Buy vs rent for Bay Area in 2019

Google / Eng ogc
Oct 19 21 Comments

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

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TOP 21 Comments
  • Fast Enterprises / Eng nskcjx4
    The stock market appreciating 10% a year is absolutely unsustainable and unreliable
    Oct 19 2
    • Google / Eng ogc
      OP
      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.
      Oct 19
    • Palo Alto Networks !šŸ’„
      10% is accurate. Buying power isn't 10% due to inflation, it's more like 6%.
      Oct 19
  • Twitch / Biz Dev #smalldick
    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.
    Oct 19 6
    • Twitch / Biz Dev #smalldick
      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 :/
      Oct 19
    • Google swinglyf
      Well, obviously you can play leverage on the market with options without needing to borrow money.
      Oct 19
    • Twitch / Biz Dev #smalldick
      Not sure if troll... But options in many ways act as synthetic leverage tools. You can basically build a leverage profile with options. But they cost you just the same, if not more

      Options are expensive. In addition to money you lose from the larger bid ask spread and commissions on trading platforms, with each passing day, there is decay costs. Hence why it's not optimal to hold double or triple leveraged etfs, cause while they are leveraged to the market, they do also lose value everyday, and if you do want to roll over, you sustain extra trading costs. So you basically pay your cost of "debt" in different ways
      Oct 19
    • New / Product
      agencylife

      New Product

      BIO
      Run a boutique valley development shop remotely from a small town. TC all cash 400
      agencylifemore
      This is mad convincing, bout to call up my rental landlord and tell him Iā€™m taking the house
      Oct 19
    • Twitch / Biz Dev #smalldick
      Um... You should prob only do that if it's going to be your primary residence for the next say like 10 years (cause taxable benefits), and you're in a market that's not super saturated and over valued.

      One thing op forgot to mention about stocks is that it's liquid. Unlike a house which you can't really dump if the market is down turning. On average, if you hold a house for like 10 years, you almost always at least break even. So if that's your time horizon, plus you have kids and stuff and want to give them a backyard to play and stuff, buying is not a bad option.

      But if you're short time horizon, I do think it's better to wait
      Oct 20
  • Apple dingbats
    Thanks for making me feel marginally better about renting in the bay. Have a cookie šŸŖ
    Oct 19 0
  • Amazon IPA!
    If you can rent a 1.4M house for just 4500/month - by all means do it....is rent really that cheap out there?
    Oct 20 1
    • Google / Eng itzme
      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.
      Oct 20
  • Facebook public2
    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.
    Oct 19 0
  • Microsoft CeAE87
    If you have more downpayment than 20% does it skew it even more toward stocks?
    Oct 19 5
    • Google / Eng ogc
      OP
      Yes
      Oct 19
    • Microsoft CeAE87
      So the article says in 30 years you will make 100k more with stock vs having a house?

      Ummm that 100k is like.. nothing
      Oct 19
    • Google / Eng ogc
      OP
      The point is that n-3% is the appreciation rate that will break even... That's why 100k out of 10M seems like nothing. It's by design
      Oct 19
    • Microsoft CeAE87
      Ahhh because 7% per year in appreciation for houses is pretty much unheard of. Got it. šŸ‘šŸ¼
      Oct 19
    • Google / Eng ogc
      OP
      For the commonly used 30y mortgage, the word I used was "improbable". Maybe you should read the article :)
      Oct 19
  • Twitch / Biz Dev #smalldick
    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
    Oct 20 0

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