In our blog from December 6, we went through the claims made by Michael Barbaro in the December 1, 2023 episode of The New York Times podcast, The Daily. Barbaro had concluded it was “not the right time to buy real estate.” He also interviewed David Leonhardt:
When house prices are high, as they are in most parts of the U.S., buying often wastes more money because of broker’s fees, mortgage interest, house repairs and other costs of owning.
We are revisiting our post because The New York Times has doubled down on theirs.
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 our previous post, we chose to focus on why “now” is always the right time to buy real estate. In this post, we will look more closely at the four ways in which Mr. Leonhardt claims homebuyers are “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 key thing to notice in the above sentence is “more quickly.” Three of the four points he goes on to make fall apart when you take out “more quickly.” That is because renting loses its advantages over the long term, except for one.
The first is the broker’s fee, which is also known as the commission. And in a typical transaction, this fee is about 6 percent of the house price…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.
This argument would only make sense if For Sale By Owner did not exist as a concept. Sellers choose to sell unrepresented to save money for themselves, not the potential buyer.
A FSBO seller and a represented seller are going to price their home at the highest price they think they can find someone to pay. With a FSBO, the portion of that price that would have gone to the broker just goes to the seller instead. People don’t choose FSBO to save the buyer money, they do it to increase their proceeds.
The second thing is you are 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 if you rent.
Renters pay interest! Your rent pays your landlord’s mortgage! Do you think he is subtracting interest from that and only charging you for the principal? Further, when you pay off your house, the interest is gone. When your landlord pays off his house, your rent does not go away
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.
This is only true if property values remain flat, which they never do. Jenny’s house tripled in value in 12 years. She still owes half of what she paid, but she could pull out twice the original price. That option would not exist after 13 years of 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.
Good one. This is the only real advantage renting has. However—and, once again-- there is no reason for a tenant to think repair costs are not built into the rent. When a landlord is deciding how much to charge per month, the full cost of ownership is considered-- including principal, interest, insurance, taxes, upkeep, and HOA. This amount is then subtracted from the market rate for homes in the neighborhood. What remains is the landlord’s profit. Should a landlord manage to avoid costly repairs for a year, this increases his profit. It does not decrease the tenant’s repair costs, as they are built into the rent, and the rent does not change. A homeowner who avoids repairs does see a difference in their housing expenses.
The fourth is when you buy a home, you make a down payment. It’s often about 20 percent of the house price, so it’s a significant amount of money. Just to do the arithmetic here, a 20 percent down payment on a $500,000 home is $100,000.
Or 15,000. Or $9,000. A 20% down payment is not industry standard. First-time buyers can get an FHA loan with a 3% down payment. Closing costs? Go new construction and get a 10k contribution.
This is one point where we would really take issue with the concept of money being “thrown away.” That argument is more plausible in terms of interest, but the down payment? That money is still money. Real Estate is an asset, the same as your checking account. Further, the thesis of the article was why now is not a good time to buy. Down payments are not a feature of “now,” homebuyers have always put money down.
In conclusion, we once again must ask why the NYT is so invested in discouraging young homeowners. Our assessment from last year still seems the most likely:
Prices are up and inventory is down, and the result has been that large swathes of the population feel “locked out” of homeownership. This is causing young people to perceive the economy as “bad.” This perception is dangerous to many entrenched interests, so there is motivation for pundits to try to “spin” these conditions in such a way that paints renting as a choice.
