Should You Rent or Buy? The New Math.

from New York Times I'm Michael babo. this is the. [Music]. daily today for many Millennials. purchasing a home has become almost. entirely Out Of Reach so much so that we. asked our colleague David leonhard. whether it's time to change once and for. all how we think about the wisdom of.

buying versus. renting it's Friday December. 1st David on yesterday's Daily we talked. to our colleague Gina smac about why. this economy has been so frustrating for. younger Americans in particular and a. big reason for that as Gina mentioned is. the cost of housing in particular the. cost of home ownership which feels. almost entirely Out Of Reach for so many.

Millennials because interest rates are. so high right now and so are home prices. and I'll be transparent with you our. team here at the daily is made up of a. lot of said Millennials who live in big. cities spend a lot of time on Zillow and. have gotten very frustrated and they. really want to know will they ever be. able to afford to buy a home so that. caught us thinking can we help listeners. think about whether buying a home really. makes sense right now and naturally. David we thought of you you've been.

writing about economics and housing for. a very long time you once helped create. a calculator for people to use to. determine if home ownership is right for. them and you just wrote an entire book. about the American dream of which home. ownership is so Central I. did so if you're somebody thinking about. buying a home right now should you just. pretty much give up on the idea give up. on the idea that has been seen as a. ticket to adulthood and a reliable path.

to creating wealth and just accept that. you're going to be a. renter yes for most people the answer is. yes you should give up on the idea you. shouldn't feel bad about it renting has. this unfair stigma in this country it. kind of does doesn't it it does but. giving up on it now doesn't mean you're. giving up on it. forever H well just very quickly can you. just give us David your shortest but. most Illuminating explanation for why.

these prices are so stubbornly high. because from everything I know about. economics when the cost of buying a. house goes up and up and up because of. interest rates then demand for those. houses should go down and therefore. people selling houses should have to. lower the price therefore prices should. start falling but that hasn't happened. you're absolutely right about that. Michael when interest rates go up prices. should come down but housing isn't a. normal market and it doesn't adjust very. quickly because people get in their. heads we're not willing to sell our.

house for less than this amount so. imagine a family that bought a house for. $600,000 and put $100,000 into a new. kitchen they're just not willing to sell. their house for less than. $700,000 right and that's basically what. has happened now sales have gone way. down the number of sales but prices. haven't adjusted that much and so for. any individual you're really in a tricky. spot because interest rates have gone. way up in the last few years and house. prices have not come down.

and you put that combination together. and the cost of buying a house for. families in almost every Market in the. country is vastly higher than it was. just a few years ago right and. especially for Millennials it's. basically like lethally high yes because. Millennials are by definition younger. than Baby Boomers or Generation X so. Millennials have not had decades to. build up savings that can go toward a. down payment and younger people tend to. make less money on average than older. people in the job market and so.

Millennials just don't have the. resources on average to buy homes that. older people can Okay so let's return to. the case that you started to make that. renting is okay maybe better than okay. it's good and that we can collectively. let go of home ownership as our gold. standard for a life well-lived I am. happy too the rap on renting is that. you're throwing money away because. you're writing a check to a landlord. each month that doesn't build any equity.

in your home and that's absolutely true. you are doing that when you rent but. it's important to think about all of the. ways that when you buy a home you are. also throwing away money in fact you're. throwing away more money when you buy a. home more quickly than when you rent so. I think there are four different ways to. keep in mind that you're throwing money. away when you buy a home the first is. the broker's fee which is also known as. the commission.

and in a typical transaction this fee is. about 6% of the house price on a. $500,000 house 6% equals. $30,000 on a $1 million house and a lot. of homes including modest homes in the. northeastern California cost a million. that 6% fee equals $660,000. now technically the seller and not the. buyer pays this fee but in reality that. difference doesn't matter the fee comes. out of the money that the buyer is.

paying and the fee inflates the home's. cost so a broker's fee often amounts to. tens of thousands of dollars that a. buyer has to spend and never gets back. right the second thing is you were. paying interest on a mortgage when you. buy a home and many people say yes but. there's a tax deduction that reduces. that interest and it's true there is but. it only reduces that interest you're. still paying the cost of interest that. you never have to pay pay if you rent.

and it's a really significant amount of. money not only that but in the first few. years of paying a mortgage the way. mortgages are structured you pay almost. entirely interest so what you really. should think about is that in your first. several years of living in a house you. are going to pay many tens of thousands. of dollars to a combination of real. estate agents and Banks almost none of. which is actually home equity for you. right and the case you're making is that. you may in fact be throwing away.

significantly more money than you would. be if you rented during those years. that's exactly right okay that's. meaningful what are the other two ways. in which you end up kind of throwing. money away even when you're buying a. house not renting things go wrong in. houses all the time sometimes it's. little repairs like maybe a toilet. breaks and you have to spend several. hundred dollars on it sometimes it's. really big repairs that just completely.

sneak up on you like your roof needs to. be repaired or else you're going to have. rain coming in the roof that can be. thousands of dollars when you rent you. don't pay that right when you own you do. pay that and over time it ends up being. a really significant amount of money. when we created this rent versus buy. calculator for the New York Times years. ago we made this a specific factor which. was the amount of money a typical. homeowner spends each year just on. repairs what is that number for a.

typical homeowner it's often 1% of the. purchase price of the house so if you. have a $500,000 home it's often $5,000 a. year when you add up everything and so. that's the third thing okay what's the. fourth the fourth is when you buy a home. you make a down payment it's often about. 20% of a house price so it's a. significant amount of money just to do. the arithmetic here a 20% down payment. on a $500,000 home is. $100,000 on a million home it's.

$200,000 it's an enormous amount of. money if you rent a home you don't stick. that money underneath your mattress you. can invest it and while all Investments. bring risk over time most Investments do. just fine they make a positive return. and so the comparison when you buy a. house should not be to zero it should be. in part to what would happen to your. down payment money if you invested it in. the stock market or in bonds or in a BAS. index fund that over time tends to grow.

and so people should think not only. about these direct costs of home. ownership but of the opportunity cost of. not being able to invest your down. payment in another way that it could. make a return right you're saying on top. of all the costs associated with buying. a house that may not Ever represent a. real return on the use of that money you. have to tie up the biggest chunk of cash.

you probably have in your life in a home. when that money could be used you know. in a Fidelity or a Vanguard or a TIA. account that pretty reliably will unless. there's giant stock market crash yield. returns and make you profits that's. right and let's put a fine point on this. over time the stock market has risen. substantially faster than house prices. that seems important it is important and. it's a point that many people miss the.

stock market is not guaranteed to go up. and I don't want to suggest it is but. over history the stock market has risen. more quickly than housing prices have so. David you are somewhat successfully. crumbling the myth that home ownership. is so great renting is so problematic. but I want to be very skeptical and here. I have some ego some skin in the game I. am a homeowner and I'm a New Yorker and. in a place like New York you tend to.

think of housing as a long-term. investment and kind of if we're being. honest I can't lose investment right you. buy a home in a place like New York or. Boston or Washington or San Francisco. and the argument has always been that. prices creep up maybe it's slowly but by. the time you're ready to sell you're. going to make some real money and the. long-term value of that investment is so. meaningful that that it tilts all the.

scales away from renting toward owning. so what would you say to that so the. first thing I would say is I'm old. enough to remember the housing bubble it. was less than 20 years ago prices fell. in essentially every Market in the. country including New York including San. Francisco including all these markets. Nationwide as an average prices peaked. in 2006 and did not return to that Peak. until 20.

2017 and so prices really can fall in. the housing market they fell quite. rapidly in that post2 2006 period and. sure then they started Rising but if you. bought in 2006 it took a really long. time to get your money back so that's. the first thing I would say prices. really can fall the second thing here is. I think inflation plays a lot of tricks. on our minds because inflation can be. really significant and so the idea that. a house price goes up over time is both.

true and less important than it sounds. the price of almost everything goes up. over time the price of lettuce at the. grocery store goes up and we tend to. miss this with housing because we buy a. house and then often don't sell it for. many years and we think oh my goodness. it went up so much in price but we get. tricked into thinking it goes up a lot. the thing I would compare it to is most. items in our lives are like children. that you live with and they're growing.

every day and so you don't really notice. it but a house is like that distant. cousin that you see at a wedding once. every seven or 10 years and they have. soared they've you think oh my goodness. she's so much taller than she used to be. and she is but so are all the other. children who are her age and we. shouldn't think that somehow um she has. some phenomenal qualities of growth that. other human beings do not. have uh I never thought of my kids in. those inflationary David given all of.

this I think we have to accept the. strength of the argument you're making. here on behalf of renting but I know. something about you that leaves me to. question everything that you're saying. you own a home true or false true you. you know me well Michael I own a home. right so is this a case of you know do. as I say not as I do that's a fair. question but I don't think it. is I would say there still are times. when buying can make sense but the the. question for each person out there is is.

this one of those times for. you we'll be right. [Music]. back so David help us understand why. even in this moment when renting clearly.

makes so much sense buying still might. feel like the right decision I think you. just used an important word there. Michael which is feel I think often. buying feels like the right decision to. people even when it's not and I'm going. to use myself as an example here I'm a. New York Times Reporter who spent years. writing about renting and buying and. specifically spent years writing. articles saying people should not feel. bad about renting and about 15 years ago. when my wife wife and I were in our.

mid-30s we looked around and we said. we're in our mid-30s we're married we. have kids we were moving from New York. to Washington DC for the New York Times. and we really wanted to own we wanted to. have that feeling of owning for the. first time but we couldn't afford the. house that we wanted to live in so we. actually allowed that deep desire to own. to guide us and we bought a perfectly. nice house but it wasn't a house that we. wanted to live in for a very long time. and that was a mistake it was not a.

ruinous decision but in terms of the. strict finances we lived in that first. house that we owned for 4 years and if. we had rented for those four years in. the same neighborhood it absolutely. would have been a better financial. decision for us because of all the fees. you just talked about and the interest. you were paying the banks basically it. was a bit of a losing proposition for. you s it'ss like that's exactly right so. I really get the idea that people feel. this deep pull toward owning I've felt.

it myself and I think the number one. question that people should ask. themselves when they're trying to decide. whether to rent or buy is how long am I. going to live in this house and then how. confident am I that I'm really going to. live there that long and if the answer. is only a few years renting almost. always makes sense for all of the. reasons that we've been talking about so. far okay so the flip side of that would. seem to be if you know you're going to. be in a place for a long time then.

buying makes more sense that's exactly. right so one of the reasons is that a. big cost of buying is that upfront. realtor fee and so if you're buying a. $500,000 home and $30,000 of it goes to. realtor's fees but you're going to go. live in that house for 20 years that's. just not that big a deal if you're going. to live in a house for only four years. the way my wife and I were back when we. first bought that's actually a lot of. money MH if we had instead taken the.

money we used on a down payment for that. first house and invested it in other. ways it would have kept growing and we. wouldn't have had to pay all those. realtor fees and the mortgage interest. and the repairs we put into that house. and we actually would have had more. money for a down payment several years. later than we did right and I think you. should be commended as a financial. reporter for admitting to making. Financial mistakes thank you everyone. makes mistakes I guess the only question. is whether you admit them and learn from. them right and admit them you know to.

millions of people okay so Dave what are. the other factors that might tip. people into buying versus renting even. right now when prices are high and. interest rates are high well one's a. little technical but stick with me here. when you buy a house you are buying it. with leverage as people say because. you're getting a mortgage and you don't. have to pay for the entire house let's. let use an example here you buy a.

$500,000 house and you put down the. $100,000 down payment and for the sake. of this let's just ignore all the fees. and costs right you have a $400,000 loan. $400,000 loan let's imagine a few years. later you go to sell that house and its. price has gone down to $400,000 you've. lost all your money because your down. payment was just $100,000 but the flip. side of that is that if the house price. goes up to just. $600,000 you've doubled your money right. because your down payment was just.

$100,000 and you pay off your mortgage. and you get $200,000 Now by now you know. this you don't actually double your. money because you spent a ton of it on. fees and on interest and on house. repairs and you could have instead. invested that money in the stock market. so in that example actually there's a. decent chance if you lived in that house. for a few years that buying was a bad. decision but the math holds no matter. what which is you're buying a house with. leverage and so it is the case that. since they're a govern government. subsidies for mortgages so it's easier.

to borrow money to buy a house than. borrow money to invest in the stock. market that leverage does tend to help. people over time who buy homes put very. simply when things go well the fact that. you're buying a house with other. people's money tends to make the good. outcome even better exactly and so far. we've just been talking about finances. Michael and life is about more than. money amen and I actually think the. biggest case for buying is not the.

financial. [Music]. case owning a home feels really good you. don't have to worry about things like. the landlord raising the. rent and it's your space when you own a. home you can renovate the kitchen and. make it the kitchen of your dreams you. can paint every wall in the house. right economists sometimes talk about. the difference between investment and. consumption and I don't think people. should feel bad about the fact that.

spending money to buy a house is a. really good form of consumption in many. cases right it's not just an investment. if it was just an investment then owning. a home would be like owning a stock and. they're different they're really. different I mean if you own a stock for. 20 years and you lost some money on it. there's really no benefit if you own a. home for 20 years and you raised your. children there and you met friends that. you're going to have for your whole life. all that stuff matters more than whether.

you made a little bit of money or lost a. little bit of money on it right stocks. don't create memories not most of them. no. exactly so here's a way I would think. about it if you found the place you want. to live for 15 or 20 years in that case. it is often the right decision to. buy and speaking of living in a home for. 15 or 20 years or even longer there's. another point we haven't talked about. which is the reality that a home for.

many families is a place where multiple. Generations end up living a parent buys. a child grows up in the house raises. their kids in the house and that house. becomes a kind of intergenerational. creator of wealth that's exactly right. I'm curious when you think that the kind. of Market that favors. homeownership might ever return When. interest rates might fall when prices. might fall so that people aren't feeling.

so locked out of buying if they want to. yeah I mean I can't predict the future. but I can offer people a benchmark to. think about this so they can figure out. when might be a good time to buy there's. this concept we've used in the times. that I really like called the rent ratio. which we've run by a lot of experts and. it's just a simple index but what it. tries to do is capture the relative cost. of buying and the relative cost of.

renting it's actually quite simple take. the price of a house that you're. interested in buying and then find a. somewhat similar house to rent and. calculate the annual price of renting. that house so for most houses the. obvious price is a monthly rent so just. multiply it by 12 Y and so you've got. the annual cost of renting and you've. got the price of buying that home. forever and you divide the home price by. the annual cost of renting was divide. the home price by the annual cost of.

renting okay exactly so let's imagine. that again a $500,000 house you're. buying and you found a similar place to. rent that would have cost $25,000 to. rent for one year you divide $500,000. the price of the home by $25,000 okay. I'm L I'm literally doing that with a. calculator okay okay so what' you get I. got 20 yes 20 is the rent ratio there. and when you get a rent ratio that high. it means that it's going to be very hard. for you to make a decent return on.

buying a house in anything less than a. decade or more I was interviewing Mark. xandy who's an economist who's been. looking at housing for many many years. and he said right now with current. interest rates he thinks the break even. point is about 18 if you can find a rent. ratio of 18 or lower it will often make. sense to buy Now spoiler alert you're. not going to find a ratio of 18 in just. about any housing market in the country.

because housing is so expensive right. now and that's part of the reason why. for so many people it really does make. sense to rent right now right but I. think the service you have really done. here David Beyond telling us whether to. rent or buy is you you have effectively. liberated I suspect a lot of us from. this. Paradigm where renting is. somehow not enough and represents any.

kind of shortcoming I mean it just feels. like we need to let go of that and maybe. we should have let go of it a long time. ago and this housing market has really. helped us. understand why it's okay to do that I. think that's exactly right Michael don't. beat yourself up if you're renting don't. think you're making a bad Financial. Choice in many cases you're making a. really Smart Financial Choice and you're. not wasting tens of thousands of dollars.

particularly in a housing market like. this and so the first thing I would say. is you should feel fine about renting. particularly right now better than fine. you should feel good about it in most. places if I could do it again I would. have rented for my entire 20s and 30s I. think it would have been a better. financial decision to do so and it. really wasn't until I was almost 40 that. my wife and I found a house that we. really wanted to live in. and could afford and thought we would be.

there for many. years and in fact we have we've lived in. that house for more than a decade it's. where I'm sitting right now talking to. you and we love it and buying that house. was the right. decision I completely understand why. most people want to. own and just because you don't buy right. now or don't buy for the next few years. years doesn't mean that you're never. going to own a home and in fact one of.

the ways to take a step toward owning a. home in the future is to avoid making a. bad financial decision in buying a house. now and instead building up the down. payment so that in the future you can in. fact be the homeowner that you want to. be well David thank you very much we.

appreciate thank you. [Music]. Michael we'll be right. [Music]. back.

here's what else you need to know today. Israel has agreed to a plan to minimize. civilian deaths when its ceasefire with. Hamas comes to an end according to US. Secretary of State Anthony blinkin who. pushed for the plan during a trip to. Israel we made clear the imperative that. before any operations go forward in. southern Gaza that there be a clear plan. in place that puts a premium on. protecting civilians and the Israeli.

government agreed with that approach. during a news conference on Thursday. blinkin did not specify Israel's plan to. protect civilians but said he had pushed. Israel for safe zones for Palestinians. to gather in Gaza and had asked Israel. to spare critical gazan infrastructure. such as hospitals there are concrete. steps that we know and we we heard can. Ensure the best of anyone's ability that.

that happens the ceasefire which. involved the release of Israelis taken. hostage by Hamas and the release of. Palestinians held in Israeli prisons has. lasted for a week but is scheduled to. expire. today today's episode was produced by. Ricky netki and Alex Stern with help. from Jessica Chung it was edited by Mark. George and Liz oalen with help from Lisa.

Chow was fact checked by Susan. Lee contains original music by Rowan. nisto Dan Powell and Marian Lozano and. was engineered by Alyssa Moxley our. theme music is by Jim brunberg and Ben. lansburg of. [Music]. wonderly. that's it for the daily I'm Michael.

aboro see you on. [Music]. Monday.