Price Stability: The Mirage of Capitalism

Living in a capitalist system, you inherently accept and live on a razor’s edge.  Assets needs to rise in value over time, but not too quickly, or a lot of people will be left without assets.  With this in mind, the average person has to play a dangerous gambling game where they risk their future worth by purchasing and holding assets with perceived future value.

As an example, we consider a private home to be an asset that can be sold for profit in the future.  The other alternative is to rent a residence.  Rentals have the associated concept of burning money since all rent is considered to be “thrown away”.  However, let us consider the home as an asset further before rendering a verdict on its actual future value.

First, let us consider the expenses that go into renting a property.  The occupant will generally pay the rental fee on a per monthly basis and with usually also have to pay the utilities for the rental property.  Amenities that are provided as part of the property are generally maintained by the owner of the property as long as normal standards of behavior are met.  For example, if a rental home comes with AC, as long as the occupant will keep the temperature within reasonable limits (say 70 to 75 in both winter and summer), the owner assumes the cost of maintaining the operation of the AC system.  In some cases, there may be a fixed maintenance fee that is charged to the occupant for sending out a repair person.

Next, let us consider the expenses that go into owning a property.  Most important, there is the cost of the property itself.  Either via a mortgage or a cash payment, the owner must purchase the property from the previous owner (or compensate some entity for building the home if that is the case).  In the case of the mortgage, it is not uncommon for the owner to pay 150% to 200% of the cost of the home over the length of the mortgage (take a 4-5% mortgage rate over 30 years and the math becomes pretty simple).

There is also the cost of utilities, same as in the rental property.  However, the owner is also responsible for the amenities; either via a homeowner’s warranty or by paying for maintenance and repairs out of pocket.   On top of this, there are property taxes and in some cases home owners’ association fees.  These additional expenses are generally offset by the fact that a comparable rental property would have a much higher rent monthly payment than the mortgage payment.

Let us conduct a thought experiment where two friends, John and Mary want to live next to each other in one of those cookie cutter sub-burbs.  They both live in identical homes and have extremely similar lifestyles.

John decides to rent his home, while Mary decided to buy her home.  Their homes are both valued at the same value and their rent and mortgage rates are set accordingly.  Let’s say John has a $2000 rent payment and Mary has a $1200 mortgage payment (she has a good mortgage percentage and rolled her taxes into her monthly payment).  On top of this, both have identical utility payments and bought their homeowners insurance from the same company with the same terms.  Their only real difference is that John rents while Mary bought.

How do their financial fortunes pan out over time.  If John and Mary live in paradise and no natural disasters happen and nothing ever breaks, then after the term of the mortgage is over, Mary will start coming out ahead as her mortgage payment goes away and her costs are reduced drastically.  However, we live on planet Earth, and on this particular planet, shit happens.  Not stuff, stuff happens to fantasy people, shit happens here.  Hailstorm might come in and take out every window on John and Mary’s block.  The soil might shift and damage their foundations.  It might snow hard and their roofs might collapse or at least crack.  And this is when renting becomes wiser.

In the case of normal wear and tear, John can call up his landlord and report the issue.  The landlord is then obligated to send out repair people and whatever insurance the landlord might have is the landlord’s business.  To John’s point of view the maintenance is either free or paid at a flat rate.  For Mary, calls to insurance offices and dealing with insurance adjusters is going to happen each time a major item breaks in the home.  This may not seem that bad, but the difference between calling when a window is broken by hail and having to deal with insurance companies, and the cost of deductibles as well as the possibility of a higher insurance premium are likely to offset the savings of a mortgage vs rent.

Over the lifetime of the home, renting will absolutely “throw money away” as no assets are built up by paying the rental rate.  However, the added cost and hassle of home ownership will likely throw away just as much if not more money.

This is not a condemnation of home ownership, just a series of observations on the topic from a prospective home buyer.  Yes, even knowing all of this, I am still looking to purchase a home.