There is a lot of good sense in this article, but I have some problems with it. Perhaps the biggest: It appears to be written as if a house is only an investment; as if the buy-or-rent decision is made entirely on the basis of what will maximize your future overall wealth. I’m all in favour of maximizing wealth (all else being equal, at any rate) but a house is not only an investment; it is, as you point out, also a place where you are likely to be spending ~87k hours of your life, and you may reasonably choose to do something that makes you poorer overall if those 87k hours are substantially more pleasant for it.
Those non-financial factors aren’t all in favour of buying over renting. The article mentions one that goes the other way, though of course only in the context of what it means for your financial welfare: if you rent and don’t own, then it’s often easier to move. Here are some others:
Buy, because if you rent there are likely to be a ton of onerous restrictions on what you’re allowed to do. No pets! No children! No replacing the crappy kitchen appliances! No changing the horrible carpets!
Buy, if the properties available to buy (where you are) are more to your taste than the ones available for rent. Or: Rent, if the properties available to rent are more to your taste than the ones available to buy.
Buy, because if you rent then your landlord can kick you out on a whim. (Exactly how readily they can do that varies from place to place, but they always have some ability to do it and it’s a risk that basically doesn’t exist if you buy.)
Buy, if you get a sense of satisfaction or security from owning the place you live in. Or: Rent, if you find that being responsible for the maintenance of the place feels oppressive.
Some other quibbles.
People spend on average 50% more money on mortgages, taxes, and fees than they spend on rent. If that money were invested in the market it would be earning you a return.
Does that include morgage repayment as well as mortgage interest? Mortgage interest, taxes, and fees are straightforwardly “lost” in the same sort of way as rent is; mortgage repayment, though, is just buying a house slowly. That money is invested, in real estate rather than in equities, and it is earning you a return. (Possibly a smaller, more volatile, and/or less diversified return, for sure; I’m not disagreeing with that bit.)
let’s look at three examples of people trying to time the market. All three people invest at a rate of $200/mo. [...]
OK, let’s look. Where are the actual numbers? All I see is vague descriptions (e.g., A invests immediately before each crash, but how much do they invest on each occasion? An amount derived somehow from that $200/mo, but how? E.g., is the idea that the money sits there until a crash is about to happen and then however much is available gets invested, or what?) and final numbers with no explanation or justification or anything. For all I can tell, romeostevensit might just have made those numbers up. I bet he didn’t, but without seeing the details no one can tell anything.
Also: $200/mo 40 years ago is a very different figure from $200/mo now. Does anyone do anything at all like investing at a constant nominal rate over 40 years? It seems unlikely. If instead of “$200/month” you make it “whatever corresponds to $200/month now, according to some standard measure of inflation” then the numbers will look quite different. (For the avoidance of doubt, I expect that A,B,C would still come out in the same order.)
[EDITED to add:] Anecdotally, the people I know who have bought houses generally seem to have done OK, largely independent of when they’ve bought; the people I know who have rented seem to have had no end of problems. But (1) this is a small and doubtless unrepresentative sample, and (2) I think richer people are more likely to buy and poorer people more likely to rent (especially as I live somewhere where buying is generally assumed to be something you want to do), so I don’t think this is very strong evidence of anything.
and buying for those reasons makes more and more sense in sanely priced markets (ie a reasonable breakeven time).
> Does that include morgage repayment as well as mortgage interest? Mortgage interest, taxes, and fees are straightforwardly “lost” in the same sort of way as rent is; mortgage repayment, though, is just buying a house slowly. That money is invested, in real estate rather than in equities, and it is earning you a return. (Possibly a smaller, more volatile, and/or less diversified return, for sure; I’m not disagreeing with that bit.)
I don’t break down different costs, I look at how much money you put in over time and how much you wind up with at the end. The cash flow argument is relevant because of the opportunity cost of a compounding return in the market being stronger on average than returns to housing.
> OK, let’s look. Where are the actual numbers?
It’s based on a simple portfolio backtest (ex post) + monte carlo (ex ante). Yes the money is held. You’ll need to assume in general that I did distinguish between nominal and real dollars everywhere in the analysis that lead me to saying the things I said. I currently don’t have a definitive answer for whether future inflation variance would hurt investors or home buyers more.
> Anecdotally, the people I know who have bought houses generally seem to have done OK, largely independent of when they’ve bought; the people I know who have rented seem to have had no end of problems.
Most renters don’t actually put their money in stocks, they spend it. Which is a major consideration for normal people. House buying winds up being net positive for probably the majority of the population as forced savings. And sure, most home buyers do ‘okay’ but only if you ignore the counterfactual where they retire years earlier and are less stressed in general. People imagine buying a home will reduce stress the same way single people imagine a relationship will reduce stress...which is to say, sure, it can, but the variance is about the same.
Repayment versus interest etc.: Looking at total money in and total money out is fine so long as you do it carefully; in this case “carefully” means you can’t just say “If that money were invested in the market it would be earning you a return” as if those mortgage payments aren’t earning any return. I don’t know how a typical homeowner’s payments divide between repayment, interest, and other things, but it seems quite possible to me that more than the difference you’re talking about is repayment, in which case it could even be that the higher returns you (might hope to) get from investing the money in index funds rather than housing are more than counterbalanced by the fact that more of the money is being invested.
Of course the right way to answer this is to do the actual calculations, and you very reasonably suggest that your readers go and find a rent-versus-buy calculator and try to do them. Nothing wrong with that. But I think the way you describe the situation is no more accurate than the “if you rent you’re throwing the money away” line one hears from people arguing on the opposite side.
Stock market investors: If those numbers for hypothetical investors A,B,C come from a simulation you did then I think the article should say so, and should say something about what assumptions you made. As it stands, you’re just asking us to take them on faith. I don’t find them terribly implausible, and your simulations may be excellent, but we can’t tell that.
Anecdotal nonsense: Yup, the forced savings thing is a good point (and presumably not very applicable to anyone who’s bothering to read a lengthy article about the financial merits of renting versus buying). My suspicion is that the “poorer people rent, richer people buy” dynamic is an even bigger reason why my observations aren’t much evidence about what any given person here should do. But I don’t think the counterfactual is relevant here, because the observation I was drawing attention to wasn’t “buyers are doing OK” but “buyers are doing better than renters”.
Yes, home price appreciation is taken into account. Fraction of equity earned over time (loans being front loaded with interest payment) is taken into account.
I’m sure you took into account things like house price appreciation. But what you said about investing the difference between what renters pay and what owners pay was misleading and wrong. You can do as careful and accurate and insightful a simulation as you please, but if what you say is “people pay more in mortgage + fees + taxes than in rent, which is bad because they could have invested the difference in the market and then they’d have got some actual returns” or “rent is bad because it’s just throwing money away” then you are making a broken argument and I think you shouldn’t do that. Not even if the conclusion of the broken argument happens to be the same as the conclusion of the careful accurate insightful simulation.
The question isn’t whether back-testing is hard, it’s how well you did it and whether whatever assumptions you made seem reasonable to any given reader. Again, my complaint isn’t that your final results are bad, it’s that we have no way of telling whether your final results are good or bad because you didn’t show us any of the information we’d need to decide.
[EDITED to add:] This is all coming out more aggressive-sounding than I would like, and I hope I’m not giving the impression that I think the OP is terrible or that you’re a bad person or any such thing. It just seems as if your responses to my comments aren’t engaging with the actual points those comments are trying to make. That may be wholly or partly because of lack of clarity in what I’ve written, in which case please accept my apologies.
I get it, I get this shape of feedback on LW and expect it. I think it’s a product of differing expectations for what sort of posts belong on LW. This post isn’t particularly concerned with the full suite of tools you’d need to deploy to rigorously show that my argument is correct. And that isn’t its intention. I wrote this because people asked me to surface all the relevant considerations I was aware of for home purchase. In my model, becoming aware of the relevant considerations is often much more important than tuning the confidence bounds of the considerations one is already aware of. The frame of the post assumes the sign flip that I think those considerations warrant, which makes it not come off as a collaborative truth seeking effort either. And I am open to having missed important things. But I’m not going to backfill all the epistemic rigor. I don’t know of a good write up that argues the opposite side of this that actually takes into account the seemingly important things.
This post isn’t particularly concerned with the full suite of tools you’d need to deploy to rigorously show that my argument is correct. And that isn’t its intention. I wrote this because people asked me to surface all the relevant considerations I was aware of for home purchase.
I haven’t been following the thread here, but from a quick glance, seems like that would have been good to include an epistemic status or other preamble about your intention with the post. From my quick read, I had the impression that it was very carefully considered/rigorous.
Added some info at the top. I think some people want a degree of quantitative modeling that I’m not going to pour 10+ hours into polishing into usable form. This should ultimately really be a guesstimate model and I’d encourage someone with the relevant chops to apply to the EA funds to get a grant to create a much better rent-to-buy calculator that the entire community can then use to get better confidence bounds on individual decisions.
My own take is “it’s quite important for people to throw up ideas on LessWrong without being forced to delve into hours of rigor, but for that to really work as a norm I think it’s fairly important to have epistemic statuses spelling that out, so people know what to expect.”
(I also have not read this post or discussion, don’t have strong opinions about this particular example).
There is a lot of good sense in this article, but I have some problems with it. Perhaps the biggest: It appears to be written as if a house is only an investment; as if the buy-or-rent decision is made entirely on the basis of what will maximize your future overall wealth. I’m all in favour of maximizing wealth (all else being equal, at any rate) but a house is not only an investment; it is, as you point out, also a place where you are likely to be spending ~87k hours of your life, and you may reasonably choose to do something that makes you poorer overall if those 87k hours are substantially more pleasant for it.
Those non-financial factors aren’t all in favour of buying over renting. The article mentions one that goes the other way, though of course only in the context of what it means for your financial welfare: if you rent and don’t own, then it’s often easier to move. Here are some others:
Buy, because if you rent there are likely to be a ton of onerous restrictions on what you’re allowed to do. No pets! No children! No replacing the crappy kitchen appliances! No changing the horrible carpets!
Buy, if the properties available to buy (where you are) are more to your taste than the ones available for rent. Or: Rent, if the properties available to rent are more to your taste than the ones available to buy.
Buy, because if you rent then your landlord can kick you out on a whim. (Exactly how readily they can do that varies from place to place, but they always have some ability to do it and it’s a risk that basically doesn’t exist if you buy.)
Buy, if you get a sense of satisfaction or security from owning the place you live in. Or: Rent, if you find that being responsible for the maintenance of the place feels oppressive.
Some other quibbles.
Does that include morgage repayment as well as mortgage interest? Mortgage interest, taxes, and fees are straightforwardly “lost” in the same sort of way as rent is; mortgage repayment, though, is just buying a house slowly. That money is invested, in real estate rather than in equities, and it is earning you a return. (Possibly a smaller, more volatile, and/or less diversified return, for sure; I’m not disagreeing with that bit.)
OK, let’s look. Where are the actual numbers? All I see is vague descriptions (e.g., A invests immediately before each crash, but how much do they invest on each occasion? An amount derived somehow from that $200/mo, but how? E.g., is the idea that the money sits there until a crash is about to happen and then however much is available gets invested, or what?) and final numbers with no explanation or justification or anything. For all I can tell, romeostevensit might just have made those numbers up. I bet he didn’t, but without seeing the details no one can tell anything.
Also: $200/mo 40 years ago is a very different figure from $200/mo now. Does anyone do anything at all like investing at a constant nominal rate over 40 years? It seems unlikely. If instead of “$200/month” you make it “whatever corresponds to $200/month now, according to some standard measure of inflation” then the numbers will look quite different. (For the avoidance of doubt, I expect that A,B,C would still come out in the same order.)
[EDITED to add:] Anecdotally, the people I know who have bought houses generally seem to have done OK, largely independent of when they’ve bought; the people I know who have rented seem to have had no end of problems. But (1) this is a small and doubtless unrepresentative sample, and (2) I think richer people are more likely to buy and poorer people more likely to rent (especially as I live somewhere where buying is generally assumed to be something you want to do), so I don’t think this is very strong evidence of anything.
and buying for those reasons makes more and more sense in sanely priced markets (ie a reasonable breakeven time).
> Does that include morgage repayment as well as mortgage interest? Mortgage interest, taxes, and fees are straightforwardly “lost” in the same sort of way as rent is; mortgage repayment, though, is just buying a house slowly. That money is invested, in real estate rather than in equities, and it is earning you a return. (Possibly a smaller, more volatile, and/or less diversified return, for sure; I’m not disagreeing with that bit.)
I don’t break down different costs, I look at how much money you put in over time and how much you wind up with at the end. The cash flow argument is relevant because of the opportunity cost of a compounding return in the market being stronger on average than returns to housing.
> OK, let’s look. Where are the actual numbers?
It’s based on a simple portfolio backtest (ex post) + monte carlo (ex ante). Yes the money is held. You’ll need to assume in general that I did distinguish between nominal and real dollars everywhere in the analysis that lead me to saying the things I said. I currently don’t have a definitive answer for whether future inflation variance would hurt investors or home buyers more.
> Anecdotally, the people I know who have bought houses generally seem to have done OK, largely independent of when they’ve bought; the people I know who have rented seem to have had no end of problems.
Most renters don’t actually put their money in stocks, they spend it. Which is a major consideration for normal people. House buying winds up being net positive for probably the majority of the population as forced savings. And sure, most home buyers do ‘okay’ but only if you ignore the counterfactual where they retire years earlier and are less stressed in general. People imagine buying a home will reduce stress the same way single people imagine a relationship will reduce stress...which is to say, sure, it can, but the variance is about the same.
Repayment versus interest etc.: Looking at total money in and total money out is fine so long as you do it carefully; in this case “carefully” means you can’t just say “If that money were invested in the market it would be earning you a return” as if those mortgage payments aren’t earning any return. I don’t know how a typical homeowner’s payments divide between repayment, interest, and other things, but it seems quite possible to me that more than the difference you’re talking about is repayment, in which case it could even be that the higher returns you (might hope to) get from investing the money in index funds rather than housing are more than counterbalanced by the fact that more of the money is being invested.
Of course the right way to answer this is to do the actual calculations, and you very reasonably suggest that your readers go and find a rent-versus-buy calculator and try to do them. Nothing wrong with that. But I think the way you describe the situation is no more accurate than the “if you rent you’re throwing the money away” line one hears from people arguing on the opposite side.
Stock market investors: If those numbers for hypothetical investors A,B,C come from a simulation you did then I think the article should say so, and should say something about what assumptions you made. As it stands, you’re just asking us to take them on faith. I don’t find them terribly implausible, and your simulations may be excellent, but we can’t tell that.
Anecdotal nonsense: Yup, the forced savings thing is a good point (and presumably not very applicable to anyone who’s bothering to read a lengthy article about the financial merits of renting versus buying). My suspicion is that the “poorer people rent, richer people buy” dynamic is an even bigger reason why my observations aren’t much evidence about what any given person here should do. But I don’t think the counterfactual is relevant here, because the observation I was drawing attention to wasn’t “buyers are doing OK” but “buyers are doing better than renters”.
Yes, home price appreciation is taken into account. Fraction of equity earned over time (loans being front loaded with interest payment) is taken into account.
Back testing portfolios isn’t very hard nowadays: https://www.portfoliovisualizer.com/
I’m sure you took into account things like house price appreciation. But what you said about investing the difference between what renters pay and what owners pay was misleading and wrong. You can do as careful and accurate and insightful a simulation as you please, but if what you say is “people pay more in mortgage + fees + taxes than in rent, which is bad because they could have invested the difference in the market and then they’d have got some actual returns” or “rent is bad because it’s just throwing money away” then you are making a broken argument and I think you shouldn’t do that. Not even if the conclusion of the broken argument happens to be the same as the conclusion of the careful accurate insightful simulation.
The question isn’t whether back-testing is hard, it’s how well you did it and whether whatever assumptions you made seem reasonable to any given reader. Again, my complaint isn’t that your final results are bad, it’s that we have no way of telling whether your final results are good or bad because you didn’t show us any of the information we’d need to decide.
[EDITED to add:] This is all coming out more aggressive-sounding than I would like, and I hope I’m not giving the impression that I think the OP is terrible or that you’re a bad person or any such thing. It just seems as if your responses to my comments aren’t engaging with the actual points those comments are trying to make. That may be wholly or partly because of lack of clarity in what I’ve written, in which case please accept my apologies.
I get it, I get this shape of feedback on LW and expect it. I think it’s a product of differing expectations for what sort of posts belong on LW. This post isn’t particularly concerned with the full suite of tools you’d need to deploy to rigorously show that my argument is correct. And that isn’t its intention. I wrote this because people asked me to surface all the relevant considerations I was aware of for home purchase. In my model, becoming aware of the relevant considerations is often much more important than tuning the confidence bounds of the considerations one is already aware of. The frame of the post assumes the sign flip that I think those considerations warrant, which makes it not come off as a collaborative truth seeking effort either. And I am open to having missed important things. But I’m not going to backfill all the epistemic rigor. I don’t know of a good write up that argues the opposite side of this that actually takes into account the seemingly important things.
I haven’t been following the thread here, but from a quick glance, seems like that would have been good to include an epistemic status or other preamble about your intention with the post. From my quick read, I had the impression that it was very carefully considered/rigorous.
Added some info at the top. I think some people want a degree of quantitative modeling that I’m not going to pour 10+ hours into polishing into usable form. This should ultimately really be a guesstimate model and I’d encourage someone with the relevant chops to apply to the EA funds to get a grant to create a much better rent-to-buy calculator that the entire community can then use to get better confidence bounds on individual decisions.
My own take is “it’s quite important for people to throw up ideas on LessWrong without being forced to delve into hours of rigor, but for that to really work as a norm I think it’s fairly important to have epistemic statuses spelling that out, so people know what to expect.”
(I also have not read this post or discussion, don’t have strong opinions about this particular example).
Yes, with the edit “Quite important” → “necessary”