Shiller Thinks Owning a Home is a Terrible Investment

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cheese_breath
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by cheese_breath » Wed Oct 16, 2013 12:43 pm

I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by ryuns » Wed Oct 16, 2013 12:47 pm

Interesting article, though I don't believe this should really come as a surprise to anyone here. It seems intuitively unsustainable that house prices in aggregate could escalate more quickly than median incomes.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by tludwig23 » Wed Oct 16, 2013 12:54 pm

cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
+1

Not at all part of my long term retirement/investment plan.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by IlliniDave » Wed Oct 16, 2013 1:04 pm

For some/many people owning a home is a great idea. But I'm of the ilk that doesn't consider owning my home a financial investment at all. Someone else characterized it as a lifestyle choice, and I would generally agree with that, although for me personally it's maybe a quality of life choice (I just like the peace of mind that comes with being essentially un-evictable).
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by pop77 » Wed Oct 16, 2013 1:28 pm

Home is not an investment from an asset appreciation perspective. However is a great investment from an inflation hedge on expense perspective. I am assuming you are using some sort of financial prudence in determining how big a home you need. It gives me great comfort that the biggest expense I have is fixed and will not rise for the next 15 years. Home still has to me maintained and it is an expense that is not hedged against inflation. So are utilities and property taxes. However they are much smaller compared to rent. If you buy a house considering rent equivalent calculations you will not buy beyond your means.

Add to this, the government subsidies in the form of low interest rates and tax deduction on home loans.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by dbr » Wed Oct 16, 2013 2:57 pm

I own a home.

It is most definitely an investment.

It is not a very good investment.

I own a home anyway.

The above is true for a very large number of people.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Quickfoot » Wed Oct 16, 2013 3:01 pm

Rule #1 of life: You can find a smart person that will disagree or agree with anything, no matter how hair brained it is. Rather than worrying about what other people think (who are in completely different situations) people should focus on figuring out what works for them.

I've owned two homes, will own another one but not for investment. Owning a home protects you from rent inflation, 20 years into a 30 year mortgage you will be paying less (no PMI) or the same as you were 20 years ago while people that have rented the whole time will be paying significantly more.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by expat » Wed Oct 16, 2013 3:07 pm

It's speculation not investment.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by abuss368 » Wed Oct 16, 2013 3:38 pm

Interesting.

Thank you for posting.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by jwa » Wed Oct 16, 2013 4:12 pm

It puts a roof over my head and keeps me warm in the winter. That's good enough for me.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by lindisfarne » Wed Oct 16, 2013 4:20 pm

If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity. With each passing year, what I pay is a smaller percentage of what I would have to pay in rent. I do most work myself so maintenance costs are not too bad. I will end up saving money by owning over renting (I would have utilities to pay if I rented). However, the longer I own this house, the more I will save.

I would not advise people to buy a home thinking they will make money (after all maintenance, taxes, & insurance are considered). You should not buy a home if there is a good deal of uncertainty over whether you will have to switch to a job more than about 50 miles away. However, long-term ownership (especially if you buy a basic home, rather than a super-size home) generally will end up with the smart homeowner (who does most maintenance, & does not hire) coming out ahead.

Some people like having a landlord to call when something goes wrong. I absolutely hate renting. I hate the uncertainty, the inability to change things, and the fact someone else can make decisions that could force me to move. I don't like the fact I have to allow someone else into my home. Landlords vary in terms of how trustworthy they are. Owning pets makes renting even more expensive and it's more difficult to find an option that allows pets.
Last edited by lindisfarne on Wed Oct 16, 2013 4:23 pm, edited 1 time in total.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by bengal22 » Wed Oct 16, 2013 4:23 pm

All I can say is I have always treated my home as an investment. And not a terrible one at that.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Jack » Wed Oct 16, 2013 4:30 pm

lindisfarne wrote:If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity.
If it is true that rents are way out of line with ownership costs, the rational investment decision would be to move out and rent your home for a substantial profit, and then find a neighborhood where you could rent more cheaply.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by placeholder » Wed Oct 16, 2013 4:41 pm

Jack wrote:
lindisfarne wrote:If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity.
If it is true that rents are way out of line with ownership costs, the rational investment decision would be to move out and rent your home for a substantial profit, and then find a neighborhood where you could rent more cheaply.
1. He didn't say substantially more.
2. Running a rental is work.
3. A cheaper neighborhood would likely be less desirable. That's why it's cheaper.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by DVMResident » Wed Oct 16, 2013 4:50 pm

My home is definitely an investment. My net cash flow is $400-450 better per month than an similarly sized apartment in the same area (all costs included) and I expect that difference will grow larger over the years. Granted, I rent out the back house-so it's a hybrid place to live/income source.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Bungo » Wed Oct 16, 2013 4:56 pm

cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
Well said. Surely if there is anything we should have learned over the past few years, it's that the house you live in is an expense, not an investment. It MIGHT be worth more when you sell it, or it might not, and even if it increases in value, it may easily be outperformed by other assets (e.g. a nice Vanguard index fund) you could have bought with the money.

Meanwhile, the house is guaranteed to cost you money every month - probably more than you are paying in rent if you factor in all the expenses. Even after it is paid off, you still have to pay for maintenance, insurance, and property tax.

Buy a house if you want one and are in a position to afford it, but don't neglect real investments, such as retirement savings, in order to do so.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by hq38sq43 » Wed Oct 16, 2013 5:06 pm

Quickfoot wrote:Rule #1 of life: You can find a smart person that will disagree or agree with anything, no matter how hair brained it is. Rather than worrying about what other people think (who are in completely different situations) people should focus on figuring out what works for them.

I've owned two homes, will own another one but not for investment. Owning a home protects you from rent inflation, 20 years into a 30 year mortgage you will be paying less (no PMI) or the same as you were 20 years ago while people that have rented the whole time will be paying significantly more.
How about people who have rented, instead of people that have rented? I'm trying to start a movement against people that in favor of people who.
Harry at Bradenton

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by littlebird » Wed Oct 16, 2013 5:17 pm

Over my parents' lifetimes and mine, home ownership has been an excellent investment, my parents' good fortune ultimately devolving to me. So far in my children's lifetimes (they are now approaching their 50s) home ownership has been an excellent investment. So, while Nobel Laureate Shiller may *say* that home ownership is a terrible investment, and while nobody knows what tomorrow may bring, home ownership has been an excellent investment for several generations of my, probably approximately average, family.

And I didn't even mention my maternal grandparents who bought a 4 family house when my grand-dad retired from his factory job, and lived comfortably in one apartment, collecting the rents on the others, until grandma died in her mid- nineties.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Sconie » Wed Oct 16, 2013 5:28 pm

A home is primarily consumption in my view. And, it is somewhat similar to eating dinner-----would you rather eat hot dogs and beans----or steak?
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by lindisfarne » Wed Oct 16, 2013 5:30 pm

Jack wrote:
lindisfarne wrote:If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity.
If it is true that rents are way out of line with ownership costs, the rational investment decision would be to move out and rent your home for a substantial profit, and then find a neighborhood where you could rent more cheaply.
You've failed to take into account the costs of that option.
You haven't factored in the value of the time it would take to find a renter and hope they treat the home as well as I do, which is very unlikely, and thus, I would experience increased maintenance costs. The vast majority of tenants treat rental property with great disrespect and can cost landlords a fortune in maintenance costs.
You also haven't factored in the value of the time it would take to pack & move, rent a truck, hire people to help me move, then unpack & get everything put into place & get used to it (at least a year), and there's a monetary cost to stress. You also haven't factored in the cost of items damaged in a move.
You haven't factored in the time it would take to rent a home. You haven't factored in the stress of dealing with a landlord, or dealing with a tenant, or the headaches of dealing with maintenance at both places, plus having to let strangers into my rented place so that maintenance could be done.
You haven't factored in the additional cost of renting that comes with having pets.

Your option doesn't factor in the fact it makes no sense to rent one's own home & rent elsewhere (unless one cannot sell one's home). If I were going to rent, I would sell the home I own.

You haven't factored in the fact I really like my home and would not consider renting it to anyone, or moving out & renting somewhere else.

Plus, you missed the part of the message where I said "I hate renting".

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by NoRoboGuy » Wed Oct 16, 2013 5:46 pm

tludwig23 wrote:
cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
+1

Not at all part of my long term retirement/investment plan.
I do consider it "longevity insurance" that can be tapped late in retirement if needed. Having said that, I do agree a home should not considered a financial asset in a portfolio for investment purposes. "Everybody has to live somewhere."
There is no free lunch.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by TimesAWastin » Wed Oct 16, 2013 5:48 pm

I like articles like this because they make me feel better about not having the wherewithal to own.

Also I did some cursory math on it a while ago and, where I live and work right now, to buy a place with similar amenities, square footage, and location, owning would cost quite a bit more just counting mortgage and taxes, and not including maintenance (both in dollars and time). Eventually though there is the fact that you'd own this property and place and could sell it to get some of your money back. After some more speculative math (assuming the house's value would keep pace with inflation) it would take a solid 20-25 years from the time of purchase before I could consider the money being paid into the mortgage would not be "wasted" (as some call rent).

That does assume I could gather up the 20% down payment before the decade is out, and qualify for the mortgage, both hurdles that are not even on the same planet.

That said, in the right area, for the right price, owning sure would be nice. I'd enjoy a lawn, and the satisfaction of ownership.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Blues » Wed Oct 16, 2013 5:51 pm

cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
I agree. I don't even bother including it when calculating our personal net worth. (Yeah, I know...)
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by berntson » Wed Oct 16, 2013 5:59 pm

Image

This chart represents historic home prices since 1890 based on Shiller's housing data (http://www.econ.yale.edu/~shiller/data.htm). It indicates that after inflation, homeowners should expect the value of their homes to roughly keep up with inflation and not much more.

Note that Shiller's data is only for home prices, so this is not the whole picture. It does not include savings in rent, income from renters, or government subsidies (i.e. the home interest deduction). But it also does not include costs like property taxes, maintenance, and insurance.

Homes are like lawnmowers. No one buys a lawnmower with the expectation that it will appreciate in value. The reason you buy a lawnmower is to save money on lawn maintenance. Its usually cheaper in the long-run to buy a lawnmower and mow the lawn yourself than to pay someone else to mow your law. So buying a lawnmower is a good deal, but that does not make it an investment (in the sense that you expect it to appreciate in value at a rate that exceeds inflation).
Last edited by berntson on Wed Oct 16, 2013 6:09 pm, edited 2 times in total.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Jack » Wed Oct 16, 2013 6:07 pm

lindisfarne wrote:
Jack wrote:
lindisfarne wrote:If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity.
If it is true that rents are way out of line with ownership costs, the rational investment decision would be to move out and rent your home for a substantial profit, and then find a neighborhood where you could rent more cheaply.
You've failed to take into account the costs of that option ... etc, etc.
All you have told me is that you have a highly illiquid investment, which is really an argument against self ownership in the first place and decreases its value.

A high premium of rent to ownership is a market anomaly that cannot persist forever. It can take a while to adjust because of the illiquidity of homes, but it can't last forever. If there is a high premium for rent, then investors will go in and buy up houses in order to rent them out, enticing home owners to sell. This pushes up the price of houses until equilibrium is reached. Home ownership isn't the most efficient market, having lots of frictions, but that really says it is more risky. You can just as easily get burned by anomalies as profit from them.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by expat » Wed Oct 16, 2013 7:19 pm

A home is an unpaid job as a property manager, an opportunity to run an unprofitable business with no tax breaks for maintenance or depreciation, and opens the possibility of spending an excessive amount of money on unnecessary improvements.
Last edited by expat on Wed Oct 16, 2013 8:01 pm, edited 1 time in total.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by lindisfarne » Wed Oct 16, 2013 7:27 pm

Jack wrote:
lindisfarne wrote:
Jack wrote:
lindisfarne wrote:If I were to rent my home, I would be paying more than I currently pay for mortgage, tax, & insurance, plus I'm building equity.
If it is true that rents are way out of line with ownership costs, the rational investment decision would be to move out and rent your home for a substantial profit, and then find a neighborhood where you could rent more cheaply.
You've failed to take into account the costs of that option ... etc, etc.
All you have told me is that you have a highly illiquid investment, which is really an argument against self ownership in the first place and decreases its value.

A high premium of rent to ownership is a market anomaly that cannot persist forever. It can take a while to adjust because of the illiquidity of homes, but it can't last forever. If there is a high premium for rent, then investors will go in and buy up houses in order to rent them out, enticing home owners to sell. This pushes up the price of houses until equilibrium is reached. Home ownership isn't the most efficient market, having lots of frictions, but that really says it is more risky. You can just as easily get burned by anomalies as profit from them.
You're still not reading what I wrote. But we're getting nowhere.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by john94549 » Wed Oct 16, 2013 8:42 pm

A personal residence might, or might not, be a good "investment". If in a good school district (no need for private schools), check. If in a low crime area, check. If held for a longish period eligible for Prop 13 (California), check. If in an area with historically above-average appreciation, check.

Really hard to draw area-specific conclusions from general statistics.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by joe8d » Wed Oct 16, 2013 8:54 pm

Blues wrote:
cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
I agree. I don't even bother including it when calculating our personal net worth. (Yeah, I know...)
+1
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by berntson » Wed Oct 16, 2013 9:06 pm

john94549 wrote:A personal residence might, or might not, be a good "investment". If in a good school district (no need for private schools), check. If in a low crime area, check. If held for a longish period eligible for Prop 13 (California), check.
That is, a home is an "investment" in the same sense that a lawnmower is an "investment". You can reasonably expect to save money by owning a lawnmower. Heck, if it's an electric lawnmower, the state of California could even decide to give you a subsidy for owning it! But it's still not an investment in the sense that owning a Vanguard mutual fund is an investment: You still can't reasonably expect it to appreciate in value at a rate greater than inflation.
john94549 wrote:If in an area with historically above-average appreciation, check.
I found this suggestion most interesting. Maybe there are investment grade homes and non-investment grade homes in the same way that there is investment grade art and non-investment grade art? If a home is in the right area, then maybe one can reasonably expect it to appreciate in value. So it's an investment even if not all homes are an investment.

I'm asking this as an honest question. Do you (or anyone else) know of any statistical evidence suggesting that homes in areas with higher than average historic appreciation are more likely to have higher than average appreciation going forward?

(Compare: It is not at all obvious that stocks with higher than average historic rates of appreciation are likely to have higher than average appreciation going forward.)

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by kenyan » Wed Oct 16, 2013 9:52 pm

I consume shelter. It is important to me. I have consumed shelter via renting for many years, and only recently decided to change my consumption choice to house ownership. Financially, I am now worse off (though my house is nicer than any place I rented); I have a huge down payment that I cannot access, and my costs (which are well beyond PITI) are substantially higher. In addition, there is now a sizeable Load (6% or so - up to 9% perhaps if I decide to buy a different place) on moving. I also have to work much harder on maintaining the place, so there is the cost of my time as well. Sure, nobody - aside from perhaps the tax man - can kick me out, but I also can't move easily if I want to switch jobs/school districts or shorten my commute.

Now, because of this equity I am very slowly building, I do expect I will be better off in the long run. If we have much higher inflation than expected, I will probably be much better off, since I won't be facing continual rent increases. However, an investment? The place I live? Nah, not really doing it as an investment. I wanted the consumption choice to be financially prudent, but it's not an investment I'm counting on to make me money. That's what my retirement accounts are for.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Slapshot » Wed Oct 16, 2013 10:00 pm

I bought a home 39 years ago for $35,000. Today that home is worth Around $330,000, and that's down from over $400,000 before the crash. For the past 19 years it has been paid off. With a HELOC from that home I have purchased 2 investment properties, one of which is paid off and another is half paid off. I'd say that was a pretty good investment. Of course, like everything else, timing is everything.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Texas hold em71 » Wed Oct 16, 2013 10:30 pm

dbr wrote:I own a home.

It is most definitely an investment.

It is not a very good investment.

I own a home anyway.

The above is true for a very large number of people.
+1

Also... This just in... It is a horrible financial mistake to have children. Dogs, cats, pets- they will drain you. Why water your garden? It is just like throwing (pouring) water down the drain. There is more to life than rate of return - at least there is more to MY life than rate of return.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Blues » Wed Oct 16, 2013 10:48 pm

Texas hold em71 wrote:+1

Also... This just in... It is a horrible financial mistake to have children. Dogs, cats, pets- they will drain you. Why water your garden? It is just like throwing (pouring) water down the drain. There is more to life than rate of return - at least there is more to MY life than rate of return.
Image

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Leif » Wed Oct 16, 2013 10:59 pm

From the time I bought my house until now inflation has gone from $1 to $2.13. According to zillow my house value has gone from $1 to $4.30. Of course these results vary greatly depending on area. I'm lucky that my area has had good appreciation.

I now have another house, but I kept this as a rental. It is fully paid off. The rental I get is 4.5% based on the current zillow value, ignoring expenses. Once expenses are added in my return is around 3.8%. It seems to be reasonable stable income that will help in retirement.
Last edited by Leif on Wed Oct 16, 2013 11:04 pm, edited 1 time in total.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Harold » Wed Oct 16, 2013 11:02 pm

For those who like to view financial decisions in a fundamental manner, there’s a far less mysterious way to look at this.

As with any investment, the value of a home can be viewed as the present value of the cash flows it generates. A bond cash flow is dividends; a stock cash flow is dividends/earnings; and a home cash flow is rents.

If you buy a home, you’re prepaying the future rents – that’s what the cash price is. An assessment of potential inflation and other changes in future rents due to future supply/demand is already baked into the price. Depending on the markets, a suitable risk premium may or may not be already included in the implicit rate for discounting those future rents to determine the current price. A homeowner will also have a variety of expenses that will reduce (or even eliminate) his return.

As time passes, the value of the home will change due to a decrease in discounting period, rents you have received (or consumed if you live in the home), and the continual reassessment of rents and market pricing of those rents (i.e. discount rates). The home investment can be a very favorable one for the investor/owner if the future rents were understated – and even moreso if the price included a favorable risk premium that is realized. If future rents were overstated (or worse if the risk shows up, and rents aren’t collected at all), the investment can be quite bad. If all assumptions were correct, the price bumps up by the discount rate and is reduced by the rent he receives (or the rent consumed by the homeowner who is happily enjoying his home).

This has nothing to do with a mortgage payment. If someone decides to borrow to buy a home, he has decided to take on a defined bond-like negative cash flow in exchange for the positive cash flow of the rents. Besides the present value of the mortgage payments equaling the amount exchanged for a portion (or all) of the future rents, those cash flows have little relation with each other (in payment amount, risk level, etc.)

Just thought it might be helpful to offer an analytical framework.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by cbeck » Wed Oct 16, 2013 11:24 pm

cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
This statement is only true if you can afford to regard any loss of value on your home with indifference, in the same way you might view such a loss in value of some shoes that you have bought. If a loss of say, 30%, in the value of the house would not have any effect on your subsequent standard of living, then you can indeed afford to regard it purely as a consumption choice. Otherwise, you are fooling yourself.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by berntson » Thu Oct 17, 2013 1:23 am

Slapshot wrote:I bought a home 39 years ago for $35,000. Today that home is worth Around $330,000, and that's down from over $400,000 before the crash. For the past 19 years it has been paid off. With a HELOC from that home I have purchased 2 investment properties, one of which is paid off and another is half paid off. I'd say that was a pretty good investment. Of course, like everything else, timing is everything.
Well done. It's worth putting these sorts of gains in perspective though. Adjusting for inflation, $35,000 in 1974 is $165,000 in today's dollars. So you earned 1.8% a year (annualize) in real terms. You would have earned roughly 1.2% a year if you had invest in risk free t-bills. So you earned about .6% a year annualized over what you could have had risk-free over the same period. Keep in mind that this was also the biggest housing bull market in US history! Homeowners should not expect it to happen again.

On the other hand, owning a home also probably reduced your ownership costs. So the amount saved could be added to your gains as well. Not bad really. :beer

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by tludwig23 » Thu Oct 17, 2013 3:40 am

cbeck wrote:
cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
This statement is only true if you can afford to regard any loss of value on your home with indifference, in the same way you might view such a loss in value of some shoes that you have bought. If a loss of say, 30%, in the value of the house would not have any effect on your subsequent standard of living, then you can indeed afford to regard it purely as a consumption choice. Otherwise, you are fooling yourself.
The loss of say, 100% of the value of my house(1) would not have any effect on my subsequent standard of living. As long as I have no need to move or sell, the market value of my house makes no difference, except to determine my property tax rate.

(1) Assumes that the loss of value is due entirely to market valuation, not to a loss of the structure, land, water rights, etc.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by jaxxmjd » Thu Oct 17, 2013 3:52 am

I'd rather build equity in a property I owned than in an property someone else owned.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by magneto » Thu Oct 17, 2013 4:51 am

jaxxmjd wrote:I'd rather build equity in a property I owned than in an property someone else owned.
+1

Shiller says :-

Historically, between 1890 and 1990, the actual rate of return on owning a home has been virtually non-existent. We think housing is a great investment. Shiller says it's not.

Unquote

In addition to our own residence we are fortunate to own rental properties which by buying at the right time (when rental yields are high, and consequently property costs low) have proved some of the wisest investments we ever made.

Sometimes any asset class can be expensive, sometimes cheap (madness of crowds).

So very puzzled by Shiller's conclusion.
Last edited by magneto on Thu Oct 17, 2013 5:03 am, edited 1 time in total.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by IlliniDave » Thu Oct 17, 2013 5:01 am

Just for curiosity sake I did some back of the envelope calculations. The sum total of my down payments, mortgage P/I, property tax, and insurance come out to 103.7% of my homes current value per Zillow (and a distressing data point, within an eighth of a mile of my home, a house sold for 25% below its current Zillow estimate this past June). If I add in just the "large" maintenance costs I've hit over the years, I'm right about 120% of my home's present value. So my investment has paid around -1% per year nominal (lower maybe because I didn't convert the older dollars to 2013 dollars). I also paid off my mortgage more than 10 years ahead of schedule, so it could have been "worse". Taxes and insurance are about 1% of the home's value annually going forward, which about negate any appreciation over inflation for flyover country housing markets.

Of course, my bottom line is probably better off than if I'd rented for the last 15.5 years. But It's not easy for me to see that as a financial investment. Having bought vehicles I've saved a lot of money compared to taking a cab to work every day too, but almost no one considers a commuter car an investment. Tobias makes an interesting case in The Only Investment Guide You'll Ever Need that any cost avoidance can be viewed as an equivalent investment paying a rate of return equal to your tax rate--so it's just a matter of how far you're willing to extend definitions. You can make similar arguments for cars, lawnmowers (as discussed above), a stove, or a plumbing snake.

Certainly for a lot of people ownership is a net plus, so ownership can be considered an investment in the most general sense. Specifically as a financial investment in the narrower sense that we look at stocks and bonds, it doesn't stack up well (or meet the criteria that I personally use to define such investments). Many people were sold that story at the peak of the mid-2000s housing frenzy in an to convince them to overextend themselves to buy overpriced properties (caveat emptor) in place of traditional investments. Even now many consider their home as a primary retirement investment. That's probably what RS is objecting to.
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by tphp99 » Thu Oct 17, 2013 5:32 am

For the "home is not an investment" crowd, do you own your home, and how many houses have you bought/sold/currently own?

I've been both lucky and unlucky in real estate. But never have I actually lost money like I have with individual stocks. I simply hold on to the undervalued (paper loss) homes and rent them out - those homes act like bonds paying dividend. Of the 4 current rentals, "yield" is approx 4% after all costs factored in (including management = no sweat equity). I'm having trouble find bonds paying 4%.

Don't get me wrong, I've seen people lose quite a bit in real estate because they over-leveraged. But in all cases, their cash flow dried up and they become "insolvent", not because the houses were "consumed" and get discarded like a meal or a lawnmower. Not sure about that argument.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by jaj2276 » Thu Oct 17, 2013 6:27 am

joe8d wrote:
Blues wrote:
cheese_breath wrote:I learned long ago not to look at my home as an investment, but rather as a lifestyle choice.
I agree. I don't even bother including it when calculating our personal net worth. (Yeah, I know...)
+1
I actually do include my home, but only the amount of principal I've paid down (down payment + monthly principal payments). No price appreciation due to home values increasing or improvements I've made is included. So every month, I'm adding a little bit more to this investment in the form of my monthly principal payment. I view the interest, maintenance costs, HO insurance, and property taxes as my "rent." My rent declines every year (hopefully) due to the interest portion also declining (although possibly overwhelmed by increases in maintenance/HO ins/prop tax in any given year).

On the books, this investment will show a 0% return (and a negative return if adjusted for inflation) until I'm actually able to liquidate it.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Browser » Thu Oct 17, 2013 8:03 am

I'll bet there's a perfect correlation between posters who own homes and believe they are kinda, sorta, investment-like (build equity, longevity insurance, etc.) vs. people who don't and believe they aren't. Don't know why I'm saying that....cognitive dissonance maybe?
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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by sscritic » Thu Oct 17, 2013 8:17 am

Browser wrote:I'll bet there's a perfect correlation between posters who own homes and believe they are kinda, sorta, investment-like (build equity, longevity insurance, etc.) vs. people who don't and believe they aren't. Don't know why I'm saying that....cognitive dissonance maybe?
Are you saying that Shiller is a renter? Or that the author of the article is a renter? Or that the headline writer of the article is a renter? All three are renters? Wow, triple dissonance reduction!

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by Dinero » Thu Oct 17, 2013 8:21 am

A paid-for home generates tax-free imputed income.

Although you cannot directly spend such income, it remains a pretty good investment.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by czeckers » Thu Oct 17, 2013 8:25 am

Maybe not a good investment when viewed as an asset would be expected to provide net gains on an after-inflation basis.

However, for many Americans, home ownership is the primary way they accumulate assets through the equity in their home.

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Re: Shiller Thinks Owning a Home is a Terrible Investment

Post by leonidas » Thu Oct 17, 2013 8:38 am

I have never done any calculations on my home to determine if it was a good investment. I have owned 2 homes in the last 13 years. The first one I bought in 2000 for 255k and sold in 2005 for 605k. In those 5.5 years I paid about 40k in property taxes and maybe 75k in interest before any deductions. Then there was the closing costs for selling and all the fixing up...lawn maintenance..and the sale was tax free! Either way, I came out way ahead since I was leveraged (I put 55k down). The second home is a different story all together. Paid 700k and doubt I can get more than 625 now. 15k a year in taxes plus all the upkeep. Kind of like buying 2 stocks where one goes up a bunch and one goes down and in the end you matched the index, just with more risk.

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