87,000 Hours or: Thoughts on Home Ownership

Mind if I reeeee real quick?

First let's address the idea that renting is 'throwing money away'. This ignores the opportunity cost of investing extra income and the lump sum of the down payment into a house instead of the stock market.

I have a feeling this explanation is misleading.

Investing in the stock market and in the real estate market are two different things, different risk profiles etc. Correctly, this should read, "This ignores the opportunity cost of investing extra income and the lump sum of the down payment into a house instead of the exact same house, but renting it out to someone and collecting the rent."

This points to a better explanation: You always "pay rent". You being alive and taking up space always costs something, because space just costs something. Either you live in someone else's space, in which case the cost for you of taking up that space is the rent you're paying them; or you live in your own space, in which case the cost for you is the rent that you could collect from someone else if you didn't take up the space.

When you effectively "pay rent to yourself" in this manner, economists call it "imputed rent". Treat it like you would treat any other rent in your calculation.

When thinking about whether to invest your money into a house or something else, typically you want to decouple that decision from your living situation and see if it still makes sense. Regardless of where I live—given my net worth, does it make sense for $XXX,000 of my investment portfolio to be tied into this specific piece of real estate?

Then the standard investing advice applies:

• you can only systematically make money in a market if you know more than other people who participate in that market know (e.g. maybe you have a friend in the zoning comittee);
• don't put most (or God forbid, all) of your wealth into a very specific asset (like real estate in a specific city);
• etc.

you are making a long term bet which, if it doesn't pan out, will simultaneously leave you without that high paying job, either forcing you into a long commute or selling the house and moving to a different city.

See, you're conflating land ownership and tenancy here. You can absolutely move wherever you want while owning and renting out a house somewhere else.

These scenarios are still highly reliant on you being sure you want to stay in a particular spot for at least 10 years

Same issue here.

There is of course a reason to own a place: so that you can refurbish it to your liking—or you might even want to build a house to your liking, if,like me, you think there just aren't any existing buildings designed in a sane way. You just can't rent a place from someone else and start tearing down walls and installing gadgets—and even if you were allowed to, you don't wanna invest into improving someone else's place.

(ETA: Just to clarify, even if you're buying/building a place for the reasons mentioned in the previous paragraph, you should still be aware of the tradeoffs; the price you pay for the ability to customize your living space is that most of the value can disappear with a particularly shitty election outcome, war, immigration, the collapse of the financial system in that country—anything you can't get insurance for.)

I'm pretty surprised this entire argument goes without using any amount of quantitive modeling or data analysis.

I do think it presents a bunch of persuasive and philosophical arguments in the direction of your conclusions, but it's easy to imagine (and find, searching on the internet) persuasive and philosophical arguments in the opposite direction.

(Caveat: I'm a bit new to this forum and how things work, but surely for folks here this is better answered by building a model and incorporating uncertainty?)

A few of the specifics you give I've found are not borne out in the research I've done (e.g. price sensitivity has more to do with location/centrality than it does with luxury, though more luxurious homes tend to be built farther from city centers). This could just be from different sources, but I'm noticing want to wave several large [CITATION NEEDED] flags.

Also maybe it'd be useful to share the quantitative analysis I've done? Basically "modeling the financial, legal, and social implications of buying a house together" has been the biggest project of mine for 2019 outside of work, but I'm not an expert (most of us in my house, myself included, are first time home buyers). I'd consider myself better informed than the average person who has not owned a house for an extended period of time, but would be very interested in learning more and learning where my models are bad.

For interested folks I found Shiller's Irrational Exuberance to give a bunch of nice solid models (backed with data!) on speculative pricing bubbles in ways that seem to apply to SF bay area housing in particular.

First let's address the idea that renting is 'throwing money away'. This ignores the opportunity cost of investing extra income and the lump sum of the down payment into a house instead of the stock market. People spend on average 50% more money on mortgages, taxes, and fees than they spend on rent.

People who rent houses make money from doing it---landlords aren't in it out of the goodness of their hearts. I guess maybe you can get this kind of gap if you use nominal rather than real interest rates? But that doesn't seem financially relevant.

To first order you are going to be paying the same amount whether you buy or rent, unless the market is irrational. The most important corrections are (i) you'll be making a big investment in housing and the sales price will incorporate the value of that investment, so you need to think about whether you want that investment, (ii) there are transaction costs and frictions from both buying and renting, and the buying transaction costs will be larger unless you are living in one place for a reasonably long time.

(Maybe 10 years is the right ballpark for amortizing out transaction costs of buying---e.g. if those costs are 10% per sale, then over ten years that's 1% of the value of the house per year. At rent to buy of 30, that's about one third of rent. Some of the buying overhead will be embedded in rent, since landlords need to break even. And I'd bet the total inefficiencies of renting are in the ballpark of 10-20% of rent.)

So if you are living long enough to amortize out the buying transaction costs, now we are comparing the investment in housing to the investment in the stock market. The most important argument here is that if rent goes up your obligations go up, so you want investments that go up in that case as well. If you are staying in one place, owning a house is basically the optimal hedge against future rent obligations (since an increase in expected future rents will increased your wealth by exactly the same amount). I think there are a lot of caveats to that argument, but it's a reasonable first order approximation and it's a mistake to think about the finances of buying a house without considering it. This depends mostly on living in the same real estate market for a long time, not living in exactly the same house (though it's even better if you are living in the exact same house).

The average person spends about 10 years (87k hours) in a house before moving, which already goes against people's tacit models.

It seems to me that this is the key point, which is why you made it the title and the first sentence of the original post, but I feel like it has been lost in the discussion and maybe swamped by the rest of your post. The longer the tenure, the better buying is. 10 years seems pretty short to me, maybe not a mistake for the average buyer, but definitely a mistake for the marginal buyer. I'd expect most buyers to have an explicit model of more than 10 years, not just a tacit model. But translating it into hours seems to lengthen or obfuscate it and distract from the point.

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.

My wife and I owned a house for about a decade, then rented for a few years, and now own another house. I don't expect to rent again, and I do expect to move locations a few more times.

Whether it's a good investment is ... idiosyncratic. It's a single asset in a limited market. It's the least liquid investment I can imagine (with the possible exception of owning a business, which I've done and don't intend to repeat). I've gotten lucky, and paid attention to location and sustainability of growth, and it's worked out well.

If it had worked out super-poorly, like statewide crash, lost job, mortgage default bad, it would be worse than renting. If it had only worked out mildly bad, a loss in value but still able to make payments, I'd prefer it to renting, even at a financial loss.

Control is worth a lot to me. I can fix things to my liking. I can make upgrades that I like, rather than asking the landlord to make minimal repairs to protect their value. I will move out on my timeframe, not someone else's.

The average person spends about 10 years

Who's that average person you are talking about and where does that number come from? Are you speaking about the mean time a US citizen spends in their house before moving or are you talking about something else?

I did not read -- so probably should not comment, but will anyway. In a very quick skimming nothing jumped out at me regarding the aspect of time horizons and particularly wealth transfer to the next generation.

Did I just miss that? If not would adding the idea of inter temporal transfers (inheritance) change any of the conclusions?

[Edit to add] While not about a house, I recently sold a trailer and truck. Given the response I was clearly under market price but as I was really interested starting to "clean up" my possessions I am not crying about the possible opportunity loss there. But was I did give some thought to was: What was a rough estimate of the rental rate on the two for the time I owned them. A very quick and crude calculation in my head came to under $400 a month easily.

That is a little deceptive in that these were not really used daily or even weekly -- lots of down time. So (assuming I could even find a place to rent what I had) I might have come about better renting rather than buying. But that is only because I was not using them daily. If the house worked out the same I think I come out miles ahead buying the house in most situation. (Anecdotal to be sure and possible not a good comparison setting)

In a booming market, buying can be valuable as a hedge against rising house prices