( I set up Fb to automatically create a “note” for all of my blog posts. Unfortunately, this makes two different places to leave a comment and no easy way to federate. Anyone have a solution for this? )

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

Let’s look at the two scenarios.
1. Person buys a $250,000 home with a modest down payment. Assuming a 30-year fixed loan at 6%, the total cost of that mortgage will be ~$560,000. This includes an approximation for property tax, which is another major expense that renters don’t have to pay (at least not directly).

So after 30 years, the home buyer has spent $560,000. So, now we have to ask “was it worth it?”. To answer, we need to guess the home’s value. If we look at the last 30 year period (1970 to 2000 for example) we see that median home prices increased by 504% in that 30 year window. The median price went from 23,000 in 1970 to 139,000 in 2000. So if the $250,000 home we bought increased in value by 504%, it would now be worth $1,260,000. The buyer paid $560,000, but gets to sell for $1.2M. That’s a profit of $1,010,000. Not a bad deal. Even if he did have to kick in $50,000 of repairs and upkeep over time.

2. The renter would have probably paid ~$1,200 per month in rent for a similar home (at least in the midwest, where I am basing this example). For a 30 year period, assuming no increases in rent, he would have paid $432,000. So he saved on raw cost. However, he has nothing to sell. He will have to keep paying until he dies.

Now, my assumption that the home will increase in value by 504% is probably not accurate. Especially if you consider the “bubble” around 2000. I thought I would minimize its effect by cutting off at 2000 instead of 2005. I think we should try to collect more data to find a more realistic estimate for how much the home value would increase. This article says 233% is more realistic…

http://www.consumerismcommentary.com/2007/03/15/the-cost-of-buying-a-home-over-30-years/

2. Wasn’t there a time in history (maybe 20 years ago) that buying a home *was* a killer investment? If home values increase at a rate higher than the stock market AND you get government subsidies – isn’t it a financial no-brainer? I think the problem now is that home values aren’t increasing, people payed inflated prices and they are stuck with that oh-so illiquid asset.

As for the “you’re throwing your money away” argument, I think it has at least some merit. If you are paying a landlord, you are not investing that money. You are buying flexibility and insurance, and those things may be worth more to you than a monetary return … but from a dollars-and-cents standpoint, your return on investment is precisely zero.

Overall, I agree with you. Our culture scorns renters and I think that is a mistake. If you value flexibility and piece of mind more than monetary return, you should rent. Also, the real estate market is completely broken for a variety of reasons right now so it is probably a smart move to just to let the dust settle before making any moves.