Author here. Thought I’d highlight my favorite, perhaps non-obvious feature: the slope of the charts tells you whether the variable is positively or negatively correlated with the cost of buying. And depending on the settings, that slope can change from positive to negative.
For example with the defaults, the down payment chart is flat. This means the total cost of buying is relatively unaffected by the size of your mortgage. Felix Salmon pointed out this demonstrates the Modigliani–Miller theorem:
Of course, there’s still a big intangible difference between having debt and not having debt, like your ability to respond to market or income changes. And in an inefficient market, loans can be more or less expensive.
Playing with the variables and seeing slopes change from positive to negative or vice versa is interesting, too, because these suggest different optimal decisions. Like as your investment return rate goes up, the down payment slope becomes increasingly positive — meaning when stocks are doing well (and assuming mortgage rates aren’t also going up), it’s better to have a smaller down payment and put more money into investments. To a lesser degree, your marginal tax rate changes the slope of the down payment as well, by discounting the mortgage interest payments.
The magnitude of the slope also gives a sense of your risk: you can see how sensitive the equivalent rent estimate is to small changes.
Huge props for including things like the Marginal Tax rate for tax deduction and closing costs, which most of my peers that I've spoken to are unaware of or fail to take into consideration properly. I just recently had a conversation with a friend about renting vs buying, and I raced through many of the factors in this calculator to demonstrate that it's not such a simple question and that there are many factors that depend on one's financial (and other) situation, but it totally went over her head bc I was going way too fast. I'll definitely use this page when explaining things to my friends in the future. Thanks so much :)
Not sure why you're getting downvoted for this, it's actually a quite relevant point, i.e., the the side-by-side comparison should include the consideration that you get to enjoy rent-free accommodation in the home for a certain number of years (or even generations!) once it's paid for. It gets more complicated when you have to factor in a positive probability for various outlier events such as the house getting bombed in a war, the entire city going Detroit, etc;
- owning a house may make it harder for you to decide to move and accept a job/opportunity elsewhere, or to travel -- the impact of which is unquantifiable
- for some people, by the time they'd finish paying off a house they'd already reasonably expect their parent's to have passed on and left wealth/property; for these people, particularly entrepreneurs, having free capital in the intervening period would turn out to be more rewarding so rental is a very sensible option
- not everybody is born where they want to end up; I've moved between 3 cities and 2 countries in my 12 years as an adult (each time increasing my earnings, opportunities and life experience significantly, like climbing rungs on a ladder), and I'm hoping to move a 4th time so that I can finally have access to the top-rung opportunities other people born in major cities and 1st world countries take for granted -- the idea of owning houses in each of these cities and somehow managing to rent them out as some propose here is absurd to me, I barely have enough time to take care of my basic needs, nevermind run a multi-national property empire, and besides which there a
Ultimately as nice as this calculator is, this is a very personal decision.
> owning a house may make it harder for you to decide to move and accept a job/opportunity elsewhere, or to travel -- the impact of which is unquantifiable
Why is it harder? Not sarcastic at all, by the way : it's just that I am in Hong Kong and it's actually quite common for expats here to buy a house, give it out for rent, and never come back to Hong Kong again! In fact, I know of some cases where people have bought flats without even looking at them! (In both cases, someone they know manages rent collection + maintenance, presumably for a small fees?). So I was wondering what is different about the US / wherever you are right now.
Yes, it's a very personal decision, those were the exact words I was looking for! I suppose hardcore economists would say that the Utility Function is very personal.
If you decide to move, you have to do something with the house. I'm not sure about Hong Kong, but in the US, even once you own the house free-and-clear, a house is still a major expense -- insurance, property taxes, etc.
You can sell it or rent it to cover those costs, but both of those options take time and effort. To sell it, you need to market it, negotiate with a buyer, etc. To rent it, you need to market it, pick a good tenant, collect rent, do maintenance and repairs, probably deal with legal matters like eviction, etc.
I guess you could just give it away (but doesn't that still involve a bunch of title transfer fees?) or just stop paying taxes and let it get repossessed (but doesn't that destroy your credit?).
If you rent, you can just pack up and leave -- the only limits are any terms stated in the lease.
All of that said, I'm doing exactly what you mentioned -- I bought a house instead of renting, even though I don't plan to stay here very long (I'm actually thinking of moving again in a few months, once I've been here for a year). But I did it with the explicit intention of renting the house to make a profit once I move -- and I plan to do that with my next place, as well.
I currently pay $55/month for someone to worry about collecting rent, finding someone to rent, negotiating, checking credit, etc. for my rental property. It is not very profitable in terms of cash flow, but I am building equity into the house.
Yep, finding a property manager is one great solution to the problem. Did you find a good one easily? I've heard it's really hard to find a good one that actually manages the property well and keeps it rented out consistently. I haven't really looked myself, though, so all I really know about it is from stories on BiggerPockets.
I went with the agent who sold me the house in the first place, and found me a rental before then. I don't know how much of it was luck and how much was by design but the rental is in a location where rent is higher than mortgage payments by quite a margin and I found a good company to manage it.
I don't think it's harder, my house is in Florida but I live in the Bay Area now. As long as you have someone that can collect the rent etc.. for you it's not a big deal if you did not stretch yourself too thin with the purchase.
You sound like me. That said I still try to buy property, just not where I live, so I look at as purely a long term investment that will hopefully be profitable in the distant future.
I think it's being downvoted because the calculator does take this scenario into account, but the commenter (and you) seem to have not looked at it very hard. It clearly recommends that you buy instead of rent in the commenter's (and your) scenario:
How Long Do You Plan to Stay: Max this.
Investment Rate of Return: Zero this. Because you seem to assume that the renter isn't investing the downpayment, principle payments and any other net savings and won't be able to trade the proceeds for 100% ownership in the home at the end of what would have been the mortgage period. Or set it to -10% (the max negative the calculator allows) if you assume the renter will squander rather than invest the money, with no commensurate happiness return.
The result with be buying is better than renting unless you can rent that home at an impossibly low price.
If you're disciplined enough to have actually invested what would otherwise be the down payment, and kept it invested, and reinvested the proceeds, you'd own one house's worth of money after the 30 years and could proceed to buy a house using cash.
(Subject to the assumptions of returns and interest rates, etc etc.)
Yeah it was the same for me and that made me raise an eyebrow.
At the end of 30 years I will own my home. At the end of 30 years of renting I'd be in the exact same boat I'd be in day 1 renting.
The calculator makes a major assumption that if you rent you take your down payment money and invest it. Obviously the investment will be worth a lot after 30 years of interest. But this assumption is based on the false premise that you are sitting there with your down payment ready and it's just a choice of where to put it.
In reality, people don't usually save up a down payment until they've already decided to buy. So it's a false comparison.
It's also assuming that homes like the one you would buy are available to rent, so "everything else" is equal. Which is also a false assumption.
Basically this calculator is set up to make you feel good about paying a rent that's more than a mortgage payment would be.
Choosing to rent or buy shouldn't just be a purely financial decision. The real question is are you ready for the responsibility of being a home owner? Do you look forward to the prospect of having a permanent home and investing in it? Or do you just want a place to live and have someone else be responsible for maintenance?
> In reality, people don't usually save up a down payment until they've already decided to buy. So it's a false comparison.
Even given the first sentence is true, its not a false comparison, given the assumption the reason that people don't save up the money (or just invest it gradually, same thing) is that they have something more valuable than investing to do with the money (i.e., that the decision not to do so unless they are planning to buy a house is rational). If so, the investment value is the correct lower bound on useful use of the money to compare a home purchase to, because what they'd actually do is something else that has greater expected utility (even if that utility isn't in the form of a cash payout in the future.)
You're choosing one part of my comment in isolation and arguing against it without context.
My point was that there's more to the decision than the simple "Will I make more money by investing in stocks than in real estate?" equation that pro-renting people usually point to. Of course stocks are a better return on your investment than real estate from a pure investment perspective.
There's more to choosing to buy than simply the pure financial motivation. If your motivation is purely financial then you shouldn't buy a house to live in but buy a house to rent out.
> You're choosing one part of my comment in isolation and arguing against it without context.
No, I'm not, I'm just excerpting the part that's most clear in explaining the focus of the response; we're in a medium where the whole context is preserved and directly accessible, so there is no reason to include the whole thing -- its already right here and available the reader.
> There's more to choosing to buy than simply the pure financial motivation.
That's true, and not a part of your comment that I have an issue with; its quite correct that looking only at the financials -- and even within the financials only the expected returns and not, e.g., the particular risks involved, since the disutility associated with risk is not consistent among individuals -- potentially understates the value of buying (but, that's true of renting, too). But that's irrelevant to the question of whether comparison to investing as an alternative is a false comparison based on the observation that people who aren't purchasing wouldn't often have the downpayment available immediately to invest.
Assuming an equal start without any downpayment at all, you have to be Oracle of Omaha great with your stock investment portfolio to beat the return on investment inherent with housing since the difference between mortgage and rent in most markets will only give the renter a couple hundred dollars a month to invest.
In the end, the owner will likely recoup every dollar of principle they pay in the long term, while the renter has to find an investment opportunity that will not only return all of their loss (the rent they've thrown away) but then beat the increased valuation the housing market will provide the owner.
What about stocks? Stocks are a medium to high risk investment with no guaranteed return on investment. It's actually pretty hard to make an educated guess what the return would be. But we can give it a go. According to this analysis,
the nominal compound annual return of the Dow from
year-end 1900 to year-end 2011, excluding dividends,
was 4.75%.
That's actually pretty good and annihilates current CD rates (which hover around 2% for 5 year jumbos). Let's run these numbers. According to my handy compound interest calculator, with a current principle of $0.00 (starting from scratch), adding $2,400/yr over 30 years, compounded annually at 4.75% gives me about $160,000. That's actually pretty close to my inflationary upper bound calculated earlier!
But that's also an upper bound.
However, the real compound annual growth was only
1.6%. That is, when we use constant dollars, we
discover that the purchasing power has only
increased 1.6% per year.
So we should actually run the numbers with 1.6% we end up with about $93,000. That's great, but even with the miracle of compound interest, I'm not putting a dent in that $1.6 million.
Let's get crazy, let's say I'm a fantastic stock picker and I can beat all this and I'm making about 12% per year. Running the compound interest calculator, I get $650,000. That's pretty amazing, but I still have about a million dollars to go to break even. I actually have to hit 16.5% every year, for 30 years, to break even.
This site lets us run another kind of calculation, the average rate of return for the S&P 500 over some date range. I picked the last 30 years and got 12.67% not adjusted for inflation and only 9.57% adjusted. Professional fund managers struggle to beat the S&P. So realistically, you aren't going to either over the long run.
Higher marginal tax rates increases the $ value of mortgage interest deduction for the same amount of mortgage interest payment (since a deduction reduces taxable income, but the amount of reduction in actual tax liability is the reduction in taxable income times the marginal tax rate.)
I see, but most mortgage doesn't have interest income tax deduction here in Canada?
edit: Just check interweb, only mortgage that being used to invest for more incomes are eligible for tax reduction in Canada, thus more trouble to convert a house mortgage to investment mortgage.
Your mentioning of this made me check out the graphs again - and I noticed that the graph depicting the size of a down payment was flat. That could only mean one thing: the cost of mortgage insurance (that you will be forced to get if your down payment is lower than 20%) hasn't been included. That's a major cost on low down-payment house purchases.
We’re not currently including mortgage insurance, no. You could approximate it by increasing the mortgage rate, but the tax treatment of mortgage insurance payments may be different and so that may not be accurate. Perhaps this is something we can add in the next iteration of the calculator.
The interaction between down payment rate and mortgage insurance rate also reveals a limitation of our user interface: On the one hand, it’s nice to have all the variables decoupled so that you can set and explore them independently. On the other hand, many of the variables are not independent. If you change one variable, you may need to change other variables to maintain a realistic scenario.
Having the mortgage insurance rate tightly coupled to the down payment would probably be too limiting, but maybe there’s a still a way to better identify when certain variables (or combination of variables) are unrealistic.
Maybe instead of just having reasonable defaults, you could include reasonable ranges through a background gradient on each graph (darker for more common, lighter for less common)? With that, you could manipulate the reasonable ranges through interactions between graphs, while still allowing people to set the actual number anywhere they pleased.
Definitely. We actually designed something like that, but due to time constraints weren’t able to ship it (yet). One complication is that a reasonable range for a given variable can depend on other variables. But hopefully we’ll figure it out.
I'm sure you've seen TangleJS by Bret Victor. Its performance wasn't quite good enough for the way I wanted to use it, but it looks like that level of meta-interactivity is what you're going for.
"The interaction between down payment rate and mortgage insurance rate also reveals a limitation of our user interface: On the one hand, it’s nice to have all the variables decoupled so that you can set and explore them independently. On the other hand, many of the variables are not independent. If you change one variable, you may need to change other variables to maintain a realistic scenario."
Well I'm not sure I'd call this a 'limitation' of your UI. This is actually a very common issue when designing user interfaces for models (I have been doing this for a living for almost 15 years). There is a continual tradeoff between the positives of the software ensuring internally consistent, and realistic, values - and allowing the user flexibility for edge case exploration. And then there are issues like discoverability, speed of use, technical limitations, etc. - as always.
One of my favorite mental toys in this area is: devise a way for a user to assign a fixed amount (call it a 'budget') to several categories. For a simple example, consider a budget of $100 over 5 expense categories. But it should also work for allocating a road maintenance budget across 25 districts, or for assigning a weighting to the importance of policy objectives (ecology, health, economic growth for example).
In the vast majority of cases, after several meetings about this, clients say 'fuck it, let them copy/paste their own values from Excel' (at this point I come in and broker a truce between the warring factions of several solutions and implement a meet-everybody-halfway solution :) ) It's one of those 'how hard can it be?' <2 weeks later> 'oops yeah pretty hard' things.
devise a way for a user to assign a fixed amount to several categories
A slider for each category. When one slider is moved up by 1% of the total the others automatically move down in proportion to their current value to collectively lose 1% of the total.
Yes, this is the first instinct. But moving all of the others down/up is in the majority of cases not what you want. Imagine you have 100 to spread out over 4 categories. Let's say you start with setting them all to 25. You set the first to 33, then you want to set the second to a desired values except oops, the first one is now no longer 33. Basically in this scenario you have to way to set them all to a precise value without trial and error until you're close enough to what you want.
This does work for the use case where you only want to set an initial distribution, but quite often you want to play with trading one option against another afterwards, e.g. spend more on housing and less on holidays, but not less on food or car payments. Basically when developing various scenarios you set an initial distribution (the baseline) and then make scenarios, variations on that baseline. (I imagine it's quite similar for people doing serious exercises with the tool in the OP, I've also written tools to assess investment options, that is similar too).
(The above is a simple example of a personal budget which I always use to illustrate the point, my actual use case is usually something like 'spend more on nature protection and less on road maintenance, but don't change expenditure on social security'. It's easy to see how various political persuasions have some sliders they don't want to budge on, some they want to minimize, and others to maximize).
Usually you need some form of 'reserve' account in your UI; i.e., you're 'spending' from a certain total, and as you increase/decrease some items, that amount is taken from / added back to the reserve. But then how do you guarantee people always spend everything (in some cases that is needed) without introducing modality (i.e., a dialog that says 'you need to spend everything' when you click 'next' or whatever). And sometimes you need a way to move units between accounts, without using the reserve as an intermediate store; plus you usually need a way to move exact amounts, which is hard to do with sliders.
Another approach is something where you stick with the sliders you proposed, and add functionality to 'fix' certain ones, and optionally a way to indicate how much to increase/decrease the others. E.g., proportional to their current values, or distribute the amount equally, or something else, ... The problem with this approach is that it is natural for nerds, but almost instantly becomes unwieldy for 'normal' users. And in that case, the 'fuck it, let's do it in Excel' is better.
If you're interested in this sort of things, I'd love to hear your thoughts or see mockups on other ways you think this could be done. I have talked about this numerous times but usually not with people who know something about UX or even care, beyond their project in front of them.
I never paid a penny of mortgage insurance. Let's be clear. Mortgage insurance does not protect you. It protects the bank that owns the mortgage.
You ONLY need mortgage insurance if you invest less than 20% down. Even then, you can often take a second, higher interest mortgage loan instead of paying for mortgage insurance.
A second mortgage is better for your tax return and equity and also offers better returns for the bank, which only sees a benefit from mortgage insurance if you default. Do you really want to give your bank any incentive to help you default?
The entire point of mortgage insurance is to protect the bank in the case you foreclose. It ensures the bank receives 20% of your property value so they can afford to take their time fixing and selling your house to its next owner. They don't need this risk mitigation if they have your downpayment.
> Of course, there’s still a big intangible difference between having debt and not having debt,
Both renters and owners need a place to live in the future, assuming they're not dead. If we exclude those who live with mommy and daddy or mooch off of other people...
Well, then whether the debt is formal with a mortgage or not makes little difference. Even renters are on the hook to come up with $1000 for the month of October 2016. It's just not in writing.
The main problem with owning is illiquidity and associated immobility. If you rent you can quickly down shift if you run into trouble. If you own the transaction cost is much higher if you need to move.
The main advantage of owning one's own residence is tax and stability (the flip side of the illiquidity problem). Owner's equivalent rent is not a taxable income. Capital appreciation works in your favor rather than against you when you rent.
In short owning one's own home is both economically and psychologically rewarding if you have long term stable income.
> The main problem with owning is illiquidity and associated immobility. If you rent you can quickly down shift if you run into trouble.
Where are you getting these lease-free rental units?
True, you're less on the hook with a 12 month lease, and the liability is lower than a 30 year mortgage...
But this is a very mild difference. That job's not going to wait for you to sell your house or for your lease to end.
> If you own the transaction cost is much higher if you need to move.
If you own, then eventually you're not paying anything at all for a place to live. And don't bother to mention property tax... you're paying that if you rent, too, it's just hidden.
This is a manufactured debate, it's meant to appeal to twentysomethings' bohemian aspirations. Someone wants them mobile so they can herd them around like migrant workers.
This is unequivocally accurate. I own three investment properties plus my own home. Each one is profitable, including the house that I live in.
It seems to me that the majority of this argument is that rents will not increase. That is a fallacy. All else being equal, each time you move from a place, you will likely be paying more rent because of the inevitable march of time.
And the only things a renter can do to reduce their monthly housing burden is downsize or move to less desirable location.
A homeowner's monthly burden is either static or reducing (if they're paying down the principle early), and they have all kinds of things they can use to offset that monthly housing burden, like rent spare rooms out, or use part of their home for a business.
Most rental agreements strictly forbid this. I can't compare irregular activities to irregular activities because you can always escalate it to some nonsense money making action favoring one side over another.
But supposing your agreement explicitly allows sub let's without landlord arbitrary approval, the owner is still coming out on top because the activity is simply reducing their monthly outlay while still building equity, the renter is only reducing outlay, but still has zero equity at the end of the day.
More importantly, my mortgage payment will stay the same, fixed in dollars at the year I borrowed the money (in my case 2006 dollars). While rents will continue to increase. For example, at some point in the future, I'll theoretically even be able to rent a single bedroom out that will cover my entire mortgage payment simply because of this simple truth. I'll live "for free". But your base rent price will continue increasing such that you're monthly burden will stay a significant part of your monthly income. Even if you pass along as much as you can to a subletter, that percentage won't change much while mine will continuously reduce.
Breaking lease is far simpler and cheaper than selling. It's never taken me more than 2-3 weeks to find someone to take over the lease whereas it can take months to sell a house.
Because of this ease whenever I move jobs I always move house to be closer to work (after passing probation) because in my area changing jobs can easily add an hour a day to your commute.
Depends on the country really...in Switzerland you can be on the hook for a lot more than in the states, where breaking a lease typically only loses your deposit.
>This is a manufactured debate, it's meant to appeal to twentysomethings' bohemian aspirations.
The actual "manufactured debate" is the one manufactured by the massive housing complex that tries to tell people that rent is throwing away money and it's always better to buy. Buy now! If you don't like your home, you can always sell it for more, later!
This tale has been empowered by the fact that we just went through a global, disproportionate, 20 year rise in house prices and extremely low interest rates that created much wealth for one of the largest cohorts in history. Everyone under 40 (at least) is skewed by this happenstance. Some have even managed to become wealthy from it.
The fact is, in an economically efficient world people would be indifferent between buying and renting. So there are many individual factors to consider, many of which are covered by this calculator.
TISNTAFL. Buying a home isn't free wealth (nor is renting). There are always tradeoffs.
>Someone wants them mobile so they can herd them around like migrant workers.
And maybe someone wants them to buy homes so they can't easily switch jobs or relocate, and are pinned down like wage-slaves?
And yet, right now as we speak, they're out there buying up these homes for chump change, paying cash for foreclosed homes gone to auction, and then renting them back to you for what you'd have paid in mortgage, plus extra on top of that to cover expenses.
You'll always be a sharecropper, now that you've been taught to believe that anything else is foolish.
Once I can afford enough to do it, I'll buy another home myself and rent it out to someone like you. And I'll stand there with a sheepish grin while he laughs that he got one over on me, hoping that he never realizes otherwise.
>I'll buy another home myself and rent it out to someone like you
Except I own my home...
I love people who have determined that they've found some trick to beat the market. "Oversized asset returns! All you need to do is buy real estate!". How many late-night TV seminars did you attend to to obtain this knowledge?
One day the cheap money will disappear, and the speculators (like you) will go bankrupt. Then they'll stiff their creditors, blame the banks, and the public will pick up the tab...again.
I've never seen a landlord go after a tenant for breaking a lease, honestly. The few I've talked to generally say they are beyond happy if the tenant is just out, and indeed, that's exactly what they say in eviction courts. They say they don't care about trying to get money out of the poor person being evicted, but that they just want the unit available to rent to someone who can pay. I think any landlord would be happier with a tenant breaking lease than doing AirBnb, for example.
One risk associated with owning that doesn't often get mentioned but that is more relevant these days is your exposure to misgovernance of your local governments. There were a few scares in the municipal bonds markets in recent years but home buyers should recognize that they are exposed to similar risks. After all it is the taxes they pay that will be needed to pay back the municipal debt. If a city were to get into fiscal troubles police and other public services would get cut first potentially impacting property values, maybe greatly in which case there could be a downward spiral.
Unless you're somehow securing multi-year leases, that's a cost that is passing on to you as well.
You also need to factor in the value of negative impacts of renting. When you have kids, school selection is driven by location -- and a lease is more ephemeral than a mortgage. You also always need to deal with landlords, who can be good or bad, and often cannot make changes to the property that you would like.
You don't need multi year leases. If anything that would be bad. If I rent and the city I am in goes bankrupt and has to cut public services which in turn affect my quality of life and local property values, I can pick up and move and let the owner of the property deal with the double digit hit on his property value. Meanwhile I can move in to the town next door that doesn't have those problems. The costs are not passed down to me.
That's fine when you're 23. When you have a couple of kids, and chasing the lowest taxes/rents means that you're uprooting them from school and friends, there is a high cost for that.
Ever get to know a military brat? It's a hard life.
One quick suggestion: it would be great to be able to save the numbers you've punched in so you can share a URL with someone (e.g., spouse, parents) next time the rent v. buy discussion comes up.
The format of the old version [1] is so much better. The independent variable is how long I need to live in my house to break even, not how cheap do I need to find a place to rent.
If you all you care about is being cheaper than a given rent $X, then just look at the How Long Do You Plan to Stay? chart. When the equivalent rent drops below $X, then you’ve “broken even”.
(That’s in terms of buying being cheaper than renting; if you meant making an actual profit on your home, then the equivalent rent has to drop below $0. This typically only happens when the home price growth rate is high.)
But how long you stay is far from the only independent variable. The intent of the new calculator is not just to provide a single, definitive answer — which is essentially impossible given the fundamental uncertainty in predicting the future — but to demonstrate how the variables interact with each other and give you a feel for the space of possibilities. There are many other considerations besides timing.
I've been using the old version of this for a few months. Making it obvious to which parameters the result is most sensitive is a huge improvement, thank you and well done!
Thanks, that’s good to hear. There’s always a risk releasing a new version of a popular tool. For those that still want to use the old one I think we’ll find a new home for it, too.
I really do like this new version as it seems easier to answer the main question at hand. I did like some aspects of the older one though (all #s more easily digestible, the big graph) so seeing it in a new home would be nice.
One small addition I'd consider adding is estimated rental income if you buy and plan to rent out a portion of the property. I am in the process of buying a home right now and plan to do just that, but this factor seems to be missing from the chart.
Thanks, that’s a good suggestion. There are additional tax considerations with second homes (and business properties), but it’d be nice to include these in the model.
According to the Modigliani–Miller theorem, the mix of debt (size of mortgage) and equity (down payment) is only irrelevant in a world without taxes. However, mortgage interest is tax deductible, while rent is not, so their result doesn't apply here.
The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.
I don’t think it’s a coincidence — those default values reflect the current market, and it’s a reflection of the market being fairly efficient. For example, if investment return rates were consistently higher, you could expect mortgage rates to rise as well. Taxes introduce some inefficiency, but I think the broader point still holds.
This is a really awesome tool, and as someone in NYC currently debating renting vs buying it is very useful. I used to pass around the old NYTimes Rent V Buyer calculator often when people started thinking about the topic, I definitely will send this one out instead.
I found this fascinating, and fun to play with. My own academic background is in industrial engineering, and a big part of my career has been creating analytical tools (as software) for planners. So this sort of thing is right up my alley.
Here's the problem I often run into - how valuable is this, really, compared to a good and much simpler heuristic. For instance - how well would this compare to a rule of "buy if you plan to be in the house more than [five/seven/ten] years?" One story they like to tell in operations research classes is about a couple of programmers discussing the implications of rounding when an input (viscosity) had been estimated by a field worker rubbing mud between his fingers and typing something in...
Another factor is that, in my "adult" life (adult being where I made enough money to squeak into the housing market if I so chose), housing has fluctuated wildly. I finished grad school in about 2000. Since then, housing has made a mocker of pretty much every financial decision I've made. The amount I saved was generally eclipsed by the amount San Francisco housing values increased between 2000 and 2007, dropped between 2007 and 2012, rocketed up again since then.
In spite of all that, I think that this is a very worthy tool, especially if it helps people really understand the factors that go into a decision. But considering how unpredictable everything is... do you think it really adds much as a true planning tool, beyond a vastly simpler heuristic?
But it looks like Down Payment doesn't affect the result conditioned on holding the Mortgage Rate constant. I'm not so sure that's a good assumption. I imagine the down payment strongly affects the mortgage rate you'd get.
The M-M theorem is one of those pretty void theorems that says "in the absence of all real world factors, two abstsct models are mathematically equivalent structures".
Suggestion: When the down-payment slider goes over 50% suggest that, depending on income level and interest rates, it may make sense to buy the house on a line of credit _backed by the house itself_. I did this, and it saved me a ludicrous amount of money vs. a mortgage
You don't need a mortgage in this scenario, that's the beauty.
You leverage the value of the house itself to purchase the house, all made possible by the size of the down payment.
This way, you just deposit all your available funds and income into the line of credit. It's also more flexible than a mortgage in that your can both pay off as much as you want, with the ability to borrow back against it again with no penalties. This allows you to put all liquid assets against the loan with the ability to get them back out again in an emergency. I was also able to negotiate prime on mine, so the interest was very low. I did this twice, and was able to pay off the debt within 3 years each time, single income, making less than $60k/year.
By starting with a modest house, you can leapfrog up to a high-value property in a short timeframe and a minimum of interest payments
I noticed that one of the biggest factors, unsurprisingly, is Home Price Growth Rate and rent price growth rates. Do you have any sources for the rates historically? Preferably by location.
Great visualisation and nice to see it properly accounts for all considations.
I live in London. Unfortunately, as the calculator shows, change in house prices is overwhelmingly the most important consideration in buying if you're thinking of staying for much more than 2-3 years. Admittedly growth is completely unpredictable, (and also highly inequitable), but to a large extent a decision to buy is based on expected future house prices.
For instance, I have a friend who bought three years ago - a £250k flat which would cost around £1,300 to rent. According to Rightmove and Zoopla (and the price a similar flat next door sold for recently), the monthly gain in value has been around £3,000 (!!). I also note this gain is tax free, so equates to earning more like £5,000 a month pre tax.
Unfortunately these gains are only available to those who earn enough and save enough for a deposit, or more commonly, those who receive parental assistance in purchasing property.
For example with the defaults, the down payment chart is flat. This means the total cost of buying is relatively unaffected by the size of your mortgage. Felix Salmon pointed out this demonstrates the Modigliani–Miller theorem:
http://en.wikipedia.org/wiki/Modigliani–Miller_theorem
Of course, there’s still a big intangible difference between having debt and not having debt, like your ability to respond to market or income changes. And in an inefficient market, loans can be more or less expensive.
Playing with the variables and seeing slopes change from positive to negative or vice versa is interesting, too, because these suggest different optimal decisions. Like as your investment return rate goes up, the down payment slope becomes increasingly positive — meaning when stocks are doing well (and assuming mortgage rates aren’t also going up), it’s better to have a smaller down payment and put more money into investments. To a lesser degree, your marginal tax rate changes the slope of the down payment as well, by discounting the mortgage interest payments.
The magnitude of the slope also gives a sense of your risk: you can see how sensitive the equivalent rent estimate is to small changes.