Friday, February 8, 2013

The idea of home ownership as investment

I never understood this. Even when house prices were going gang-busters. But that may just be because of my personality. Ownership, in some cases and maybe most, leads to misery. I am sure this is one of the teachings of either the Gita or the Mahabaratha or the Bhagavatham (maybe none of these but some philosophical Hindu text). I do not own a car or a house. Fortunately for me, I live in NYC (does not seem so fortunate when I tally up my necessary expenditures). I cannot dream of owning a house here because I cannot afford it. It would be a nightmare to own a car here.

So, how did whoever-did-it succeed in selling this wonderful myth that home ownership is good for you? Having to deal with maintenance issues itself is dreary enough to put off any fleeting thoughts of buying one. I am sure it will a prudent choice depending on the location and prospects of having a stable job at that location for a sufficiently long time. In NYC, it seems like a no-brainer. Just rent. In Columbus, OH, it may be better to purchase (I do not have numbers to support anything here - just gut feeling) but will it ever be an investment?)

NT times has a nice interactive feature that takes a few inputs and calculates whether it will be better to rent or purchase. The required inputs are: (1) Monthly rent, (2) Home price, (3) Down payment, (4) Mortgage rate, and (5) Property tax rate. A lot depends on what you enter for these inputs. Property tax rates usually vary between 1 % and 2.5 % (surprisingly Texas is at the higher end - effect of no state income tax?) I think one should add the average cost of maintenance of the house to this number. Check this website - - not sure how reliable it but it gives a suggestion that maintenance costs are 1 % of home value on an average. That is effectively increasing the property tax rate by 1 %. In NY and NY, the property tax rate is around 1.8 %. So, effective property tax rate would be 2.8 %. 30 year fixed rate mortgage is approximately 3.6 %. Cost of house and rent are ($800000, $2000) in NY, (300000, 1000) in Texas, and so on. Also, it is assumed that house value increases at 2% and rent at 3%.

*I made a mistake regarding the effective property tax rate. Actually, there are other numbers that can be entered through the "Advanced Settings", which includes stuff like maintenance costs. That actually adds the 1 % I added to the property tax rate.

Clearly renting turns out to be better in NYC. Surprising thing is that it turns out that the numbers I used as representative of Texas also implies that renting is better. That makes me feel good about my bias towards renting - rather not having to own. But it is kind of surprising. I have not looked into the details of the NYT interactive tool. I am not sure how it takes tax benefits of mortgage interest rates into account. In any case, before you make any big decision like buying a house, play around with tools like these.

Obviously, some owners will have other reasons than just owning the home as an investment. But those of you thinking of home as an investment, listen to Robert Shiller (he of the Case-Shiller home price index) talk on this topic.

No comments:

Post a Comment