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I feel like there should be a difference between "rent" and "mortgage rent" (programming.dev)

submitted 8 months ago by danhab99@programming.dev to c/chat@beehaw.org

28 comments fedilink hide all child comments

Since the housing market looks like a crowd of people just signing mortgages as fast as possible just to then turn around and charge that mortgage plus a little bit.

I shouldn't pay someone's mortgage like seriously this is just adding an unnecessary problem to the real problem of "living somewhere"

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[–] blindsight@beehaw.org 21 points 8 months ago (1 children)

Essentially, there's four different things going on:

The interest payment portion of the mortgage
The principal payment portion of the mortgage
The opportunity cost of capital invested in the downpayment and home equity (principal payments)
Market exposure to rising/falling housing prices

We can simplify it a bit by imagining a 0%-down, 0-principal-payment mortgage: if mortgage rates are 6% (for easy math), then every $100K of home value costs $6K/yr in interest, or $500/mo. So, at 6%, a "fair" rent on a $500K house is $2500/mo.

What that means in reality is that with $100K invested in the down payment, the owner is paying $2000/mo in interest (with the rental money), and is "earning" $500/mo on their $100K investment. (Plus, on average, they are investing 1/360th of the $400K owed on the house in home equity through principal payments... greatly oversimplifying compound interest and amortization schedules).

That $100K in the stock market could instead earn, on average, about 9% in equities, or ~$750/mo. That's the opportunity cost; instead of buying a rental property, the next best alternative is likely something like stocks.

But the owner also gets exposure to the housing market, and could also earn a return on home appreciation.

Now let's add the 5th component: damage, maintenance, vacancy, and "deadbeat" tenants. Owners also take on the risk that renters will not pay their rent, that they won't be able to find renters consistently, or that the home will be damaged. There are lots of horror stories of tenants doing $50K of damage in a year they only paid $20K in rent.

Anyway, all that said, it's a lot more complicated than just "paying their mortgage for them". I don't know what it's like in your area, but in the market where I live, rental prices are not covering the full mortgage payments... but it still usually works out if housing prices continue to go up forever. Once that bubble bursts, a lot of rental property owners are going to be losing a lot of money—especially since home appreciation was their only profit in the first place!

This comment so far ignored maintenance costs and land taxes, but they should probably add another $500/mo to both sides of this equation; it doesn't affect the rest of the analysis, though, since it should effectively be a wash between the owner and the renter.

[–] danhab99@programming.dev 8 points 8 months ago (1 children)

So (feelings opinions)

It sounds like owners are taking on a whole lot of risk just so the banks don't. If that's the case then is the equity actually good enough to merit me being the banks money armor?

And 80% agree with the equity argument, I just can't help not have hope for the future and am literally asking who is gonna buy my house in 40 years? Less kids are being born, this country is falling into Republican hands so can't rely on selling my house to immigrants now can I?

I feel like Americans have known why we're here for so long and now this generation doesn't. I can't tell if it's for a reason someone is keeping secret or if the answer doesn't exist bc we're not supposed to be here anymore.

[–] blindsight@beehaw.org 4 points 8 months ago* (last edited 8 months ago) (1 children)

who is gonna buy my house in 40 years?

A sad but serious answer is that your house will either be worth less or worthless because of climate change (looking at you, Florida, but also wildfires/water scarcity) or extra valuable for those seeking climate refuge.

Completely seriously, it was a major consideration when my wife and I decided to move to where we are now, to one of the safest areas of our country for climate change risks.

[–] loops@beehaw.org 2 points 8 months ago

Same, though living on the coast I want to get a place that will likely not be underwater in the next decade or so.

https://www.floodmap.net/

[–] DessertStorms@kbin.social 17 points 8 months ago (2 children)

There should be no rent - housing is a human right, and there is enough to go around, people shouldn't be allowed to own more than they could reasonably use.

[–] blindsight@beehaw.org 17 points 8 months ago (1 children)

The piece I don't understand from this idea is: who will pay for the investment in building the housing, then?

Communal co-op housing is likely a better model, but it only works with government-subsidized low-interest-rate loans. Without those programs, who's going to put down the $500K it takes to build the home in the first place?

Until our capitalist system changes, I don't know how to square that circle.

[–] frog@beehaw.org 12 points 8 months ago

Social housing is where it's at! Local government builds the houses, and maintains ownership of them, but rents them out at what is essentially a relatively nominal figure that covers maintenance, admin costs, etc. Everybody that needs a home is guaranteed to get one, and the tenancy is guaranteed to last as long as they need it.

There are many European countries where social housing works very, very well, without those countries not having capitalism. It just requires governments that can be held to account when they don't provide enough housing. This is why social housing floundered in the UK compared to other European countries: a rigged voting system meant it became harder to evict the pro-landlord Conservative party.

[–] 1rre@discuss.tchncs.de 10 points 8 months ago

Housing is a human right, so give everyone UBI and offer social housing for a fixed proportion of that UBI that leaves enough for a very basic life (as in "homemade bread and water and enough to replace the cheapest of furniture when it breaks" basic, not "can't go on holiday to somewhere warm this year" basic)

If you want something better and have the skills to get it then you can earn it and supplement your UBI, but nobody goes hungry or without a house. With free college tuition, you can even spend your days studying instead of working so you don't starve, so it's not like there's an argument against it there.

I can't think of anything fairer... If you wanna own more than you need, go for it, but in doing so don't make people literally homeless

[–] Nemo@midwest.social 12 points 8 months ago* (last edited 8 months ago) (2 children)

Do you think rents should be less than the mortgage? Or are you complaining about rent-seeking?

[–] jarfil@beehaw.org 6 points 8 months ago (2 children)

rent-seeling

https://www.thefreedictionary.com/seeling

"To stitch closed the eyes of (a falcon)."

What?

(also TIL, and WTF...)

[–] Nemo@midwest.social 9 points 8 months ago* (last edited 8 months ago) (1 children)

Sorry, rent-seeking. It's when capital buys a scarce or exclusive resource in order to charge consumers for access to it indefinitely. Finite expenditure for potentially infinite revenue.

It's generally considered extremely immoral when used on the means of survival. Not just profiting off the misery of others; but making others miserable specifically in order to profit from temporary relief of that misery.

Despite the name, it doesn't usually apply to real estate (since there's usually other real estate available); rather, that provides a good analogue for the model. A better example is buying the patent to a lifesaving medication and then charging exorbitant prices for it.

But there are cases when it definitely does apply to real estate, such as when the local primary employer also owns most of all of the housing stock in commuting range of where they enploy people. Think mining "company towns" or, say, the Hyde Park neighborhood of Chicago around the University of Chicago in the 80's and 90's (and, after a couple decades to let the outrage die down, again today). They control their employees' homes, giving them outsize leverage in labor relations, but they also can charge unfair rents due to their monopoly.

[–] jarfil@beehaw.org 4 points 8 months ago

Right, wasn't sure if you meant that or something else.

In real estate, people often forget that houses are not forever. They require maintenance, sometimes full refurbishment to bring them up to code, then eventually they become condemned, with extra cost to clear the land, and even the land itself may need utilities renewed. They're long lasting, but ultimately perishable goods (in most cases).

Even in captive audience situations, the calculation is not as simple as comparing mortgage to rent, since rent is the final expense, but mortgage is only a part of it. Depending on how long the housing lasts, how expensive is the upkeep, and what is its final resale value, rent as high or even higher than mortgage, can be the cheaper option.

In some cities with controlled rent, and historical building protection laws, owners have been known to purposefully leave a building unoccupied and in disrepair, just so it would get condemned and they could build a new one in its place. Some cities have struck a deal where owners can tear down the inside of a building, as long as they preserve the facades.

There is definitely a bunch of people speculating, and housing seems to follow a periodic bubble cycle, but then they burst, leaving most of the small and naive investors as bag holders.

[–] Bldck@beehaw.org 2 points 8 months ago (1 children)

Rent seeking 🙂

[–] jarfil@beehaw.org 3 points 8 months ago

Yeah, wasn't sure if seeking, sealing, or selling... so looked it up, and TIL seeling is an actual word, plus a common misspelling of ceiling. 🤷

[–] evranch@lemmy.ca 4 points 8 months ago

The real problem is with corporate landlords who are attempting to buy up as much of Canada's housing stock as possible and control the market (rent-seeking as you say) otherwise the "mom and pop" landlord really is providing a service more than making much of a profit.

Years ago I moved out of my mobile and into a real house. The mobile was paid for by then and I thought hey, I'll rent it out instead of selling. Make some money, give someone a home.

What a nightmare. In the end I was forced to sell it just to be rid of the last in a long line of delinquent tenants, despite me doing my best to vet them.

Activist renters don't seem to realize that there's someone on the other end of the deal who is holding the bag. I agree, rent should be free, housing should be a right. But without a co-op or government to build the house and maintain it, the person who has to do that is your fellow working man, and do you expect them to do that for free or at a loss? The whole time while being treated with disrespect like they were some greedy billionaire?

Of course you are paying their mortgage. You're using their credit and wearing out their consumable asset (the house) the least you can do is cover the costs! If you don't like it, take out a loan, buy a house yourself and you'll soon find out how much it costs to own one! Hint: more than rent unless you bought with cash (And by doing that you have lost the opportunity cost. Which is fine if you live there, but not if it's supposed to be an investment)

Investing in rental stock only works in a rising housing market, or if you're a slumlord. Otherwise, just buy index funds, a lot less hassle and better returns.

[–] furrowsofar@beehaw.org 4 points 8 months ago* (last edited 8 months ago) (1 children)

Buy your own house or condo for cash. Then you pay maintenance and taxes only. Done.

The big issure is the high cash price of housing. The true total society cost of housing per unit per year is actually the annual maintenance cost plus the cost of new construction per year divided by the total number of units. This is presumably less then the cash price.

General cash price is pretty close to the cost of building a new house. I guess you could annuitize that over a life time to get a set of annual payments and compare. Or you could go the other way and calculate the present value of the annual per unit cost and compare to cash price.

[–] bane_killgrind@kbin.social 8 points 8 months ago (3 children)

But I don't have hundreds of thousands cash

[–] metaStatic@kbin.social 6 points 8 months ago (1 children)

hundreds of thousands

oh man, if I could find anything under a million ... I still couldn't afford it

[–] bane_killgrind@kbin.social 5 points 8 months ago (1 children)

You can build new at the edges of suburban wasteland for cheaper sometimes don't lose hope

[–] metaStatic@kbin.social 6 points 8 months ago (1 children)

I live in Australia. Hope wasn't lost so much as drug out on the street and shot.

[–] bane_killgrind@kbin.social 5 points 8 months ago

Yeah... That hope was a nice bloke. Should have seen it coming.

[–] furrowsofar@beehaw.org 3 points 8 months ago* (last edited 8 months ago)

Even if you do pay cash, housing is expensive. Our little house in a not so good part of town costs about $25K a year. About half that is out of pocket and the other half is capital opportunity cost. One reason many people carry mortgages longer then they need to is the capital opportunity cost. My wife and I both rented until about age 45 and to our surprise we were just barely able to do cash at that point so we did.

The other issue at the moment is high interest rates. Mortgages look less good compared to cash. The other issue of course is the high market price of homes as I said previously. That drives both mortgage and capital opportunity cost and is not directly related to true society wide cost, but is more of a financial mumbo jumbo thing.

[–] furrowsofar@beehaw.org 1 points 8 months ago* (last edited 8 months ago)

I am guessing but probably about half of the cost of rent is related to true costs and the other half related to the financial mumbo jumbo of capital opportunity cost.

Just based on my experience owning our house.

[–] originalucifer@moist.catsweat.com 3 points 8 months ago (2 children)

you can buy on a contract that would achieve something like this. kinda like the "rent to own" model

[–] confusedwiseman@beehaw.org 2 points 8 months ago

Wouldn’t that be known as a land contract?

[–] danhab99@programming.dev 2 points 8 months ago (2 children)

Wait isn't that exactly what a mortgage is?

[–] originalucifer@moist.catsweat.com 6 points 8 months ago* (last edited 8 months ago)

no. in a mortgage you technically own the property and the bank has it as collateral against the loan.

a contracted home purchase the 'lender' retains the ownership of the home until you finish paying off the contract. if you dont, they keep the home and the money youve paid to that point.

[–] Nemo@midwest.social 5 points 8 months ago

Not quite, because you can pay off a mortgage early to save overall.