The article talks a lot about mortgages. How does the math work if you pay in full at the time of purchase?
this post was submitted on 20 Nov 2024
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Not the scenario this article talks about. Most people need mortgages, especially first time buyers.
you divide the amount of money that it costs by the amount of dollars you would pay to rent something like that per month and then figure that's how long it'll take for you to look at a duck instead of a chicken
Then add a few years, since you'll be the one paying to replace wear items like roof, carpets, and appliances.
That's true in general. And if you assume a perfectly efficient market, yes, renting would never be cheaper than buying. On the other hand, if markets were perfectly efficient, no company would ever be able to make a profit at all.
One market distortion is that in certain times, people will actually pay a premium for renting. People aren't perfectly rational actors. Or moreover, they prioritize things beyond just simple cost. Even if buying is more expensive that renting, all costs considered, often people will pay more just for the stability and certainty that comes with home ownership.
The housing market is also distorted by all the present owners with locked-in 30-year mortgages. This has suppressed the supply of existing homes on the market. Rental companies don't get access to federally-subsidized 30 year mortgages, so they are less subject to this interest rate lock-in.
I pointed out a few things, but these are a few of many. The key thing to realize is that housing is highly illiquid, and its production, ownership, and sale is heavily regulated, taxed, and subsidized. It's a heavily regulated market. This means that the market will not always follow basic econ 101 behavior. Yes, in theory, rentals will include all costs. But that is rarely the case.
In fact, in a perfectly efficient market, it's likely that neither buying nor renting would be beneficial. If everyone acted perfectly rationally all the time, the cost of renting would exactly equal the cost of buying. And in that world, buying would never be worth it, simply because it wouldn't be worth the extra hassle to safe not a single penny.
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insurance and property taxes and a very large HOA fee that looks almost like a rent payment if you're in a good city
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I might still not understand but... Landlords have to pay insurance as well. Why would they be the exception. They have all the same costs and also want to make a profit. How can rent be cheaper then?
Because if you buy a house, it's just you and the bank, so you need to cover the banks risk for you as an individual, meaning higher interest rates. Larger purchases, or a group of houses are covered by different loan types, flexible rates at for example international rated plus half a point.. and that is mich cheaper. The rate might fluctuate.. but if the government strongarms the fed to keep the loans practically free, companies borrow for free plus half a point. And that is a lot of difference.
Also, the landlord is dropping that money into an asset that often appreciates in value. As long as they otherwise have cashflow to cover it, they can afford to "lose" money each month and make a big payday when they sell it.
Because on average, I imagine very few rental homes are brand new constructions/purchases so their mortgage is a couple years old and lower than if someone bought that same home today.
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Highly dependent on where one lives I guess. My friend just rented a new apartment and his rent is over double what my mortage payments are. That's also money he is never getting back where as in my case my house is paid in about 15 years after which I own the damn thing and the monthly mortage payment drops off entirely. Excluding mortage, the montly cost of owning my house is 275€ which includes water and electricity.
Excluding mortage, the montly cost of owning my house is 275€ which includes water and electricity.
That's also excluding regular maintenance or emergency repairs that a landlord would be (often reluctantly) responsible for. It is also possible to do big, expensive, necessary renovations on a house and have it hardly affect the value at all.
My mortage payments for one year would cover all maintenance I've done to the house during the 8 years I've lived here including an entire bathroom remodel. Obviously someone less handy would need to hire someone to do the jobs I've done myself so that helps a little with the costs, but still. The maintenance costs for my house aren't even in the top 5 expenses I have.
It is also possible to do big, expensive, necessary renovations on a house and have it hardly affect the value at all.
Isn't this kind of irrelevant unless you're a house flipper? If you own a house and make renovations to it, it is because you find some practical value in it.
A house flipper would do everything they can to avoid having to do something like this. It's primarily a normal home owner who would have to shell out for this.
Ex. when I bought my house, they told me the roof had recently been redone. I didn't know enough about it, but the pre-inspection didn't see any issues. Fast forward a year later we have someone look at it because it isn't looking right in some places. Turns out it's a very old "torchdown" roof, and by "redone" the previous owners had someone spray it with a silvercoat paint. This is something you do maybe 2-3 times in the life of this kind of roof. The inspector said there were at least 7 layers of paint, the roof itself was way past its recommended lifetime, and if there were any issues it would be impossible to know without taking the whole roof off. They said we could just wait until we have a leak, and then get it replaced, but (given several weather and money factors involved) we chose to go ahead, bite the bullet, and have a new roof installed. This was enormously expensive, but if I were to put the house on the market right after it was done, the state of the roof was already priced in. If someone wanted to pay $X a year ago thinking the roof was already recently "redone", me getting it actually redone isn't going to move that needle for anyone. It was purely for my peace of mind as the home owner who wants to continue living here. Sure that has value to me, but no tangible value that I can use to justify the purchase vs renting. I could have rented in this place for well over a year for the price of that roof.
A house flipper would have said "well, let's try to get rid of this thing before that becomes a problem for us to worry about, shall we?"
The best thing you can do to improve the value of your house is granite countertops and stainless steel appliances. The next best thing is some kind of fancy bathroom. Finally, a fresh coat of beige paint and moving out almost all of your stuff is a big help.
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It's not about what your mortgage payment is. Interest rates are significantly higher now. See how much the same house costs at the current price and interest rates. Most likely it's significantly higher now as both rates and prices have increased.
My mortage payment is 520€/month including interests which are tied to Euribor12 and change once a year. My interests now are less than they were a year ago.
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