Buy vs rent for Bay Area in 2019
Anyone ever run the numbers on buying vs renting in the Bay area? Looks like if the stock market appreciates 10% a year, the house needs to appreciate 7% to keep up. These are Bay Area numbers. https://www.myroadtofire.com/blog/buying-vs-renting-a-house-in-the-bay-area
Road to FIRE
I think you didn't factor in leverage. A house only needs to appreciate 1 percent if you're 10 to 1 leveraged to achieve the same returns as the market yielding 10 percent. You can argue that you can also take on leveraged positions in the market. But nobody would lend that money to you. As scam and fucked up as it sounds, getting a mortgage is the only way you can leverage an asset almost 10 to 1 times at an insanely low cost of debt, like what? 2.5 percent every year for the next 10 years? Where else are you going to get cheap money so easily? So yeah, over the long run. A house almost always makes more money than the stock market, simply due to the fact that you can borrow more. The only caveat is that if there is ever a market crash, and the housing market goes down 10 percent and you just bought a house. You're fucked. If you're leveraged 10 to 1, your entire equity is wiped out. At that point, you might as well walk away from your mortgage because you're paying into negative equity. That was precisely what happened in 2008. Do you think a similar sort of crisis will occur? That nobody would know. Tldr: your math is a bit flawed because in your far right column, you need to calculate equity value, not enterprise value of your house. Initially, for your 1 million dollar house, you only downpayed 100k. So when the house becomes 1.1 million, you just earned 100k with 100k, ie a 100 percent return on equity. Obviously, there's selling costs and what not. But over 10 years, those fees are neglible. In other words, if in 10 years, your house became 2 mil, then you would have made 900k profit, with only 100k in capital. That's fucking insane returns.
The calculation takes into account leverage
I suppose you're right. But then what you're implying with your Calc is that once the leverage loses its effect, ie you've waited 10 years and any return after that is on a much larger capital base and thus seeing diminishing returns, you are still holding onto the same market rate earning 7 percent on no leverage. It's no longer apples to apples. The right math should be you releveraging and taking out a second line of equity against your house to reinvest into another house at 7 percent growth on leverage, thus resuming your leveraged returns :/
If you have more downpayment than 20% does it skew it even more toward stocks?
Would you rather have 7% on x or 5.5% on 5x? (See historical return of everything). If compounding is the 7th wonder of the world, leverage is the 8th.
Thanks for making me feel marginally better about renting in the bay. Have a cookie 🍪
If you can rent a 1.4M house for just 4500/month - by all means do it....is rent really that cheap out there?
I just looked it up. Thats the ballpark for the same house. I'm renting a townhome now for $3,300/mo. Zillow says it's worth $1.1M. so it's reasonable.
I do want to also point out that buying is basically also hedging against future inflation in rent. You essentially are locking in a long term fixed price payment that won't go up, while rent will likely go up
The stock market appreciating 10% a year is absolutely unsustainable and unreliable
10% has been the average for the last 40, 60, and 100 years. But even if the market returns 8%, housing needs to return 5% to break even.
10% is accurate. Buying power isn't 10% due to inflation, it's more like 6%.