> 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.
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.)