The Mathematical Case For Buying a Powerball Ticket 480
HughPickens.com writes Neil Irwin writes at the NYT that financially literate people like to complain that buying lottery tickets is among the silliest decisions a person could make but there are a couple of dimensions that these tut-tutted warnings miss, perhaps fueled by a class divide between those who commonly buy lottery tickets and those who choose to throw away money on other things like expensive wine or mansions. According to Irwin, as long as you think about the purchase of lottery tickets the right way — purely a consumption good, not an investment — it can be a completely rational decision. "Fantasizing about what you would do if you suddenly encountered great wealth is fun, and it is more fun if there some chance, however minuscule, that it could happen," says Irwin. "The $2 price for a ticket is a relatively small one to pay for the enjoyment of thinking through how you might organize your life differently if you had all those millions."
Right now the Multi-State Lottery Association estimates the chances of winning the grand prize at about 1 in 175 million, and the cash value of the prize at $337.8 million. The simplest math points to that $2 ticket having an expected value of about $1.93 so while you are still throwing away money when buying a lottery ticket, you are throwing away less in strictly economic terms when you buy into an unusually large Powerball jackpot. "I am the type of financial decision-maker who tracks bond and currency markets and builds elaborate spreadsheets to simulate outcomes of various retirement savings strategies," says Irwin. "I can easily afford to spend a few dollars on a Powerball ticket. Time to head to the convenience store and do just that."
Right now the Multi-State Lottery Association estimates the chances of winning the grand prize at about 1 in 175 million, and the cash value of the prize at $337.8 million. The simplest math points to that $2 ticket having an expected value of about $1.93 so while you are still throwing away money when buying a lottery ticket, you are throwing away less in strictly economic terms when you buy into an unusually large Powerball jackpot. "I am the type of financial decision-maker who tracks bond and currency markets and builds elaborate spreadsheets to simulate outcomes of various retirement savings strategies," says Irwin. "I can easily afford to spend a few dollars on a Powerball ticket. Time to head to the convenience store and do just that."
Odds are favorable in a way (Score:4, Insightful)
My odds of winning may be 1 in 175 million, but my odds of getting $337 million dollars any other way are 0 so it's not that bad.
Sure if I work hard and invest right I can earn a few million, but 175 million is just not going to happen any other way. I'm willing to spend a couple of dollars for that slim chance.
Re: Odds are favorable in a way (Score:2)
Actually the odds of you becoming a multi millionaire are significant higher forming a startup.
There are 300 million people in the us. Statistics wise this means if every man, woman, and child bought a ticket 2 would win with these odds. Ask yourself how many self made millionaires are there? Lots!
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The math so often quoted most often neglects to include taxes and often a shared jackpot. I always look at the ratio.
I've done much better in the stock market. Unlike a non winning Powerball ticket, stocks rarely pay zero. If you refuse to sell at a loss, when you don't sell this week, your non winning stock is still in the game.
I generally play the market for a 2:1 gain. Some stocks haven't doubled yet, but most have.
Unlike a lottery ticket, none has gone to zero that I have.
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I have better odds finding a winning lotto ticket on the ground than if I buy one.
No, I don't think so. Any odds of finding a winning lottery ticket on the ground would be drastically worse because first you have to calculate the odds of finding that ticket in the first place. Given that the winning ticket would have to have been purchased locally (tickets are sold across the US and bought by Canadians on the border) or carried into your area somehow, it would have to end up in an area where you could find it, and you would have to find it at the precise time that it was in the same sp
I'll take the wine instead (Score:5, Insightful)
Re:I'll take the wine instead (Score:5, Insightful)
Incorrect. Buying a *single* ticket is worth it, since it puts you on the playing field at least. It's buying 2+ tickets that aren't worth the money, Every ticket after the first raises your chances by such an incredibly small amount that it's not worth it. The first ticket raising your chances above a flat zero is worth it though.
Re:I'll take the wine instead (Score:4, Funny)
Not buying a ticket alone does not leave your chances at zero. There is a miniscule probability that the winning ticket will be dropped in a parking lot and a non-purchaser will find it and claim the prize. The only way to make your probability zero is to not buy a ticket AND ignore all tickets found in the parking lot.
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This whole topic is really weirding me out. My dad has always said (well, for at least 20 years or so) that he plays the lottery just for the fantasy of winning. In reply, I often make the same lame joke about being almost as likely to find the winning ticket in the parking lot. We're not so clever, me and my dad.
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I must be as old as your dad, as I don't care for gambling (losing money, really, the games are fun) but I see buying 2-3 PowerBall tickets per year (when the jackpot is big) about like your dad does.
I'm not buying a chance to win, I'm buying a chance to seriously dream about what I would do with all that money.
I occasionally enhance it by plugging the expected winnings into a spreadsheet I built that lets me actually "spend" the money to see just how fabulously I could live. My spreadsheet is ridiculously
Re:I'll take the wine instead (Score:5, Funny)
It's buying 2+ tickets that aren't worth the money,
Unless you buy 2 tickets with the same numbers. Which could make sense because if someone else has the same numbers you will get 2/3 instead of 1/2. Even better: buy 99 tickets with the same numbers. Just the face of that other dude who ends up winning 1% of the jackpot would be well worth the $198 investment.
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Unless you buy 2 tickets with the same numbers. Which could make sense because if someone else has the same numbers you will get 2/3 instead of 1/2. Even better: buy 99 tickets with the same numbers. Just the face of that other dude who ends up winning 1% of the jackpot would be well worth the $198 investment.
Are you daft or making fun at people who are bad at maths?
So the first ticket means you get 1/2 of the jackpot. The second ticket only adds 1/6th of the jackpot. The third ticket adds the difference between 3/4 and 2/3 which is just 1/12th. The 99th ticket is worth 1/2500th of the first ticket. Your chances of winning haven't grown, the expected winnings have about doubled. For the same money you could have increased your chances of winning by a factor 99.
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Your leaving out the entertainment factor.
One ticket is less than a cup of coffee at Starbucks or a large soda at most restaurants. It is about the same as a song on Itunes.
So is the fun of possibility of winning several hundred million dollars worth the cost of a cup of coffee?
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You're both right because you're talking about two different things. Investments have return on investment, consumption has utility. If I'm thirsty a bottle of water is very valuable but two bottles are only marginally more useful, even if they cost the same. Obviously the pool consists of the people who bought tickets minus cost and profit so the expected return is negative and as an investment it's terrible.
As a consumable, one lottery ticket lets you dream of winning the lottery - hope is a powerful thin
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How about lottery pools. A few years ago a group of 6 or so IT staff (all on the same team) won the mega millions, ~$200 million. What happened to the seventh guy who didn't put his cash in with the rest of the group? After a few weeks of staring at 6 empty chairs knowing why those chairs were empty, he quit and took a mall job. I'd hate to have been the manager of that team...
Re:I'll take the wine instead (Score:4, Insightful)
People don't gamble for a guaranteed payout of the expected return. If that were the case, casinos would consist only of a teller window where you'd hand in a $100 bill and get $70 in return. People gamble in hopes of being an outlier when it comes to the actual return. Some gamble in small stakes game, for them it's mostly about the thrill of the game itself; most games are more fun when there's actually something at stake, even if it's a candy bar. Others gamble in lotteries, in order to increase their chances at riches from a flat zero to some tiny probability. That's a poor decision only if you look at averages.
My advise: gamble away, as long as you don't gamble with money you don't have or can't afford to miss, and don't count on a positive outcome. That goes for lotteries as well as insurance (or more accurately: not having insurance)
Re:I'll take the wine instead (Score:5, Interesting)
You have insurance? Same thing: the expected return on insurance is also negative (insurers need to make a profit somehow, after all), and based on that value it seems silly to have it... until you ask the owner of the uninsured house that burned down.
Red herring. The expected value of your insurance is fairly close to its cost. More importantly, if the probability that your insurance would have to pay out were astronomically low, it wouldn't, in fact, make sense to buy insurance. But it's not. The probability that something will happen that causes you to need that insurance is non-negligible.
With that said, I find this conversation funny because both sides are ignoring the whole point of the article, which is that even if the cost of the lottery ticket exceeds its expected value (and it usually does), and even if the odds of winning are so small as to be negligible (for big prizes they always are), the lottery ticket often has net value for its worth as entertainment.
It's fun thinking about what you'd do if you suddenly had $200M. Really, it is. I can entertain myself for hours just thinking about strategies to manage it that wouldn't ruin my life by causing people to hound me for money, and yet still allow me to do the things that I want. I can do that (and sometimes do) without actually buying a lottery ticket, but paying the $2 for a ticket makes it dramatically more intense, and therefore entertaining. I don't buy many lottery tickets; I've probably purchased two or three in the last twenty years, but I've always felt like I got good value from them.
(Now we'll see if my AC stalker crapfloods responses to this post.)
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Have you ever thought about stealing the lottery's entertainment? I can get your $2 entertainment for $0.
I think you missed the following sentence from my post:
I can do that (and sometimes do) without actually buying a lottery ticket, but paying the $2 for a ticket makes it dramatically more intense, and therefore entertaining.
Having the ticket convinces my statistically-incompetent lizard brain that there's a chance it will actually happen, because said statistically-incompetent lizard brain is completely incapable of grokking small probability events -- and that same lizard brain has a direct line to the pleasure centers.
Re:I'll take the wine instead (Score:4, Informative)
I think the lottery is a win in general. Yes, you have people who become addicted or can't afford to spend the money, but that's life. On the plus side a lot of people sincerely enjoy playing and much of the cash goes to public works and schools and such. It's practically an optional tax, and the idea of taxes being optional I find fantastic.
Except for the fact that the lion's share of money raised by the lottery is from people purchasing multiple tickets. And for the fact that money raised by lotteries does not typically add to the tax base, it just allows governments to decrease the amount of money they send to the schools from out of general revenue.
http://stoppredatorygambling.o... [stoppredat...mbling.org]
"80% of Lottery Profits Come From 10% of the Players"
http://www.cpjustice.org/stori... [cpjustice.org]
"...What we found, however, was that lotteries did not enhance the funding of public education. Lottery states actually used a smaller percentage of their wealth for education than did non-lottery states...."
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I still maintain that by not buying a ticket my odds of winning are not significantly reduced.
Precisely true. I've won $175 in lottery money from scratch tickets, but I've never bought one.
Instead, some of my relatives have taken to giving a few of these as gifts at Christmas. I think it's ridiculous, but whatever. So, over the past few years, I've won something like 5 or 6 tickets for a total of $175, including one ticket that got me $50 and another that got me $100.
No one else in the family has ever won more than $20-25 on a single ticket, despite some of them buying scratch tickets on a re
Old Joke (Score:4, Funny)
So this woman goes in to church and prays to God.
"God, you know our situation. My husband is in the hospital. I can't find a job. Our kids are hungry. Our house is in foreclosure. We have no money to pay the bills. Please, God, if you would let me win the lottery, all of our problems would be solved."
Lottery comes and goes and the woman doesn't win. So she goes back to church and prays again.
"God, our situation has gotten worse. My husband is home from the hospital but is sick. All of the kids are now sick as well as hungry. The bank says they're going to kick us out of the house. The power and gas have been shut off. Please, God, let me win the lottery so that we can be happy and we will only take what we need to get back on our feet and then donate the rest to the church!"
Lottery comes and goes and the woman doesn't win. So she goes back to church and prays some more.
"God, we're in desperate straits. The police have kicked us out of our home. They bank has taken all of our posessions to pay off the debt. My husband and children are living in the park, but the police have threatened to kick us out of there. Please, God, don't forsake us! Help us by letting me win the lottery!"
Suddenly, she hears a booming voice say:
"Meet me halfway! Buy a ticket!"
Thanks. I'll be here all week.
A tax on stupidity (Score:5, Funny)
I figure the lottery is a tax on stupidity. And if it goes to $500 million I'm easily ten bucks' worth of stupid.
Re:A tax on stupidity (Score:5, Interesting)
"Shoot Honey, after taxes, forty million wouldn't make a dent in our lifestyle"
Re:A tax on stupidity (Score:4, Funny)
Let's assume it's all about the entertainment value of the fantasy of winning. Then, it's perfectly logical: for the same $2, a $500 million jackpot provides 12.5x the entertainment of a $40 million jackpot.
Or as Dirty Harry might say:
I know what you're thinkin' - is it 500 million or only 40? You just gotta ask yourself one question: do I feel lucky? Well, do ya' punk?...
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Maybe, but... I'm trying to think of the things I could buy (or do) with $500 million that I couldn't also buy (or do) with "only" $40 million. I'm not coming up with a whole lot. Moon base, maybe?
I fear you may be grossly underestimating the cost of a Moon base. I mean, the Chinese Chang'e 2 lunar orbiter mission cost around $150 million; I can't find a price tag for their unmanned Chang'e 3 rover, but I can't imagine it would be cheaper. Forget putting a man on the Moon--either to live, or especially if you're concerned about getting him back again....
Back in the mid-2000s when you could buy a seat on a Soyuz launch for a week or two on the International Space Station, the quoted prices [wikipedia.org] were b
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Don't forget the risk (Score:3)
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You have the illusion of control, but no actual chance to do anything about a drunk coming into your lane or t-boning you at a red light.
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Can't you play online? Most European lotteries allow you to buy a virtual ticket with an online account.
I've always wondering what would happen if you had a winning online ticket. When you win smaller prizes you get an email saying "we have some good news about your ticket" but not the actual amount. You then log in and see "congratulations, you won â2.50!" Would it just say "congratulations, you won â25,000,000!" or what?
Normally the money goes into your online account balance and you can withdra
Split pot? (Score:2)
I doubt they discount the expected value based on the possibility of a split pot.
Without knowing how many people are playing this round, you don't have totally accurate estimates.
Before you get started with your Maths (Score:3)
You probably have a better chance being eaten by a polar bear and a regular bear in the same day than winning the big prize on the lotto.
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The rare bear metaphor stands on its own merit.
I always keep (Score:5, Funny)
I always keep (Score:5, Funny)
Cheap entertainment for obsessive planners! (Score:2)
I buy tickets for the state lotteries each week. Relatively low payouts compared to Powerball, with a greater (but still infinitesimal, 1:6,000,000 or 1:2,000,000) chance of winning.
It is entertaining, for an OCD-ish planner like me, to jigger with figures (inflation, taxes) and imagine what kind of lifestyle and payouts to relatives the week's jackpot would support.
FWIW I'm an extremely aggressive saver, have a rigorous household budget, and live a modest lifestyle; there's a good chance I'll be able to re
Why not fantasize about finding a winning ticket? (Score:2)
The odds aren't appreciably closer to zero, the enjoyment is the same or greater, there is no chance of disappointment, and the cost is zero.
If you invest the $104 a year you'd otherwise spend on lottery tickets then with interest at the end of 40 years (from age 20 to age 60) you will have accumulated about $9K, assuming 3.5% interest.
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Where does one get those magical 3.5% interest? I wouldn't be surprised if government bonds pay less than that by now.
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Optomist...
$9,000 US dollars in 40 years will be about $5.00 US value. In fact a large Coffee at starbucks will cost $10,000
As long as it's only one ticket (Score:2)
As many have already pointed out, $2 won't even buy a decent cup of coffee, so most people (or, most people who post here anyway) wouldn't miss it. Regardless of how one might feel about the value received, the investment is pretty much down in the noise.
But where this can do damage (to anyone, not only the minimum-waged) is the mistaken belief that one can acquire the prize by buying a *whole lot* of tickets. Every once in awhile you hear of people who have hocked their possessions and put every dime the
if buying a speck of hope is what.. (Score:2)
..floats your boat, go for it. people spend stupider money on "fun".
absent that type of reason, don't bother rationalizing, there's no rational point in buying lottery what-so-ever.
Would I blow that much anyway? (Score:2)
I'm one whose behavoir aligns pretty well with the article. I start playing the lotto when the jackpot gets north of $150 million. Statistically and historically it's wasted money, but I can blow $10 here or there without much consequence. If I saved and invested all the money I wasted on powerball, I'd have maybe $1,000-2,000- not a life changing amount of money for me.
As I type this, a thought occurs to me- maybe I should double my lotto expenditures- every time I buy lotto tickets I deposit the same amo
I spend about $60 bucks a year on Powerball (Score:2)
When it gets over $350 million I spend $20 on 10 tries.
I read the article, and it is interesting considering what one's initial expenditures would be.
Of course I don't expect to win, I will check my numbers in the morning.
I have, luckily, had much better performance with roulette, where I stand at about 300% above where I started all told (under $2000 in earnings total). Good times, I like Vegas every few years...
Figure ALL the odds (Score:2)
I can't back it up (I've never done that before on /., really) but I read somewhere that your odds of getting killed at the convenience store or on the trip to the convenience store to buy the lottery ticket are greater than your chance of winning the lottery jackpot.
Much better deal is available. (Score:2)
Idea stolen from here [dilbert.com]
The Mathematical Case for..... (Score:2)
Yes, the Powerball is 175 million to 1 against winning, being $15 million or $450 million. The odds don't change. There are only so many numbers.
But so what? The cost of 'a' Powerball ticket, $2, is trivial. If $2 really makes that much difference in your budget....even $2 a week, every week....then you do not need to do it, whatever the percentages say.
I spent $20 on this drawing (Score:2)
I almost never buy lottery tickets but every once in a while when the pot gets big I'll spring for some quick picks on the off chance I'll win. It's money I can easily afford so why not take the chance. Now if I was spending every week on the lottery that would be stupid but every once in a while isn't that big a deal. It's kind of like when I go to Las Vegas and play blackjack. I'll take maybe $250 in to play with and I quit if I loose it all.
If by some strange chance I do win I'll reserve enough to li
Pure expected value analysis misses the point (Score:5, Insightful)
The expected value of a gamble being positive does not necessarily mean it is a good idea for a limited human.
Consider, for example, a lottery which cost $50K to enter, and returned 10e80 dollars with probability 1 in 10 billion.
Expected value dictates that it's an absolute home run, but 99% of individuals would not take that bet, because with near-certainty it will bankrupt them.
Similarly, for most, a $1 bet for a $1M jackpot with 1 in 1.1 million odds (e.g. negative EV) is better than a $1 bet for a $10M jackpot with 1 in 9.9 million odds (e.g. positive EV).
Why? Because of the nonlinear value money has to an individual.
If it's so good (Score:2)
Title misleading (Score:3)
There are some basics involved (Score:2)
Yes, the odds of winning are 1/175M. But the odds of winning without a ticket are exactly zero, which is inifnitely smaller than 1/175M. Also, they run these lotteries until someone wins, which means SOMEONE has to win. That someone could be you if you buy a ticket. It CAN'T be you if you don't.
Me? I never buy lottery tickets. My life is pretty good. Not wealthy, but rich.
RS
I hate the lottery (Score:2)
Useful gain (Score:3)
3, 33 or 333 millions. Would that make any difference? I don't think so.
It you want to calculate the expected gain then you should only consider the useful gain.
For me, 1 or 2 millions would be enough for the rest of my life so if I had to choose a lottery, I would pick one that maximize the probability to gain that amount. Any lottery with a smaller maximal gain (e.g. a few millions) but a higher probability is a better choice.
Guy refused to do the math for break even (Score:3)
If the odds are 1 in 175 million, then a $2 breaks even when the after tax, instant profit exceeds $350 million. In this particular jackpot was $564 million. Instant payment of $381 million. Now, taxes (and the chance of splitting it with others) makes this not a real investment, but it got pretty darn close.
But if the jackpot got to say $800 million, buying a ticket becomes a mathematically good bet.
But there are other things going on. Honestly, if you hit the jackpot for anything over 20 million, it won't make that much of a difference. It will radically change your life in pretty much the same way. Most likely you will gain somewhere between six months to one year of happiness, a year or so of realizing that things are going poorly and then the rest of you life with a CRAPLOAD of depression and anger about how everything went to hell.
Why? Because if you gain something too quickly and easily, you neither value it nor do you know how to maintain and keep it.
Chances are very high you will want to help out a few people you know that really need it, which will cause a bunch of people that don't really need it to come begging for help. If you turn them down, suddenly your friends turn on you. If you don't turn them down, suddenly you are broke.
Your leisure activities will dramatically change and your friends won't be able to afford to go with you unless you pay for them. Which turns the relationship from friends to hanger-ons. It's hard enough to keep family from disintegrating, let alone your friendships.
Honestly, my advice to anyone that wins is to REFUSE TO TELL ANYONE YOU WON. At most, tell them you won a smaller amount. Don't sign anything giving up your privacy, instead keep it a secret from EVERYONE you are not married to. Set up a Trust that will anonymously help people you think truly need it, and do NOT take credit for it.
You can't 'bring your friends' along for the lifestyle, but you can occasionally show them a fantastic time.
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You're missing the point. $2 is worthless to me. I can't buy a coffee (one I would drink) with $2, someplaces you won't even get a soda with it, and maybe would get me breakfast if I ate a donut but if I'm honest I have trouble thinking of a single restaurant I'd actually eat at with something on the menu for $2 or less.
$200 million is worth a lot to me, there's so much I can do with it.
Therefore, it's worth my trading $2 for the prospect of $200 million because I give away something I don't value ($2) fo
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Therefore, it's worth my trading $2 for the prospect of $200 million because I give away something I don't value ($2) for the chance of having something I do value ($200 million)
Why would you want something that is a hundred million times more worthless than what you already have?
I normally wouldn't be this generous, but I like you and you sound like a nice guy. If you ever find yourself in this situation, I'll only charge you $10 to take that useless $200 million off your hands. My normal rate for such cleanup would be $100.
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You're missing the point. $2 is worthless to me. I can't buy a coffee (one I would drink) with $2, someplaces you won't even get a soda with it, and maybe would get me breakfast if I ate a donut but if I'm honest I have trouble thinking of a single restaurant I'd actually eat at with something on the menu for $2 or less.
No, $2 isn't "worthless" to you. It's worth precisely $2. You may not be able to buy much with it by itself, but if you're at a store trying to pay for your new tablet with cash and you only have $298 in your wallet instead of the $300 price, well, that $2 could cause you some annoying inconvenience, at a minimum.
Of course, if I only made minimum wage I might really care about those $2, but I don't
And this is the real problem. The amount people spend on lottery tickets per year seems inversely proportional to their income (to a point). It's not that a $2 ticket is going to be a huge inco
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I don't see my home as an investment. I'm buying the ability to knock down walls and move power outlets if I want to at a premium. Installing central air was expensive, but in my climate it's not very common. Somewhere down the line, I can install a hot tub in the back yard, again very expensively. I won't be able to get my investment back when I sell it...but it's worth it for me personally as an owner.
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I won't be able to get my investment back when I sell it...but it's worth it for me personally as an owner.
If you can't get your investment in a hot tub or air conditioning back when you sell, then how does it differ in any practical sense from renting?
The reason to buy instead of rent is specifically for the investment in the property itself. At the end of ten years of renting you have no equity; it is the equity in a purchased home that makes it different.
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When I was renting, everything that needed to be repaired seemed to also be an excuse for raising the rent. When we had a hot summer and our air conditioning broke, our landlord claimed that fixing the AC cost so much that it necessitated a large rent increase.
With buying a house, our payments are fixed. Yes, repairs are our responsibility (and given that we have an older house, we've had more than our fair share), but those can either be prioritized (peeling paint comes after fixing a broken chimney) or
Re:Another silly decision (Score:5, Insightful)
And in the meantime you are shelling out for taxes, maintenance, and being rooted in one area.
If you think that rental rates don't include the taxes and maintenance, you're naive.
And in many areas, house prices go down. So when you buy a house for an investment, you are really speculating
The question is not one of absolute values but of relative. "Buy instead of rent", not "buy for investment". When you leave a house, even if the value goes down, you still likely have some equity. When you rent you walk away with nothing.
The OP was saying that he was buying not for the investment but because he could install air conditioning and a hot tub even if he couldn't get his money back on them when he sells. He won't get his money back on them when he rents, either, so what's the reason to buy?
Yes, I know everyone in the media and our politicians calls home ownership an investment, but they are wrong. 2008 proved that.
2008 proved that people who bought houses they couldn't afford lost money. My house has doubled in value. When my bank offered me two options (fixed and ARM) I opted for the one I could afford. That meant looking five years down the road and seeing the balloon. There was no gun held to my head to pick the wrong option.
The people making money or I should say, making the decent returns, on your house are the banks.
Why yes, they make money off the loan (as they should -- they take a risk loaning money and they don't have it until I pay it back), but I will still have a good chunk of change should I ever decide to sell. Not as much money as I spent total, but nothing to sneeze at. And at no point in my loan was I ever upside down, simply because my eyes weren't bigger than my stomach.
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The main reason the banks are profiting from on houses is because they have essentially socialized the risk of their investment while keeping the profits private. The reason for interest on loans is to overcome the opportunity cost of lending the money to a borrower in addition to the risk of default. Under a "normal" system, the 2008 housing crisis should have caused all the banks holding the loans to go under. The threat of this happening is what is supposed to prevent the banks from making risky inves
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Under a "normal" system, the 2008 housing crisis should have caused all the banks holding the loans to go under. The threat of this happening is what is supposed to prevent the banks from making risky investments in the first place.
That's true. But the banks weren't allowed to properly evaluate the risks.
In this scenario, where you are essentially gambling with someone else's money (i.e. the tax payers)
Yes. And that's fair since it is the representatives of the taxpayer who forced the banks to ignore the risks and make the loans anyway. The Community Reinvestment Act was a legislative act that forced banks to make loans despite well-known and patently obvious risks. When a bank was required to include things like unemployment payments and ignore past credit histories when deciding which loans to approve (and how much money could b
Re:Another silly decision (Score:5, Informative)
The CRA did NOT cause the financial crisis! This has been debunked many times. In fact in ~75% of communities CRA loans had lower default rates through late 2009 than traditional conforming loans (let alone crap like interest only, sub-prime, and liar loans) due to more stringent underwriting criteria. No, the cause was improperly rated securities comprised of crap that was sold in bundles to the big banks and through the back door to Fannie and Freddie.
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That's true. But the banks weren't allowed to properly evaluate the risks.
Yes. And that's fair since it is the representatives of the taxpayer who forced the banks to ignore the risks and make the loans anyway. The Community Reinvestment Act was a legislative act that forced banks to make loans despite well-known and patently obvious risks. When a bank was required to include things like unemployment payments and ignore past credit histories when deciding which loans to approve (and how much money could be loaned), then those who forced the high risk loans should be the ones responsible when they fail.
That the "community activists" (ACORN, PUSH, etc.) jumped on the CRA bandwagon to threaten banks that didn't make enough risky loans with legal action is still a side-effect of the legislative regulations that our politicians enacted. Their actions led to the collapse. Be angry at them, not the people they forced to make the loans.
I mostly agree with you, but consider the fact that the CRA really only got the ball rolling. The banks were forced to take on vastly more risk than they ever would have under normal circumstances and the pressure to do more of that was only increasing. The banks responded to increasingly frightening balance sheets and risk management warnings by investigating ways of continuing to provide ill-advised loans forced upon them by CRA and public policy without carrying the risk long terms. In other words, they
Re:Another silly decision (Score:5, Interesting)
And in the meantime you are shelling out for taxes, maintenance, and being rooted in one area.
Those are included in rent as well, just not broken out as line items, but they are there.
So, for a single family home that you live in, it is an expense. Yes, I know everyone in the media and our politicians calls home ownership an investment, but they are wrong. 2008 proved that.
It is both actually... the trick is not to move every 5-7 years...
I've been in my home for 10 years, at my current rate of payments, my mortgage will be paid off in the next 6 years. I'm not paying anything more per month than local rents for the same size house would cost, yet in 6 years, I'll own a $400k house free and clear.
That strikes me as an investment. Per month, I'm paying $3,000 including PITI and some extra towards principle. That $3K is about what the same house rents for.
Now it is true that I have to do repairs, replace the HVAC and water heaters, both of which I've done... but those rather pay for themselves when you're willing to buy the good units. My HVAC replacement was just over $17K for a pair of units (3,800sqft, so a 5 ton and a 3 ton unit). However they replaced a 15 year old 13 SEER single stage unit with a 16 SEER dual stage, dual speed unit. The savings in my electric and gas bills over 10 years makes the replacement free, vs. keeping the older units. Had a landlord done it, do you really think he would have put in such nice units into a rental house that he isn't paying the bills on?
Your equity? Let's put it this way, if Congress ever removes the mortgage interest deduction, attitude about homes being an investment will change. The people making money or I should say, making the decent returns, on your house are the banks.
Meh, at current rates, it isn't that big a deal... it is mostly in people's heads...
My current mortgage is 3.5%. The annual interest is less than $10K. It is a deduction, not a tax credit, so my actual savings from it is about $2,500 in taxes, give or take a few hundred. It is nice, but not the reason to own a home.
We have been programmed in our society to take on debt: cars, houses, education, etc ... And our tax system has also distorted how we "invest" our money.
Cars and education I agree with you, to a point... A car can be an investment if it lets you get to work. Leather seats and a V8 are not required for that however, those are luxuries.
Education? That can be an investment, if you pick the right major and go to cheaper schools and don't rack up stupid loan amounts.
Both can also be bad... it just depends...
Debt is a wonderful thing, if it makes you money, which it can... I've financed equipment and inventory purchases before and earned back many times the cost of debt. That is "good debt".
Putting a trip to Europe on the Visa that you can't pay at the end of the month? That is "bad debt".
It isn't complex, but debt can be both good and bad, depending on what it is used for.
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Quite a trick considering the broken social contract. No employer will employ anyone for the long term or take the risk to train someone for a particular job anymore. YOU take the long term risk. Your house payments are a liability.
Then why do you work for someone else?
I started my first business when I was 19 years old... other than a few bits here and there, I've worked for myself for over 20 years...
If you do want to work for someone else, if you live in a decent sized city, there is always work to be found...
Stop paying your property taxes if you believe that. We'll see how long that delusion persists.
Yea, and if I don't mow the lawn, the city will come do it and bill me a lot of money. I'll own the house free and clear from a mortgage payment, that should have been obvious... taxes are still a social obligation, but my
Henry VI, part 2 (Score:3)
We'll need engineers in 20 years, that would be a fairly safe bet... Probably lawyers too... And doctors...
I'm not sure we need lawyers now, let alone in 20 years
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And watch my rent go up, or watch the landlord sell the place out from under me, or get foreclosed on, or decide to move in themselves? No thanks. I'm also paying a premium for stability. Yes it's dependent on keeping a stable job, but it really cuts down on the number of things that could force me to move. Peace of mind is invaluable.
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I think you meant to say "just sayin'"
just sayin'
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lol say that to the people who bought a home in toronto or vancover in the past 15 years. quadruple their investment
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buying a home. Hasn't made sense since the 1970s. The social contract is broken, you no longer can rely on job security or a decent pension. Yet the banks still expect you to pay them on time. A home is a *liability*, not an investment.
No, rent is a liability with no possible return on what you put in. Renting is for suckers and I wish that I had bought over a decade ago instead of renting all that time. I finally got into the property market and the assessed value of my condo has increased in just 6 months.
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I rented for a long time -- ten years -- and recently "bought" a house. The fact is, most people borrow the money to get a house, I know I did. So in the first instance, I was renting a property directly, but the second is like renting money to buy a property. In the second instance, there's a whole lot of extra maintenance issues that aren't included in the monthly payment either and so I figure I'm paying roughly double to rent the money to buy a house than I paid to rent a (very nice waterfront) apart
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buying a home. Hasn't made sense since the 1970s. The social contract is broken, you no longer can rely on job security or a decent pension. Yet the banks still expect you to pay them on time. A home is a *liability*, not an investment.
That depends entirely on your situation. For me I'll have 30 years in my current job in April and I paid off my house 6 years ago so living has become very inexpensive for me. When I retire in 2 or 3 years it will be a bonus not to have to pay rent or house payments. My basic living expenses are only about $600/month.
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You enjoy your $1200 a month rent while I enjoy my much bigger place in a better neighborhood for $600 a month.
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And since I paid my house off 6 years ago I'm spending $0 a month (well really I have to reserve about $200/month for property taxes).
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So you're still paying rent basically. What happens if you stop paying those taxes? That's the problem with people just starting out now.. There is no job stability and taxes only go up.
Re: Another silly decision (Score:2)
Yeah until you are 60 and too old to work and can't ever retire as your landlord forces you to work forcing you to be a Walmart greeter
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Buying a house is fucking expensive. If you took the difference in cost (between renting and buying the same property), and put that in an index fund, there is a pretty good chance that you will have a bigger pile of cash saved up after 15 or 30 years than what you would have from selling your house at the end of your loan.
The big difference is that buying a house forces you to invest that extra money. That investment may or may not be a better investment than the stock market.
Buying a house even when it
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buying a home. Hasn't made sense since the 1970s. The social contract is broken, you no longer can rely on job security or a decent pension. Yet the banks still expect you to pay them on time. A home is a *liability*, not an investment.
Landlords expect you to pay them on time, too.
I bought a home in 1998. It's paid off now and worth over double what I paid for it. Somehow, I'm just not regretting my silly decision to buy.
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At least in the Bay Area the housing prices have recovered and are higher than ever. California recovered faster than most of the country. Even during the crash my house was still worth quite a bit more than I paid for it back in 1997.
Re: Another silly decision (Score:4, Insightful)
Indeed. And our apartment was raising the rent by $150. So we found a house, and are now paying $100 less (after mortgage and escrow) each month, plus the enjoyment of simple things like being able to paint or remodel, and plant a garden or have a bonfire in the back yard. Seems like a solid choice despite the social contract.
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Definitely a good option in your case. In ours, we found a townhome that allows us to paint and do limited remodeling, and plant a garden. And if anything major goes wrong, we don't have to foot the bill. Oh, and there's rent control on the entire complex, so raising the rent is indexed against property taxes (meaning property tax would also be going up like this).
Other than as a financial investment, I really can't see the reason for buying a condominium though -- you pay just as much, and own no land (
Re: Another silly decision (Score:5, Insightful)
Definitely a good option in your case. In ours, we found a townhome that allows us to paint and do limited remodeling, and plant a garden. And if anything major goes wrong, we don't have to foot the bill. Oh, and there's rent control on the entire complex, so raising the rent is indexed against property taxes (meaning property tax would also be going up like this).
Other than as a financial investment, I really can't see the reason for buying a condominium though -- you pay just as much, and own no land (but still have conditions you must agree to about property use).
I'd buy land in a rural area if I could afford to live there -- but that's what retiring people tend to do, and it's bumping up the land value pretty much everywhere as the boomers retire.
The big difference between renting and buying is that instead of throwing away money to pay someone else's mortgage, you are building equity in your own property. You do "own" a portion of the strata if you bought a "freehold" instead of a "leasehold". The latter is rent free for a period that is usually 99 years and after that date, you lose whatever value you had and have to enter into a lease with the land owner.
A Home Without Equity is Just a Rental with Debt (Score:5, Informative)
The big difference between renting and buying is that instead of throwing away money to pay someone else's mortgage, you are building equity in your own property.
This was common sense in the 1960s and 1970s. Now with debt consolidation, second/third mortgages and other similar schemes, home equity is frequently tiny or illusory.
there's an excellent report on this matter that was published more than 10 years ago.
A Home Without Equity is Just a Rental with Debt:
http://papers.ssrn.com/sol3/pa... [ssrn.com]
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Re:A Home Without Equity is Just a Rental with Deb (Score:4, Insightful)
It's silly to say that it made more sense in the 60's and 70's than today, because nothing about the economics have changed, only the behavior of mortgage holders.
Even so, whether one is a better decision depends on the interest rates, the length of the mortgage, realtor fees, and what the market is doing. This calculator lets you figure it all out, and is actually a pretty impressive applet in terms of presenting information and allowing you to quickly get a grasp of all the variables in the problem: http://www.nytimes.com/interac... [nytimes.com]
The big thing that changes the equation the most IMO is going with a 15-year mortgage. Especially considering that rates are generally 1% lower on the shorter mortgage, it makes a dramatic difference in how your equity builds. For instance, on my home I could've taken a 30-year at 4.75% and paid $1100 a month, with maybe $100 of that going to principal. Instead, I'm paying $1400 a month on a 15-year @ 3.75% interest rate, with $700 going to principal every month. Think of it this way: would you pay $300 a month to get $600 more in equity every month?
Of course, the scenario changes as you get farther along in the mortgage, but conventional wisdom I've seen says that short mortgages are only for people who are intending to pay off a house and retire in it. Seems to me that short mortgages are best for anybody who doesn't like being a slave to the bank.
Re:A Home Without Equity is Just a Rental with Deb (Score:4, Informative)
Did you read the report before talking about short-sighted comments?
For those who don't want to read a 30-page report just to decide if you have a valid point (or if the report you linked is even relevant), I'll provide the summary that you should have provided, and try to guess at the argument you were trying to make (but didn't):
The report argued (in 2001, before the bubble and collapse) that much of the growth in housing was driven by relaxed lending which allowed more segments of the market to buy homes, and that this growth was driving an increase in prices. It further argued that if we saw a significant economic collapse, particularly a large rise in unemployment, that this effect could collapse.
Your argument, I presume, is that buying a house is risky because the price could collapse, leaving the borrower "upside down", holding a large debt they can't pay.
(Now we'll see if my AC stalker crapfloods responses to this post.)
You don't decide, the market does (Score:4, Informative)
According to Numbeo, the buy/rent ratio in Seattle is 10. That'sobscenely expensive (Boston is 3), but that's still pocket change compared to Geneva, Switzerland, where it's 35!!! Look at the numbers, the price *per square meter* in Geneva is 2x the average monthly disposable income.
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The catch is that you have to live in Alabama or New Jersey... ;^)
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Disposable income is what's left over after i pay all my bills, right?
No, that's discretionary income. Disposable income is what you have after you deduct taxes, but haven't paid for anything else.
http://en.wikipedia.org/wiki/D... [wikipedia.org]
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There are some regions where property tax hikes can really screw you over in that situation, but I guess in that case your house would be worth enough that you can sell it and downsize.
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You look at the probability of that happening. Renting just means you're certain to lose.
Probability that I have no equity after 25 years of renting a property: 100%
Probability that some great disaster means I have no equity after owning a property for 25 years: less than 1%
I'll take the second odds.
Of course you should think of the "what ifs" before making financial decisions, but concentrating all on just the risks and not at all on the upside is every bit as silly as thinking of only the upsides and igno
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So fucking what?
What's that get you? 1/3 of a small coffee at Starbucks?
It'll get you a medium ("Grande" in Starbucks-speak) coffee-of-the-day if you don't add anything to it. (Which is how I order it.)
But the point is still valid. The cost of a single ticket is down in the noise.