on a cheap house (not to mention maintenance and repairs). There's no doubt that I am ahead for having rented here for most of the past decade.

However, I sense the tables turning now and wonder if it's time to flip my strategy. Anyway, I already know the general pros and cons of owning vs. renting. The main factor I'm weighing in this thread is locking in costs. I don't care too much about being free to decorate, renovate, make it my own, etc. I've been there and done that and found it to be a distraction. At this point my main interest, aside from being in a place I really like, is hedging against housing cost inflation.

I can see the lifestyle part. I think part of the financial it is Market based. Here in Denver an apartment is like $1800/mo for a modest one. That is more than a 3.25% 30 year loan for $400k. That is the loan my daughter just got and she used $200K equity from the house she bought 5 years ago. That does not include taxes and insurance so I understand the cost is more.

I dont spend much on maintenance, but I do it myhself. My roof has about 30 years left on it at least. I changed my own hot water heater so that was about $500

"The average rent for an apartment in Denver is $1,824. The cost of rent varies depending on several factors, including location, size, and quality"

 

[OldShooter]

I'm surprised that no one has mentioned the false premise here: That owning your home will "lock in" housing costs. The only lock-in IMO is locking into a steady stream of increasing future expenses: utilities, real estate taxes, routine maintenance like paint, electrical and plumbing, major maintenance like roofs, driveway concrete, exterior siding and painting, "caretaking" like lawn care,... The beat goes on and the lyrics get more and more expensive.

That said, I wouldn't consider renting, but our costs aren't locked in. Don't I wish.

 

[tmm99]

The value of our house has doubled since our purchase five years ago, so I'm glad we bought it when we did. Renting has gone up in the last 5 years as well, but not at that rate, but it's up (maybe 20% or 30% more now compared to 5 years ago). Buying a house can hedge against inflation. If the housing prices are affordable in your area now, I'd consider buying.

 

[youbet]

I have never rented. But I can say that we are now relieved that my son wanted to own his home as opposed to renting as rents have now skyrocketed. His modest 1400 sq ft home which he bought new in 2017, costs him about $14K a year to maintain, i.e. property tax, insurance, HOA and utilities. To rent an apartment with 2BR / 2BA, we are looking at about $3K per month now.

What is his opportunity cost of the money he has tied up in the house? (Just to make the analysis complete and valid.)

 

[youbet]

I'm surprised that no one has mentioned the false premise here: That owning your home will "lock in" housing costs. The only lock-in IMO is locking into a steady stream of increasing future expenses: utilities, real estate taxes, routine maintenance like paint, electrical and plumbing, major maintenance like roofs, driveway concrete, exterior siding and painting, "caretaking" like lawn care,... The beat goes on and the lyrics get more and more expensive.

That said, I wouldn't consider renting, but our costs aren't locked in. Don't I wish.

I couldn't agree more. We rented for two years (a one bedroom walk-up in the city) and have owned for 49 years. I prefer to own. But we've never considered home ownership "locking in" housing costs.

The record keeping and financial calculations to compare owning vs renting are beyond me to comment on. And our picture is muted by the fact that our home represents less than 5% of our net worth.

To me, it's more of a lifestyle question than a financial question.

 

[RetiredHappy]

What is his opportunity cost of the money he has tied up in the house? (Just to make the analysis complete and valid.)

My son is very conservative with his money, and using a conservative 5% growth compounded each year, the money in the "bank" would have appreciated by 22%. Since his purchase from 4 years ago, the current market value is 40% over what he paid.

If he were to rent at $3K per month, he would still have to pay for utilities, internet and renter insurance.

 

[youbet]

My son is very conservative with his money, and using a conservative 5% growth compounded each year, the money in the "bank" would have appreciated by 22%. Since his purchase from 4 years ago, the current market value is 40% over what he paid.

If he were to rent at $3K per month, he would still have to pay for utilities, internet and renter insurance.

Those percentages aren't a good way to work with "opportunity costs," but if that's all you have to work with, so be it.

Sounds like the house is a good investment for your son but his conservative investing approach has cost him a ton, maybe a ton and a half, over the past few years. And that's OK. Everyone has to do what they're comfortable with.

 

[Sunset]

..... At this point my main interest, aside from being in a place I really like, is hedging against housing cost inflation.

Then move to a rent controlled area. There are probably different types of rent control, so factor that in.

 

[Music Lover]

It's hard (impossible) for anyone to give answer the question when it's unknown how long the OP plans on staying in a house if they buy.

 

[Badger]

Everyone has their own idea regarding the cost difference between renting and owning. So this is mine done with quick calculations on the back of a napkin.
i bought my house 40 years ago for $66k that included the money from the previous house. Ballpark calculations for taxes and insurance for those years was no more than $200k. Repairs like new roof, painting, plumbing, etc. was about $30k. Total is about $296k. Sure there were some other minor expenses like buying a lawn mower, some tools, etc. but only a few thousand. I paid off the house early so there was the interest paid that was around $100k at most. So I have about $396k invested in owning the house for the past 40 years.
The latest valuation for this house is now more than $1.1 million. At today's date that would give me $704k equity in the house.
An apartment with the same location advantages at the beach might average $1400/month for those 40 years - so at least $672k of rent that is gone.
I am so far ahead of the game that I don't think I could be convinced that renting would be an advantage for me.


Cheers!

 

[Scuba]

This is not always true. For most of the past 10 years here, the housing market was depressed or static. My liquid investments have done far better. For the first 9 of those 10 years, I was in an apartment that cost less per month than taxes and insurance on a cheap house (not to mention maintenance and repairs). There's no doubt that I am ahead for having rented here for most of the past decade.

However, I sense the tables turning now and wonder if it's time to flip my strategy. Anyway, I already know the general pros and cons of owning vs. renting. The main factor I'm weighing in this thread is locking in costs. I don't care too much about being free to decorate, renovate, make it my own, etc. I've been there and done that and found it to be a distraction. At this point my main interest, aside from being in a place I really like, is hedging against housing cost inflation.

I agree 100%. Many of these posts seem to believe that housing always goes up. My first house in TX declined significantly in value and we sold at a loss due to a job move. Our first house in CA also declined in value. We sold that one for lifestyle reasons. Many moves and houses later, we made a lot of money on some and lost a lot on others, but I’m not sure we are substantially ahead of the game from a financial perspective.

While it’s true that you can make a property your own when you own it, that is one of the reasons ownership is more expensive. Remodeling and “projects” aren’t cheap. Also rentals tend to be smaller spaces and have lower utility costs.

Having said all of this, we do enjoy owning our own homes and continue to do so. We just recognize that home ownership has a lot of costs that go with it so it isn’t necessarily a financial benefit.

 

[captain3d]

Not many people stay in a house for 40 years and you did not calculate any benefits of investing spare money after rent.

I can rent a $1mill house for $3500/month in California.

I can invest $1mill in rental property in other states and gross $10,000/month

The calculation is never simple

 

[Andre1969]

Housing cost increases can definitely be sporadic, and aren't guaranteed. For instance, here's the sales history of my old condo:
1988: $88K
1994: $84K (this is when I bought it)
2004: $185K (this is when I sold it)
2007: $245K
2017: $190K

It was a 3br/2ba, 1 car garage. 1254 square feet. Built in 1973 (although I remember the circuit breaker having a sticker that had 12/72 on it)

I lucked out, buying towards the end of a downswing. One my my neighbors, in the summer of 1990, paid $91K for a smaller unit, 2br/1ba, 945 square feet. And it was years, before anything in that neighborhood broke the $100K barrier. Probably not until around 2001 I'd guess.

My old unit went on the market back in 2019 and they tried to ask $300K for it. The current owner (the one that paid $190K for it) is listed as an investment company, and it's not listed as a principal residence, so I imagine it got turned into a rental. A similar unit to mine sold earlier in the year for around $263K.

I'd imagine the only buyer in that timeframe that really made out like a bandit was the guy who bought it from me. It was December of 2004 that I sold, and he sold in March of 2007, so turning $185K into $245K in that timeframe isn't a bad deal, at all. But then, who knows; he might have taken a big hit on whatever he bought, after my place.

In my case, going from $84K to $185K in 10 years, sounds pretty sweet. But adjusting for inflation, it's more like going from $107K to $185K. And then there was 10 years of condo fees, property taxes, maintenance/repair, etc. I also put about $17,000 into it to get it ready to sell, and at one point had to replace the heat pump.

So, from a purely investment standpoint, it wasn't all that profitable. But, at the end of closing, I walked out of there with a check for $94,000 (I guess it was a more trusting time; I'm sure they'd do wire transfers for that these days) In contrast, if I'd been renting, I would have had nothing to show.

 

[Bryan Barnfellow]

The inflationary aspect of renting vs owning would seem to be country dependent. Where I live the economic system is very stable and inflation is negligible. Also, a landlord cannot increase the rent for a leased apartment unless they make a material improvement inside your flat. This doesn't include fixing things that are broken. It's a Swiss law. So, we have paid the exact same monthly rent for 13+ years now. During this time the owner made numerous improvements to the building itself, both functional and aesthetic. Also, under certain conditions if interest rates decline sufficiently you can petition your landlord to reduce your contracted rent.

We rent for two major reasons: We can live in a location (along side a lake) that would require too much of our investment assets to pay for if we wanted to buy (generally in terms of the 20% minimum down payment; the mortgage rates themselves are around 1% or so). The market here is very expensive for ownership, including how owned property is taxed. Second, if we wanted to cut back on our living expenses, we can always move to a less costly location with a fair amount of ease.

Okay, I'll add a third. I've never looked at home ownership as an investment. For me it has always been an infrastructure cost, which I always tried to optimize in terms of price and enjoyment. That said, when I lived in the US, I always made a "profit" on my home sales. My investment strategy is to include real estate assets (mostly REITs) in order to cover that aspect of the investing universe.

-BB

 

[Ramen]

So, from a purely investment standpoint, it wasn't all that profitable. But, at the end of closing, I walked out of there with a check for $94,000 (I guess it was a more trusting time; I'm sure they'd do wire transfers for that these days) In contrast, if I'd been renting, I would have had nothing to show.

Interesting story, thanks. When I've sold, I've walked away with similar checks, but having "something to show" is not the only measure of a housing decision. For me, the benefits of renting over the past 10 years have been the convenience of the locations and the freedom from the chores of ownership, among other things. These are intangible and cannot be "shown" like a check, but they are no less real.

As for the false premise mentioned above, thanks, I get that. I was referring to the loan payment portion of monthly expenses, assuming the mortgage rate is fixed. I realize the potential for maintenance and repair expenses. Last night I read a few pages of the ongoing "Your Recent Repairs" thread. That discussion is better than any rent/buy calculator for a preview of what ownership can involve. A reminder and reality check.

 

[Music Lover]

I realize the potential for maintenance and repair expenses. Last night I read a few pages of the ongoing "Your Recent Repairs" thread. That discussion is better than any rent/buy calculator for a preview of what ownership can involve. A reminder and reality check.

Obviously, a major factor in ongoing repairs and maintenance is one's DIY ability and desire. The difference can be substantial. For example, I estimate that I've saved over $100,000 in my current home by doing my own maintenance and improvements (I've been here since 1997). Although to be fair, I probably would not have done several of the improvements if I had to pay someone the going rate.

 

[youbet]

Obviously, a major factor in ongoing repairs and maintenance is one's DIY ability and desire. The difference can be substantial. For example, I estimate that I've saved over $100,000 in my current home by doing my own maintenance and improvements (I've been here since 1997). Although to be fair, I probably would not have done several of the improvements if I had to pay someone the going rate.

Yes. Handy and frugal folks like to ignore the value of their own labor in maintaining and improving their home. I've put in thousands of hours over the 40+ years we've been in this home. Everything from routine upkeep such as cutting the grass and trimming the bushes to light decorating such as painting to significant repairs and remodeling.

If over the past 40+ years I had a part time side gig for 5 - 10 hours a week or so and faithfully invested that money into a TSM index fund, I'd have quite a stash today! Folks often don't allow for those opportunity costs in their analysis.

Now, I'd rather maintain my own home as a side gig rather than do work for someone else, so that's what I do. But I'm well aware that a more accurate cost of owning my own home and maintaining/updating it over decades involves a significant opportunity cost of not having an outside side gig.

Again, I strongly prefer home ownership over renting and chose that lifestyle. But I'm not so naive as to ignore the more subtle "opportunity cost" factors in the costs of home ownership.

 

[Music Lover]

Interesting point. I've focused on how much I've saved but not the lost opportunity. Of course that assumes that if I lived in an apartment that I would have found a second job. I'm not sure that I would have.

 

[GRR1865]

This may sound like a quirky reason to own but about 2 years ago we bought an EV. Owning our own home simplifies that because it was easy to set up charging. Not owning our home would have really complicated that as we would have had to solve a major problem. Charging at home saved us about $1,500 per year in fuel. It’s not a major issue for most people today but in a few years it could be. Having a landlord would complicate that unless the landlord wanted to make the shift. It’s all about how much control over your life you want & not about EV’s. My point is to think about what you may want/need in the next few years.

I’m currently renting in CA and part of my lease addresses not being able to charge and EV without the landlords permission. It’s fine for me since I have a normal car right now but I plan on my next car at least being a plug in hybrid.

I just moved in and plan to be here for the next 4 years but after I likely will own again for the “my home is my castle” reasons. (Current local and short timeline are why I’m renting). But it is nice knowing that unless I personally break it, it’s my landlords responsibility to fix it.

 

[Sunset]

Everyone has their own idea regarding the cost difference between renting and owning. So this is mine done with quick calculations on the back of a napkin.
i bought my house 40 years ago for $66k that included the money from the previous house. Ballpark calculations for taxes and insurance for those years was no more than $200k. Repairs like new roof, painting, plumbing, etc. was about $30k. Total is about $296k. Sure there were some other minor expenses like buying a lawn mower, some tools, etc. but only a few thousand. I paid off the house early so there was the interest paid that was around $100k at most. So I have about $396k invested in owning the house for the past 40 years.
The latest valuation for this house is now more than $1.1 million. At today's date that would give me $704k equity in the house.
An apartment with the same location advantages at the beach might average $1400/month for those 40 years - so at least $672k of rent that is gone.
I am so far ahead of the game that I don't think I could be convinced that renting would be an advantage for me.

Cheers!

You made me do the calculations for comparison, of a place that DIDN'T rise in value much.

It still can be a savings.

People can go through my numbers if they wish, but the summary is:
Our ownership cost us money, but it cost less than renting, so ownership benefited us a savings compared to renting of $297K. Some of that was because I did fixing myself on things.

However, had we rented and instead invested most of the lump sum, we would have come out ahead in 1 investment and close in some others, (not counting taxes, as too complex) , had we invested in BND we would have done much worse.

My gut feeling is had I included taxes at just 12% on the investments, that renting even in the best case would have been close.


Bought in 2003 with cash: $213K house tanked in 2008, now Zillow estimate: $263K
Equity in 18 yrs: $36K after subtract 5% real estate fee and $1K legal fees.

Taxes over 18yrs est: $81K
Insurance over 18yrs est: $18K

NET house cost: $36K − $81K - $18K = -$63K

To have the same lifestyle, could have rented this house for $1,800/mo
To rent would have been: $360,000 for 18 yrs.
So owning NET via savings: $360,000 + (-$63K) = $297K in the pocket.

Renting we could have invested the $200K for 18 yrs in:

• VTI $851,686 - $360,000 = $492K
• Wellington $632,204 - $360,000 = $272K
• BND $333,218 - $360,000 = -$27K
• BRK.A $611,444 - $360,000 = $251K

 

[tulak]

I owned for 20 years, rented for a year and now own for the last couple of years. I enjoy customizing my house, which you can’t do when you rent.

I live in a HCOL area where it’s been better off to buy than rent for most (all?) of my adult life. Except if you bought/sold around pre/post 2008. But I know people that bought after 2008 and have done really well.

 

[daylatedollarshort]

Interesting story, thanks. When I've sold, I've walked away with similar checks, but having "something to show" is not the only measure of a housing decision. For me, the benefits of renting over the past 10 years have been the convenience of the locations and the freedom from the chores of ownership, among other things. These are intangible and cannot be "shown" like a check, but they are no less real.

As for the false premise mentioned above, thanks, I get that. I was referring to the loan payment portion of monthly expenses, assuming the mortgage rate is fixed. I realize the potential for maintenance and repair expenses. Last night I read a few pages of the ongoing "Your Recent Repairs" thread. That discussion is better than any rent/buy calculator for a preview of what ownership can involve. A reminder and reality check.

Robert Schiller has said over the long term housing tends to keep pace with inflation, unless you live in some place where supply can't keep up with demand. The house we owned prior to our current house barely budged in price for decades after we sold it. The house we live in now has gone up 8 times from the price we paid. This is what I think one big difference was - the house before was in a plain area with loose building restrictions. Whenever the price of homes went up, builders could just build up and out the surrounding suburbs with no natural or legal roadblocks, so the price of homes never really skyrocketed. In the long term, supply always caught up with demand.

Where I live now (Bay Area), the housing shortage is caused in part by less buildable land due to restrictive zoning laws, land set aside for parks, and geography (bodies of water and mountains) and limits to the commuter train and freeway system. The train system has been expanded in recent years, but it makes land served by the train system more desirable and expensive.

So your long term outlook for housing considerations depends, at least in part, on if you have investments that tend to keep up with or surpass inflation, and where you live / how much buildable land there is. Another consideration might be more people working at home may cause a migration to better weather and lower cost locations, kind of like we saw with the U.S. having less industrialization in recent decades and people moving out of factory cities, leaving property prices in the factory belt depressed for years.

 

[OldShooter]

A couple of minor points: First, I think residential housing cannot go up long term at a rate greater than personal incomes. This is a slight mod on the idea that it will follow inflation, as personal incomes IIRC rise slightly faster.

Second, from an ROI POV, a personal residence's capital value is typically leveraged by a mortgage. So if the house averages 50% borrowed money, then the ROI is double the increase in inflation, less the interest cost. But again, that's not why most of us want to own our homes.

 

[SnowballCamper]

I think the only way to lock in housing costs is to get a rent controlled apartment, but utilities, insurance, and such are still not fixed costs...

I think on average, rent is a bit more than ownership costs, because the landlord needs to make a profit.

We have to live somewhere...renting limits the downside risks (to rent increases and paid rents), but eliminates upside gains in terms of equity. Of course, if you find a place with cheap rent compared to what a comparable property costs to own, you could invest the difference, and consider yourself lucky.

I'm glad I don't rent anymore.

 

[ncbill]

Everyone has their own idea regarding the cost difference between renting and owning. So this is mine done with quick calculations on the back of a napkin.
i bought my house 40 years ago for $66k that included the money from the previous house. Ballpark calculations for taxes and insurance for those years was no more than $200k. Repairs like new roof, painting, plumbing, etc. was about $30k. Total is about $296k. Sure there were some other minor expenses like buying a lawn mower, some tools, etc. but only a few thousand. I paid off the house early so there was the interest paid that was around $100k at most. So I have about $396k invested in owning the house for the past 40 years.
The latest valuation for this house is now more than $1.1 million. At today's date that would give me $704k equity in the house.
An apartment with the same location advantages at the beach might average $1400/month for those 40 years - so at least $672k of rent that is gone.
I am so far ahead of the game that I don't think I could be convinced that renting would be an advantage for me.
Cheers!

Counting your labor as free always helps.

But just think of what it would be worth (plus regular cash flow) had you put that money towards an apartment complex instead of a SFR and lived there as the "super" during those decades.