> Textmate (and its revolutionary text-snippets) were the catalyst to my migration
Hooo damn TextMate snippets, that brings back memories. Hard to convey how hyped I was to use these. That is also what drove me to Mac at that time. I remember writing hundreds of those snippets for every possible C++ construct, and <tab> to fill in variable name, type, loop counters and so on.
I thought about that a lot too, and in the end I think it just comes down to stupid economics: What do you want them to do with all this money?
1) Most top US tech companies are flooded of money. Everyone dumps money in the SP500.
2) This money has to go somewhere. You can't just redistribute it as dividends, otherwise it's an admission that you won't grow and giving you more money would be a 0 sum game.
3) So you have to invest it somehow, somewhere.
4) Obviously you can spend that money buying whatever company you can.
5) Once you've bought realistically enough, you just hire more, and people will think that there should be some kind of linear relationship between resources spent and revenue growth.
6) You can also do grand projects, like the metaverse, convert all you software to blockchains, become AI native, etc. and dump billions on these.
So essentially it's all about projecting growth and potential.
Money that people “dump” into the S&P isn’t going to the company’s bank account. It’s purchasing shares on the market that were owned by other third party shareholders.
For example, in 2025 Meta was a net purchaser of their own stock ($26 Bn).
These companies are awash in cash because they’re generating revenue in excess of their costs. Nothing to do with the amount of money people put into the S&P 500.
Secondarily, this is exactly why I agree that LLMs likely won’t have the impact OP believes it will. Companies hire not just for output, but for
1. Training (future management, future architects, future bankers, future developers)
2. Generally adding smart people to their teams, capturing a cornered resource
3. Showing governments and shareholders that they have created “jobs”
And a plethora of other reasons that I can’t think of.
John D. Rockefeller (pioneer of the modern corporation) is quoted as saying: “Nobody does anything if he can get anybody else to do it. As soon as you can, get someone who you can rely on, train him in the work, sit down, cock up your heels and think out some way for the Standard Oil to make some money.”
Buying back shares it sold at a lower price, right? The lifecycle of a share starts with the transfer of money to a company in exchange for a share. It ends with a buy back, ideally at a higher price.
But still, at the beginning it is a transfer into the company’s coffers.
I’m not sure what the justification is, but I assume it’s some flavor of “so index fund holders don’t miss out on returns”.
It’s crooked because index inclusion drives massive flows at any price. SpaceX understands this and with so much money on the table probably exerted influence (maybe the big AI players contributed too).
Passive funds don’t care about price (quite the opposite, they reward higher market caps in a feedback loop).
But with an IPO, you’re supposed to let the market have some time to find the right price.
Not to mention the changes related to profitability rules etc.
Agree with this sentiment. However, I think the S&P 500 fudged the rule to 6 months which I believe adequately straddles the line between 1. provides time for price discovery and 2. includes a large piece of the market that would otherwise be included if not for the seasoning cutoff.
Agree with you entirely with respect to other indexes including earlier than 6 months.
The last time meta sold stock on the market was a primary stock offering in December 2013, roughly a year and a half after its initial public offering (IPO).
I find it crazy that so many people misunderstand this basic fact about how the market works.
100% correct, but I'll add that companies do use shares in other ways which also matter.
For example shares can be used for buying labor. Either as options or as grants, bonuses etc. It ultimately winds up in the public shares pool, but the first recipient receives it in place if company cash.
The second major use is in acquisitions. Buying other businesses using stock instead of cash is a useful tool often wielded. Again, not released onto the open market, but winds up there eventually.
Plus you can use them as loan collateral, balance-sheet improves and so on. So their price matters and their value to the business extends far beyond the IPO.
“belong” is a flexible word. You’re right in theory but depending on the situation money in your bank account is worth more to you than an equivalent amount of money in a company’s bank account (of which you are a shareholder).
I think this is right, but it can be stated more simply as companies hire to invest in growth, and they conduct layoffs when growth slows (not because of AI or "improved productivity"). Everything else is storytelling and emergent phenomena.
Incentives in companies are such that there is never a shortage of people pitching projects that require more headcount. Growth justifies the decision to hire more headcount, but the connection from increased headcount to growth is tenuous and usually difficult to impossible to demonstrate with any real confidence. It wasn't so difficult pre-industrialization, but mechanization, automation, computerization and now AI have progressively made it harder and harder to really understand the economics of labor. You do need to hire people to pursue new areas, but also every incremental person adds to communication overhead. The effects of this depend on the org structure and the operating environment over time, so what may have been a good idea at the time can flip to net negative due to outside forces beyond the control or foresight of any decision maker. This explains why companies do layoffs while still hiring at the same time.
Facebook doesn't get the money when you buy a share of META -- that goes to the person you bought the share from. They could do an offering to raise money, but they aren't. They've been doing the opposite, they've been buying back shares at a significant rate. Some of it is to offset stock based compensation, and some of it is just stock pumping.
> Facebook doesn't get the money when you buy a share of META
Technically no, but in reality yes, because shares are used as currency.
For instance, META does not acquire companies using cash, they use their own shares as payment. The higher the stock price, the lower the dilution.
Same thing for stock options and RSU.
So, it's true that stock prices don't translate 1:1 to cash inflows, but wherever stocks are currency (employee compensation, benefits, acquisitions, etc), it does translate.
The high share prices do subsidize Meta's share-based compensation, which seems to make up a substantial portion of the total wage bill. High and rising share prices also allow Meta to purchase other companies with Meta shares, instead of having to pay cash, which is beneficial in many ways.
That's an illusion. They book the expense at the cost of the share on grant date, so it looks good on the P&L, but they have to purchase the share at the price on the exercise date, so it's a significant drain on free cash flow.
Given that the thesis of the original post is that companies are swimming in money due to high stock prices; significant drains on free cash flows probably aren't the cause.
This is only sorta true, the total dilution from SBC is very small for most tech companies with some outliers (cough snap cough).
They may not purchase on exactly the vesting date but they certainly do offset the issued shares with buybacks. I think they can choose to reduce those buybacks without as much rigamarole as they'd need to issue new shares for funding, so they can effectively used that as a "back door" way to raise money. I think it might juice their P&L a little too, but I doubt that's why they do it.
"Tech stocks are growth stocks", that's pretty much how the market sees them anyway.
So essentially, they are not expected to be boring businesses yielding stable dividends to investors. That's your aristocrats stocks postioning: J&K, P&G, etc.
What is expected from tech stocks is the opposite: small to no dividend, reinvesting inflows into ever growing new businesses and technologies. A tech stock distributing dividends to shareholders instead of reinvesting in new projects would be seen as a mark of failure to innovate, incapacity to grow.
One tangent from this is that few of the big 'household name' tech products that have become infrastructure for modern life for huge amounts of people seem to be allowed to be mature and stable, they must be kept changing (beyond maintenance) or to offer some other new thing.
Yeah, it's how you pay dividends at capital gains rate instead of income rate. But also, Apple is kind of stagnant.. if they had something better to do with the money they wouldn't be doing the buybacks.
The observation is right but the causality is off. The money comes from extraordinarily profitable lines of business rather than investors. Hiring is driven less by business concerns and more by various layers of management advancing their careers by managing more and larger teams.
Isn't it to some degree? My understanding was with index funds was that the index is required to be backed by some in-kind holding of the component index products by whomever minted the index share. If more people buy the index then more of those in-kind backing products must be held e.g. as collateral. If you're REQUIRED to buy this stock because of your index/etf positions, necessarily the demand goes up, and necessarily the price goes up too. Companies _definitely_ materially benefit from stock price increases.
When people buy into an index fund/ETF, they are buying existing shares of that fund (which are already backed by the component stocks of that index) from other people who already have them. If there are 1M shares of an index fund that tracks the S&P500 floating around out there, and you go into your brokerage account and buy 1,000 shares, you have not increased that 1M figure by 1,000. There are still 1M shares; you have just bought 1,000 shares from an existing owner (perhaps another individual investor with an eTrade account just like you) who wanted to sell them.
In a case where an index fund does have to buy more shares of the underlying components (for rebalancing purposes or whatever), they are buying shares from other people on the open market: institutional investors, hedge funds, prop traders, etc. They are not buying from the company behind the stock ticker.
Yes, companies do sometimes issue new shares to the open market in order to raise cash. But that's not a daily activity; some companies may go years (or even forever) without doing another public offering beyond their IPO. Other companies do it somewhat regularly, perhaps a couple or few times a year. And some just do it when their stock price is high and they think offering more shares would be a good deal for them.
You’re making this unnecessarily complicated. Whether you purchased shares of a company through an ETF or directly, through your personal trading account, that money only goes to the person or entity that you bought the shares from. Maybe with some trading fees going to your broker (uncommon now thanks to the trend set by Robinhood).
This coupled with incentives by middle upper middle mng to grow headcount as that is how you progress in mng career path regardless of need.
If apple blows a few billion on excess headcount, no one will bat n eye. Senior director of internal tool org ABC needs 10 more people to get the next version out when a multi year long miss has no material impact.
> I'd love is some sort of trade that would eliminate my exposure to SpaceX
You can just short SpaceX of an amount equivalent to its share of your SP500 holdings. You will have to pay borrowing costs though, but on something that liquid it will be very small.
Yeah. For comparison, SpaceX will be maybe half the size of MSFT. MSFT is 7.4% of the SP500 index, so for a $1,000,000 portfolio if you were to short MSFT you'd pay 0.25% on the value of that 7.4%, or $185/year.
So eliminating SpaceX exposure will cost you $100 per million of your SP500 ETF per year, or so.
We aren’t talking about penny stocks we are talking about a tech giant. At the scales that any ordinary investor is operating at there will be no liquidity issues with shorting it and if it is in your index fund the short and long positions will directly offset if you size it correctly leading you to have net zero exposure to SpaceX.
They're saying if the stock goes up and you get margin-called on the short, you have to sell index shares, you can't just annihilate the Tesla shares with the anti-Tesla shares and walk away.
I think most people trade synthetic, just because it's faster and you don't have to wait for settlements, but maybe that is different if you trade onshore (I am a foreign investor).
Anyway if you are synthetic your margin is most likely shared between shorts and long on the same instrument, so no, you wouldn't be called.
Yeah you're not wrong. I didn't think about it that way because you can't really break something out of an ETF basket, and you also don't control the ETF basket, but if you think those risks are minimal it's probably fine to just compare dollars-to-dollars.
Personally I would still probably go with the long put strategy unless the price difference is exorbitant.
The ETF that seemingly arbitrarily changes its rules? In such a short time frame too? This change is going proposal to implementation in.. what, two weeks total? I don't know about you but I don't keep up on this stuff unless it hits the news like this one.
You are not entering a contract with a long put. You are buying a contract that, if you want, you can just let expire with no obligation to do anything. It's effectively simple insurance (as opposed to a short position, which is an actual liability, which will eat you alive in exceptional circumstances).
Yes you are, and options are complicated. Actually, the mere fact that you think they are "simple insurance" is enough proof to me that you probably don't understand it enough to safely buy one.
> You are buying a contract
Oh right, you've bought a PUT, now the fun part: you have to manage your position/exposure, could you enlighten me how you do that?
Could you explain me why buying a SpaceX PUT in a high IV regime (e.g. soon after IPO) will have it drop 40% when the IV decreases after 1 month, even though price moved in my favor? It should be simple, it's just a simple insurance product right?
Seriously. Someone, likely not super financially literate, ask a simple question about how to neutralize a stock exposure, and your answer is to advise buying options? Just stop.
Look, I think you're missing my point a little bit. Let's simplify it to risk, since that's what kicked off this conversation.
Your pension or whatever holds an ETF that (soon) contains some SpaceX shares. You buy a put option on SpaceX direct. What's the absolute worst thing that could happen?
Your pension or whatever holds an ETF that (soon) contains some SpaceX shares. You short sell a SpaceX share. What's the absolute worst thing that could happen?
I switched to ZMK circa 2024, and never looked back at QMK. I am the proud owner of a Corne wireless from typeractive, and it's such a beautiful product. The nice!nano are also a welcome addition.
There is a growing community of enthusiasts starting to sell ZMK powered boards from traditionally QMK based designs, so if you're interested, Etsy is where all of this is happening. MochuKeeb is a good example.
Thanks a lot for your part in the journey to modern, wireless custom keyboards Nick!
Inheritance tax in practice is implemented above a certain threshold.
There is nothing wrong with striving to give a heads up in life to your kids, on the contrary, it's a core, visceral instinct of parents to do so, and removing that would be alienating.
There is a certain level of wealth though, where the "heads up" transforms to an unstoppable compounding lever.
France for instance has a progressive inheritance tax (starting at 5%, up to 45%), triggered for children inheriting at 100k€ per parent. In practice, 50% of the population inherits <70k€.
Also, the proposed Zucman tax in France for instance is triggered starting at 100M€ wealth. At these levels, a mere 2% risk free investment yields 2M€ annual income, this is enough to both compound and enjoy a very luxurious lifestyle. This level of wealth is unstoppably compounding, and that is why it is proposed to tax it.
If you don't, well you end up with a US situation, where disproportionate wealth (and thus power, influence) end up in the hands of random citizens with their own agendas, possibly (likely) orthogonal to the interests of the majority.
Unless i've misunderstood the text, the Zucman tax proposed a minimum 2% tax rate for the >100M€ rich bastards who don't already pay 2% of their income in taxes, not an additional 2% on top of existing taxes.
> The irony is that PEs exist largely because of pension funds.
The irony goes way deeper than that.
A large part of PE clients are university endowment funds.
Harvard for instance has close to $60B in its endowment fund, 40% of which is invested in PE. At this point, Harvard is more an investment fund, with a university as side business.
I think, if you were to say there is a way where you can take $10b and have that money make more ROI with less risk than $1000 can, people would look at it and scream this is broken let’s policy this out of our economy. It defies all laws of a balanced economy (not a capitalistic one, a balanced one). It’s just like monopolies and we have strong laws against that.
But… if you were to say hey we need to pay our old people and we desperately need some way we can deploy massive amounts of money at higher rates of return, people will say… hmm well it’s broken but the alternative is worse so we’ll ignore it.
But now imagine you have a way to deploy large amounts of money and get large returns off that money. Every large amount of money (endowments basically) will jump on it because why not? That’s literally an endowment dream scenario.
So pension funds are the moral reason these other huge chunks of money to get large returns. PE firms have become a streamlined business model because they continue to improve what they are good at doing, and it’s insane that we haven’t passed laws against it yet. Except of course we can’t mess with it because it touches government workers.
So yeah even if we wanted to policy it out of our society it’s practically impossible from a social point of view.
I think you have this pretty backwards. Private equity does not exist because of pensions. Private equity is investment that has not taken additional steps to be a part of regulated public markets.
It's true that private equity is dominated by institutional investors. One reason for this is that the investments are generally deemed too complicated, illiquid, and risky for retail investors (although the Trump administration is trying to change this).
Additionally, if we added the kinds of regulations, reporting requirements, standardization, etc, that would be necessary to scale this model to hundreds of thousands or millions of investors participating in an informed manner, we would simply recreate public markets.
PE has two definitions, the first is its structure as a private business investment.
Pensions did not create this business structure, it has existed forever.
The second definition is the subset of PE that is systemically buying businesses and extracting wealth from consumer and worker to asset and shareholder.
The article is not talking about the first definition and neither am I.
To regulate private businesses equity is not what I’m going for either, it’s regulating the large PE firms doing this specific business model en masse.
I don't believe that's ironic. Harvard and other "elite institutions" are the places with massive endowments, not state colleges or anything. Frankly the more I think about it the more it's nothing particularly interesting, just a fractal representation of the privilege of wealth as far as you want to drill down.
Not entirely... U Mich's is ~$20 billion, UVA & OSU are both around $8 billion, UCLA's is ~$5 billion, the Texas + Texas A&M system have nearly $50 billion in AUM.
Lost in the commotion is the chaos that NIL is wreaking on universities and their donation funnels. The donations side of things seems to be rapidly drying up as a revenue source.
> If you take the money you'd use for a down payment and mortgage and invest it instead (after paying rent) you end up in about the same place.
That is not the right way to see it.
If you have the cash to buy upfront, then yes, real estate is not that good an investment, unless you have a loaded portfolio already and want to diversify a bit, get some high inflation hedge, etc.
The real value of buying a home is leverage. That is, most people cannot go to a bank and borrow $500k. The bank will just not make a blank loan like that without any idea of what you're going to do with it.
Buying a home though is well understood and borrowing is made relatively easy.
For most people, buying a home is the only way they have to actually get significant leverage from borrowing.
Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface in an HN discussion.
It's probably worth making a closer comparison though:
* Buying a House on Loan: commit to paying off a $450k loan over 30 years at 5% interest, with an immediate $50k down payment and the home itself as collateral. So ~$2500/mo payments, another 400k in interest by the time you're done. Your home probably appreciates by that much in most markets, which gives you a million dollar asset at the end. In some good markets, it may appreciate by 3-4 times, which would mean you have a 1.5-2 million dollar asset.
* Pure Financial Investment: put $50k into a fund, add sustained regular $2500/mo contributions. Let's imagine that the fund averages a conservative 5% annual return and we do this for 30 years. The outcome should be... a bit above 2 million dollars.
All investment involves risk and variable outcomes, but the BHL plan probably has a more varied outcome. Parity may be as common as substantial profit.
The PFI plan, on the other hand, performs really well even considering conservative 5% returns: over 2 million dollars (minus 400k you would have probably paid in rent). Bump it to 8% returns and we're looking at 3 million, a performance even many good real estate markets couldn't match.
Its major problem is that you need to be disciplined about putting the chunky contributions in, which means you need to consistently have rent-payment-level disposable income to make this work. Many working people don't.
Leverage lets housing costs go to equity and interest payments, which is key leverage for people who don't have disposable investment income. But less key for people who do.
A house is an inflation hedge. Any calculation about investing the difference has to subtract the rent you are paying and rent goes up every year. There is no where where you can pay a rent anywhere close to what I'm paying for my mortgage in my area and I'm only 5 years into this. Of course I lucked out by locking in that sweet sub-3% rate, but still, I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term.
A house in a long term play. I didn't buy until I know where I wanted to anchor. That's the deal. I didn't want to be in a situation where late age destitution came because I couldn't afford where I wanted to live anymore. I got to see that play out with older relatives who did go the rent only route. Course I have to pay property taxes, but as it stands it's less than $200/mo and I don't imagine it'll rise above that taking inflation into account. That is something I can afford in retirement even on social security.
There is maintenance, but living in a neighborhood full of elders, a lot of it is truly optional. And honestly I think the only maintenance I've paid thus fair is the yard only because I don't want to do it myself. For me financially this is a hell of a deal with the only trade off that I must stay here. And... I'm settled enough that I'm willing to do that. I moved all over in my early career to find where I wanted to be.
> I find it hard to believe that over time if you took the money you'd put into a house and subtracted out rent, you'd end up winning in the long term.
You are not alone. The thing is this is such a common argument that there are a zillion rent vs buy calculators [1].
That said, yeah sub 3% the math often does work out in terms of buy (assuming you don't sell before 7 years which the average person _does_ sell before). But sub3% and holding for 30 years is actually rare.
It basically comes down to that the down payment gives renters such a headstart in gains that the homeowner takes forever to overcome it. But keep in mind they're also comparing a similar rental house to the bought house. So If you'd rent a smaller 1 bedroom apartment but only going to buy a 4 bedroom house then you're really behind in the math.
The problem I have with buy vs rent calculators is that the speculative questions often end up dominating the decision. How much will rent go up in the place you rent? Nobody knows. How much will the value of the property appreciate during the period you own it. Again, this is unknowable. So you put in a range of guesses for these, and you can get it to come out as a good or bad investment depending on what you guess.
My guesses were ludicrously wrong when I did these back in 2018, relative to what has actually happened in both the rental market where I live, and the value of the house I bought. I concluded that the reason to buy was only about the non-financial aspect, and that we'd probably lose a little money all told. But it has turned out to be a six figure win in practice. Rent has gone way up, we were able to refinance to one of these very cheap loans during covid, and the property value spiked around the same time. I never would have guessed any of that. And any of it could have gone the opposite way.
So the calculators were honestly pretty useless. It's all too unknowable.
Stop - have you also accounted for 750K loan amount in mortgage interest tax deduction, and the SALT cap of 40k?
Are we looking at markets where we had massive appreciation in real estate values in the last 5 years? Because while you might say they were outsized and abnormal, the stock stock market was, too. The years of ZIRP made everything nuts.
The one thing missing from that calculation... the rent goes up over the 30 year period while the mortgage is fixed (subject to changes in tax rate and insurance as value hopefully increases).
9 years into my current home and my 20 year mortgage is substantially less than renting a similar house in the same subdivision. And because it's 20 year, the interest rate is lower, and when I retire, I'll only have to cover tax and insurance at a fraction of the future rent.
And people aren't including the interest deduction on income - up to 750K loan amount worth. This is a form of subsidy that renters are handing over to mortgaged owners.
It forces you to make some assumptions on market returns and such, but it gives a pretty clear picture. The biggest variable is how long you expect to live in the same place (longer favors buy) and the next biggest is the ratio of average rent to average housing payment. The inflection point being that if you live in one place long enough to pay off the mortgage, then it obviously starts to be much more advantageous to buy, but that requires you predicting your life 30 years in the future.
> but that requires you predicting your life 30 years in the future.
This is true, but the vast majority of people - especially in the US - don't move around the country or even state every few years. One of the biggest, perhaps the biggest, pro of renting is that you're not tied down to one place for very long.
It's pretty rare that someone buys a house then is suddenly forced to move hours away.
Moving around a lot incurs its own costs. Time, transportation, movers, deposits (which you're unlikely to get fully returned), new furniture... I think it's an additional "hidden" cost to renting that doesn't get talked about much.
The cost of moving from owned home to owned home is far higher. Brokers, lawyers and all the associated closing costs can be huge. And you still have to pay movers and worry about new furniture.
Yes, but you decide when to move from your owned home. My point is landlords can and do cause moving “churn” when you rent above and beyond when you’d move voluntarily.
It is possible to find weird inversions where it never makes sense to buy - prices are too high and rents are too low. CA has these places, where property tax arbitrage by renters can be less than the new property tax would be if sold.
You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.
That point is in the analysis after the bullet points (in phrases like "minus 400k you would have probably paid in rent" and "you need to consistently have rent-payment-level disposable income to make this work. Many working people don't.").
I considered putting it up in the bullet points. Apparently deciding against that lost my expressions of this point to some readers, including yourself.
But yes, this is why the analysis after the bullet point mentions the profile of people who don't have $2500 disposable income. The leverage matters more to people in this situation.
Having seen this conversation play out more than a few times and even turn a tad fighty, I think this is the fault line:
* people who do this kind of analysis frequently and generally have high disposable income often see that they can leverage compound interest rather than pay it, so the Pure Financial Investment plan seems like a slam dunk to them, and for their profile they're probably right.
* people who generally don't have high disposable income see that they can use leverage to make their rent payment do double duty, which seems like a huge win for them, and for their profile they're probably right.
What I did leave out is how a mortgage can bound your living costs. Another commenter correctly pointed out rents can expand dramatically. Where incomes track rents, I don't think this makes a dramatic difference, and that's why I didn't include it, but it's true this isn't guaranteed, and mortgage can function pretty well as a hedge.
Your calculation is bogus, you are 1) assuming infinite money 2) assuming infinite time.
1) When you say "add sustained regular $2500/mo contributions", you forget that compared to buying your place, you also have to pay rent, most likely at the same amount you would pay back your mortgage assuming same quality of life. So either you have a free $2,500 to spare (in which case you could also have invested that amount in the buying case, or borrowed more), or you have $0 to invest.
2) You cannot just take the expected value of two different returns distribution and assume you would earn it in both cases. That would assume you have infinite time to wait for the average rate of returns to converge. If your life depends on said returns, you cannot just say "oh nevermind I'll wait another 15 years to withdraw". In your example, stock market returns are immensely more volatile than real estate.
The house gives you a place to live, so the PFI plan is either a huge miscalculation (not a great place to start when you're making a numerical argument) or intentionally disingenuous. Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes. If you're getting a $2500/mo mortgage, what's rent for a similar house? Could be $2k/mo, could be $3500/mo. And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years. After the initial post-purchase increase, taxes are usually capped to some degree as well. For most people rent is capped for at most 1 year. So every year you rent you will have less money to invest, and eventually you'll have to start taking money out of that account because your rent has surpassed what your mortgage payment would have been 5, 10, 15, 25 years ago.
When you run the numbers honestly it's really, really hard to get similar gains renting as you can buying, especially 30 years in the future.
Renting gives you a giant pile of additional money you can save and invest so that after 30 years you could buy a house in cash if you wanted to. The person with the house does not have this cash, they have a house instead.
After 30 years you either have a house or enough cash to buy that house. In many cases, the rate of return on the cash is sufficiently greater that it is significantly more than the value of that house.
Rent is much cheaper than the total monthly purchase costs in many locales. Literally thousands of dollars per month of net cash per month to investments in the renting scenario. And that cash appreciates at equity rates rather than debt rates. This is on top of being able to invest the down payment instead of spending it on a house.
I have decades of data on this in a few locales (including Bay Area and Seattle) based on my own experience and despite buying and (still) owning homes several times. It never pays out better than renting and investing. The math doesn't math. I still buy places occasionally but I am honest about this reality.
For the kinds of places I rent the finance math is so heavily tilted toward renting that it is a no-brainer. I'm not alone in this; I know many people of means that choose to rent even though they could buy any house they wanted.
Run the numbers - mortgage with interest deduction, SALT deduction (property taxes apply), appreciation, add the principal as paying yourself back. Compare it to renting comparable home, with the rent going up with inflation (which in some places is being generous). After a few years, you'd be surprised how the math looks.
A careful re-reading of my comment will reveal that I did mention rent as a factor in at least two places: one as an opportunity cost to be reckoned with for people following the PFI plan (with which my example still comes out looking good), one as a cost of living substantial enough for many working people that they do not have significant disposable income, which makes leveraging their largest living cost appealing.
> Interest rates are closer to 6.7% which means your $2500/mo doesn't even cover your principal and interest of $2600 which is to say nothing of PMI (which will be required since you didn't put 20% down), homeowner's insurance, HOA fees, or property taxes.
Using a 5% interest rate was one of several simplifying assumptions that I chose to be generous to the Buy Housing on a Loan plan.
You are correct that interest rates are presently and historically higher than that, and that mortgage insurance, homeowners insurance, property taxes, and some maintenance costs that under the BHL plan can add up to significant housing costs that aren't going to equity and therefore aren't well-leveraged. In other words, the BHL plan actually comes off worse than I made it look.
(If there's a counter side of that, it's that landlords can and will pass on those costs so they're reflected in rents... but sticklers will notice that landlords who are done with amortized costs or who financed at lower rates can choose not to do that and may have incentives to depending on the market.)
That's in absolute terms. There's a relative point too: the higher the interest rates, the more the field tilts towards the PFI. It magnifies debt/leverage, making that path more expensive, and it magnifies return from invested income, making that path more rewarding if you can swing it.
> And don't forget that other than insurance and taxes, your mortgage payment is capped for 30 years.
I did leave out the bounding effect that a mortgage can have, and that's arguably an important missing point.
Wy would someone do that? My observation is that incomes also tend to grow in rough parity to rents in many markets -- in fact, local income growth is probably the primary variable local rents are dependent on (at least in a functioning market). This means during prime earning years decades from retirement, rent changes might be an acceptable simplification. But you're probably right that the closer you get to retirement, the more important bounding costs is. And there might even be other situations where the tradeoff starts to make sense even for earners with significant disposable incomes.
Eagh, the leverage really isn't that cheap, and you can think of renting as giving you cheap leverage too (it's just your borrowing the house instead of the money).
The leverage only matters in an appreciation market (which we’ve been spoiled with in the USA since boomertimes). If you distill the math on assumed zero appreciation (or zero “real” appreciation) it becomes not so terribly pretty.
It’s really a form of various hedges wrapped up with a bow, that for many people is desirable (and since we HAVE had appreciation it doesn’t “turn out bad” most of the time anyway).
Anyone who says “renting/buying” is the only way to go is missing something.
Renting also has hedges embedded, and every hedge can be a risk position.
In particular the interest rate options in foxed mortgages are pretty expensive and it only hedges the cost of a particular house not housing in general.
Housing cost is correlated with local incomes so in some ways it's doubling down. In particular recessions are deflationary in the immediate aftermath.
Uhhhh where are you getting that $2500 a month to invest? That’s your landlord’s money, dawg. And they’re gonna expect at LEAST another $100 year over year if you don’t want to move.
Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. The recent 40-year trend of decreasing interest rates lulled a lot of people into the belief that real estate leverage is an unalloyed good.
> I bought my current home in 2011 for $420k, and the Zillow currently estimates its value at $757k.
Well yeah, in the last 20 to 30 years in most countries the story has been the same. My parents bought a house in Brazil in the early 90's for 30k and we're now selling it for 400k. My relatives in Australia bought a house in Adelaide for 400k around 5 years ago. Prices exploded there and it's now around 700k. They got 300k dollars in a few years while actually earning less than that in salaries over the same period.
On the other hand, me, in Europe, managed to lose money on a house I bought 10 years ago because I overpaid (at the time it was really hard to buy as competition was huge) and after COVID, prices in my region fell 20% and never recovered... Also, I invested too much on a new building in the property which people in this country don't actually value a lot, so the investment did not pay off.
But before that I had made 60k on an apartment in just 2 years. So, while I know too well that the housing market can be unpredictable, I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.
> I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.
I think they have. As mentioned above, the past 40 year trend of declining interest rates appears to be at an end. It was the most significant factor in rising prices in my opinion.
You also have to factor out inflation over those periods of time, as often it turns out the return is relatively anemic, but the time periods are long.
>> Leverage is great when prices are increasing, but not when prices are moving in the opposite direction.
This.
I worked for a medium sized company in the early aughts. It was a family owned business. The eldest brother was the owner and we often had lunch and he would tell me that once I make x amount, then I should buy this kind of real estate. When you get to this xx amount, then buy this kind of real estate. Fuck the stock market, only real estate goes up in value every year like clockwork. At the time he had several rental properties and three or four houses located all over the country.
That was until 2008.
Its funny, I ran into him at an architecture conference a few years back and one of the first things he said to me was, "Remember that real estate advice I was giving you? You can completely ignore that now!" and we both had a good laugh about how drastically the market had changed since 08'.
Sounds like your friend did something wrong with his investments. I had rentals before 2008, and bought more during the crash in South Florida for pennies on the dollar. It was a great time to buy.
In some states (California being one) the original mortgage on a house purchase is non-recourse. This means that the bank cannot come after your personal assets in the event of default. Yes your credit gets dinged but the leverage of a home loan is fundamentally different than a margin loan in the stock market.
This is only relevant when rates are low. Rates are currently higher than the growth you can expect in housing prices.
I have done repeated financial models of this over the last 15 years and it has never made sense to buy a house for me.
When rates were low, if I had bought a house and then stayed in it a long enough time to counteract transaction costs, it could have been ok, but in expectation, basically everyone buying a house would have been better off investing the money from their downpayment & repayments into the stock market.
Reminds me of 25 years ago, the default BitchX config on most distributions contained something that would crash the client with a message "I did not read the configuration".
If someone remembers what it was actually, that would really bring back memories
The zellij layout includes panes for OpenCode, a shell, a neovim, inotify tests, etc.
I cycle through the zellij sessions during agent prefills.
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