Buying a house seems to be a complicated decision, specially in the current market where federal interest rate is high and if it is your first home. However, the decision depends heavily on individual circumstances and long-term goals.
In this article we are going to take a typical example scenario where
a) a person does not own any primary residence,
b) they are employed and not looking into investing in own business (which could potentially bring more money),
c) they have some liquid cash (enough for the downpayment of a home) and thinking of either buying their first primary residence or keep renting and invest that money in some other option.
For the above scenario, some other options to invest would be stock market, bonds, retirement accounts, ETFs, CDs. You could also consider some alternative of the conventional investment options like cryptocurrencies, collectibles (like art or other rare items that increase in value over time), being an angel investor in a start-up etc.
Based on the economy at the time of writing this, it seems stock market (specially S&P 500) is still one of the top conventional option for investing as it has the highest growth rate in last 10 years compared to the other options.
Analysis with educated assumptions
Before we jump into the details, the entire calculation is coded in this excel sheet. All the formulas and input parameters are shown in separate cells. Feel free to make your own copy and update the input parameters to reflect the results for your own circumstance.
Lets dive into the problem, which would be to figure out which option would leave you with more money at the end of 10 years. If you have a particular amount of cash, in one option you will pay it as the down payment of a property, calculate the cost of homeownership for next 10 years and then sell your home. In the other option, you will invest that money in some S&P 500 index fund and keep paying rent for 10 years. We will calculate the total gain or loss for both options at the end of 10 years.
In these two scenarios, we will not calculate the effects of common factors like, inflation, cost of utility (gas, water, electricity etc.) or any non-essential costs like house repair and maintenance etc.
Homeownership cost and balance after 10 years
Let’s take a typical home in San Francisco Bay Area. We will assume a listing price of $1 Million, of say 1500 sq ft somewhere in the San Francisco Bay Area. Now, for practicality, let us assume the appraised price is $900k. To make it simple, we will assume to have the liquid cash of 20% of the down payment, which is $180k. If we do not have this, we would need to consider a PMI which can be input in the above sheet to adjust the cost. The interest rate is volatile, but credit unions are known to provide lower rate. For the sake of simplicity, lets consider it as 5% for 30 years fixed. This makes the the monthly mortgage amount at $3865.
Two other primary costs are insurance and property tax. A typical property tax rate in San Jose would be 1.46. Home insurance yearly premium can be anything between 1200 to 1800 for the chosen size of property, lets assume it to be 1300 for this calculation. Hence, with $1095 as monthly payment for property tax and $108 for that of insurance, the total monthly cost of ownership would be around $5068. 10 years of that is around $608k.
Now, house price appreciates over time in various degree. There are areas in SF Bay Area where it grows by 100% in 7 years, and somewhere else it grows by the same in 15 years. Based on research, we found that the historical median growth for SF Bay Area was 88% from 2014 to 2024. We will use that for our crude but educated estimate. At the time of sale, you would typically pay 6% for the real estate commission to the selling agent and 2% would be paid as the closing cost to the lender. Also the remaining loan balance would be
remaining balance = L * ((1 + r)^n – (1 + r)^p) / ((1 + r)^n – 1)
where:
L = Original loan amount ($720,000)
r = Monthly interest rate (0.05/12 = 0.00416667)
n = Total number of payments in loan (30 years * 12 = 360 payments)
p = Number of payments made (10 years * 12 = 120 payments).
So the remaining loan balance to be paid here is around $585k. We deduct the remaining loan balance and the (6+2)% selling commission and closing cost from sell proceeds, for which we will be left with $1.14 million. Thus, in a very high level, the down payment cash of $180k results in $1.14 million in 10 years!
Stock market gain and rental cost
If we have invested the entire down payment money in stocks, we would benefit from the ever increasing growth rate of S&P 500. Based on historical median, the growth was 176% in last 10 years (2014 to 2024). Though this is the highest growth we probably have seen in any other decades, but let us use this for future projection. Market can go anywhere, so please take it with a grain of salt!
If you have invested the amount similar to the down payment of the above house which is $180k, it will become around $316k in 10 years.
Rent in SF Bay Area is also volatile. For a 2 bedroom apartment it can be anywhere from $2700 to $4200. We are considering $3300 as the median. The rent typically increases by 5% every year. So the total amount paid as rent would be
monthly rent × 12 × (1 – (1 + r)^n) / (1 – (1 + r))
where r is 5 and n is 10. So it will be $498k.
So even after a gain of $316k, you will wipe that out with the rent payment of $498k. Not only you will have no money left from the stock market gain, you will end up paying an additional $181k from your pocket in 10 years. If there are any other traditional investment options that could give you more than 176% growth in a 10 year period, please let me know.
Conclusion
Buying property in general is always financially more wise as you would be betting on the gain of the total house price (that you only paid a fraction of) against the gain of the actual cash you invested in stock market. It would be a different scenario if you have the entire listed house price as liquid cash. At that point, it would be more beneficial to invest that in stock market because of the higher net gain and the non-essential hidden costs like repair and maintenance of a house. If not, happy house hunting!