Economics on Buying vs Renting a House

by on February 1, 2016 at 7:25 am in Economics | Permalink

I was asked on Quora What do economists think about buying vs renting a house? Here’s my answer:

Housing is overrated as a financial investment. First, it’s not good to have a significant share of your wealth locked into a single asset. Diversification is better and it’s easier to diversify with stocks. Second, unless you are renting the basement, houses don’t pay dividends. Stocks do. You can hope that your house will accumulate in value but don’t count on it. Indeed, you should expect that as an investment your house will appreciate less than does the stock market. You didn’t expect to get a great investment and a place to live in the meantime did you? TANSTAAFL.

Another problem with houses is that home ownership locks people to location making it harder to move for jobs. The problem is especially severe because no one likes to sell at a “loss” even when it is rational to do so. So when jobs disappear and home prices fall instead of moving, people hold on for too long just hoping that things will get better. It’s troubling that both across states in the United States and across countries higher home ownership predicts higher unemployment rates. See Does High Home-Ownership Impair the Labor Market?

So why do so many people buy houses? Houses are lovely if you enjoy interior decorating, backyard barbecues and talking to your neighbors. Houses today also come bundled with a significant side asset – access to so-called public schools. One argument for school vouchers, by the way, which isn’t emphasized as much as it should be, is that vouchers would break the strong connection between where you live and what schools you attend. Poor people would have a better chance at attending good schools if schools and housing weren’t bundled together so closely

Owning a house is also a part of the “American Dream” and perhaps as a result the US tax code subsidizes houses, especially for the rich. Most economists, however, think that the United States tax code is inefficiently biased toward housing. There is no good reason to bias people away from renting and towards buying. Germany is a wealthy country and a majority of Germans get by just fine by renting. See Most Germans don’t buy their homes, they rent. Here’s why.

One final point: behavioral economics tells us that we quickly get used to big houses but we never get used to commuting. So when you have a choice, go for the smaller house closer to work.

1 Horhe February 1, 2016 at 7:30 am

What do you do with firms whose whole idea is jacking up share prices and whose philosophy involves not paying dividends? Like Apple. Does Google pay dividends? They are all based on cashing out the difference in share price.

2 dan1111 February 1, 2016 at 7:43 am

I’m no expert, but it looks like Apple paid dividends 5 times in the last year:

3 Horhe February 1, 2016 at 8:53 am

I stand corrected, but the spirit of the question remains. Those dividends are minuscule. This site has regularly featured discussion on Apple sitting on huge amounts of cash for fiscal and image reasons (mature companies, with no exciting investment or research projects, are the ones that pay out cash), and has actually been sued by investors for the lack of dividends commensurate with its financial success. Look at the ratio between dividends and stock price. Imagine what it was when Apple’s stock was larger.

4 msgkings February 1, 2016 at 2:28 pm

Have you ever heard of returning cash to shareholders via stock buybacks? These are actually not very different from dividends. If you don’t know about those, you should probably stop trying to understand corporate finance.

5 Kinanik February 1, 2016 at 6:52 pm

Disregard, (almost) always, any comment that is “stop trying to understand” X.

6 Horhe February 2, 2016 at 8:03 am

You mean the thing that was considered market manipulation before the 1980s? Yes, I have heard of them, and, aside from some narrow uses, I disagree with a company using its money (or debt money) to buy back its own stock. Buying from your shareholders at a premium compared to the market seems like a very roundabout way to disburse some cash and a very good way to pad the financial indicators that are most likely to be analyzed by prospective investors (also get the C-suite some bonuses).

7 msgkings February 2, 2016 at 11:58 am

What premium? They buy their stock in the market just like the rest of us.

8 Horhe February 2, 2016 at 4:07 pm

I would have expected at least a bit of a premium, otherwise why would the company bother being the one paying? That makes it even less reputable. As a shareholder, especially a smaller one, I can just cash out in the market whenever I feel is best. The best buybacks are those that pay a premium and go around the market. Like when you buy stock back from your employees etc. I’ve lived through a few of those.

9 Axa February 1, 2016 at 8:24 am

Google equity history is not special. 1000+% return of investment if you bought at IPO prices sounds out of this world but not. If you bought boring equities like Genworth Financial (GNW) during the Great Recession you also had 1000+% ROI in a few years. There’s a world of equities beyond Apple, Facebook and Google.

10 Thomas February 1, 2016 at 1:50 pm

Dividends don’t matter. You can sell off small portions of a portfolio to effect your own dividends. You cannot do that with a house – at least not in any practical way.

11 Bruno Mota February 1, 2016 at 2:37 pm

“[H]ouses don’t pay dividends”

Ever heard of AirBnB? Not quite the same as dividends, but you can earn money from your house when you are not using it.

12 Thomas February 1, 2016 at 4:22 pm

“Practical”. Some people disagree with the practicality of allowing strangers to sleep in your house at night.

13 Angela February 6, 2016 at 9:59 am

AirBnB is in the top 3 hotel chains in the world. It is as practical to open or stay at an AirBnB as it is to stay at a Marriott or a Hyatt or a Best Western. You can rent a whole house, not just shared living spaces.

That said–AirBnB can provide dividends whether you’re renting or buying. I subleased my rented home on AirBnB and made $500-$1000/month. Better ROI than getting a roommate. Or the stock market for that matter. (-;

14 The Original D February 1, 2016 at 2:30 pm

I don’t see how that’s relevant. How often does your house pay you a dividend? How easily can get you get out of that house (stock) and into another one if you don’t like the dividends.

NB I’m following the last sentence to a T. I own a house but am leasing it out. I moved closer to work and now my 45 minute plus commute is about 6 minutes. It’s a much smaller place but I barely even notice.

15 rayward February 1, 2016 at 7:45 am

Tabarrok omits an advantage of home ownership: forced saving. By that I mean the owner/debtor has no choice but to make monthly payments on the mortgage, which, over time, reduce, and eventually eliminate, the mortgage balance. While it’s true that few people today actually pay down the mortgage balance (because they move often or refinance often), the equity in the home for the greatest generation was usually the largest asset in the estate, something my generation appreciated. But even if people today don’t actually pay down the mortgage balance, in the event of an unexpected expense, tapping into the equity in the home is almost always much cheaper than tapping into that 401(k) (the latter subject to penalties and taxes). But Tabarrok’s main point, that the home is not the best investment, is correct, notwithstanding bubbles (which, as we know, burst).

16 Alex Tabarrok February 1, 2016 at 7:55 am

The forced savings point is a good one.

17 Govco February 1, 2016 at 11:57 am

Also easier to leverage your equity and place risk on the lender; in California the purchase mortgage is nonrecourse.

18 The Original D February 1, 2016 at 2:31 pm

Yep, and it’s straight out of behavioral economics.

19 David B February 1, 2016 at 7:02 pm

The forced savings point worked much better when many fewer people did cash out refinancings. When we were looking for a house during the bubble, it was amazing how many people had houses that had doubled or tripled in value, but had little, no, or even negative equity thanks to refinancings.

20 Grant McDermott February 1, 2016 at 7:09 pm

Pretty solid evidence for the forced savings argument (i.e. housing as a commitment device against “temptation” spending) here. (Slides here.)

21 John Higgins February 3, 2016 at 4:58 am

If you are looking at a home as an investment and as was stated, “people had houses that had doubled or tripled in value, but had little, no, or even negative equity thanks to refinancings” Doesn’t that mean that they cashed out their profit? Just like a good stock pick? Let’s take that statement on a $250,000 home purchase with 20% down. Buyer invested $50,000 in a down payment. Let’s say the value of the home doubled. That investment of $50,000 is now worth $300,000. That is a 500% return. Not bad. Ever hear of leverage? Now back to your example of the guy that had the home that doubled or tripled in value but still has no equity. Where do you suspect that money went? That’s right, it went straight to the homeowner’s pocket. He took out the equity (profit). He may have squandered that investment on foolish things, but that is a topic for another discussion. Housing is a unique “investment”. Offering low borrowing rates, high leverage, long terms of repayment and an offset to renting. Historically, less than 30% of people pay cash for a home. So leverage is huge in this equation. Take out the housing crisis and housing had a steady rise in value from post WWII with few dips (Boston and California notwithstanding). It was nearly a sure thing. We learned all sure things come to an end. But that does not mean housing is a bad investment. During the crisis from 2007-2010, everything but gold and US treasuries lost a ton of value including stocks.

22 Leonard Pereira February 5, 2016 at 8:02 am

Good observation about leveraging. Today you can leverage 97% and put down 3%. If the value of the home goes up 3-5% a year, you recover your downpayment pretty quickly. Then you have closing costs of 8% which will take another 2 years to recover.

Here’s what I noticed: Most, almost everyone when they sell, if they sell in 4-5 years, can sell and walk-away with a small return of 1-5% of the value of the home, doubling their downpayment investment or more, even if you factor in home-improvements.

However, mentally, people have a false sense of what they think their investment is worth, they relate the value of their home as being their money.

The stock market can leverage 50% of the value of your portfolio, real estate is 97%. With each investment you chose, there’s going to be other issues, maintenance, taxes etc.

For most run-of-mill folk, owning a home is an easy way to get in and save (paying down your mortgage). Today the renting rates are above mortgage rates here by about 10%.

23 Daniel in VA February 1, 2016 at 8:15 am

Isn’t the forced saving just working toward rent-free living, though? And if the homeowner lived in a smaller, cheaper house, they would be just as rent-free after paying the mortgage and have had a chance to accumulate savings elsewhere?

24 Jeff R. February 1, 2016 at 9:54 am

The mortgage interest and the property tax paid both reduce federal income taxes. You don’t get either one of those deductions from renting.

25 anon February 1, 2016 at 10:01 am

A bug in the system. Or, a conscious preference for home building over individual economic health.

26 Brian Donohue February 1, 2016 at 11:14 am

Aren’t similar tax benefits available to landlords, and wouldn’t they be reflected in rents?

27 Cliff February 1, 2016 at 11:32 am


28 Lord Action February 1, 2016 at 1:24 pm

Landlords don’t get the capital gains exclusion, which is a huge part of the tax advantage of owning.

You can make rent or buy decisions the same way you make self-insurance decisions: if you can, you should capture the profit for yourself.

Holding the product constant (which in fairness you can’t because rental real-estate is generally lower-end), landlords have the same expenses as owners, plus some overhead of managing tenants and vacancies, a worse tax situation, and an expectation of profit. Economically, renting is going to be inferior to buying long-term and on the average. Details may make markets and people temporarily deviate from this, but it’s the right general conclusion.

29 Cliff February 1, 2016 at 1:41 pm

Landlords do get to deduct repairs and depreciation, though

30 Lord Action February 1, 2016 at 1:46 pm

By lowering their basis in a future capital gain reckoning.

Also on the landlording side of things are potential economies of scale. For example, if you own 100 single-family homes and rent them out, you probably pay wholesale prices for maintenance and insurance.

31 Vivian Darkbloom February 1, 2016 at 2:10 pm

Good point. The incidence of tax (and tax benefits) is tricky.

@ Acton

Landlords get to deduct interest and taxes without itemizing. That is a significant advantage. Also, repairs don’t reduce basis. Neither do deductions for insurance which owner/occupiers don’t get at all, either.

There are exceptions, but, on average, I’d guess investing in major city centers (as opposed to burbs) has been a pretty good investment. Rule of thumb: invest in real estate that is not easily duplicated.

32 Lord Action February 1, 2016 at 2:16 pm

Action, not Acton.

I completely believe that landlording is profitable in general. That’s a central component of my argument.

I do think there a lot of hobbyist landlords who get into it because they don’t realize landlording is more “job” than “investment.”

33 ladderff February 1, 2016 at 2:25 pm

Similar benefits may be available to landlords but when you do the incidence analysis on this you do not find that the subsidy is straightforwardly passed on to the renters.

34 Shane M February 2, 2016 at 12:48 am

“The mortgage interest and the property tax paid both reduce federal income taxes. You don’t get either one of those deductions from renting. ”

Not if you take the standard deduction. Initially it made me upset when it seemed the tax code was encouraging me to take on debt and not pay down my mortgage – actually seemed to reward people who bought more house than they could afford – but I paid off my home just for the principle things rather than hanging onto the debt.

I now am actually renting after cashing out and selling my home. I’m not sure how things will work out, but my stress level is much reduced from when I was in the process of selling the home.

35 Chris February 2, 2016 at 3:15 am

You are probably doing the right thing. Whenever I’ve calculated all this out (including return on potential down payment if renting versus buying, prop tax, insurance, maintenance, cost of realtor and closing on sale, tax deduction, etc) buying turns out better in the long run, but not by as much as people tend to believe. It often takes 7 to 10 years just to break even with renting, depending on your assumptions for home appreciation rate and investment rate for your portfolio. The biggest benefit is to either buy or rent significantly less house than you can afford, because portfolio returns tend to outperform housing (and by a substantial margin).

36 Sara February 2, 2016 at 10:41 pm

With todays low interest rates the standard deduction can higher than taxes and interest….or will be after a period of time.

37 M1EK February 1, 2016 at 9:25 am

The Greatest Generation also benefitted from the Great Wage-Price Spiral of the 1970s. That’s the primary reason they ended up with so very much equity; their mortgage didn’t go up and prices and wages did.

38 Dave Smith February 1, 2016 at 9:38 am


39 Matt2 February 1, 2016 at 12:56 pm

I think their outcomes have colored current expectations in real estate, as they have in many other things. Maybe we need to accept that 1945-1970 (roughtly) just isn’t “real.”

40 Bill February 1, 2016 at 11:08 am

You have to look at other commitment devices available to you and that you forgo if you get a mortgage. You might be better off choosing another commitment device.

So, if you have a 401k plan, but do not fund it fully so you can pay your mortgage, you have made a bad financial decision.

41 Hazel Meade February 1, 2016 at 11:13 am

Well, if you’re the kind of person who doesn’t need to be *forced* to save, then banking the money in a mutual fund will provide better returns and is much more liquid than the equity in a home. And you don’t have to put your largest asset at risk if you need to borrow against it.
Many people have nasty horror stories about what the banks do in forclosure that costs them most if not all of the equity they had in the house. Which is like losing your entire mutual fund balance instead of withdrawing a few grand.

42 Albigensian February 1, 2016 at 12:30 pm

I’d really like to see a more complete comparison of the cost of renting vs. owning.

One obvious difference is that the principal and interest on a fixed-rate mortgage won’t go up (although taxes and utilities will, and insurance probably will) whereas rents can and usually do increase whenever one’s lease is renewed.

Also, owning favors longer-term investments (e.g., you’ll buy better insulation for your house if you think you’ll live there long enough to see some payback and perhaps more efficient appliances, but if you’re renting and tenant pays utilities then the landlord’s not so motivated).

There’s certainly less flexibility in owning (although leases also reduce the flexibility of renting, as an opportunity worth moving for seldom happens just when one’s lease is expiring).

Finally, buying includes significant market-value risk (although there’s upside as well as downside here), as well as the possibility of unexpected maintenance and repair costs. And, well, if you get a neighbor-from-hell it’ll be easier to escape if you’re renting.

Of course, there are also significant transaction costs in buying and selling a house. Intuitively, one expects the cost of owning vs. renting (similar accommodations) to favor short-term renting and long-term buying.

Nonetheless, the rent-vs-buy question really needs some more analysis than what’s offered here.

43 Hazel Meade February 1, 2016 at 2:01 pm

as an opportunity worth moving for seldom happens just when one’s lease is expiring).

True, but it’s much cheaper and easier to break a lease than to sell a house.

44 Chris February 2, 2016 at 3:19 am

I have a spreadsheet that does all this. I suggest you sit down and work though the process too. It doesn’t take too much time and really provides an appreciation for how unclear the comparison actually is (compared to what everyone says). In fact, so many people believe that buying is the far superior choice that by renting I wonder if I don’t benefit from a slightly lower price because of misplaced demand.

45 Cooper February 1, 2016 at 1:11 pm

If I borrow $100 and pay back $110, the cost of the loan was only $10.

Paying back principle is a cash cost but it’s not really an economic cost of home ownership. Similarly, property taxes and mortgage interest shouldn’t be counted at their full cost from an individual’s prospective as there is a non-neglible tax subsidy.

So the real cost of home ownerships looks something like the following:

Opportunity cost of downpayment + aftertax cost of mortgage interest + maintenance + insurance + aftertax cost of property taxes

46 Hazel Meade February 1, 2016 at 2:05 pm

You’re missing the opportunity cost of money spent on mortgage minus rent. You could be earning a higher rate of return in equities instead of in real estate.

47 carlolspln February 1, 2016 at 3:41 pm

“You could be earning a higher rate of return in equities instead of in real estate”

Not in the 1970’s. & maybe not in the next few years, either [though you did use the conditional tense]

48 hgshg February 1, 2016 at 7:04 pm

Forced saving argument is stupid. Based on that logic, just let gov collect 5% extra tax in exchange of increased pension in the old age (that’s what many countries do btw).
Idea of ownership of things has no justification other than the primal instinct – its MINE, my presssssscious! World moves away from this. In 10 years we’ll call an autodriving uber car that will always be 1 minute away and will cost 1 dollar for a ride. Any reason to own a car? If you need to get laid, order a lamborgini for $5.

49 Darren February 1, 2016 at 7:53 pm

You mean like Social Security was supposed to be?

50 NickC February 1, 2016 at 7:49 am

Further to 4th para: why do some many economists own houses?

What about non-monetary issues: it’s easier to be thrown out of your rented house than one you own. You get less control over decor, fixtures and fittings etc in a rented home.

Also the diversification point is wrong. Owning a house is a massive concentration of my assets. But I also have a massive liability which is my need for somewhere to live. Owning a house is a hedging strategy. Being mis-matched with a diversified portfolio isn’t necessarily lower risk.

51 mavery February 1, 2016 at 9:04 am

The answer to your question is covered in the 5th paragraph: the tax code has been written in a way that makes owning houses easier, and the impact is amplified is you’re wealthy.

And if you have job stability, having one specific to live is important. If you don’t have job stability, having the option to live in many places is desirable. Purchasing a home creates many difficulties when you decide you want to move that don’t exist when you’re a renter. It can be quite limiting regarding the jobs you have access to and can lead to sub-optimal arrangements:

Get Job 1 –> Buy house near Job 1 –> Get much better Job 2 –> Commute 2 hours because you don’t want to sell your house 3 years into the mortgage

52 TMC February 1, 2016 at 9:43 am

Easy answer is if you have job stability, buy. If not, rent. These options are available now.

53 Hazel Meade February 1, 2016 at 11:17 am

It occurs to me that owning a house can lower your negotiating leverage for wages/salary, because it means you are less likely to quit and take another job elsewhere. If you want to be able to threaten to leave a get a better job, you want your boss to know that you’re renting and can relocate if necessary.

54 Lord Action February 1, 2016 at 11:58 am

Alex’s point about relative ability to move is the best part of his post. But it’s not like home-owning is the entire problem, or even a large part of it. Houses are relatively liquid and transaction costs are not huge. But moving means leaving your friends and pulling your kids out of school and saying goodbye to their friends. It means gambling on new neighbors. It’s disruptive, even if you’re a renter.

55 Ricardo February 1, 2016 at 12:18 pm

I think the transaction costs are huge. Getting into and out of a $500,000 house will cost you around $50,000.

56 Lord Action February 1, 2016 at 12:21 pm

I think that’s about double what most people pay. Plus, the capital gain is sheltered, whereas landlords don’t get that benefit and pass the cost on to you.

57 JonFraz February 1, 2016 at 1:24 pm

Also: if you are married it means your spouse has to leave his/her job and find a new one, which is a pretty significant issue these days.

58 Thomas February 1, 2016 at 1:58 pm

The transaction will require (typically) 6% in commissions for realtors and (possibly) a sudden lump sum maintenance cost that can certainly be 4% or more of the value of the home.

59 Lord Action February 1, 2016 at 2:09 pm

The national average is 5.18%. If you’re paying 4% for improvements, your realtor is smart and you’re a sucker.

60 Thomas February 1, 2016 at 4:25 pm

Homeowners are allowed to postpone maintenance. It wouldn’t surprise me in the least to find that people undermaintain their homes for years but must improve before selling. Carpet, paint, appliances, code violations, professional cleaning, etc. If optimal maintenance is 1% of your home’s value per year, and a homeowner performs half of that, it only takes 8 years of ownership to accrue 4% in deferred maintenance, assuming that maintenance problems do not beget more maintenance problems.

61 hgshg February 1, 2016 at 7:12 pm

I’ll make it simpler: if you have kids, buy. If not, rent. It’s just too boring to live/work in own place for 5 years straight.

62 Kevin- February 1, 2016 at 9:11 am

Alex mentioned the key non-monetary issues, like decorating, etc. Having rented and owned multiple times, I find that I care much much less about decor and things like that when I’m renting, as long as the space is functional and has good light. On the flip side, every homeowner knows that their “to-do list” of home improvement items and decorating projects never gets fully checked off, and one either pays a small fortune on up-keep, or devotes an enormous amount of weekend and evening time to that work. We are generally more fussy and anal about little things when we own.

This to me is probably the biggest thing that makes me want to rent when we sell our current home — I want my free time back. And I’m someone who is very handy, and likes most of these home repair projects.

I don’t understand how Alex is wrong about diversification. The risk of being homeless doesn’t seem to have anything to do with investment diversification, AFAIK. And my experience is that anyone who as the credit and means to own a home, even a humble one, has the means to find a decent place to rent. I’ve never known of a case where it was a choice between having nowhere to live, and buying a home.

63 Lord Action February 1, 2016 at 9:30 am

“I don’t understand how Alex is wrong about diversification.”

It’s much easier to evict than to foreclose, and it’s hard to imagine a financial system where it wouldn’t be that way. You gain a lot by matching an asset to the liability.

“I’ve never known of a case where it was a choice between having nowhere to live, and buying a home.”

This depends entirely on where you want to live. Try renting in a nice suburb where the kids will have good schools, and you’ll pay through the nose for something awful.

64 Hazel Meade February 1, 2016 at 11:25 am

It’s much easier to evict than to foreclose

If you are someone with a significant risk of being evicted, you shouldn’t be purchasing a home.

65 Cliff February 1, 2016 at 11:48 am

You can be evicted for many reasons that have nothing to do with you, like the owner wants their house back

66 Cliff February 1, 2016 at 11:49 am

Well you can just have your lease not renewed, is what I mean

67 Kevin- February 1, 2016 at 11:35 am

Again, the talk of eviction vs. foreclosure has nothing to do with the importance of investment diversification. And if you think it’s remotely easy to evict someone from an apartment, you don’t know any landlords. Foreclosure is extremely difficult, but eviction isn’t easy. And both are exceedingly rare except when the renter/owner is either refusing to pay, or is doing far worse.

I’m sure you’re correct about renting in the ‘burbs not being easy. On the other hand, most places I’ve lived the folks living in the suburbs are paying property taxes to support the local schools, also paying through the nose to send their kids to private schools. And they’re commuting away their lives, so they have to pay people to spend time with their kids.

I just realized another thing that I haven’t seen anyone mention here. Homes are not only extremely illiquid as investments (it once took me over a year to sell a home), but the transaction costs to both buying and selling are huge. Most people who own a home for years and then sell don’t being to factor in those transaction costs, which after the cost of upkeep, and after factoring in inflation, usually makes their true net “profit” close to zero. Homes are ultimately a decent inflation hedge if you own long enough, but rarely much more than that.

68 JonFraz February 1, 2016 at 1:26 pm

Re: most places I’ve lived the folks living in the suburbs are paying property taxes to support the local schools, also paying through the nose to send their kids to private schools.

Are you living in downscale areas? Because the major attraction of middle class neighborhoods in the ‘burbs are their schools, and it would be absurd to pay through the nose to live in a good school district and then also foot the bill for private school.

69 Jay February 1, 2016 at 1:49 pm

To be fair I think most people are conflating “eviction” with “not renewing a lease” or any other reason that the renter is required to move out involuntarily.

70 JayT February 1, 2016 at 5:37 pm

Being evicted/not having your lease renewed is actually very, very easy for a landlord (at least in California) if they are selling the property or moving in to the property. I live in the Bay Area, and I’ve had both of those things happen. In one case the landlord was moving back into the area, so he gave me 60 days notice (I was month to month), in the other case my landlord of seven years wanted to retire and his house was worth several hundred thousand more than he had paid for it, so again, I was given 60 days.

I’m still renting because I haven’t quite decided if buying in the Bay Area really makes sense for me, but the biggest draw of it is that no one could kick me out as long as I pay my bills, which I’ve always done.

71 Nathan W February 3, 2016 at 3:15 pm

If the landlord sells, you might have to move. This is a very easy “eviction”.

72 Cliff February 1, 2016 at 11:51 am

As a landlord, that is not my experience. Generally renting homes in upscale suburbs with good school systems is not more profitable than elsewhere (as I suppose you would expect, economically).

73 Lord Action February 1, 2016 at 12:08 pm

I’m not sure I intended to draw the conclusion you’re inferring. I agree that there are tax and market realities that make high-end home landlording hard to do. Rent covers the mortgage, the upkeep, the less-favorable tax situation of the landlord, and his profit. It also caters to the low-end of each market. Of course you get less for your money. But I don’t think that implies the landlord’s profit is large.

74 Cliff February 1, 2016 at 1:27 pm

Well you said you have to pay through the nose to rent something awful if you are in a nice suburb with good schools. That seems to imply that you are paying a lot relative to what you would pay to buy. But if that were the case then landlording should be profitable. Are you positing the main reason for the discrepancy is tax treatment of capital gains? Landlording in general is tax-favored but in a coastal area I can see the capital gains being a significant factor. At the same time there is the 1031 exchange option.

75 Lord Action February 1, 2016 at 1:41 pm

Mostly the capital gain exclusion, but also covering vacancies and other tenant hassles, plus some expectation of profit. The tenant has to pay for all that, and an owner would not.

76 Thomas February 1, 2016 at 2:01 pm

I’ve found that as a proportion of the value of the property, higher end rent is smaller than lower end rent.

77 Lord Action February 1, 2016 at 2:13 pm

I’ve found that as a proportion of the value of the property, higher end rent is smaller than lower end rent.”

The only way a landlord can do this profitably is if there’s an expectation of appreciation. Which is an awfully risky thing to count on to bail you out in an investment.

At the end of the day, landlords have to be profitable, and they have to do so while facing some challenges owners do not. That’s why in general you are worse off renting.

78 liberalarts February 1, 2016 at 2:28 pm

The initial point about diversification is a very good one, and eviction has nothing to do with it. If the relative price of housing rises (relative to say manufactured goods or wages), then homeowners have a more valuable asset and an opposing more pricey consumption. Those who invested in stocks will end up spending a higher portion of their income/wealth on rent than before, but without the opposing increase in their housing capital value.

79 Hazel Meade February 1, 2016 at 2:42 pm

Anecdotally, the higher-end homes I have seen tend to be rented by their owners and often in temporary situations – like the owner is spending the next two years in France, and wants to keep the place occupied. Or the housing market went to crap and there are few renters who can afford it.

For various reasons they tend to be relatively affordable – cheap for what you get. Thing is that most people who can afford them are looking to buy. There just aren’t that many renters looking to rent high-end homes.

80 Hazel Meade February 1, 2016 at 2:47 pm

At the end of the day, landlords have to be profitable, and they have to do so while facing some challenges owners do not. That’s why in general you are worse off renting.

This is true about insurance as well. You’re better off paying out of pocket on average, because the insurance company has to be profitable, so paying for healthcare via insurance is necessarily more expensive.

And yet, you still pay for insurance to reduce your risk, in the same way that you might decide to pay a premium for rent in order to diversify your assets and keep them liquid. The landlord probably owns more than one property and hence is diversified so he doesn’t carry the same risk in owning that you do. The landlord might also employ a handyman who does all the repairs on a group of properties so his maintainance and upkeep costs are lower.

81 Thomas February 1, 2016 at 4:35 pm

“The only way a landlord can do this profitably is if there’s an expectation of appreciation.”

These are different markets with different consumers with different elasticities, so I’m not sure what your argument is. Secondly, there are fixed costs in residential construction, which means that all things equal, a smaller home is more expensive, per square foot, than a larger home, as the fixed costs tend toward 0 per sq ft. Third, fixed costs in rental management are such that a 3000 sq ft home and a 2000 sq ft home have similar administrative costs. These things manifest in real life experience constantly. Your gallon of milk has a lower cost per ounce than a pint of milk and so on, and so forth.

82 acarraro February 1, 2016 at 7:51 am

Houses produce income and tax free income at that: you can live in them. Granted it’s not cash income, but it’s still income. They don’t need to appreciate in value. Plus you will always need a place to live so you are born short housing (and food and energy), so owning a house is a hedge.

You can argue housing is not a great investment nowadays, but what asset looks cheap today? Also houses usually allow for large leverage which can be very useful in terms of diversification (as you can borrow and invest in something else).

83 dearieme February 1, 2016 at 8:11 am

Until 1963 the “imputed rent” of owner-occupied housing was taxed in Britain, which seems entirely rational to me.

84 Ken Arromdee February 1, 2016 at 12:23 pm

No more so than taxing the “imputed child care expenditure” of a stay at home housewife who takes care of children. Or the “imputed car repair service income” of someone who repairs his own car.

85 JonFraz February 1, 2016 at 1:28 pm

To me that seems absurd. Would you tax someone who owns a paid-off car, or no car at all, because they are not making car payments?

86 jeffd February 4, 2016 at 3:11 pm

What was truly irrational about the 1963 British tax code was an absurdly high tax on income and absurdly low taxes on land, which encourages the rich to pour their money into land rather than productive economic activity. Income taxes are lower now, but low land taxes remain, and that is the underlying cause of the London housing bubble, which is causing a massive intergenerational transfer (from young to old) in that city, causing massive waste time and energy on commuting because of the lack of incentives for infill development, and will eventually lead to a Japan-style bust of the British economy. Same thing in a milder form will happen in the coastal areas of the USA at some point.

87 anon February 1, 2016 at 10:06 am

A condo and a house are equally places to live, but they are treated very different aspiration and achievement wise. Which makes me think financial justifications for large houses are post hoc.

Or I should say justification for overallocation of resources to personal residence.

88 Ivy February 1, 2016 at 12:15 pm

The condo versus house example has another few elements.

Condo board vagaries and common-wall/floor/ceiling neighbors may not be desirable to many homeowners. There is a relative freedom to be in one’s own castle, without a board of indeterminate direction or motivation in a shared castle-ette.

Distance from neighbors and reduction in random noises, cooking odors or what have you are benefits to living apart instead of cheek-by-jowl. Many homeowners looked forward to getting away from the relative constriction of apartment living and don’t want to repeat that by buying a condo if they can help it. That is another reason why condo prices tend to be more volatile than house prices. Barking dogs may be a bug in both situations, although likely more in housing.

89 anon February 1, 2016 at 5:46 pm

On the other hand, with a condo you can just report a leak and come home to find a new roof going on.

90 TMC February 1, 2016 at 6:18 pm

And you pay for that.

91 anon February 1, 2016 at 6:47 pm

Sure, but the homeowner association fee is group coverage, almost a “maintenance club.”

92 rayward February 1, 2016 at 7:53 am

Here’s another point that Tabarrok doesn’t mention: the advantages of renting tend to be inversely related to the housing market. By that I mean that rental housing is abundant, and the rents reasonable, when the price of homes is down, something we recently experienced (when the price of houses collapsed in the financial crisis). A reason is that owners couldn’t sell (many houses being underwater), and in an effort to hold on to the houses until housing prices recovered, owners would rent them, with rents falling as owners added to the inventory of rental housing. Today, as the price of homes has recovered, the inventory of rental housing has fallen considerably, and, consequently, rents have increased.

93 Kevin- February 1, 2016 at 9:23 am

Are there numbers that back this? I’ve lived through a couple of housing bubbles and very hot housing markets, and what always struck me is that as home prices shot up, rents barely budged, and even with that fact making renting more attractive, lots of renters I knew suddenly wanted to follow the herd and tried to buy houses they couldn’t afford.

I know there’s probably some “sticky rents” reason rents not rising as fast as housing cost, but I’ve seen rents adjust downwards quickly in response to local economic conditions (except where there’s rent control, which ironically is bad for most renters), but my impression is that residential rents tend not to be so responsive in the upward direction.

Ultimately there is something irrational about home ownership in the US. I’m on my fourth home, and I’m a thrifty and handy guy, and home ownership is significantly more expensive than renting. The home mortgage deduction gets totally swamped by expenses most people barely keep track of. Few factor in local RE taxes, the need for insurance, and the surprising costs of maintenance and upkeep. And then there’s the staggering cost of owning a home with a sociopathic neighbor next door. You can’t put a price, or rather a cost, on that.

94 Kevin- February 1, 2016 at 9:31 am

Add on: per Ted Craig’s point below, I am comparing owning a home to renting an apartment. I would never rent a home, for the reasons he outlined.

But before you say this is an unfair comparison (apt. rental vs home ownership), let me say that in every home I’ve owned, we’ve used about half of the livable space, and a tiny fraction of the yard, while in an apartment the space is usually fully utilized. Right now I have two “guest bedrooms” that are really for storing furniture and stuff we don’t need, and a dining room that gets used three times a year.

95 Hazel Meade February 1, 2016 at 11:33 am

Check my comment on last weeks link to the decluttering book by Kondo. You have two bedrooms used to store stuff. Think about how much owning that stuff is costing you, just to afford the storage space. If you got rid of it, you could live in a significantly smaller home, and save that much on mortgage/rent.

96 Kevin- February 1, 2016 at 11:40 am

Hazel, I just got the Kondo book, and am looking forward to applying it. I should mention that my largely unused rooms will still be part of my mortgage even after they’re decluttered. I’m not paying anything extra for that storage, and I won’t realize any gain from emptying those rooms (except psychologically, and especially when we sell the place and move). My point is that my case is similar to most homes I go into, where there are multiple rooms that are rarely used. Most homes are full of extra space that people think they need, and makes them favor homes over apartments. As you say, it’s actually a burden, since nature and homes abhor a vaccum, and our stuff comes to own us. Especially when you need to move somewhere for a new or better job.

97 Hazel Meade February 1, 2016 at 11:48 am

You could rent the unused rooms, either long-term or on AirBnb (if you’re in a desirable location).

98 JonFraz February 1, 2016 at 1:33 pm

Why do you buy such over-sized houses?

99 Thomas February 1, 2016 at 2:10 pm

Often there is not a variety of sizes of houses within a single neighborhood. Want to live in the low crime neighborhood in the best school district with desirable professional neighbors? At least in most places outside of major cities with high-end rental markets, that will mean 5 bedrooms, 5 bathrooms, a formal dining room, a finished basement, 3 car garage, a living room, a family room, a breakfast nook, etc.

100 The Original D February 1, 2016 at 2:39 pm

That’s absurd. Even in neighborhoods like that there are practically always smaller townhouses available. In fact, I’ve owned a townhouse in a neighborhood exactly like that for 13 years.

101 Thomas February 1, 2016 at 4:21 pm

Absurd? Not quite. So you’ve presented townhomes, which may or may not exist in a 2000+ main floor sq ft neighborhoods. What about smaller single family detached homes? It’s simply a fact that many people purchase homes that are larger than they need because of the limited supply of smaller homes within desirable neighborhoods. In the higher end neighborhoods I am familar with, townhomes may constitute < 5% of the housing stock, and in middle-end new construction neighborhoods, in the districts with new school buildings, there is no such thing as a < 3 bedroom home.

102 Kevin- February 1, 2016 at 5:08 pm

@JonFranz, this is the good ol’ U S of A, the land of big houses, home of the McMansion. People pay by the square foot, not by the quality of the contents of the home. Builders long ago figured out their profit margin is much greater for large homes than for small or medium homes. RE agents also get paid more for getting you into a bigger home. And, frankly, most home buyers love the idea of tons of space, “just in case.” So where I live, like many places in the US, the decent neighborhoods have homes that start above 2000 sq. ft and go up to 4000 sq ft. Went to a new home tour recently and the smallest home was over 4000 sq. ft., with the larger ones going up to 6000 sq. ft. Yes, for single families.

I bought this too-big house because it had what we needed, where we needed it, and I made an incredible deal. The extra rooms were just bonuses. When we move, will be happy to downsize dramatically, whether it’s a home or an apartment.

@Hazel — the little granny cottage I built 2 years ago is going up on Airbnb next week. It will more than pay my mortgage and RE taxes. So even with that sweet setup, I can see clearly the many financial and time-sucking downsides to home ownership.

It’s amazing what a loaded topic this is. People are surprisingly unable to look dispassionately at either home ownership or car ownership.

103 Hillary February 1, 2016 at 10:31 am

My Minnesota anecdote… I bought a townhouse in 2012. At the time I was renting an apartment about the same size for $775/month. My expenses went up to about $900/month when I bought (mortgage, HOA, utilities that were included in rent, property tax, and about $100/month average maintenance). Three and a half years later, my expenses are still about $900/month, but the apartment rents for $1100. I don’t get any income tax benefit since I have a fairly small 15 year mortgage with a low interest rate.

In my area, multifamily construction stopped in 2007 and hasn’t restarted outside the luxury and senior housing markets. Theoretically the luxury construction should have pushed lower end competition further down the scale, but low end rents have been going up faster on a percentage basis. A friend manages an older building that usually has the lowest rents in its neighborhood. He’s been raising rent by at least $100/month every time a lease comes up for the last 18 months, and he’s not testing if that’s the limit of what the market will bear.

104 Engineer Dad February 1, 2016 at 11:03 am

Hillary’s anecdote reflects my experience too.

Rental housing owners dramatically reduce rents in hard times and can raise rents substantially each year as the economy recovers. This obviously favors buyers who purchase during recessions.

What’s not widely known is that the federal government shares part of the responsibility for the noxious label ‘rent seeking bastard’ since federal tax laws pressure owners to raise rents when their rents are too low.

105 Hazel Meade February 1, 2016 at 11:42 am

What’s not widely known is that the federal government shares part of the responsibility for the noxious label ‘rent seeking bastard’ since federal tax laws pressure owners to raise rents when their rents are too low.

Good point. I was discussing this with a business owner in downtown Leesburg a few weeks ago. The owners in the area keep trying to jack up the rents to a point that it is driving local businesses out. There are currently several downtown storefronts sitting empty because the owners don’t want ot cut the rent ot the point someone will move in. It didn’t occur to me that they might be doing it because their taxes are getting jacked up. Sad thing is a few months ago Leesburg seemed like this charming colonial town that was on the edge of a gentrification boom, and now suddenly there are shuttered storefronts everywhere.

106 Cliff February 1, 2016 at 12:05 pm

What federal tax law are you talking about?

107 Rusty Synapses February 1, 2016 at 12:30 pm

I don’t understand this comment – can you explain? My understanding is many landlords keep rents for occupied apartments with decent tenants below market (for unoccupied apartments) because they want less turnover. Are you saying the rent has to be high enough or else you get a passive loss you can’t use?

108 Engineer Dad February 1, 2016 at 3:56 pm

Cliff asks, “What federal tax law are you talking about?”

Fair Market Value

Rent the home for its fair market value (FMV). The landlord must ensure that the rent being charged is not too low; otherwise, the IRS will deem that it is not fair market value for the rental and may limit what can be claimed for losses. If it's a situation where the home is being rented to a relative and the rent is less than what is considered FMV, it's possible that the IRS would consider the difference between what is FMV and the rental amount as taxable income for the renter.

Determine the FMV by a comparison of equally sized rentals in the same neighborhood. If there are no comparable rentals, obtain an average by doing a search in nearby neighborhoods in the same zip code. FMV can be a little precarious to judge, as in this time of economic downturn, rentals have become especially competitive. It is possible that the FMV is far below the amount of the mortgage payment. If this is the case, it is very important to prove that the FMV is accurate, or the IRS may disallow the losses from the rental beyond the revenue earned.

109 Cliff February 1, 2016 at 8:34 pm

I’m not aware of that being a serious concern in arms-length tenant relationships

110 Jan February 1, 2016 at 11:08 am

The inverse, is that buying a home protects you from rising rents, especially if you are on a fixed income. Living in growing city, my rent often rose much faster than inflation. While I acknowledge that home upkeep has significant costs, and it can come in waves, owning I think is overall better for those interested in protecting themselves from ever-rising cost increases.

111 Hazel Meade February 1, 2016 at 11:45 am

Couldn’t this problem be solved by locking in the rent with a long term lease?
Yes, there are penalties for breaking a lease, but it’s much cheaper to break a lease than sell a house.

112 Cliff February 1, 2016 at 12:06 pm

Owners don’t generally want long-term residential leases

113 Cooper February 1, 2016 at 1:15 pm

Very few rental contracts last longer than 1 year. I know hundreds of renters, none of them have leases longer than 1 year.

There are some rent control laws in some cities that distort the housing market but if you aren’t covered by a rent control law, your rent varies on a year to year basis by whatever the landlord thinks he can charge.

114 Hazel Meade February 1, 2016 at 2:08 pm

True, but at least in theory you could negotiate a longer lease. I see no reason why the landlord would oppose keeping you as long as possible.

115 BW February 1, 2016 at 3:41 pm

The big reason for buying in my opinion is that it protects you against being forced to move when you don’t want to. I put a high price on knowing that I won’t have to go looking for a new place I can afford (that allows cats) at a time I did not choose, and then have to pack, pay movers, unpack, learn the quirks of the new apartment — why doesn’t this aspect of home ownership come up more often in these discussions?

116 Cliff February 1, 2016 at 12:07 pm

Rents skyrocketed during the housing downturn.

117 Kristian February 1, 2016 at 7:53 am

Do you own or rent yourself?

118 Kristian February 1, 2016 at 7:54 am

Sorry! Alex, do you own or rent?

119 WC Varones February 1, 2016 at 7:55 am

Another major benefit you’re missing: it’s the only asset most people can buy with 4:1 (or more) leverage and that has consistently appreciated at least as much as inflation.

120 aloha jane February 1, 2016 at 9:16 pm


121 Matías Espinosa February 1, 2016 at 7:57 am

Well, houses do pay dividends, which are the alternative cost of monthly rent. Other than that, I’ve been giving this advice for years, specially for a reason not considered here, which is that people pay a premium in house prices due to the emotional value of ownership, in other words they are overrated and overpriced, making rent almost always relatively cheaper and more convenient.

Of course ownership has its advantages, like the fact that durable investment and improvement is not lost when you move (or at least doesn’t have contractual costs implied), but what if you use that money to pay the rent of a better house instead?

122 TMC February 1, 2016 at 9:56 am

Renting is only cheaper for about the first ten years, after that, and not paying attention to what rent has risen to, owning feels pretty cheap.
Taxes and utilities still rise, same as renting, but you lock in the payment. Look at the interest part of your payment and that’s what you are paying for rent.
Next look at the amortization table for your loan. ‘Rent’ goes down over the years, not up, until you have an asset you would never have had.
As for diversification, if you do live somewhere for more than ten years, owning turns out to be cheaper than renting, there is no saved money to invest somewhere else.

123 Moelicious February 1, 2016 at 10:39 am

You don’t even need to wait ten years. The NYT has an excellent “should I rent or should I buy” calculator and I broke even after three years. Now that I’ve been there five years I’m saving $25k a year vs. renting.

124 Matías Espinosa February 1, 2016 at 11:15 am

You are being oblivious of opportunity costs because you are only seeing cash flows and not paying attention to what would you do with the money you use to pay for the house if you didn’t buy it. Of course you would face higher interest rates for a loan to invest (if you can get it), but you would still have positive flows from whatever you decide to invest in, plus the liquidity and diversification you can enjoy from financial assets.

Another important point made in the original post was about that diversification: I really don’t know the numbers, but I don’t think that for a specific neighbourhood the rents are especially stable over time, even though for a given city they are.

The queston in the end is: with a given amount of money, do I live in a better house by owning a house of that price or by paying rent with the dividends of investing that money somewhere else? Correcting, of course, to different interest rates of both the assets themselves and the loans I can get to finance each option.

125 Cliff February 1, 2016 at 12:16 pm

That’s totally insane. Investing on margin and using the dividends to pay rent? What could go wrong???

The reality is that sometimes renting is less expensive and sometimes buying is less expensive. It is completely wrong to say that rent is “almost always” cheaper. If you could buy a house and rent it out profitably, then it makes more sense to buy the house- right?

In Northern Virginia, it is much cheaper to rent a giant house in an expensive suburb than to buy, and there are many such houses to rent. Renting a large house in Great Falls for $3000/mo is much better than paying $1M for it, financially. But a couple of years ago, for many townhouses it was cheaper to buy than to rent. Many townhomes could be bought for <$200k and rented for $1500 which is profitable (10% ROI). In such situations a person with a stable job would be crazy to rent the townhouse. In Richmond, in contrast, giant homes are not available for rent- buying is the only choice if you want a giant house in a good school district.

126 Matías Espinosa February 1, 2016 at 4:30 pm

You are actually right, you must consider the partcular situation to make a decision. On the other hand, it is not about you using dividends to pay for rent, it is about the cost of all that money put in the purchase of the house; where the money actually comes from is not relevant.

But the general reasoning -that house prices tend to be high relative to rent- seems to be logical, and certainly there is some evidence pointing that way. Of course differences tend to be negligible and could actually be explained by taxation and other factors.

127 jk February 1, 2016 at 7:59 am

Germans rent because German law gives renters a quasi ownership right over the house/apartment.

128 Andrew M February 1, 2016 at 8:50 am

Where do Germans live when they retire? (Or, who pays their rent?)

The average homebuyer will have paid off their mortgage by retirement; this is clearly not the case for renters.

129 Horhe February 1, 2016 at 8:55 am

I also read about cases where some Germans were evicted to make way for refugees.

130 yo February 1, 2016 at 9:30 am

Pensions. If you’re fully or partly on the dole in Germany (“Arbeitslosengeld II” or “Grundsicherung im Alter”) because your income or pension and assets are below EUR 1000, the government will pay rent directly for you, plus you get national health insurance and some pocket money for food etc. People on the dole are preferred tenants for landlords because they always get paid. The government will pay your rent everywhere regardless of how much it is (e.g. jobless people living in the centre of Munich are common) so there’s still some “social mix” in every neighborhood.
We’ve had some issues with grandmas (=never worked much, never paid in much, so low pensions) being too proud to apply for “Grundsicherung im Alter” though. This one is a political issue, with the left always like “look, grandma can’t pay rent, increase the Pension” when in fact grandma could apply for the dole.

131 Anuraag Agrawal February 1, 2016 at 8:03 am

I wish this article had more math – in particular I feel like it compares renting to buying at full price, not mortgaging. When mortgaging a condo with similar quality to an apartment, the monthly payment AFAIK is similar to rent and both amounts will be unavailable for buying the safer investment, stock. But when renting, the money is gone forever and with mortgage you will hopefully sell at least as high as you purchased, but even at a loss plus the interest, my feeling is you’d still lose less overall money than the equivalent rent in most cases. Is this not true? Does the risk of losing more than if you rented make renting + buying stock more profitable?

Also can you explain exactly what is the inefficiency of “inefficiently biased toward housing”? The article about Germany seems to imply that there is no right or wrong in biasing towards rent or own, other than the chance of total war destroying the investment.

132 Jan February 1, 2016 at 8:49 am

Agree, this seems to be a huge omission. I suppose if your assumption is that most people will tend to pay on that mortgage the rest of their lives anyway (due to a late start in buying, moving, or refinancing, etc), it is more of a wash. But a lot of people do pay off a house by the time they retire, or even well before. In that case, they get their retirement dwelling for the cost of taxes and upkeep only.

133 Chris S February 1, 2016 at 9:37 am

Having done these types of analyses, as well as rented and owned for a number of years (not at the same time) analyses of owning tend to leave out the unexpected-expense items, which are sometimes lumpy and not insignificant. New roof ($12,000), new siding ($10-20k), septic issues, furnace, other appliances, depreciation like “the kitchen is outdated so upgrade for $15k or no one will buy.”

Plus the mobility issues are unquantified.

134 Shane M February 2, 2016 at 1:18 am

Very much this. To sell my home I put on new roof, remodeled 2 bathrooms, remodeled kitchen, new water heater, new hvac unit, had some other work done. (It was an older home, built in 1976, but updates were “needed” to sell in competitive market). In total a huge outlay of cash (about 20% of the selling price of the home), and after that about 7-8% transaction cost to sell.

One other point: (I’m renting now after selling my home). I bought much more home than I will rent, and I expect my utilities to be considerably less when renting than when owning. Lower electricity and gas bills are expected due to less area to heat/cool. Additionally, far less maintenance – I’m was so sick of “fixing up the house” to sell.

135 Cliff February 1, 2016 at 12:20 pm

The monthly payment should be much lower than rent for it to be a better deal to buy. When you buy you have to put 20% down which is invested if you rent. With the mortgage initially little goes into principal. Later more of the payment goes to principal but due to discounting things that happen in 15-20 years are not so important to present-day decisions.

136 Axa February 1, 2016 at 8:10 am

Tyler’s advice feels a little bit rigid and binary. You can jump from equities to real estate and back to equities. I moved to another country for work and rent two houses back home. I’m risk averse, once I had equities and when I considered gains were “good enough” I sold everything and made a 50% down-payment of the second house. When I finish the 2nd mortgage I’ll go back to equities, but with more confidence and peace of mind.

I won’t forget one day back on March 2009 when the portfolio was 70+% below initial investment. I just went home after work, I drank six pack of beers listening to some music and went to bed to sleep by 20h00. Not a good feeling. When I cashed out in 2013 I was 190+% above initial investment. Equities are great, but what a thrilling ride. I was single then, I’d bet that my 2009 equity price plunge would be a lot more thrilling if married.

The best investment and entrepreneurship advice I had is “bet the resources that you can afford to lose”. As I said, I’m risk averse.

137 valuethinker February 1, 2016 at 11:56 am

Your housing portfolio dropped around 35% in price if you matched the US national average in that time.

Housing aggregates tend to lag stock market indices. Consider the movement in REIT prices (which is a “real time” measure of the market’s sentiment towards commercial RE). Roughly speaking, REITs dropped c. 70% at their worst point ie more than the market as a whole. I do not know what residential apartment REITs dropped (I imagine by less) and a big part of that drop was the debt leverage REITs hold– but US homeowners are mortgaged too.

BTW being out of equities you missed a 300% return from the bottom in March 2009 until the recent peak. You would also have received a (pre tax) return of around 2.5% p.a. from dividends over that time.

The main thing about personal home ownership in the US is it is strongly tax advantaged. Shiller’s data shows that housing has been a mostly lousy investment long term (gains as little as 1% real p.a., on some numbers actually *falling* in real terms over sufficiently long periods– a big question mark is the impact of renovations on returns).

The main advantage of owning residential RE as a rental investment is that you can leverage it. As long as property prices go up in nominal terms (at a higher rate than you are paying on a mortgage) then you should make money on the investment. You cannot leverage stocks to anything like that extent, and you are subject to “margin calls” when equity values drop.

The exception is the one Krugman dubbed “Zoneland/ Flatland”. He’s channeling Edward Gleaser. In (mostly coastal) cities where zoning controls are tough and prevent new housing being built (NYC, San Francisco, LA, Seattle, Boston) then housing prices (and rents) have moved up way, way faster than inflation long term. That’s not true of cities in Texas or AZ, say.

138 Axa February 1, 2016 at 1:19 pm

I bought for medium term horizon on Sep 2008, in hindsight I’m happy to exit with a nice profit. It may not be perfect, but what pc of people bought at the March 2009 bottom? As a non-resident US alien I payed a lower capital gains tax at home. When the decision was taken, inflation was a bigger worry than looking tirelessly for yield. Every case is different.

139 Brian February 1, 2016 at 8:19 am

While I basically agree on all points, there is always the argument that people take care of their home and neighborhood a lot better when they feel like they own it. I think the selfish optimum is to be the only renter on the block!

140 John Mansfield February 1, 2016 at 9:24 am

It seemed strange that housing as part of a community was almost completely ignored except for the bit about schools; regarding schools there was some promotion of loosening the tie between housing and schools. So I take it that Tabarrok has little awareness of concepts like “neighborhood”, and is unable to opine whether there is value in having residents literally invested in a community.

141 Lord Action February 1, 2016 at 9:37 am


In my experience neighbors-who-own are far superior to neighbors-who-rent. It’s just anecdotal, but I have observed the same thing.

142 MOFO February 1, 2016 at 10:06 am

Mine as well.

143 (Not That) Bill O'Reilly February 1, 2016 at 10:49 am

Having rented in a mostly owner-occupied neighborhood for my 3 years of law school, I have no qualms admitting I was far less invested in the neighborhood than those around me.

144 Chris S February 1, 2016 at 9:38 am


145 Dave Smith February 1, 2016 at 9:39 am

Huge possible selection bias in your statement.

146 Hazel Meade February 1, 2016 at 12:05 pm

I think the selfish optimum is to be the only renter on the block!

Agree! Find a nice area full of settled families in a good school district, and then rent.

147 Cooper February 1, 2016 at 5:23 pm

It’s even more true in the condo environment.

You want a building full of owner occupied units. The FHA requires that 50% of units in the building be owner-occupied if you want an FHA loan.

148 Jon February 1, 2016 at 8:24 am

Alex: The school voucher situation would be far more complicated then just giving people vouchers and letting them choose schools.

A key issue is you won’t have unlimited access without significant cost increases. If some schools are in high demand you will end up either charging higher fees for those or having some way of restricting access.

Now some people can get around the housing induced segregation by income and race because many high income areas have low income pockets and some school systems have introduced magnet schools, charter schools, and regional clustering that alleviates some of the issues.

I have yet to see any evidence that a 100% voucher system would not force even more segregation by requiring admissions restrictions or fees for premium schools.

149 MOFO February 1, 2016 at 9:02 am

segregation of schools or neighborhoods?

150 Lord Action February 1, 2016 at 9:40 am

Yeah, part of the premium people pay for exclusiveness is for the neighborhood and not just the school.

It would be nice not to have to live in a particular few square miles to get my kids the right classmates, but I also want control of my neighbors and the kids in the area around my house. It’s not like I have Bin Laden’s compound with a big wall to keep out the riff-raff – I interact with these people all the time.

151 Hazel Meade February 1, 2016 at 12:08 pm

Has it occurred to you that your engaging in the worst sort of classism?
You’re effectively punishing the children of poor families by preventing them from socializing with anyone but the other riff-raff.

152 Lord Action February 1, 2016 at 12:12 pm

Well yeah, I was very much aware of that while I wrote it.

I want to pay money to have my children not have to deal with the crap I dealt with as a kid in a much poorer place. I want their high school girlfriends drawn from a pool of the children of doctors and professors and engineers. I want the best possible peer effects I can arrange.

153 Hazel Meade February 1, 2016 at 12:31 pm

Ok, well, as long as you’re upfront about it. 🙂

However, as a kid, I feel like I was one of the kids that got discriminated against because of the classism of the parents of my peers.
My parents stuck me in a private religious school with a bunch of much richer kids, which basically consigned me to nerd status, just based on not being dressed in brand-name clothing all the time. And then there were the parents who simply decided that their kids couldn’t be friends with me because they assumed that “poor person = bad kid”.

I went to an Ivy League university, so I got my revenge.

154 Hazel Meade February 1, 2016 at 12:37 pm

Another classism story, just to clarify the point:

When I was in 7th grade at the private school, the teacher cut me out of the math club because the other kids lied and said that I cheated on my math tests. And she believed them, for some reason …. *ahem* (classism).

The next year, I switch to a public school and won the local math competition, carrying the whole team to take the team championship as well, ending the private school’s multi-year winning streak. I’m sure that burned that teacher hard … 🙂

155 Lord Action February 1, 2016 at 12:39 pm

I’m normally a big Hazel Meade fan, but your 12:08 comment is kind of appalling.

Of course I want to buy better experiences for my kids, and of course I care much more about that than I do about the experiences of other people’s kids. Part of what I want to buy is a barrier to entry for other families so that those who get through really care about the same things I do. To me, it sounds like your parents did exactly the right thing and got a good outcome from it. But, importantly, so did the rich kid parents that forced you to jump through those hoops to prove your worth, and excluded all those wanna-be Hazels who didn’t try so hard.

156 Hazel Meade February 1, 2016 at 2:17 pm

Part of what I want to buy is a barrier to entry for other families so that those who get through really care about the same things I do. To me, it sounds like your parents did exactly the right thing and got a good outcome from it. But, importantly, so did the rich kid parents that forced you to jump through those hoops to prove your worth, and excluded all those wanna-be Hazels who didn’t try so hard.

I’m cool with people doing what they think best for their children (whatever it takes), but you should acknowledge that the barrier does not merely keep out people who aren’t “trying”. It keeps out people who are just poorer than you. And it means that the realtively poor have to try harder than the relatively rich. The other rich kids didn’t have to jump through the same hoops I did. And it was fairly unjust for some families to tell their kids they just weren’t allowed to be friends with me, purely because of (perceived) class.

157 Lord Action February 1, 2016 at 2:28 pm

How exactly do you think the “rich” got where they are?

158 Hazel Meade February 1, 2016 at 2:34 pm

What, you think it was all assortive mating and nepotism?

159 JonFraz February 1, 2016 at 1:36 pm

Lots of people just don’t bother to interact with their neighbors beyond the more basic social courtesies.

160 Lord Action February 1, 2016 at 1:49 pm

It’s hard to do that when you have kids. And to pick a recent issue, snow-clearing.

161 JonFraz February 2, 2016 at 1:21 pm

We had Snowzilla here too– 29.2 inches of snow. I did my own shoveling and would not have interacted with the neighbors at all, except that I like the people the next door and offered them the loan of my snow shovel since their had been left in their shed out back– which was drifted firmly shut.

By the way even in really rich areas, teenagers go off the rails. Where I grew up the kids on the “good” side of the tracks had the best drugs (I am not joking). In the 90s in oh-so-uppity Grosse Pointe some high school seniors were busting for throwing wild booze parties where they got freshman girls drunk and had their way with them. Money and virtue are quite orthogonal to each other.

162 A Definite Beta Guy February 1, 2016 at 9:57 am

My thoughts exactly. The actual problem is that school quality overall is abysmal: a few exceptional regions exist. Eliminating the geographic tie does not eliminate this fundamental problem, it merely creates a new method of allocation (and one not favorable to me, so thanks, but no thanks).

163 Cliff February 1, 2016 at 12:52 pm

What is your evidence that school quality is abysmal? Are you aware that Japanese-Americans test better than Japanese in Japan, Swedish-Americans test better than Swedes in Sweden, etc.?

By the way if it were true I think that would be the best argument for vouchers, which would allow poor schools to fail and raise overall school quality substantially.

164 A Definite Beta Guy February 1, 2016 at 1:26 pm

Your question doesn’t affect the point, which is that redistributing a scarce resource does not make it better, and, more importantly, the current distribution method matches my interests.

To your tangential point: if you are convinced the median American school is so fantastic, then you can send your child to the median American school. You are Free to Choose.

165 Cliff February 1, 2016 at 1:33 pm

I have no idea what you are talking about. You think vouchers cannot improve schools overall? That’s just wrong.

I get that you bought a house in a good school district (as did I) and therefore the current system favors you but that is an uninteresting observation.

166 A Definite Beta Guy February 1, 2016 at 1:45 pm

Okay, let’s make this simpler: Access to top schools is a scarce resource. Access to top schools needs to be rationed. Changing the method of rationing does not change the fact that it needs to be rationed. Unless your “vouchers” turn median schools into top schools (and they don’t), then we’re right back at square one.

Whether vouchers mildly improve outcomes for certain groups does not concern me at all. If you need solutions, destroy the teacher’s union, abide by the standardized testing, expel the trouble-makers, enforce discipline, marry off the single mothers, prosecute the dead-beat dads.

167 Lord Action February 1, 2016 at 1:50 pm

The number of top schools is not fixed, ADBG.

168 Hazel Meade February 1, 2016 at 2:33 pm

I’m inclined to think that the importance of school district is somewhat overrated.

First of all, if you’re trying to guarentee Ivy League college entry, then you aren’t going to public school anyway.
Secondly, I suspect the quality of public schools roughly track the socio-economics of the surrounding communities. There aren’t many shitty schools in rich school districts, and there aren’t a lot of great schools in poor school districts. If you live in a decent are, the school is probably decent.
Thirdly, a lot depends on the students themselves. Is a smart kid at a 7/10 school really going to be impaired much relative to a smart kid at a 9/10 school ?

169 A Definite Beta Guy February 1, 2016 at 3:02 pm

The number of cars isn’t fixed, either. They are still scarce resources and they still need to be allocated. Giving “vouchers” for schools also does not change that they will still need to be allocated in some fashion.

I would agree with you WRT school districts. Some school districts have homes so expensive that the education isn’t really worth it. I solved this conundrum by not buying a home there.
Similarly, if you feel my tastes in school district are a bit “champagne,” you can simply not buy a home in my school district, either.
If you think a home is too expensive, try a townhome, apartment, or condo, as you mentioned below.
Free to Choose!

170 Ted Craig February 1, 2016 at 8:32 am

“Most Germans don’t own their homes.” Even fewer Swiss do and and the third lowest in Europe is Austria. Gee, I wonder if there could be a cultural element? Nah, there’s no such thing as culture, only markets.

By the way, the U.S. is really low on home ownership compared to most Western countries:

Renting a house, by the way, sucks. I rank housing options as follows: renting an apartment, owning a house, owning a condo and renting a house, with a huge gap between the first two and the second two. Renting a house, in my experience, is the worst of all worlds. It’s all the work of owning without any of the benefits.

171 matt2 February 1, 2016 at 9:03 am

I agree with your rankings, with the caveat that it may vary depending on your exact circumstances. Since moving out on my own I’ve rented a studio condo just north of Boston, rented a house in the far NW reaches of 495, owned a condo in Metrowest, owned a house outside Norfolk VA and now rent a brand new apartment in Montgomery County.

The condo was like a scratch ticket – bought when everybody said not too around 96/97 and sold in 2004. No special insight, we bought what we could afford two years out of college because that’s what we thought you did when you got married and had jobs. People we sold it too made a bundle too, the second buyer after us took a huge hit.

Made some money on the house, too, but not a ton. It wasn’t huge, under 2000 sq ft but in retrospect still way more space than we needed and most of it went unused most of the time. Spent money we didn’t need to putting furniture in and heatingf and cooling empty rooms. Compared to Boston it was dirt cheap, and the rental stock wasn’t great down there anyway. All I really miss is the backyard.

Because of job uncertainty, selling the house was a great relief. Alex’s point about not being anchored to one spot is a good one. The other comment about quality of neighborhood when there are too many renters is also true in my experience. Over the years more and more of the homes in our section of the neighborhood turned into rentals and although it wa sstill nice you could see a lack of maintenance startign to become the norm. Happily for owner occupants the HOA did keep after them.

So far the best fit out of all of them is the apartment. Three minute walk to the red line, half hour walk to work, an elevator ride to restaurants, beer, hair cuts and a five minute walk to a brand new grocery store. Although the rent is twice the old mortgage, the total “cost of living” is close to the same. Utilites are down from between $400-500 to $125. Sold one car so insurance is down. I bought gas this weekend for the first tiem since Christmas. Not paying for a gym because the one in the building is so good. There’s a lounge with TVs, pool tables, etc so instead of going out to a bar I can grab something out of the fridge and go down there.

I like that I COULD own a home – though I don’t see owning a new townhouse/condo of equivellent quality in comparable location as a possibility at close to the monthly payment.

172 JonFraz February 1, 2016 at 1:37 pm

Landlords are still responsible for repairs when you rent a house.

173 Plucky February 1, 2016 at 3:05 pm

Legally and technically correct. Have you ever actually been involved in such a dispute though? The landlord/tenant relationship is usually an awful one, especially when mediated by an agent on the landlord’s part.

174 JonFraz February 2, 2016 at 1:29 pm

I’ve rented for years. The only big problem I ever had with a landlord happened in 2008 after we moved away from our rental house in Fort Lauderdale and the landlady decided she could keep our deposit– she was a house-flipping ditz getting her comeuppance in the real estate crash and, at a guess, no longer had the original deposit. I had moved out of state so I satisfied myself with a scorchingly vitriolic email exchange. As far as repairs go I’ve never once had a problem with getting major repairs done. Lesser stuff I do myself, arranging with the landlord in advance to submit any receipts (and short the rent for the indicated amount) for expenses over and above the couple-of-nails-and-a-screw level. Landlords actually appreciate that since it saves them a fair amount of hassle. There are, certainly, jackass landlords out there, but there are also jackass tenants. As a general rule being a good tenant produces a good landlord, with exceptions for maybe corporate types and outright slumlords– but I do not live in slums.

175 bob February 1, 2016 at 8:37 am

If you buy a house you know exactly what you’re buying. You have something tangible, you can live it in. Equity being firm ownership is more of a myth. The firm’s capital is in no sense yours, owning equity is an act of faith in many layers of a corporate bureaucracy. If things breaks down like in 2008 or worse, it’ll be easier to live in and retain your house (especially with a paid off mortgage) than to extract value from your stock portfolio. Boards of directors would screw over stockholders in a second because of uncertainty or a financial crisis, it would take a far more extensive sort of social meltdown for you to get forcibly removed from your fully owned house. Anyway if housing is overrated then I guess you don’t believe in the efficient markets hypothesis.

176 Lord Action February 1, 2016 at 9:43 am

“Anyway if housing is overrated then I guess you don’t believe in the efficient markets hypothesis.”

This. It’s worth exactly what you pay for it. We aren’t talking about some obscure, illiquid, difficult-to-understand market here.

177 Cliff February 1, 2016 at 12:55 pm

It is illiquid and inefficient. It’s pretty much the classic inefficient market.

178 Lord Action February 1, 2016 at 1:10 pm

It has nothing on VC. Or distressed debt. Or antiques. Or labor. About the only thing it’s less liquid and efficient then is the big public securities markets.

179 Cliff February 1, 2016 at 1:34 pm

That is the relevant comparison, though.

180 Lord Action February 1, 2016 at 1:53 pm

Sure, and the market for Apple stock is less efficient and liquid than the market for 90-day T-bills. But it’s still efficient and liquid.

181 Cliff February 1, 2016 at 8:45 pm

The real estate market is not though

182 Jan February 1, 2016 at 8:41 am

So why do so many people buy houses? Houses are lovely if you enjoy interior decorating, backyard barbecues and talking to your neighbors. Houses today also come bundled with a significant side asset – access to so-called public schools.

Hmm. People can enjoy all these things in rentals, no? (Maybe not extreme versions of decorating, like renovation)

183 Chris S February 1, 2016 at 9:39 am

Not quite. Not all amenities available for sale are available to rent.

I recently looked in the rental market for something roughly equivalent to what I own (single family home in spacious subdivision in my preferred, large, school district). Search results? Zero.

184 Lord Action February 1, 2016 at 9:46 am


Rentals in nice towns are typically one-step-above-teardown. They’re rented by people who can barely afford access to the school system, or who are in town for some short period and would be killed by transaction costs if they bought and sold.

185 dan1111 February 1, 2016 at 11:18 am

This is not true of all markets.

186 Lord Action February 1, 2016 at 12:13 pm

I’m mostly familiar with the Northeast and California.

187 Jan February 1, 2016 at 11:36 am

The amenities are certainly available, just not all the time in every market. Same could be said about buying, though likely to a lesser extent.

188 Salem February 1, 2016 at 8:47 am

Points in favour of owning that you neglect:

1. Tax. If I own my own home, I pay no tax on the ability to live there and no tax on capital appreciation. If I invest in the stock market, and use the dividends to rent, then I have to pay income tax on the dividends, CGT on capital appreciation, and my landlord has to pay tax on the rent I give him. That’s a triple tax wedge between buying and renting. To be fair, you do mention tax, but only as an “inefficient bias” in the tax system. Perhaps it is inefficient, but we as investors don’t get to set the tax code, just respond to it. Instead, you should put it as the number one reason why buying a house is a great financial investment.

2. Leverage. No-one will lend you 300k at sub-2% interest to set up a 500k stock portfolio. But they will lend you 300k at sub-2% interest to buy a 500k house. Housing doesn’t have to outperform equities to make buying a 500k house with a 300k mortgage a better investment than investing 200k in the stock market.

3. Incentive compatibility/moral hazard. The landlord isn’t properly incentivised to make the property nice to live in, and the tenant isn’t properly incentivised to look after the long-term elements of the property. Moreover, the tenant cannot invest to customize the property to their own needs.

189 Chris S February 1, 2016 at 9:47 am

1. You miss several arithmetical points.
a. The landlord does not pay tax on the rent received, only the profit of the endeavor. $1000 rent with $999 expenses = $1 profit.
b. Tax on capital gains narrows the spread between the return on housing vs stock, but the proper question is, does ROI(stock) – CGT >? ROI(housing).
c. You don’t mention the mortgage interest tax deduction, but this is priced into the housing market. The owners at the time of the enaction of the tax enjoyed a windfall, but now that’s been competed away. The real winners are banks who have larger mortgage balances and therefore more interest income.

2. True – most economists (at least the ones I took classes from) tend to assume capital is available for any project/investment. Not the case for us mortals.

3. Also true, but if people like to live in nice places they will demand landlords keep the place nice (and pay accordingly).

190 Asher February 1, 2016 at 8:48 am

Someone already pointed out that houses do provide dividends, which are the housing services.

Home ownership also provides an extremely valuable call option, the right to renew the lease indefinitely.

Very important to distinguish between good reasons to own a houses (such as the call option) and good reasons for the public to subsidize home ownership. Alex sadly does not make this distinction adequately clear.

There are very good reasons to own a food processor but none that justify subsidizing their ownership. Economics on buying them are almost uniformly positive, but there is no policy dimension.

191 AGallantChromeTiger February 1, 2016 at 8:52 am

Renting, unless done under rent control, means that as housing prices rise, you bear the cost.

Owning means that, as housing prices rise, you reap the benefit. If you expect to live in the same place for a reasonably long time, then buying is probably better than renting.

192 mavery February 1, 2016 at 9:16 am

Sure, but you’ve got to define “long time”. “Until my kids are off to college” or “Until I move on to my next job in 2-5 years”?

My inexperienced opinion is that buying makes sense if you intend to pay off the mortgage. I mean, the first X years are mostly paying interest rather than capital, no?

There also seem to be more middle men involved in purchasing homes than in renting. Realtors on both ends take a percentage, there are fees, mortgage insurance, etc, that seem to take a bite at every opportunity.

193 Rock Lobster February 1, 2016 at 8:52 am

“behavioral economics tells us that we quickly get used to big houses but we never get used to commuting”

Speak o’ the devil, I am just now considering a move from Manhattan to Hoboken, partly to get more square feet for my dollar (and to save on the NYC income tax) at the expense of a more obnoxious commute.

194 iamreddave February 1, 2016 at 12:18 pm

Stress That Doesn’t Pay:The Commuting Paradox

‘Full compensation for commuting 23 minutes (one way), i.e. the sample mean, compared with no commuting at all, is estimated to require an
additional monthly income of approximately 242 Euros or 18.86 percent of the average monthly wage.’

195 John February 1, 2016 at 9:08 am

Housing is overvalued as an investment but that wasn’t the question. Favorable tax treatment is an argument for, not against, owning.

Someone do the math taking into account the opportunity cost of the down payment and the favorable tax treatment of mortgages.

196 Chris S February 1, 2016 at 9:49 am

Favorable tax treatment on mortgages does not accrue to buyers. Its been competed away – all buyers in the segment receive the same treatment and include it in their budget when bidding on a house.

197 dan1111 February 1, 2016 at 10:20 am

It’s not so simple. There are many more moving parts. For example, the tax treatment also results in more housing being made available for ownership and less for renting.

198 Heorogar February 1, 2016 at 9:09 am

” . . . if schools and housing weren’t bundled together so closely . . . ” I believe that removing “housing” and replacing with “property taxpayers” makes a more apt analogy.

Additionally, do not rents and trends in rents have bearing on housing decisions and values?

I have owned since 1979. The only debt on my house is approximately 10% of market value home equity line that is amortizing at prime – recently rose 0.25%. Additionally, I pay (high) property taxes, utilities and maintenance.

Re: investment. I purchased my first house in 1979 for $50,000, with 20% down payment, $12,500. I sold in 1984 for $100,000, a five-year, $37,500 capital gain on my $12,500 equity in the house – plus I had a roof over my head for the five years. I rolled the money, plus additional, into a $156,000 house in a better area, closer commute, etc. The value of this house has been up and down. It’s up again. Thing is you have to have a place to live and raise a family.

I agree. The housing decision isn’t completely rational. In addition to emotions and the so-called American dream, the variables are too many and too complex for the typical person. For example, a friend in NYC purchased a condo in 1992. Shortly thereafter market values fell. He was upset and asked what he should do. I said, “Can you afford the payments? Ifso, what’s the problem. The value isn’t the main concern.” Believe me: market values came back.

Now, if one purchased in 2006, one had a problem. But, most places prices are ascendant, though it’s been a long time coming.

199 Nathan W February 4, 2016 at 12:10 pm

I prefer “children” to “property taxpayers”.

200 Chris February 1, 2016 at 9:12 am

And this article reproduces the problem that every other article has on the same topic.

You can’t compare buying a house to buying stock – you have to compare it to renting. The reality is you HAVE to live somewhere. You can either rent (which is throwing money away), or can buy, which might allow you to at least break even. Examining homeowning as an investment is not reflective of the financial situations of most people – they aren’t sitting around with an extra 100,000 dollars and debating what to do with it. They have to live somewhere and they can either rent or buy.

That is what you need to examine homeownership in the context of. Is it more economically effective to rent (throw the money away), or buy a house and then pay for all the insurance, upkeep, etc and hope to break even or make money when you sell? Even if you sell at a loss it can still be a better investment than renting.

Of course, a bunch of upper-middle class white male economists and journalists who went to elite schools aren’t thinking of the problem this way.

201 mavery February 1, 2016 at 9:21 am

A lot of folks consider purchasing a house an investment. Some people buy second houses for just this reason.

Regardless, the choice is Buy vs. Rent + Invest for most people, not Buy vs. Rent or Buy vs. Invest.

202 Lord Action February 1, 2016 at 9:48 am

“Buy vs. Rent + Invest”

Do you really think renters are investing more on average than buyers? I find that very difficult to believe.

203 dan1111 February 1, 2016 at 10:16 am

Obviously renters invest less on average, but that is mainly because of the different populations (most obviously renters are poorer on the whole). mavery’s point still may be true from the point of view of individuals.

204 Lord Action February 1, 2016 at 10:28 am

I suspect renters save less on average controlling for other characteristics like age and income.

My anecdotal experience (take it for what it’s worth) is that my peers who rent are more consumption-oriented and my peers who buy are the ones obsessed with their 401(k) asset allocation. It’s a time-orientation thing.

205 Hazel Meade February 1, 2016 at 12:18 pm

my peers who rent are more consumption-oriented and my peers who buy are the ones obsessed with their 401(k) asset allocation

Beside the point. Other things being equal, is it better for the long-time-horizon-oritented to buy then to rent? Someone who is obsessed with their 401(k) might decide to rent because it’s a financially sounder decision.
Renting doesn’t turn you into a consumption oriented person.

206 Lord Action February 1, 2016 at 12:24 pm

One of my points was that people who do the math tend to be buyers rather than renters. Draw what conclusion you will from that.

It’s also possible that you’re a particularly conscientious person and that some people aren’t, and the alternative for them is rent and spend everything versus buy and have forced savings and a probable capital gain.

207 Cooper February 1, 2016 at 1:39 pm

Another factor to consider is that tax advantaged investment options are limited. You can’t put more than $18,000 in a 401K.

If you’re a renter who has already maxed out his 401K, your marginal dollars are being invested at a relatively high tax rate. Buying a house gives you another avenue for tax advantaged investment.

From the point of view of society, this might be a waste of resources but on an individual level you can gain from this.

208 Shane M February 2, 2016 at 1:40 am

fwiw, I’m going through this right now. My home was paid for, but I’m selling and will rent. I’m thinking it’s going to be a sound decision but we’ll have to see. I’m planning to invest the proceeds of the home sale. I don’t plan to increase consumption levels; I’m simply converting the equity in my home for equity I can invest, and in the process am simplifying and scaling down (downsizing).

I _think_ the renting is a good choice, but much depends on how the investments work out. A market collapse will make it look like a bad decision if I’m positioned incorrectly.

209 Hazel Meade February 1, 2016 at 12:15 pm

Would be true for me. It’s cheaper in terms of straight-up rent vs. mortgage payments to rent than buy an equivalent place up and down the market. The extra money is going into an investment account.

MAYBE would be a little cheaper if I went with a 30 year ARM but then then payments would jump in 5 years and I’d have to sell or refinance.

210 Cliff February 1, 2016 at 1:11 pm

It completely depends on the ARM product you buy. Don’t pay much attention to any teaser rate, just the margin. If you don’t need interest rate insurance they can be a good deal.

211 TMC February 1, 2016 at 10:33 am

It really depends how long you’ll be in the home. My guess is break even is 10 years, after that owning is cheaper and it turns into owning (a place to live + appreciation + paying down the loan) + investing vs. renting.

I own 4 single family homes in a decent enough area to raise kids in. When I buy, I need to put an average $20k into them to get them into shape and can mortgage them at 80% LTV. All these have had the mortgage and expenses paid for by the rent from day one. They start out pretty tight, but after a couple years you’re making $250/mo profit on top of the tax write offs. Not killing it, but it’s OK long term. 15 years they will all be paid off. On average I visit the houses once every two years to service something. ( I do drive by more often).

All these folks could own for what they pay in rent. I’m just lucky that it’s not right for them now and they are willing to pay off my mortgages for me.

212 Sara February 2, 2016 at 11:57 pm

There is a subset of renters who could either rent or buy. My brother is a doctor and he rented for decades… he bought a house during the recent downturn. But on the whole, my renters appear to choose to rent and drive very nice cars and keep the house very cold in rhe summer and absolutely toasty in the winter. However, their rent is less than what it would cost them in theory to finance 100% of the house they live in at current market value and pay PITI and set aside 12% for repairs. None of them probably has a down payment outside their 401k.

213 Curt F. February 1, 2016 at 10:04 am

I’ve generally found that claiming that rent is “throwing money away” is a very reliable signal of ignorance.

214 Slocum February 1, 2016 at 9:18 am

At least in my state, there is a significant property tax advantage to ownership over renting. Primary residences are taxed at a special ‘homestead’ rate while rentals are taxed at a much higher commercial rate. Then, of course, there is the mortgage interest deduction and the waiver of capital gains taxes on selling a primary residence. DIY ‘sweat equity’ (also untaxed) is likewise impossible in a rental. More significantly, house rental is an uncommon option in the U.S. — except in poorer areas where the average family can’t afford to buy. In other neighborhoods, houses are usually available to rent only for limited periods (while the homeowner is away for a time or is waiting for the market to recover before selling). Which means instability for the renter — you may find yourself having to move at the end of your lease, which is a major hassle and particularly unpleasant if you have kids who’ve made friends in the neighborhood or if you cannot move and remain in the same school boundaries.

215 Floccina February 1, 2016 at 9:40 am

My state also has a homestead exemption which means renters pay higher taxes for the same home and because the average renter is poorer than the average home owner I consider it a corrupt tax exemption. The politicians know that renters do not see the tax and so they tax them at a higher rate. Politics is all about showing the benefits and hiding the costs.

216 Slocum February 1, 2016 at 10:15 am

It’s not just renters not seeing the tax — they’re not economically sophisticated enough to understand those taxes are coming out of their pockets instead of being paid by their ‘rich’ landlord. Rental properties are often owned by *corporations* don’t you know, so of course the taxes should be high 😉

217 TMC February 1, 2016 at 10:38 am

I’ll add one thing to this. I, above, stated I own 4 single family houses, but I also have a 4 suite house. All smaller cheaper units whose families definitely use government resources more heavily (excluding any welfare type benefits). A higher tax may be warranted.

218 Njnnja February 1, 2016 at 9:22 am

The other tax advantage that owning a house has is the first $500,000 of capital appreciation when you sell your house (for a couple) is tax free. Combine that with 4x (or 5x, or 6x…) leverage, and the after tax return of investing in a down payment for your primary residence is much better than reasonable alternatives on the upside.

And on the downside, there is great power in home ownership. Particularly in judicial states, homeowners have much more power to negotiate with lenders about staying in a home in adverse circumstances than renters do with landlords (with the possible exception of highly regulated rental areas like NYC).

219 TallDave February 1, 2016 at 9:26 am

Agree, commuting is a huge deadweight loss on the economy and a large detriment to the commuter. There is probably some good literature on the topic, although I can only recall seeing a couple papers on it.

220 Chris S February 1, 2016 at 9:52 am

I actually have a short commute right now (~15 minutes) and am not that happy about it. I like to listen to audiobooks or the news while driving, and it seems too short. Just short of 30 minutes seems like my sweet spot.

This might be affected by the fact that, when I arrive home, I am mobbed by kids, have to make dinner, drive to sports etc etc and am rather frantic for a few hours. YMMV.

221 Lord Action February 1, 2016 at 10:22 am

I recall hearing somewhere that walking commutes also average around 25 minutes. Perhaps people prefer a certain separation between home and office, or at least are willing to trade pay-for-commute in mostly the same way.

222 Floccina February 1, 2016 at 9:32 am

The incentive to maintain and improve the house are better for the home owner. Also if you do your own home improvement you beat the tax man out of some money.
Also we should replace “bad schools” with “schools with bad students”.

223 Floccina February 1, 2016 at 9:51 am

Alex’s arguments though make a great case for buying less home than you can afford.

224 KR February 1, 2016 at 9:40 am

If I wanted to talk to my neighbors, I’d rent an apartment in the city. I bought a house with a big yard so I wouldn’t have to talk to them.

225 Butler Reynolds February 1, 2016 at 10:49 am

If you really wanted to talk to neighbors, you’d rent a lower-income apartment.

In neighborhoods and nice apartments I’ve lived in, people seem to keep to themselves. When I was single and used to rent cheap apartments, there was always somebody who had a crazy story to tell!

226 josh February 1, 2016 at 9:40 am

So your saying that owning a home might interfere with what is really important, being in interchangeable, atomized part of a giant technocratic economic organizational machine. Thanks for the insights as always Alex.

Not that Cowen is that great, but why is Tabarrok even allowed to contribute to this blog. Doesn’t one always know what he is going to say before he says it?

227 Govco February 1, 2016 at 12:23 pm

That first sentence was gold, even with typos. But you should’ve omitted the direct insults.

228 Chris Lawrence February 1, 2016 at 9:41 am
229 Floccina February 1, 2016 at 9:43 am

Leads to question should people borrow to invest in other assets like they do to buy a home?

230 Shane M February 2, 2016 at 1:48 am

As long as those assets, like homes, don’t go down in value! 😉

231 Shane M February 2, 2016 at 1:50 am

In all seriousness though – Buffett and leverage contributing to returns's%20Alpha%20-%20Frazzini,%20Kabiller%20and%20Pedersen.pdf

232 RPLong February 1, 2016 at 9:53 am

The best reason to buy a house is to obtain leverageable equity. Not everyone can get a margin account, and the risk of that kind of trading is pretty high. But most people can figure out a way to get a mortgage, pay it off, and then get a HELOC with which to obtain additional assets with comparatively low risk and interest rates.

233 Alex Godofsky February 1, 2016 at 9:58 am

Alex, you miss that renters pay a significant premium to cover for the agency problems in non-owner-occupied housing. “Bad tenants” cost landlords a huge amount of money and that cost is passed on to everyone.

Additionally, if you know you aren’t going to move to a new area (or just aren’t going to change jobs), then housing changes from a big illiquid concentrated speculative investment into a big illiquid hedge against your liability of “I have to live someplace”.

234 Brian Donohue February 1, 2016 at 1:15 pm

Yup. Like just about any investment, time horizon / flexibility is a huge factor.

235 martin February 1, 2016 at 10:10 am

Not sure if this has been mentioned but home ownership was a way to fix one’s cost of housing – particularly valuable in a less mobile era. Rents were likely to rise, with inflation at least, while a mortgage was fixed. And it was paid of at retirement. Home ownership thus was a financial planning tool and often was a family’s only real significant asset. (I saw the forced savings point n a comment.)

236 anon February 1, 2016 at 10:13 am

In real life people tend to rent small places until they leap to owning large ones.

Many have made arguments along the lines that small purchases are sensible .. but living in an area where homes and buyers ratchet toward a million bucks, I think many people might be getting carried away.

237 carpenter February 1, 2016 at 10:35 am

Thirty-five years ago I dropped out of school and she made a baby. We dragged a ruined old trailer onto five acres, our five acres, which was nicer than the hovels we’d ever rented because of our dogs.
Owning is imperative if you do stuff. A redneck’s dream home is a five-bay garage with an Airstream in the last bay. Then you can weld, fix cars, stash your bikes, and what the heck, build a guest house so you don’t have to live in the Airstream. We garden to the point we’re not sure we even enjoy it, like anything else you do enough of.
When the real estate crash happened, we sold the house in town to clear the mortgage. And with the 50% drop in housing values, so went our taxes. We make very little money, are lightly taxed, and have time to read MR on a snowy morning. And we don’t have cable.

238 Shane M February 2, 2016 at 1:58 am

These are things I think about as I move from owning to renting.
– If I want a garden, I won’t be able to (unless a communal area is provided). And then, where do I store all the tools and implements that go along with gardening?
– If I need to work on my truck – certainly not as convenient as working on it in my garage, and I doubt the apartment complex even allows me to work on my vehicle in the parking lot.
– I still have most of my tools from 15 yrs living in a home. I moved my 8ft ladder, miter saw, saw horses, and several other tools. Now that I’m sure I’m going to be renting rather than buying a new place, I’m not sure what to do with everything. Maybe craigslist.

239 Paul Zrimsek February 1, 2016 at 10:41 am

“If things breaks down like in 2008 or worse, it’ll be easier to live in and retain your house”

Are we talking about the 2008 that was 8 years ago (the one with the monster housing crisis in it) or 2008 in some different calendar?

240 Carlito February 1, 2016 at 10:43 am

This is a great analysis, but I wonder how well it holds up on a microeconomic level, specifically in places like New York City or San Francisco, where the cost of renting is extremely high.

In those and other crowded/trendy/culturally important areas, the cost of ownership is also quite high, but to the points of Rayward and others, the appreciation of ownership is something completely forgone when renting.

241 Robert Reichardt February 1, 2016 at 11:03 am

Don’t forget that in Colorado we essentially have public vouchers, kids can (and do) go to any public school with space.

242 Jim Grinsfelder February 8, 2016 at 8:06 am

We have a similar system in Minnesota. It’s called open enrollment. There are also magnet and charter schools which further erode the link between housing location and schools.

I believe Open Enrollment is generally a good thing. We used it with our daughters in elementary school to get them into a school we believed was higher quality than our neighborhood school.

For magnet and charter, I believe the school system provides transportation (I might be wrong). For open enrollment, parents are responsible for transportation. That’s about the only problem I can think of, and it probably limits open enrollment for kids from families that don’t have the ability to provide daily transportation to and from a school that might be 5-10 miles away.

243 Effem February 1, 2016 at 11:07 am

You may be missing some (cynical) points in favor of owning:
1) Some states are non-recourse, this potentially creates a free “put option” to vacate your home in the event of negative equity (natural disaster, depression, etc) and stick it to the banks (and ultimately the taxpayer). Plenty of people have exercised this option.
2) The US has not choice but to keep housing values from falling as best it can given the amount of national wealth tied up. I believe any fall in house prices will be met with fiscal/monetary/legal support even to the point of being willing to accept an inflationary accident.

A point against: if the comments to this point are any indication, housing “sentiment” is quite strong making it a very consensus trade.

244 Cliff February 1, 2016 at 1:18 pm

You’re saying the US government would behave completely differently than they did 7 years ago when they let house prices slide 35%?

245 Effem February 1, 2016 at 2:29 pm

I’m saying you can expect any such slide to 100% be met with historically-unprecedented stimulus. Had prices not stabilized then started to rise I think we would have seen wide-scale mortgage forgiveness, etc. A 35% drop in the stock market might not elicit the same reaction (although would surely be accompanied by some stimulus).

246 Hazel Meade February 1, 2016 at 11:09 am

Why does housing come bundled with public education? Renters have access to the same school district as owners. If you like the school district, you can access it as easily by renting there as by owning.

The reason so many people buy is because they don’t like paying rent. When you buy, you at least build some equity in the house. But the advantages of diversificaiton are well-taken. I’m currently waffling on whether to keep renting a place that is getting slightly too small, buy the minimum that I need, or buy what I want and can afford.
Maybe I should just rent what I want …

247 Ted Craig February 1, 2016 at 11:17 am

“Why does housing come bundled with public education? Renters have access to the same school district as owners. If you like the school district, you can access it as easily by renting there as by owning.”

Somebody should make a movie about that. Oh wait, they did:

248 Hazel Meade February 1, 2016 at 11:28 am

We’re talking about whether renting is better than owning, all other things being equal. If you’re a rich person who can afford to either buy OR rent in Beverly Hills, you don’t NEED to buy in order to access the school district.
Talking about whether a poor person should rent in an area where they can’t afford to buy is apples and oranges.

249 Ted Craig February 1, 2016 at 11:36 am

Didn’t click the link, eh?

“Vivian Abromowitz’s family are penniless nomads, moving from one cheap apartment to another in Beverly Hills, so that Vivian (Natasha Lyonne) and her brothers can attend the city’s prestigious schools. Their father, Murray (Alan Arkin), is a divorced 65-year-old who refuses to retire, working as an unsuccessful Oldsmobile salesman.”

It’s based on the director’s personal experiences.

250 Hazel Meade February 1, 2016 at 11:50 am

Yes, I did click the link.

My point is that your link is a non-sequitor. We’re not talking about whether it’s rational for peniless nomads to rent in Beverly Hills. We’re talking about whether it’s more rational for someone who can afford to buy in Beverly Hills to rent or buy in Beverly Hills.

251 A Definite Beta Guy February 1, 2016 at 1:10 pm

What Hazel said. In most school districts, you can rent, and still be within the borders of the school district. You want to go to the same school as the ADBG kids? There’s apartments a little way’s away and you can do that. You don’t HAVE to buy a house.

252 jeff February 1, 2016 at 11:13 am

Can anyone link me to information on the availability of homes for rent vs homes for sale? My hunch is that rental options are much more common and varied in expensive coastal cities than they are in other parts of the country. I am an apartment renter in a midwest city and hope to purchase a home soon. I have been looking and my hunch is that (at least in our small midwest market) you are much more restricted in where you can live, and the quality of your home if you want to rent.

253 Cooper February 1, 2016 at 1:53 pm

There’s a path dependence problem in many cities. If enough middle class people prefer to buy, there will be a tendency for homebuilders to only build that type of housing. The town might then vote to restrict the construction of rental units in order to protect the established “character of the community”. Given that homeownership is tied to the likelihood that someone will vote, these zoning ordinances are almost impossible to overturn.

In the city of Alameda, a large town across the bay from SF, there was a 39 year ban on the construction of multifamily units within city limits. It’s not just a costal problem. It can happen anywhere.

But yes, I certainly agree that the sprawling nature of midwestern cities tends to skew the housing marketing towards larger homes on larger lots versus apartment buildings, reducing the availability of decent rental housing options.

254 Sara February 3, 2016 at 12:09 am has a rent option or a buy option. It also has a recently sold search that may give sold prices. also has both.

255 Beliavsky February 1, 2016 at 11:19 am

“Second, unless you are renting the basement, houses don’t pay dividends.”

They pay the “dividend” equal to your monthly rent on a similar residence (minus property taxes and maintenance costs). How can Taborrok ignore this obvious fact?

256 anon February 1, 2016 at 12:36 pm

I think “similar residence” is a common error. Overinvestment justified by overconsumption.

Ideally families would right-size their home for diversification, and stocks and bonds in addition.

257 Hazel Meade February 1, 2016 at 4:30 pm

Problem is that the interest on the mortgage is often close to what you would pay in rent on a similar place. Interest money. You’re not really putting that much down in principle, and you need to build enough equity to make it worth the closing costs if you have to move in a few years.
A 30 year mortgage is really little better than renting for the first several years.

258 DanC February 1, 2016 at 11:22 am

If you look at the data there appears to be a strong correlation between family size and home ownership. Germany is very low in the rankings of average family size. Ireland is very high. Japan would be an outlier.

259 Tony February 1, 2016 at 11:31 am

When making the rent vs. own decision, partial arguments are useless – you have to put together a spreadsheet with the total cost of living (and all other factors) in each scenario, and include options like putting the money into stocks vs. into your mortgage.

We bought a house in San Jose in ’95 for $280K, paid it off, and sold it in ’07, just before the crash, at $650K, which is just about the ideal ownership scenario. Even so, when I run the numbers assuming I’d invested any surplus cash in the Dow, it was modestly better than renting, but doesn’t come out as far ahead as you might think. If I’d just kept the money in the bank, though, owning looks vastly better. The forced-savings element has a lot going for it.

260 Marc Roston February 1, 2016 at 11:32 am

Alex falls short here, I think. This misses so many issues:

1. Stocks pay dividends. Houses depreciate, i.e. negative dividends. In fact, the depreciation on houses doesn’t even reflect the state of the economy (i.e. move with interest rates, in theory.) House depreciation is lumpy, uncertain, faces terrible asymmetries (how much should that roof cost? Did the roofer do a good job?) that renters face both indirectly and with fewer asymmetries (the management co knows.)

2. Sure, the leverage is great. Leverage is really great when prices go down! But,, since the yield curve is generally upward sloping, people are generally better off with margin loans than mortgages, over time. And, for many people having liabilities linked to the short end of the curve is a better hedged by their earnings profile.

3. Liquidity. Let’s talk about transaction costs on your stock portfolio versus transaction costs on your house??

4. Tax risk. Tell me you want to own property in Illinois?? When property values fall, taxes go up. That’s great news!

5. Countering “forced savings” which is an irrational argument…how about people who rent spend less stuff, income and wealth adjusted? I’d bet all the crap I store on that one!

261 Quantitative Sneezing February 1, 2016 at 2:31 pm

#5 is a good point–renters tend to accumulate less stuff; most people have way more stuff than they need. Stuff sitting around your house loses value quickly (you might get 25-50% back on Craigslist, but more likely you rent a storage unit).

6. One huge point no one has made is that homeownership is a second job (you are your own landlord/superintendent) that requires a great deal of your spare time and pays zero cash wages. As a renter, the time you don’t spend fixing your house can be used to earn more wages or pursuing leisure activities with great non-cash value.

262 Quantitative Sneezing February 1, 2016 at 2:37 pm

I had a detail-oriented friend who tracked every minute of work he put into the house he owned as well as every expense he had to maintain it. Assuming he paid himself roughly minimum wage, the increase in the appraised value of his house was entirely reflected in the expense he incurred to gain that value. This was before 2007…I lost track of him when the economy crashed and I moved across country to find better work (as I wasn’t upside down in a house, I could move).

263 Kevin February 1, 2016 at 3:13 pm

Because of #6 I have decided never to own a house again. I don’t think its uncommon for home owners, especially first-timers, to have a Stockholm-Syndrome-like relationship with their houses.

264 Nels February 1, 2016 at 11:38 am

The housing advice is given as if one didn’t have to live somewhere.

265 J. Edgar Mihelic February 1, 2016 at 11:43 am

Poor people would have a better chance at attending good schools if schools and housing weren’t bundled together so closely – See more at:

Doesn’t that argument assume easy transit? I know in Chicago it’s a painful commute to get to some of the selective enrollment high schools. Especially on the south side, where trains stop at 95th street.

266 Soho February 1, 2016 at 11:44 am

Don’t forget the hedging value of a house. If you live in a city that you want to be sure that you can stay in for the long term owning is an essential hedge against rising rents. Remember, there aren’t any middle class renters left in San Francisco (in many meaningful senses, renters in rent controlled units are the true owners). As a refugee from the SF rent explosion, I bought my condo in Seattle not because I hope our housing market will end up like the bay area’s but so I’m not completely screwed if it does.

267 Lord February 1, 2016 at 11:45 am

Reasonable advice on average can also be terrible advice in specific. Borrowing is a national market, buying is a local market, and it isn’t that difficult to tell the difference between between how markets will perform over the long term. Large growing metropolitan markets will outperform rural areas, and the higher the land value the better return you can expect. Diversification is desirable but where you live and work isn’t diversified either and in this case matching assets and liabilities can be good, particularly if where you live is important to you and you want to stay there even in retirement.

268 Hazel Meade February 1, 2016 at 4:24 pm

Large growing metropolitan markets will outperform rural areas, and the higher the land value the better return you can expect.

Really? Not too long ago, a house in a metropolitain area would have turned into a slum in a donut city (See Detroit).
Urban gentrification is a recent phenomenon that could easily reverse itself.

By contrast, an ever growing population means ever-expanding suburbs. It seems to me the best place to buy land would just outside the radius of encroaching development. You don’t even have to do anything with it. Just sit on it for twenty years until a developer comes along. Provided they don’t eminent domain you under Kelo.

269 Will Wilkinson February 1, 2016 at 12:02 pm

It depends on the local market and what you want, is the correct answer. I just bought a house near the university where my wife and I teach in Iowa City. Most of the housing stock near downtown campus is student rental. It’s easy to see why. Our all-in monthly payment as owners is ~$1000/month less than renting in the neighborhood we’d like to live in. Maybe if we were rational, we’d just rent the place out. But this is the neighborhood we want to live. (Tiny commute!) It would be insane to rent in the neighborhood, and a rental the cost of the mortgage + taxes + insurance would either be much shittier and smaller or much further away. (Maybe we should rent it out and then use the profit to finance a nice rental in the same neighborhood. Nope. Just too logistically complicated for busy, already preoccupied people who don’t like to think about money.) The forced savings argument is also much better than people here are acknowledging. Saving is hard, especially for Americans. (If it weren’t, there’d be more of it.) And if you buy in a place fairly well insulated from swings in the market, like a nice old neighborhood near a major midwestern research university and healthcare complex, a small return is a pretty sure thing. We’re rational! We’re rational!

270 Ray Lopez February 1, 2016 at 12:04 pm

AlexT knows how to troll the 80-100 IQ crowd and get 100+ comments! Oops, I guess I’m in that group too…

271 anon February 1, 2016 at 12:10 pm

OK, your home represents future rent.

Does your $5k outdoor oven represent future pizza?

272 Mike February 1, 2016 at 12:32 pm

Good points in this post but feel like it’s missing a lot.

The suggestion that the opportunity costs of owning a home (because you can’t move for a better income opportunity) are significant don’t seem right. Or perhaps I should say, there is an opportunity cost to avoiding opportunity cost. Maybe it is just human psychology but I think for most people the act of investing/committing to a house goes along with a commitment to a lot of other things — you surroundings, your life, your career. It’s well documented that people care better for things they own, and owning a house includes more than just the house and land because you own a part of the community. Homeowners are probably going to work harder. There is great value in planting your flag in the place you want to make your stand.

273 Andrew M February 1, 2016 at 12:33 pm

At the risk of sounding like a sleazy PUA, chicks dig guys who own their own place (even if it’s mortgaged to the limit).

274 rayward February 1, 2016 at 12:35 pm

Hiding a house from creditors, a spouse, etc. is more difficult than hiding assets such as cash, stocks, and bonds. Not that anyone would hide assets.

275 rayward February 1, 2016 at 12:37 pm

Hiding a house from creditors, a spouse, etc. is more difficult than hiding such assets as cash, stocks, and bonds. Not that anyone would hide assets.

276 Adam February 1, 2016 at 12:40 pm

In a country so disinvested of transit, I’m highly skeptical of the assertion that poor people could afford – in time and cash costs – to get their own kids to the good schools if only we gave them vouchers.

277 JayB February 1, 2016 at 12:45 pm

Well formulated answer. I would like to add one thing though. Having a mortgage means, you are getting a leverage on your investment.

Usually when people invest in stocks or any other traditional assets, they don’t use leverage, which means that during good times, they actually earn more on their house investment than what would they earn if they invest their savings in stock market. Sure, it works both ways and sure, you can get leverage from your stock broker if you want. But still, people usually don’t reallize this so it’s worth mentioning I guess.

278 Jack PQ February 1, 2016 at 12:59 pm

In Canada, there is no mortgage interest deduction and there is much less of a connection between house price and public school quality. And yet home ownership rates are comparable to the US, even higher I believe.

279 Jack PQ February 1, 2016 at 1:02 pm

What about the “forced savings” aspect of owning a house? You mentioned behavioral economics. Surely this is a positive side. You can say, better to rent and invest in an index fund, but how many will do that? There must be a literature on that (Cowen’s law right?)

280 sam February 1, 2016 at 1:02 pm

If you own the house you live in, you are not investing in the house, you are consuming it. You are neutral relative to the housing market, as price fluctuations do not affect you (other than property tax)

If you consume one house and own no house, you are short the housing market.

If you consume one house and own two houses, you are long the housing market, and are actually investing in it.

Renting your residence has all the drawbacks of shorting – the owner can call your short (and evict you) or raise your rent.

Owning your residence means you are market neutral, plus have enormous tax advantages. For most of America, it’s a wise financial decision. If you live in a market that has many foreign homebuyers or professionals with more income than financial sense, buying may not be a good idea.

281 chase February 1, 2016 at 1:04 pm

•It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
•It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
•It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
•It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
•It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
•It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
•It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
•It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
•It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
•It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
•It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
•It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
•It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
•It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
•It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
•It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
•It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.
•For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.

282 JonFraz February 1, 2016 at 1:14 pm

There are also some serious drawbacks with renting: you are at the mercy of an individual you probably do not know except through the rental contract (and maybe not even a real person), and in some areas your rights are very limited. You cannot lock in your housing costs for longer than the term of the lease. You are constrained (often extremely so) in what you can do to customize the dwelling or landscape to your liking. You may not be able to have pets, and if you want someone to move in with you, the landlord has to approve. You cannot count on living in the place indefinitely, only until the lease is up. The latter may not be a problem for young people, but after a certain point in life moving is something you really, really do not want to have to do with any frequency.

283 Chris February 1, 2016 at 1:34 pm

All of Alex’s points are true. Homes as an investment is a dubious proposition. However, most people don’t buy their home as an investment – i.e. choosing to do that instead of stocks and bonds (regardless if it is in a taxable or retirement account). They buy them because they need a place to live – it’s either that or rent.

Advantages of renting: more flexibility; less initial cost

Advantages of buying: equity; mortgage won’t increase unlike rent; you can do what you want with your property; once it is paid off, living there is “rent free”; they don’t make land anymore

Home ownership is valuable, but it shouldn’t be made a fetish. There are plenty of times when it makes better sense to rent rather than buy.

Generally the problem with buying falls into two categories – the buyer paid too much (or bought too much) initially (see people during the boom), or the place they bought traps them there because they cannot sell (see Flint, MI).

The problem is that people THINK of their homes as an investment when it’s not really. They need things that will produce income for them, or that they can at least sell and not dehouse them at the same time.

284 Jay February 1, 2016 at 1:52 pm

Another intangible benefit of ownership is saying you own to your peers, lower status is signaled by renting (right or wrong) no matter how nice the neighborhood is unless you’re in an urban environment.

285 Doug K February 1, 2016 at 1:58 pm

agree that home ownership as an investment is one of the Big Lies. On the other hand, a roof over your head is a useful asset in most economies. Also, investing in stocks/bonds aka the invisible volatile wizard market (@LydiaKiesling), is also a Big Lie. If the market plummets as you retire or become disabled or get laid off, there you are, poor for life. Now you don’t even have a roof.

“So when jobs disappear and home prices fall instead of moving, people hold on for too long just hoping that things will get better.”
False. They hold on, trying to avoid the significant economic costs of moving, as well as the tremendous emotional and economic costs of leaving family, friends, and support systems. The economic cost of moving is higher with home ownership, but it is significant even when renting, unless you can fit all your belongings in a suitcase.

“vouchers would break the strong connection between where you live and what schools you attend. Poor people would have a better chance at attending good schools if schools and housing weren’t bundled together so closely.”
False. Poor people would have a better chance at attending good schools if we put good schools in their neighborhoods. Single mothers working 2 or 3 jobs do not have time to research charter schools, do not have a car to commute across town to good schools; their kids do not have time to catch the three or four different buses required to get them across town and back.

286 Steve B. February 1, 2016 at 2:21 pm

Even if a person only plans to live in the house for less than 5 years (the average mortgage lasts ~5 years anyway), owning is better than renting due to the tax deductions allowed for property tax and mortgage interest paid. Add the potential for equity (even short-term),especially in hot markets, and the ability to borrow against the house as an asset…and it seems pretty obvious that it’s better to own than rent.

287 The Original D February 1, 2016 at 2:41 pm

Doesn’t the fact that so many people make such an irrational decision on the most expensive thing they will buy in their lifetimes call into question most other aspects of economics?

288 Dave February 1, 2016 at 2:46 pm

As others have mentioned, the inflation hedging aspect of ownership is worth consideration.

I agree with Alex, that housing is overrated as a financial asset, and a lot of people think about the value of home equity in a less than rational way. If the value of my home equity has increased dramatically, that’s nice in a sense but it’s tough to think of that as spendable wealth unless I downsize to a cheaper or smaller home (whether in the same market or elsewhere) because I still need a place to live. In other words, broad increases in housing prices don’t increase my individual wealth in the same way that, say, a broad increase in stock market value does actually increase my spendable wealth if I’m invested in the stock market.

That said, housing does to a significant degree lock in the cost of most household’s single largest individual expense – a place to live. The usefulness of that can vary depending on how long I’m planning to stay in a particular home – or at least stay in the same metro area – but it does have value compared to the risk of large annual increases in rent.

The Quartz post linked by Alex notes that German law has renter-friendly limits on the rate of rent increases – effectively quasi-ownership rights for renters – which I suspect is a pretty big reason that Germans find renting to be attractive.

289 JK Brown February 1, 2016 at 3:30 pm

“Germany is a wealthy country and a majority of Germans get by just fine by renting. See Most Germans don’t buy their homes, they rent. Here’s why.”

Yes, that works great until the landlord, your municipal government, decides they’d rather Islamic refugees live in your home of 23 years.

A woman in Germany is being evicted from her home of 23 years to make way for asylum-seekers, in the second such case to emerge.
Gabrielle Keller has been given until the end of the year to leave her flat in the small southern town of Eschbach, near the border with France.
The flat belongs to the local municipality, which says it is needed to house refugees.

290 Plucky February 1, 2016 at 4:34 pm

Other commenters are correct when they point out Alex did a poor job separating individual rationality vs policy rationality. The answer to “should you buy?” vs “should mortgage interest be deductible?” can be vastly different, and are actually negatively correlated. Also, Alex conflates a lot of different trade-offs.

My criticisms:
1. An economist answering the question “should I rent or should I buy?” should first and foremost respond with the question “What is the rent/buy ratio question?” There are all manner of well-done calculations as to equilibrium rent/buy rations from a long-run investment standpoint. Most markets tend to fluctuate around that level in the long-term, which can fluctuate by 10% or so for 18-24 month periods. Alex’s answer more or less takes as given the idea that the rent/buy ratio a buyer faces is structurally disadvantageous to buying. This is not generally true on an empirical level and more to the point an economist should not assume generically that it would be the case

2. Alex is incorrect that home-ownership pays no dividends. It does, and an economist ought to know about “owner’s implicit rent”, especially as it is the single largest component of CPI. Home-ownership pays dividends in a way that is completely untaxed. The relevant question when comparing to other investments is whether or not the owner’s implicit rent net of maintenance costs and cost-of-money is comparable to the dividend on a stock.

3. Alex’s citing of the NBER paper ignores one of its important conclusions. From the Abstract: “We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative ‘externalities’ upon the labor market.” From the standpoint of individual rationality the Blanchfield/Oswald paper does not show any an individual-level increase in unemployment.

4. Alex highlights the transaction costs of owning but ignores the transaction costs of renting. The act of moving is itself expensive, not just in money but in time, stress, and general life disruption.

5. The flexibility of a renter to move is not really better than an owners. If priced at market, a house can usually be sold in under 60 days and often in less than 30. Renting, however, usually operates on fixed-term (often 2-year) leases, and usually the decision to renew or not renew usually occurs ~60 days out from lease expiration. There is only a very slim chance that someone looking to move for employment reasons will be able to do so without incurring the transaction costs of either breaking a lease, finding a new tenant to take it over or sublet, or just having to eat the cost of the remainder of the lease. The cost of eating 2-3 months of a lease are comparable with the transaction costs of buying/selling a house.

6. The link between location, property value, and local schools is strictly speaking irrelevant to a individual rent/buy decision. A rational household would decide to rent/buy conditional within a given geography, or would consider renting/buying in 2 different locations to be 4 possible choices rather than 2. Alex’s answer implicitly assumes that in some desirable areas renting is de facto unavailable. This is often the case, but presents very different conclusions between individual and policy rationality. Most people would not consider “You should rent somewhere that you don’t especially want to live because that is more rational than buying in an area that you do” to be terribly sensible advice.

7. Even in Alex’s perfect world in which the link between schools and locality has been broken, his answer would lose consistency. The assumed tradeoff is live-in-the-burbs-near-good-schools vs live-close-to-work-near-crappy-schools, which is accurate enough. However, unless the good/crappy schools in question swap location, the total commuting time does not change. That’s because the kids have to commute to school. Granted, the parents’ time has more economic value than the kids’ time, but until the US becomes a homogenous, high-trust society like Japan, American mothers are not going to be OK with sticking their kids with a 45-minute public transit commute in order to get to the good schools in question. That transit time would in practice get borne by one of the parents for most of a kid’s education. Alex’s perfect world only becomes perfect if the new market equilibrium is that the good schools relocate close to parents’ workplaces as well.

291 Patrick Minton February 1, 2016 at 5:45 pm

“You didn’t expect to get a great investment and a place to live in the meantime did you? TANSTAAFL.”

This seems like the wrong comparison. The question isn’t whether a mortgage is a better investment than the stock market. It is whether a mortgage is a better investment than PAYING RENT AND INVESTING IN STOCKS. The TANSTAAFL argument goes both ways. If you decide not to buy a house, you have to pay rent, which, by definition, is an expense, not an investment.

There are areas of the country where mortgage payments are often cheaper than rent payments (even before accounting for tax advantages). You’d have to get a very good return indeed on your 20% down payment in order to argue that renting has greater returns than buying (assuming that investing the down payment is your opportunity cost).

292 wally February 1, 2016 at 6:26 pm

Since I’m now buy a very nice three-bedroom home on a 2-1/2 acre lot for about $500 less per month (BEFORE figuring in the tax breaks and eventual return of equity) than I was paying to rent a less nice 2 bedroom townhome, I find the author’s argument to be simply wrong.
He doesn’t know what he’s talking about.

293 AIG February 1, 2016 at 7:47 pm

Others have made some good points above to the contrary, including: greater borrowing ability, payment-free living once you’ve paid off the house (which is important in retirement) etc. All these are actually really big pros of buying vs. renting.

OTOH, some of the points Alex makes may actually seem in favor of buying, rather then renting. Especially schools.

Do people prefer sending their kids to schools that “the poor” have access to? I’m pretty sure I would not want to send my kids to such schools. If “the poor” start coming to my school, I’ll move away, and that school will no longer be attractive to “the poor”. I’m pretty sure I prefer…segregation…to no segregation. Looking purely at my benefits rather than societal benefits. So pricing the “riff-raff” out of my school district is exactly what I want to do. Since I can’t do it “legally” anymore by simply passing a law excluding certain people, I do it by pricing them out. I pay for this “privilege”, but obviously enough people seem willing to do it. Segregation, especially by income, is what people seem to prefer, and are willing to pay for.

Not sure why allowing anyone to come to a school which I finance, and want to keep exclusive, is supposed to be a positive in MY book (in Alex’s economist’s book where societal welfare is more important than mine, it very well me be a positive).

Another point which I think is weak in Alex’s comments is this “well Germans don’t buy”. So? Why is that preferable?

And third and equally importantly…Americans have the LOWEST commuting times in the developed world. By a huge margin. So this “high” home ownership rate doesn’t seem to translate to higher commuting time. Especially since, unlike Europe, companies and jobs in the US are not concentrated in downtown or one area of the city, but are generally free to relocate to wherever the commuters are. So you’re likely to have a lot more job options within a short commute of wherever you live, compared to Europe.

Saying that you change your job and now you may have to commute 2 hours instead of 20 minutes, is an anecdote. Data suggests US still has average commute times that are some 1/3-1/2 less than European average. Some of that has to do with relying on public transport (s**t) vs. car and highways (great), but that’s another factor to consider: the geographical area you can commute to in the US is far greater than in Europe, no matter where you live.

Since at a certain point in their lives most people…prefer…and actually do own houses, then we’re left with the question of whether everyone is wrong, or Alex’s binary choice is wrong.

294 jorod February 1, 2016 at 9:00 pm

Our tax code was written by the National Association of Realtors.

295 aloha jane February 1, 2016 at 9:14 pm

I read the first 1/3 of comments, no one mentioned the leverage issue? That is, you get the return on 100% of the house value, even though you only paid 20% up front? That’s the main reason a house can frequently be a slamming investment.

296 Dan Lavatan February 1, 2016 at 10:59 pm

I think many of you miss the point.

First, houses are the ultimate consumption asset. You have to live somewhere, and everything else either depreciates completely in a few years or is completely ephemeral.
Second, you can construct an environment where you are more productive than you would be anywhere else, resulting in higher earnings. Rental properties are basically slums.
Third, if you rent you are paying someone else to maintain the property, if you own you only need to buy land and can get credited for all the labor of capital improvements without having to find clients.
Fourth, houses are easy to leverage at low interest. After taxes, the carrying costs are about as low as the appreciation. The rest can be invested and the risk shifted to banks or taxpayers.
Fifth, you can avoid having to move. Moving is disruptive.

297 Larry February 2, 2016 at 12:53 am

“There is no good reason to bias people away from renting and towards buying.”

Owning property gives households a strong reason to care about what’s happening in the neighborhood/community. That is a huge positive force.

298 Mat February 2, 2016 at 6:19 am

Alex’s analysis omits the point that people have to somewhere – as other comments have pointed out.

The divided of a house should be equal to the cost of renting a similar house minus the cost of maintenance and the interest paid on the mortgage. Plus you get an inflation hedge, tax relief and exposure on a risky asset. Downside is less diversified portfolio, less liquidity, less flexibility on the labor market and transaction costs.

For example: I recently bough a house in Amsterdam and – thanks to QE – only pay 1,5% net interest a year (after tax deduction), which I my case means like 250 euro a month interest. Renting a similar apartment in the would cost like 500 – 700 euro in the regulated rental market (not available for higher incomes) and maybe a 1000 euro/month in the unregulated rental market (for higher incomes). My previous rental apartment in Amsterdam was 1200 euro/month (bit bigger but les quality in comfort). Maintenance is not that costly in a small condo…

So, I am not sure that renting plus investing is always a better a options. I do admit market distortions are important here.

299 Jay February 2, 2016 at 1:06 pm

I think he misses one of the best intangibles of owning..saying you own to your peers. Renting almost always signals low status no matter how nice the neighborhood.

300 Faria February 2, 2016 at 6:23 pm

Rent always poses a risk that the owner rises your rent or throws you out to sell the place.

As for flexibility, I don’t believe house ownership is such a burden. Actually, it is a quite safe source of income from rent.

301 Ron February 3, 2016 at 7:58 am

The major flaw in this argument is that there is a choice in investing in a home (mortgage) or in any other investment, given that a home is the only investment that you LIVE in. The amount that you would have to invest would be your mortgage payment minus the amount you would now have to pay rent. In many areas it is cheaper to buy than to rent the same home. In those areas you would have even less to invest than you have now. Taxes and interest are deductible on your federal tax returns and you don’t pay capital gains on profit from the sale of your home if you have lived in it two of the previous five years (up to $250,000 for individuals and $500,000 for married couples) making your lived in investment more of a deal. In most areas it takes 3-5 years to break even on a resale of your home, so that could impede movement to take a new job somewhere else, but in our culture very few people change cities to take new jobs. There are many other reasons that make home ownership a worthy investment for the purchaser and the community they live in. Freeing up money to invest, by eliminating your mortgage, can only happen if you trade in your home for a cardboard box.

302 Mark Clayton February 3, 2016 at 11:49 am

This economist needs to go back to school. He idn’t factor in everything because if he did, housing/real estate is the best investment:

303 Jason Adrian February 4, 2016 at 4:20 pm

What about leverage?

Sure, my house doesn’t appreciate as much as the stock market. But the equity on my home is 5x levered…

304 Rob February 5, 2016 at 8:47 am

Stocks are obviously a better investment than real estate, but you also get to enjoy living in a nice house, often something nicer than what you would rent. In some markets a mortgage is basically the same amount as rent for a similar quality home but unless you are moving often at least you build some equity with ownership. If you purchased a home 15 years ago for $500k you could easily have equity of that or more. If you rented for the last 15 years you have nothing. It’s not like you are earning a return on your rent payments. I would never buy a home to live in because of the investment potential, but I would still like to own a nice home because it has a lot of value in addition to any potential return.

305 Angela February 6, 2016 at 10:08 am

Owning a home is a GREAT way to be able to travel the country. Living in that home–possible. Throughout my adult life I have been able to move cross country and even live in Mexico for a short time because my real estate investments were occupied and paying dividends. Apartment leases are nearly impossible to get out of; your own home?–easy!

The trouble with stocks is that you need money to play. You can get into real estate with no money down. Insider trading? Not a problem with buying homes! Use that knowledge and relationship to your advantage! Want more? Put some muscle into it. We have little power over our stocks, but we can remodel, subdivide or beautify the neighborhood to increase our home investment.

306 Bob February 7, 2016 at 11:31 am

Good calculator to start with:
Anyone have a better one (publicly available)?

Then need to look at your life (is it stable? are you going to change jobs? get married? have kids? take care of parents?) at your location (how are the economics of your location? of the neighborhoods you are looking at? traffic increasing? what if a major employer goes down?) and your lifestyle (can you be a landlord? [fine for some, misery for others], do you want to take care of the property? is it important to control your environment? are you looking to buy at the same price point as renting?).

At this point, you can’t look at the entire US and it’s population to make a blanket statement “buy vs rent” for an individual decision. You have to take a close look at the details for your life. Even economists do that!

307 AbeRod19865 February 9, 2016 at 3:19 pm

I seem to be the only one who lives in an area where renting the house I would like to buy costs 30-50% more than the mortgage.

I rent a house that is way less than what my wife and I need (specially if we were to have another child in 2-3 yrs). If I were to buy the house, I would be paying around 65% of what I pay in rent. The rental market is extremely limited where I live, I just did a search on zillow for a 4 bd house in my area, got 5 hits, 4 of them with commutes almost twice as long.

The rent vs own argument will always depend on your circumstances and your area’s market. I seem to live in a market where buying will be cheaper than renting 100% of the time.

Ironically, the time is not right for me to buy because there is the distinct possibility that we will relocate in 2-3 years. If it wasn’t for that, I would not think twice about buying.

308 J_12 February 12, 2016 at 2:09 pm

simplest reason why homes are an attractive asset class for most individuals — leverage. The average person is not going to get 5:1 or better leverage on financial assets.

309 Overlooked Argument? February 28, 2016 at 11:02 am

I see that several comments have reframed this debate more realistically but want to emphasize the false premise embedded in the original article (and also in many of the dozens of other rent vs. buy economics pieces linked to below). Simply Put:

310 Overlooked Argument? February 28, 2016 at 11:37 am

It is unfair to compare home ownership to stock purchase. The choice is not unrestrained between investment choices IE.. home ownership and stock or bond investment. People need to have a place to live. The money people put into home purchases is otherwise spent in rent which offers absolutely no return or even partial recovery. While the returns on home ownership may pale in comparison to stocks, the choice is between the heavily leveraged, forced savings plan of home ownership, and completely forfeiting any hope of return or even partial recovery of the housing expense. I am always stunned by the number of articles which frame the analysis as if it were a one to one investment choice between home ownership and stocks.

It seems like it must be a pretty rare situation that rents are so much cheaper than ownership costs that the typically small difference between the two could be invested with an expected pay back more than the combined appreciation / pay down equity over time. Yes, if someone will be in a place for only a short period of time of course there is little pay down equity accumulated (most of the payment going to interest) and there shouldn’t be too much short term appreciation either (outside of a bubble). However if one reasonably expects to be in the same location for a long period of time the balance tips heavily in favor of ownership. Again the alternative is 0 return or recovery of housing expense.

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