Brunching with friends over the weekend, the conversation gradually turned to local real estate, as it is wont to do among the late-twenties, early-thirties urban professional crowd. The hosts were heading out to a series of open houses, looking at everything from fixer uppers to new construction. “You’re so lucky you bought a few years ago,” they told me and the other home-owning couple of the group, “Buying a home is just so unaffordable now.”
I live in a bonkers market. For those uninitiated to the current whims of coastal, big city home purchasing, here’s a taste of what’s going on out here: Single family homes in my area start at $1MM and go up from there (unless you’re okay with a teardown or fire damaged property, which you can probably buy for a cool $700k). For any property, especially at the “starter home” bracket, you’ll end up in a bidding war with at least five other dual high-income couples, usually one or both partners in tech. Homes last one weekend, two at most on the MLS unless there’s something seriously wrong with the property. Cash buyers routinely put in offers hundreds of thousands of dollars over asking price without inspection contingencies.
Because demand outstrips supply, since we bought our home in 2015, we’ve seen a consistent 5-6% YoY increase in our home’s value. From purchase until now, our home value has jumped just under $200k in three years. You would think, given that kind of increase, that I’d think home ownership is a wonderful investment, right?
I decided to crunch the numbers. What if all the money I have dumped into my home over the years had gone into the S&P 500 instead? Is my home equity more than what I’d’ve had in cold, hard, liquid cash?
In my analysis I took into account all housing expenses including: rent, mortgage, property taxes, insurance, repairs, and the federal and state income tax implications of home ownership. I did not include the impact of my solar panels— i.e. none of the cost, income, change in utility costs, or increase in value to the home– since I think of that more or less as its own self-contained thing with its own payback period. I assumed in my calculations a 3% yearly rent increases under the rental scenario. I discounted my home value by 5% to account for transaction costs upon sale; I also discounted the rental scenario profit numbers by 10% to account for LTCG.
I’m not going to share all my numbers, but here’s how Renter YAPFB and Owner YAPFB do in the relevant time frame at a high level:
In 2015, Owner YAPFB spends a tidy six figure sum for a down payment, delayed maintenance, and repairs on her brand new (to her) condo. The value of her home shoots up after she does mid-five-figure remodel: replacing the roof, new plumbing and electrical, flooring, foundation work. However, most of that equity is eaten up by the transaction costs of buying a home and the four months she spends paying both rent and a mortgage while construction was happening. Cumulative net benefit of buying a home: -$5,777.62.
In 2016, Owner YAPFB thinks her spree of wallet-emptying home maintenance is over when her eight-year-old furnace breaks down in the middle of winter. While she could go with a cheap replacement, she decides to install a heat pump so she can have central air conditioning in the summer. This eats up a lot of her equity gain from increasing home values. Cumulative net benefit of buying a home: $493.24
In 2017, things have mostly stabilized on the home owning front. Owner YAPFB actually spends a little less than Renter YAPFB on housing costs for the year. However, because the stock market is also going gangbusters, the increase in Owner YAPFB’s home value with leverage barely matches Renter YAPFB’s profits from the market. Cumulative net benefit of buying a home: $3,728.56.
So far in 2018, both Owner and Renter YAPFB have been sitting on their laurels, while the stock market has been jutting in fits and starts, the local real estate market continues apace, though who knows how far it can go? Cumulative net benefit of buying a home: $41,266.57.
Even in a very hot market, it’s only really clear that buying has been better financially about three years into ownership. Yes, I’d be ahead ~$40k if I sold now, that’s a far cry from the $200k top line number I started with.
Now, assuming I’m done front-loading my repairs for a while, home ownership should cost a little less than renting by a couple thousand dollars a year. In addition, I’m at the point where I should be able to “pocket” the increase in home values rather than siphon it off into yet more repairs. So assuming (1) home values continue to increase, (2) the leveraged increase in home values outpaces stock market growth, and (3) nothing catastrophic happens in terms of maintenance, my home may turn out to be financially a “better” decision than non-ownership.
But given the unsure nature of the financial situation, I cannot say the money is the main source of value I derive from home ownership. For me, the big things are more qualitative than quantitative: stability in knowing where I will live, lack of worry about being priced out of my home due to rent increases, being more integrated with my local community (homeowners have a very outsized voice in local politics), and being able to customize my home to my aesthetic and comfort preferences (paint on the walls! central A/C!). All these qualitative benefits come with their own costs (liquidity, various worries about climate change on an ocean-adjacent city), but for now I feel they are mostly worth it.
Have you calculated the rent versus buy financials on your home? Why do you (or don’t you) value home ownership?