Why do people take so big mortgage in USA?

Why do people take so big mortgage in USA?

Because:

1). They are taught that renting is dead money

2). That real estate can only go up

3). It isn't just the US. In fact some other countries have a bigger obsession with property.

They don't factor in:

1. Real estate doesn't beat markets. Not long-term. So the rental income needs to be good to justify this strategy. Very very good in some cases! A case in point. In the UK, apart from London and some `hot cities`, the price of real estate is still down in inflation adjusted terms compared to 2007. It isn't an extreme situation. Ultra long-term in the US, UK and several countries, real estate doesn't move as much as you may think. So if you bought a house in 2007, and let’s say the price is now the same in inflation adjusted terms, even the rental income won't be enough to beat the markets. Real estate does beat markets some years and even some decades, but ultra long-term, it doesn't. It lags a lot. Therefore, the rental income needs to be excellent.
2. You can get access to real estate more cheaply through REITS
3. Linked to point 2, direct real estate is expensive. You can get access to the US S&P from 0.03% per year. But fittings and other costs of real estate can be super high
4. In some countries real estate is good for tax, but in other countries it is not. In the UK, you can invest tax free in a stocks and shares ISAs. No capital gains tax up to about $20,000 per year. Not $20,000 of income, but $20,000 every year in investments. In comparison, stamp duty can be very expensive
5. Real estate is an illiquid asset. It isn't easy to sell if there is political uncertainty
6. As REITS are more liquid, it is easier to buy, sell and rebalance
7. Tenants may not pay and can be a pain in the ass.
8. Time is money as well. Having a low-cost portfolio of index funds, bond funds and 10% in REITS can be rebalanced once or twice a year. 20 minutes of work per year. But if you need to drive your car to your rental properties, you also need to factor in the costs of replacing things and your time.
9. There are risk to buying just 1 property like buying just 1 stock. A REITS index is less risky in this regard.
10. There are countless ways of earning passive income these days.
11. Leverage works in real estate but it can be dangerous. Leveraged losses and negative equity also exist.

Taken out of context, such a financial decision doesn't make much sense, but there is a good rationale.

If you look at the areas which support high housing prices and large mortgages in the $400–900K range, those are also areas that have high incomes and high income growth.

For example, here in the Bay Area, a $1M home is just the median price for a home. At that price point, you should expect to get a nice townhouse or maybe a smaller and older single family home. At $100K down, your $900K mortgage comes out to about $3750 a month if you have good credit scores.

Now, $3750 a month isn't chump change by any means and we still need to factor in about $1100 a month in property taxes and insurance. However, for the typical home buyer who can afford such a mortgage, their homeowner tax deductions and resulting refund can just about cover the property tax and insurance. For this part, it's more of a cash flow management issue as your tax refund comes 12–18 months later.

As for why it makes sense, there are a couple of reasons:

1. High rental alternative - with two bedroom condos routinely renting for $3000–4000, getting a larger single family home is a nice bargain. Since rent has been doing up by double digits per year, there’s no control over escalating housing costs as with a fixed mortgage on a home. Plus, you're getting principal repayment as a benefit of home ownership.
2. High income growth - with tech incomes going up by double digits per year, what seems expensive today will soon look like a bargain. Already, many young two-income couples are grossing over $300K per year after bonus in the Bay Area. With $25K per month in gross income, fixed housing cost of under $4K is very affordable. In a few years when they make over $400K in combined income, the $45K in mortgage payments becomes an after-thought, especially if the home had gone up to $1.2–1.3M. By then, they're more focused on buying their first investment property or paying off the first mortgage in a handful of years.

Of course, this scenario only works within the full context. If the couple doesn't make over $150K or doesn't work in tech, then those lower financial expectations should naturally lead them to a more modest price point for homes, perhaps a smaller single family home for $650K in San Jose. There are always scenarios that can make sense if the proper context is understood.

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