[baobabKoodaa]

Let me put it to you another way: if homebuyers didn't have access to cheap leverage, then a stock market index fund would appear much more appealing than house as an investment. But when homebuyers have access to cheap leverage (and stock investors don't), the balance tips more in favor of home buying. And when I say "more in favor", I mean when compared to no leverage.

Perhaps you're making an argument that even with leverage, most people would be better off investing in the stock market rather than real estate. And perhaps that is true. But leverage does tip the balance in favor of real estate.

[spacemark]

I'm saying even with leverage you would make far more money investing in index funds. The math is very clear. In the best real estate decades (which may be behind us), index funds may not win. But on average, over multiple decades it's not even close.

[baobabKoodaa]

> The math is very clear.

Can you show the calculations you made? I would expect the result to depend a lot on the assumptions you put in, particularly regarding leverage ratio, interest rates, stock market returns, and real estate returns.

[spacemark]

Sure.

It does depend on a lot, but the majority of scenarios you’ll put into rent vs buy calculators, for various places across the country, come out in favor of renting. In expensive areas, dramatically so. When interest rates are high, even moreso.

Let's take a quick look at my current situation as an example. Right now my family spends $2650/mth renting a nice home in the Denver metro area, with an excess of $2-3k/mth that goes into market investments at ~11% annual historical average. An equivalent house would cost us $600,000. Let's ignore the currently bleak housing market (where house prices have fallen ~10% in real dollars over the last 2.5 yrs), and assume your RE returns is a historical +4% annually (past 50 years).

Equation for compound interest at a fixed rate with initial sum: P = P_o * e^ (rt) After 30 years we would have the following equity in our home: P = 600000*e^(.04*30) = 1.99 million

This is with a total monthly mortgage payment of ~$4200 (including taxes and PMI), to have 1.99m at retirement.

Now let’s compare to renting and continuing to invest the money we would have spent on the house into market index funds. Equation for previous month’s interest added to $2k/mth (use excel): P_monthly =[previous month balance]*e^(r*t)+[monthly savings] After 30 years we would have the following equity in our investment account: P_monthly =[previous month balance]*e^(0.11/12*1)+2000 (use excel) = 5.73 million

So I'm paying almost the same (2650 rent + 2k/month), but have more than 3 MILLION DOLLARS MORE at retirement.

This is to say nothing of all the other costs of a mortgage besides loan interest (essentially the cost to get you to the point of buying a home). Throw out $12k in closing costs. Throw out the 10 yrs of opportunity costs putting our savings in a secure HYSA (4.5%) rather than index funds (11%) to afford a $100k down payment. Throw out maintenance ($5-8k annually) and all the time spent maintaining the home (thousands of hours).

You would be more than 3 MILLION DOLLARS wealthier if you continued to rent. The leverage helps you, but that 7% differential in average returns makes it inconsequential. The power of compound interest - it's literally the only way average people have any dream of becoming wealthy.

Homes are terrible investments, relatively speaking. It’s not even close.

[baobabKoodaa]

You have an error in this calculation where you make the assumption that real estate prices keep rising over 30 years but rent prices remain stagnant. Both of these things can't obviously be true at the same time. A more realistic calculation would have both real estate and rent prices increasing over the 30 years.

Your calculation also obscures what is the interest rate on the loan, which is the most significant component affecting the result. Sure, if you assume a high interest rate (currently baked into the $4200 number I presume), then your result will be that home ownership will look very bad. Whereas if you assume a lower interest rate, you will get a result in the other direction.

I'm not claiming that homes are great investments. And I know that renting is currently cheaper than buying a home (with current interest rates). But I am saying that your calculation isn't making a fair comparison.

[spacemark]

Valid-ish points. My calculation is my situation right now, and I don't claim it is going to be true for everyone across all time and eternity. But over the course of someone's working life, renting will net you far more money than buying in the vast majority of cases.

It's a basic power law situation. The only real question is WHEN the 11% return will overtake the 4% return. The interest on the 4%-returning loan is a factor, but it's secondary.

[baobabKoodaa]

> The only real question is WHEN the 11% return will overtake the 4% return. The interest on the 4%-returning loan is a factor, but it's secondary.

If we ignore the interest rate on the loan and simply assume stock market always makes 11% and real estate market always makes 4%, then the situation becomes really simple and is in favor of real estate investing.

Suppose a person has $20k to invest and they are considering putting it as down payment on a house, or investing in the stock market. (Let's ignore future cash flows and how those are invested, just consider the initial investment of $20k.)

Stock market option: $20k with no leverage -> 11% ROI on a $20k investment

Real estate option: $20k of your own money + $80k of the bank's money -> 4% ROI on $100k investment (counting both your money and the loan) -> 20% ROI on $20k investment (counting only your own money)

20% is better than 11%, so if you could get a zero interest loan, then the real estate investment would be much better.

Now, if we assume the interest rate is not 0%, but is instead 4% (same as our expected return), then of course the situation looks bleak.

So the interest on the loan is not a "secondary" factor. It's the most important factor.

I think the main point grandparent in this thread was trying to say that it's very easy to get cheap leverage on a mortgage, and basically impossible to get cheap leverage on stock market investments, and when you put the math on the back of the napkin like this, it becomes clear that the access to leverage can make real estate investing more appealing than stock market investing.

[elevatedastalt]

So you are saying that in general real estate with leverage is worse than index funds without leverage?

[spacemark]

Yes, in general, for the average person.

However, the flaw in this is that most people don't have the discipline to put excess cash they would have spent on a home into index funds and forego touching that money until retirement.

So a mortgage is a very compelling enforcement mechanism to get average people to save for retirement.

If we're being honest that's a much more powerful reason to buy a home than "leverage."