It seems that you have hit on a hot topic. This whole discussion reminds me a bit of the saying, “Statistics don’t lie, but statisticians do.” You can make an argument either way – financially or on the basis of lifestyle. From an investment standpoint, the reality is – like any asset – there are times when real estate is overpriced according to its value and makes a poor investment and other times it is underpriced. With that said, I think there are a couple things to point out in your argument:

- The house price appreciatiation is actually applied to the whole house. So at the end of 20 years you have an asset that you own (part of) worth about $750,000 based on 2% appreciation.
- You say that you need to be able to cover the “whole house payment” even though $900 is actually the amount that you can deduct for taxes each month. Therefore you reason that you should actually be socking away $2000/mo if you rent. The reality is that you can adjust your withholding and take less taxes from your paycheck. Or you will simply get a tax refund at the end of the year. Either way, the actual difference is the $1136/mo you calculated initially. Which won’t add up to nearly the $1 million you calculated
- An assumption of 10% annual growth is very aggresive for your investments
- Finally, if you withdraw 10% from your investments you will find that you will exhaust your funds far quicker than you planned. If the market returns say 2% in a specific year and you withdraw 10% you have decreased your principal and you will need a higer return in the future to earn it back. As we know, the markets do not always co-operate with nice even 10% returns (ask anyone invested for the last 10 years). The generally accepted “safe” withdraw rate is 4%. This would give you a $40,000 income on $1 million dollars. Not chump change to be sure, but not what most Bay area people would consider financial freedom either.

I think one good thing to come out of this real estate bubble is the challenge the myth the home ownership is the “right” way to go. As you are pointing out and so many of the commentors are highlighting, the rent v. own decision is not so clear cut and both have significant pro’s and con’s that need to be fit with each individual’s situation.

Thanks,
Brian

A great article………

That is why owning a house in the Netherlands is NOT part of the Dutch dream. Being in debt as a society is NOT financial freedom

Home ownership is an expense not an investment…..Renting is much more in line with financial freedom. I also have rented and owned property in Canada and USA

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

It basically told me that at the current market, if I were looking to buy a house as an investment, it would never turn a profit.

And I totally agree with your view of having complete freedom that you mentioned in this post.

If you’re saying house prices are too high and should come down to the point where it would make sense for landlords (which I agree with) then you’re house should be valued at say $300,000.

So instead of 1% of the bogus $500,000 figure, you should take 1% of the $300,000.

I realize it’s all about finger in the air, but the $2000 difference compounded for 20 years at 10% will add up to something.

But in general I agree – and rent.

Ok, see this isn’t really true. While no more Earth space is being created, there are huge areas that aren’t built up. But also, in the space of one house, condos can be put up… more vertical housing space. So where 1 house stood, there might be 20 condos.

Wow, it really amazed me at first that so many people were still ardently defending the “house is the only way, you idiot” position, which is pretty much how it was always given to me over the last 10 years or so… I lived in Silicon Valley during the dot-com times, and I think the housing boom there at the time merely pushed out to the rest of the country, so even though I moved to LA in 2002, the bubble never seemed to stop growing… until it did.

I didn’t realize the emotional part was on both sides… I’m miffed at being called an idiot for several years(I’m a software engineer and make $125K a year right now), and they are miffed at being stuck in a house that’s under water and that they might lose, and are desperately trying to defend that position. Well, good luck, and maybe that attitude will keep me from having to bail out too many other home “owners”.

The real answer is, of course, that buying versus renting DEPENDS ON YOUR OWN CIRCUMSTANCES, including where you live, etc. But I agree with the blogger that people have bought into this bill of goods to such a degree, that that’s all ignored by so many, nope, you’re a fool if you are a renter. (Add in the fact that I’m a single person.)

Whenever your hear *nearly everyone* say that “it only goes up! you better buy now!”, run very fast. Or better yet sell them what they want to buy if you have any.

Stocks can become worth zero, but there are ways of mitigating this. I use target funds for retirement planning, which also contain bonds and such for diversification. Plus, the wider the net, the better, for most investors.

A house can effectively become worth zero too. 15 to 30 years is a very long time in the world, and even Beverly Hills can become an abandoned slum in this amount of time. Doesn’t seem likely, but less than 20 years ago the Soviet Union was an ongoing concern, and that’s one heck of a change. True, it’s hard to prepare for revolutions, but it is still quite easy for a localized economy to have a sharp decline, like Detroit.

diane sutton: “One advantage of owning that has been overlooked, is stability. YOU decide how long you want to live there.”

That’s both true and untrue in some possible scenarios. If you can’t sell because of the market, you do not have a choice about how long you will live there. You are stuck until you can sell or rent it. Also, unless you actually *own* the house, which means no mortgage, you can lose it if you lose your job, again for instance if that local economy disappears especially since there will be a lot of sellers.

Phil: “I want to buy, but I cannot justify a million dollar loss so that I can paint the walls a different color.”

Exactly. While it’s true you can’t do much remodeling as a renter, what’s even more incorrect about this is that usually you can repaint if you want to. It’s often prohibited by the lease, but they generally aren’t that surprised when people paint. Worst case is, you repaint it yourself when you leave, or let the landlord have people do it. The last place I lived amazing had one section in the lease saying “you can’t paint!” and then another section saying “well, at least try to choose nice colors” and an attachment showing the costs of repainting. Worst case, full apartment repaint was I believe only $600.

Another biggie in my book is opportunity costs and time… I can see some appeal of messing around the house, installing things, improving things, etc, but unless that’s considered entertainment, I have to consider that work… Would I make more money fixing my own house, or doing my trade as a software engineer? Everyone’s situation is different, but in my case, I clearly would be vastly better off doing more software engineering.

Related to that, and the 15 to 30 year mortgage thing…. you really can’t count on being able to move at all if you buy a house. That’s a 15 or 30 year contract! Every time I’ve changed jobs, I’ve moved to a nearby apartment, and never had a commute more than 3 or 4 miles tops. What’s the opportunity time in having an hour or more commute versus a 15 minute one?

Now that I am contracting, I moved to Brentwood, in LA, and have a nice 2 bedroom in Brentwood Village for $1650 a month. Now I can walk to many restaurants, etc. A comparable condo right now is at least $500K (well, for now) and have been much higher, so in this market, buying was literally insane.

Is this “tax deduction” passed on to every person with a bond?

What would the income tax be on the average income mentioned, + – 74000 us pa? =(my zip code), and scrolling to the bottom of the page, we find that the estimated median household income in 2005 is $73,840. )

Historically, a person’s home WAS THIER FINANCIAL FREEDOM. Worst case scenario, you have no income but you have your home – a roof, safety and perhaps some land to farm perhaps = you where FREE to do as you please.

Hence, a person’s home = the American Dream.

Property taxes in states such as California are so high today that you can never “own” your home “FREE and CLEAR” – you need significant income just to pay the state government for the legal right to live in your own home. Combine this with local governments, community watch dogs, … and it is not longer possible achieve the American Dream simply by owning a home.

Hence, a person’s home is no longer equal to the American Dream.

I argue that you are simply chasing the same age-old American Dream but are smart enough to realize that it no longer lives within the life of a wageslave + homeslave.

The only way to achieve the American Dream today is to generate enough wage free income (dividends) to cover basic living expenses – a roof, safety, and perhaps some land to farm.

I’m optimistic that young people such as youself will help America find it’s way again through less government and a return to property rights.

Then working, saving, and buying a home will once again give all Americans (not just entreprenuers) … “to have the freedom to do what I want, when I want to do it, with no worries about my finances.”