2) In the US since 1950 the average annual inflation adjusted rate of return has been 1-2% (you can get house price indexes and CPI from the BLS if you want to do the math yourself). The number varries depending on when you stop the series: 2000, 2006, 2008

3) Inflation has run 3 to 4% over the same period.

4) Average mortgage interest over a similar period is about 7%

You can add 1 thru 4 together to see, as you pointed out, that in many cases the net effect is – break even or a little positive.

However, there are a few highly positive financial externalities from owning –
a) Lower insurance rates.
b) You can make infrastructure investments in an owned property that are impossible in a rental – i.e. heating and cooling system upgrades, energy/water efficient appliances.
c) Your cost of housing does not go up as the CPI goes up – so the longer you stay put the better deal you get.

These are real, tangible financial benefits of owning.

There are some slightly less tangible, but financial benefits as well:
i) modified risk profile – you now have an asset directly tied to the CPI.
ii) modified risk profile – your cost of housing is now 80% fixed
iii) modified risk profile – real estate is only loosely correlated to other assets
iv) forced savings – we like to assume we are rational when we make our financial plans, but for the stark majority of people, a forced savings plan is better

People like to assume that buying a house is a simple investment – and shudder at the complexity of CDOs, Options, Futures, Swaps, Etc. But, the stark fact is that the economics that underly valuation of derivatives is MUCH simpler than the economics that underly house values.

House values are insanely complicated derivatives. To get fundamental house prices you have to look at the intersection of wages, interest rates, tax policy, population density, mortgage structures/leveragability – and then you have to forecast all of those things forward and figure out the correct way to discount them.

You’re forgetting another important aspect of this calculation. Most people remember to factor interest in (counts against you) but few remember to factor inflation in (helps you).

I wrote about this extensively recently following a post on Get Rich Slowly :http://www.getrichslowly.org/blog/2009/09/30/pros-and-cons-30-year-mortgage-vs-15-year-mortgage/

Here is an excerpt from the comment I left there:

But, we always forget to take inflation and Net Present Value of money into account when making these calculations. (Same applies to prepaying your mortgage)

Remember, a dollar today is worth more than a dollar tomorrow. Assuming inflation is 2% and you have a 5% rate on your mortgage, you’re carrying cost of the debt is really only 3% as you are using tomorrows dollars to pay off your obligation so it is cheaper for you.

Quick example:
$1800 / month payment
2% Inflation

Value in today’s $ of payment 1: $1800
Value in today’s $ of payment in year 30: $993

By spreading the payments out into the future you are actually saving yourself some money.

So, I’m not really sure what your first comment was about after all because it seems that we agree for the most part. Math is important, renting is good when you can’t afford to buy, don’t need to buy, short-term, and ownership is probably better if you’re going to be somewhere in the long-term. But it’s important not to think of it as something you plan to profit from, just as a place to live and way to save money to apply to future living arrangements.

I wasn’t comparing it to renting but to investments (which is one way a lot of people talk about it)–in which barely breaking even or having ANY profit isn’t really the goal.

I’m glad that’s all you have to say because I’m really confused about what you were trying to disagree with in my post.

You may be able to rent for less that the payment + taxes + upkeep that I describe in some areas. Local economics, housing availability and other factors create some strange disparities, but my point was that situation is really not typical. There are some cases where the landlord does take an economic hit to keep an especially good renter. I have had one renter for more than 20 years. He has paid for the house TWICE in that timeframe, plus all the taxes and upkeep. Obviously, I want to keep him.

Certainly everyone should do the math and take advantage of unique situations in their area. I just felt like you were describing an atypical situation. For me, debt for a home is the ONLY acceptable (routine) debt. I don’t think that anyone should look at their house just as an investment, nor should they buy a lot more house than they need.

All I have to say!

If we continue renting small apartments instead of buying a house, odds are good (depending on the area and the prices) that we’ll end up with a lot of extra money instead of equity.

I didn’t write this to say that renting is always better, as you seem to be assuming. I’m just asking people to consider everything they’re spending, especially on purchases where interest can nearly double the price of something.

All or nothing assumptions like yours are exactly what I’m trying to steer people away from. We’re conditioned to make those assumptions instead of doing the math on our particular situations.

Renting does make sense to me if you are living in an area for a short period of time, don’t have an adequate down payment or have credit issues, but to me, that’s about it..

Property taxes add up to a lot of money you’ll never see again. And homeowners insurance. And repairs and general upkeep.
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