Owning a home has rarely been this much more expensive than renting
Owning a home has rarely been this much more expensive than renting
The premium for homeownership has grown in recent years as home insurance, upkeep, and high mortgage rates skew the buying vs. renting math.
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On paper, owning a home is almost always more expensive than renting — about 14% more, on average, after factoring in expenses like insurance, taxes, and upkeep.
I'd be interested in seeing how they arrived at the 14% number.
When I bought my first home a couple of decades ago I moved out of my 1 bedroom apartment which I was paying a monthly rent of $700/month into a small starter home with a mortgage of $1000/month. 20 years later that exact same apartment rents for $1350/month. All of the years I lived there my house payment never rose higher than the $1000/month mortgage payment while the rent on the apartment apparently continued to increase year over year. Meanwhile I ended up selling the starter home for $110,000 than my purchase prices nearly 20 years ago.
So is their 14% number just calculated on the first month of each (renting vs buying)?
Once you factor in things it mentions like insurance, taxes, upkeep along with others like a down payment then it's very easy to see where the 14% numbers comes from. Frankly, I'm surprised it's only 14%. There's a lot of additional and hidden costs with home ownership.
The difference is those "costs" are going towards buying equity that you then get to keep. Maintaining a house is expensive but it is an asset. This article really doesn't seem to understand that.
Renting may be cheaper month to month but you're literally pouring that money down a black hole never to be seen in your hands again.
No, not all of them. Insurance, property tax, and maintenance do not go to equity.
Not to mention mortgage interest.
For me, insurance and property tax work out to about 1/3 of my former rent (which was a smaller place than my current home). My mortgage by itself is about the same as my former rent. Based on what another commenter said about the typical percentage of payment toward interest (69% after 1 year, 55% after 10 years, 33% after 20) after a year my money-in-the-black-hole is roughly even to renting with about 1/4 of my total payment going straight to equity. After 10 years that goes up to 1/3 into equity, after 20 it's about 1/2.
Yes, my total payment is higher, but the home is larger; if I'd made a more horizontal move, the equity building rate would be more favorable. Additionally, I rented that space for 4 years and the rent went up 30%. The main thing to increase my payments now would be an increase in property taxes, which reflect an increase in property value. Personally, I felt very different about a 30% increase in rent than I'd feel about a property value increase that would bump taxes enough to raise my current payment 30%.
All I really did was convert some of what I'd save normally into the form of real estate. Home values typically increase about 3-5% annually, which is pretty comparable to most investment instruments. And I get the material benefit of a neat house to enjoy in the meantime, instead of some holdings with zero non-monetary value.
It's not necessarily the right move for everyone. I am particularly handy, so my maintenance costs are lower than they might be for others. But so far as money-in-the-black-hole and equity are concerned, I'd imagine most people who can shoulder the up-front costs would break even pretty quickly, interest included.
And the apartments we rented in the past had shitty inefficient heating systems (gas converted oil burners and baseboard heat that cost us a fortune every winter (7-8 months a year).
Now I’m looking at installing solar and a heat pump. Not something I could have done in a rental. The asshole landlord wouldn’t even fix the sink drain.
Property taxes are still partly tax deductible. Also even at my low mortgage rate of 3%, I get about $450/mo. back via the mortgage interest tax deduction, worth about $300/mo. over the standard deduction IIRC. I am not sure if they factor these things into the 14% number.
It's not common for people to itemize any longer after Trump's tax updates a few years ago
It’s not common for people to itemize any longer after Trump’s tax updates a few years ago
The Tax Cuts and Jobs Act (TCJA) of 2017 Trump passed put in place permanent tax cuts for corporations and temporary tax cuts for individuals. The individuals tax cuts expire next year in 2025 so in 2026 the current standard deduction for single filers of $14,600 drops to $8,300. For joint filers is currently $29,000 and dropping to $16,600. source
Unless these tax cuts for individuals are renewed, we might see many more folks itemizing again because the standard deduction is too small again.
The part of that which REALLY hurt me was the cap on how much you could deduct. I itemized even with the increase in higher standard deduction, so capping my deduction hurt me a lot.
SALT deduction elimination was devastating for some folks.
Those tax updates screwed me. Yes, it temporarily raised the tax deduction, but it also capped the tax deductions if you were above the standard. His changes cost me a couple grand a year.
This is more of a case where the article doesn't take the time to explain the nuance. Everyone knows home ownership increases equity. Which is why it costs more.
I rent a house for $4600/mo. To buy this same house in the same neighborhood, it would be roughly $1.6m, tho prices are starting to fall a little on these higher cost neighborhoods, so let's say $1.5m for a deal.
With a 20% down-payment on a 30 year fixed rate loan, it would be close to $10000/mo (including insurance and property taxes).
Also, the lions share of your mortgage goes to paying down interest for the first decade or so.
So let's say $1k goes to principle per month. You're still burning twice as much money owning as renting.
The only financial upside is that you may be able to sell for more than you paid. Minus Realtor fees, whatever renovations / maintenance you made over the years, etc.
The current market is insane.
Edit - so I'm not talking in complete generalities, I glanced at the interest/principal ratio. No idea how accurate this is.
After a year of mortgage payments, 31% of your money starts to go toward the principal. You see 45% going toward principal after ten years and 67% going toward principal after year 20.
https://www.americanfinancing.net/mortgage-basics/mortgage-payment-explained
I don't know what the ratio is in the first year, maybe 100% interest?
So at a monthly payment of $9800, $7864 of which is towards mortgage, that's $2437 / mo towards principal from years 2-9.
So essentially you're burning $7363 instead of $4600 for the hope that your house increases in value when you sell it.
Fiscally speaking. There are a lot of other pros and cons to owning.
That is the state of the buy v rent trade-off on that house TODAY. In 10 years, the rent on that house will go up but the mortgage will stay the same. Regardless of the equity you build in owning (which can be leveraged for other things even if you don't sell), your "rent" stays fixed while renting goes up every year.
Companies are able to take longer term stances and can sustain short term losses. They buy a house and keep it for 10 years, long enough that those losses transition to profits.
That's making done huge assumptions that you have no way of knowing will be reality.
Rent may go up. It may go down.
Housing prices may go up. It may go down.
Locking yourself into a mortgage for "fixed rent" may end up closing you hundreds of thousands more than apples to apples rent. Taking the above scenario, you're paying about $360k more in the first 10 years than you would renting, if rent prices don't go up over that time period.
Yes, both rent and housing tend to go up over time. But who knows what the immediate future holds anymore. Housing prices are starting to contract. There's more push for high density housing, which people generally think will lower rent (I disagree, but I'm against the grain here).
One thing I've learned from economists is that despite all their expertise, they're very bad at predicting big events that have huge impacts on the economy. And we've been getting a lot of those the last few decades.
Oh come on, that's being extremely, EXTREMELY... I can't find the word. Not pedantic, not pessimistic, and not near sighted. Whatever the term is for when you take the absolute extreme edge case to try making a point.
Rent will always go up over time due to inflation. Yes, you might have dips for a year or two, but landlords will always raise the rent based on inflation at the minimum. And regardless of big drops in house prices during economy crashes, your mortgage does not go up over time outside of adjustments to taxes and insurance. Even when there was the worst housing crash in US history in 2008, my rent never dropped. My rent kept going up every single year by the maximum amount the city allowed under rent control. Housing prices dropped, which allowed me to buy a house. And in your case where you talk about losing $360k due to buying instead of renting over 10 years, you are ignoring that $245k will be going to buying down the principle (amortization calculations for a 6% loan on $1.5M for 30 years). You spent $552,000 at a bare minimum, assuming no rent increases (impossibly unlikely), and have 0 to show for it. The owner spent almost exactly twice that but has $245k in equity on top of whatever equity had grown from house prince inflation over 10 years. Every year it gets better for the homeowner, especially when you hit 30 years and have paid off the house.... while you are still renting.
In reality, when I bought my house 12 years ago my mortgage was $3900 (with taxes and insurance) and rent would have been $4000. Now, my mortgage is $4100 and rent is $6000.
Now, I'm also ignoring the money that can be made investing the money you save renting vs buying. But if we use your assumptions, then there is no guarantee you'll make money investing your money.
How would your point of view differ if you had bought your house right before the crash? Your entire outlook on the wisdom of paying yourself via principal vs a landlord seems to be based on your particular (lucky) circumstance that you got into the market at a time where your monthly cost for mortgage was comparable to rent prices at the time. So locking it in time was a good decision.
That is not the case anymore. I have presented numbers to support that argument, even if it's overly simplified for simple calculations.
And you're seemingly ignoring the distinct possibility that housing prices may tank, at which case locking your rate at twice comparable rent would be a terrible situation.
Right now, my money is parked in other investments. We are keeping an eye on the housing market, but paying $300k as a down-payment for the privilege of doubling my monthly housing cost does not seem like a financially prudent decision, when my money is making more in its current investments. And given that if we took a loan out now, we'd probably refinance for a lower interest rate at a later time, reseting the interest/principal schedule anyway.
This is the reality of the market right now. Your outlook is not applicable in today's paradigm.
How would your point of view differ if you had bought your house right before the crash?
Just fine, because I kept it for longer than the recommended time that good mortgage brokers tell you to plan for evening out costs and riding out dips. It would have cost me an extra $300k to buy it before the crash, plus the four years it took to recover from the crash before prices started climbing again. In the four years that housing prices were dropping (2008 to 2012), my rent went up, not down. Sure it didn't go up very much in those 4 years, but it didn't stay flat like my mortgage would have (I don't know if the property tax went down during the time due to assessments dropping, but I don't think they did). And I wasn't paying down principle like on the mortgage. Yeah, my house value would have only doubled in 10 years instead of tripled, which only means I wouldn't have been able to leverage the equity to buy a vacation property that I still haven't built on.
Also, remember that the stock market ALSO crashed during that time. It took nearly 5 years for the stock market to recover from the 2008 crash.
Finally, the guy who tried flipping it just before the crash made some questionable decisions on what changes to make for his flip, some of which I have had to undo. If he had just kept the house as it was and lived here instead of trying to be a flipper making a profit, he would have been fine after 5 years. But since I owned it instead of renting, I was able to change the house as I saw fit to be happier living in it.
insurance
I was shocked as a homeowner to find that home insurance is not that much more expensive than renters insurance, especially for a condo where the HOA is sharing a large amount of the cost
taxes
I mean, especially if you’re already a homeowner and your assessment is years old, this amounts to less than $1k/yr.
Using the above poster’s example both of those costs annualize out to still be cheaper than rent
It’s actually horrifying how fast rent has gone up. Our mortgage in Boston went from being $1000mo more than average rent to $500mo under average rent in only two years. Even with the tax hike we just passed in my town, my total cost of ownership is far below renting even accounting for the savings we set aside for upkeep and emergencies
Plus this whole time we’ve been improving the property. We now have solar on a 0% apr loan and don’t have electricity bills anymore and the mo billing for the panels is less than our old electric bills. We also used a state program to replace all the insulation and windows at cost with another 0 apr loan. So our gas bill is now only ~$80-100 compared to the $400-500 gas bill in the shithole apartments around here with 200 year old paper insulation. And if we want we can use another state program to replace our furnace with a heat pump and lower that further.
So our relative cost went down even more as utilities keep going up and renters have zero control over their homes energy usage
These are very region dependant. My state has no income or sales tax, but the property taxes are higher, my 1 acre with a mobile home is basically 3k. It's almost certainly cheaper than renting, but you can't just make sweeping statements like that.
At the same time. If sales tax has always been that high then it would be silly to not realize that cost is baked into the local rents in the same region
Certainly in my town where taxes were just hiked, every landlord is going to hike rent accordingly in September (it’s a Boston thing that 90% of leases always end in September)
Sounds like you have the fortune of living where these things are cheaper. In Ontario, home insurance is much higher and property tax being less than 1K a year is completely unheard of.
The property tax on my house is $7000/year... and that is with a fixed assessment from 12 years ago. If I were to buy my house today, my tax would be $21000/year.
That’s why I caveated with if you are already a homeowner for a while. It’s totally different to be buying a house now and comparing it to rent now. The important bit is the cost is fixed and rent is not. In our case it only took two years for rent to surpass us.
But yeah. Especially if you live in a state with no income taxes, the property tax story is very region dependent. If property taxes are that extreme though, it’s almost certainly also being built into peoples rent which means it’s not contributing heavily to the difference in cost from renting and owning
Once you factor in things it mentions like insurance, taxes, upkeep along with others like a down payment then it’s very easy to see where the 14% numbers comes from.
So you're agreeing with me that they're only comparing the first month of ownership of the house with the last month of renting? There's no factoring in the long term rise in rents to their math?
There’s a lot of additional and hidden costs with home ownership.
There certainly are, but its very situational. A 100 year old home will have very different upkeep costs than a 10 year old home. A home in a hurricane zone will have different upkeep than one that isn't.
I mean neither of us know how they arrived at the 14% number. So your comparison is not really relevant and I would say it's not a good one even. But in a generic/average month-to-month overview, home ownership is almost always more expensive.
I had a long reply typed out exploring the various aspects and raising questions to the methodology and applicability of the advice in the article to different groups of people in different geographies and stage of life. However the tone of replies seems to just want to accept the article as is. Its a yahoo finance article, so the depth is pretty shallow and only speaks in broad generalizations. Your reply is doubling down on exactly that. There's nothing wrong with that per se, but it looks like the there isn't a desire in this thread to explore it any further.
So we'll just accept the article answer which you summarize well: "generic/average month-to-month overview, home ownership is almost always more expensive."
Conventional wisdom says keep renting folks and don't question it.
Did you not read the comment? Property tax, insurance, and upkeep are all perpetual costs. The down-payment, closing fees, and potential mortgage insurance are the only up-front costs.
Did you not read the comment? Property tax, insurance, and upkeep are all perpetual costs. The down-payment, closing fees, and potential mortgage insurance are the only up-front costs.
I read the comment. It doesn't address the question. "Over what period of time?"
Are they judging on owing a house for 30 years vs renting for 30 years or are they judging owning house for 1 year vs renting for 1 year?
Less relevant in a condo
For me, I'm in a condo that we bought with a 15-year mortgage during the pandemic. My mortgage (including escrow/taxes and insurance) plus HOA fees is about $2100/month. My old apartment (including monthly pet fee) was more than that when I lived there. It's currently listed for $2500/month (big complex, not necessarily my unit).
I promise all y'all I'm not spending $400/month on homeowner-specific costs. And, I could reduce my monthly cost by moving to a 30-year mortgage instead of a 15-year mortgage.
Edit: looked up my old apartment again. Holy shit, it's listed for $2750, which doesn't include a pet fee.
It's just talking about the first month / year. Assuming that only inflation is effecting prices to keep things simple the price of renting goes up over time with inflation, while a mortgage stays constant dollar wise, and since a dollar is worth less over time the payment is less.
Combine this with building equity the net cost of owning a home goes down over time while renting goes up. The question is when do those two lines meet, eg. If you bought a home now how long would it take to be paying the same as renting. Maybe it's 5 years, maybe 10 or 15 depends on the market, judging by the article it seems that period is getting longer as the starting point for a mortgage is really high and will take a while to recover.
Replace central air: $8k Deadwood 40+ year old trees: $6k Remove & replace concrete driveway without killing the 80 year old pine who's roots are buckling it: $8k Remove particle board siding and replace with vinyl: $12k New water heater (+ new requirements for not having a pressure bomb in the house): $3k
Owning a home for three years has been more expensive than renting for a couple decades. Sure the mortgage is $500 a month less then rent, but the loans/credit card + interest for all the above is killing us.
Seriously considering one of the brand new apartments in the up and coming district for only $2k a month if we can sell the money pit with outdated everything!!