The Worst Investment You Can Make: Buying a Home

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surfstar
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Re: The Worst Investment You Can Make: Buying a Home

Post by surfstar » Mon Aug 25, 2014 2:55 pm

Seeing as they do not sell cheap, 1br apartments, I will continue to rent.
There is absolutely nothing affordable to my budget without adding an hour one-way commute.

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VictoriaF
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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Mon Aug 25, 2014 3:15 pm

longinvest wrote:
Greenie wrote: Renting might free you of some obvious homeowner expenses but you really want to deal with landlords?
Great post!
It's far easier to change a landlord than the home owners association.

Victoria
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Re: The Worst Investment You Can Make: Buying a Home

Post by technovelist » Mon Aug 25, 2014 3:28 pm

afan wrote:Unless you can find a charitable landlord who leases houses out of the goodness of his/her heart, you will be paying for taxes, insurance, maintenance, mortgage, and all other expenses of the home. For renting to be better than buying (for the renter) owning an house and renting it to someone has to be a bad deal for the owner. The owner must be charging less in rent than the cost of the home. This situation certainly can exist at some times and in some places. But if it exists at all times and in all places then no one would own real estate and rent it out because it would be a sure money loser.

The NYT table at least asks what it would cost to rent an equivalent house and compares it to estimates of the cost of purchasing. For my area and situation the Times says owning is much better than renting. Housing prices are high, but so are rents.

It is possible for renting to be a better deal in other areas. Of course, this values at zero the rights one enjoys in one's own home, that renters do not share. This ignores the risks of high inflation. The analysis assumes that comparable homes are available for rent in your area. Not true where I live.

But it is worth considering whether someone should make their house a very large portion of their total networth. It is a highly undiversified asset.
Many people have far more than 100% of their net worth invested in real estate, if you count the total price of the house, not just their down payment.

E.g., $250,000 house with $200,000 mortgage and $50,000 in other assets.
In that case, they have $300,000 in total assets and $200,000 in debt, for a net worth of $100,000.
But their real estate investment "amount at risk" is $250,000, or 2.5x their net worth.
That is WAY too concentrated.
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Re: The Worst Investment You Can Make: Buying a Home

Post by Johno » Mon Aug 25, 2014 4:21 pm

technovelist wrote:
afan wrote:Unless you can find a charitable landlord who leases houses out of the goodness of his/her heart, you will be paying for taxes, insurance, maintenance, mortgage, and all other expenses of the home. For renting to be better than buying (for the renter) owning an house and renting it to someone has to be a bad deal for the owner. The owner must be charging less in rent than the cost of the home. This situation certainly can exist at some times and in some places. But if it exists at all times and in all places then no one would own real estate and rent it out because it would be a sure money loser.

The NYT table at least asks what it would cost to rent an equivalent house and compares it to estimates of the cost of purchasing. For my area and situation the Times says owning is much better than renting. Housing prices are high, but so are rents.

It is possible for renting to be a better deal in other areas. Of course, this values at zero the rights one enjoys in one's own home, that renters do not share. This ignores the risks of high inflation. The analysis assumes that comparable homes are available for rent in your area. Not true where I live.

But it is worth considering whether someone should make their house a very large portion of their total networth. It is a highly undiversified asset.
Many people have far more than 100% of their net worth invested in real estate, if you count the total price of the house, not just their down payment.

E.g., $250,000 house with $200,000 mortgage and $50,000 in other assets.
In that case, they have $300,000 in total assets and $200,000 in debt, for a net worth of $100,000.
But their real estate investment "amount at risk" is $250,000, or 2.5x their net worth.
That is WAY too concentrated.
I think this is actually one reason why some people want to insist 'a house is not an investment'. Because if they accept that it is an investment (it obviously is, though also involves consumption) they have to somehow square the high debt and lack of diversification, necessary for most people to buy a first house, with the theory (or ideology is more like it in some cases) they employ wrt 'real' investments like stocks and bonds. And by the same token for the consumption aspect, it's less ridiculous to say you shouldn't ever borrow to buy a car* than it is to say you shouldn't ever borrow to buy a house. So it's convenient in that respect to treat a house as some special case that's neither like buying a mutual fund or like buying a car.

IMO one should look at the whole portfolio together. There are bad decisions which can follow directly from artificially separating home purchase and mortgage debt from other assets and debt. It's true that many people over-consume housing (ie consume too much imputed rent) and give the excuse 'well it's an investment' but I doubt such people would consume a lot less if they didn't call it an investment.

*though per recent figures around 15% of new cars are paid for in cash v around 40% of houses. But that doesn't include used cars, and for houses it includes many buyers also selling a house on which they paid off a mortgage over time, as well as a small % of people with a lot of money, who represent a disproportionate % of volume in all asset markets, and the 40%+ recently is substantially higher than it used to be.

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Re: The Worst Investment You Can Make: Buying a Home

Post by protagonist » Mon Aug 25, 2014 7:30 pm

VictoriaF wrote:
protagonist wrote:
afan wrote:But it is worth considering whether someone should make their house a very large portion of their total networth. It is a highly undiversified asset.
Yes, but in most markets it is probably a reasonably stable and secure asset (compared with, say, equities), and it provides the security of a roof over your head. Besides which, owning real estate (eg your home) is a great diversification tool whose value has little correlation with stocks or bonds. The key is purchasing wisely, buying something you can afford, and knowing your market. I certainly think that, say, 20-40% or so of one's total assets is very reasonable, especially if it can be done without going into debt.
The issue is that it's not known in advance which housing markets will be stable on the long run. Detroit used to be a major city; now it's rather unstable. D.C. used to be unstable; now it's flourishing.

As an analogy: Owning a house is comparable to owning a business. Renting is comparable to owning a globally diversified portfolio of stocks. One can make far more money in his business. However, not all businesses survive, and both successful and unsuccessful businesses require a lot of work. Index fund investing is far easier and more reliable. Furthermore, one can rebalance his liquid investments in response to the market movements, which is virtually impossible for a business owner to do.

Likewise, home owners are tied to their locations by (1) high cost of transacting in housing and (2) inability to react to man-made and natural calamities. After a calamity strikes houses become un-sellable. Renters, in contrast have an option to move anywhere in the world. This is a valuable option both for the professional mobility and for avoidance of risks related to local calamities. Moreover, a renter does not use any sweat equity for his housing and can channel his time and energy into enhancing his career and earning more money.

protagonist wrote:I'm thinking of a friend who bought an apartment in Harlem with cash, 5th Ave on Central Park, around 2000 for $250K that is worth nearly $1M now. My friend's other assets do not amount to more than $10K maximum. Unlike most of us, my friend was hardly touched financially by the 2008 crash or 9/11, despite living in NYC. And my friend has a great place to live that brings my friend pleasure on a daily basis. You can't live in your stock or bond portfolio.
I have a friend who used to live in a large loft in Lower Manhattan. After 9/11, she has sold it at a large loss. From the 2014 perspective, she made a poor decision, but at the time, she felt fortunate to be able to sell at all. I lived in New Jersey and still remember the horror of that time.

Your friend was fortunate in his or her decision; my friend was unfortunate in hers. The point is that their "fortunes" were a matter of luck and not predictable at the time when they were making their decisions.

protagonist wrote:The fallacy of the NYT article as I see it is that it is assuming purchase of a home with 30% down and a 70% mortgage. In other words, buying something you really cannot afford. The bank owns most of it, not you. Yes, that is the norm, because it is the American dream that our country has been sold on. But would you recommend buying stocks or bonds with 30% down, borrowing the other 70%, if you only have 30% to begin with and were faced with 7% annual expenses? For somebody to spend $350K on something- anything- if he/she only has $100K in assets is foolish.
The article addresses the majority of Americans who buy with a mortgage, and 70% mortgage is relatively conservative. People able to pay the full price for a house are rarity, the Bogleheads notwithstanding.

Victoria
I agree with all of your points, Victoria. I was not trying to make an argument for owning vs renting....that is a personal choice and each has its advantages. The points you made above reinforce the idea that a home serves a dual purpose- both as a place you live and hopefully love that makes you happy, and as an investment. No investments are completely predictable, but there is wise investing and foolish investing. Your friend panicked and sold at the worst possible time after 9/11- if she "stayed the course" she would have probably done quite well. Perhaps she sold because she was over-leveraged and it was a necessity, just as one is forced to act on a margin call. So many people who would never think of buying stock on margin buy homes they cannot afford. The fact that people who can pay the full price for a house are a rarity does not justify the common practice of spending more than one knows one can pay going forward. If everybody refused to buy more than they can afford the price of home ownership would plummet. I wonder whether mortgaging was the rule or the exception in, say, the 19th century and earlier, or if it is a bill of goods sold to the public by the banking industry in relatively recent times. I don't know the answer to that.

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Tue Aug 26, 2014 9:47 am

protagonist wrote:
VictoriaF wrote:
protagonist wrote:I'm thinking of a friend who bought an apartment in Harlem with cash, 5th Ave on Central Park, around 2000 for $250K that is worth nearly $1M now. My friend's other assets do not amount to more than $10K maximum. Unlike most of us, my friend was hardly touched financially by the 2008 crash or 9/11, despite living in NYC. And my friend has a great place to live that brings my friend pleasure on a daily basis. You can't live in your stock or bond portfolio.
I have a friend who used to live in a large loft in Lower Manhattan. After 9/11, she has sold it at a large loss. From the 2014 perspective, she made a poor decision, but at the time, she felt fortunate to be able to sell at all. I lived in New Jersey and still remember the horror of that time.

Your friend was fortunate in his or her decision; my friend was unfortunate in hers. The point is that their "fortunes" were a matter of luck and not predictable at the time when they were making their decisions.
I agree with all of your points, Victoria.
I agree with your main point, Protagonist, i.e., that calling buying a home "the worst investment one can make" is excessive and frequently not applicable. Own vs. rent discussions are highly emotional, and each side uses exaggerated statements to prove its truth. The OP article illustrates the escalation of this war of opinions.

I tend to advocate renting, because it worked really well for me in terms of my career, professional development, pursuit of my interests, ability to live in urban areas, and financial success. I also realize that for many people and situations ownership works much better. My closest family members live in large houses and I like to visit them.
protagonist wrote:Your friend panicked and sold at the worst possible time after 9/11- if she "stayed the course" she would have probably done quite well. Perhaps she sold because she was over-leveraged and it was a necessity, just as one is forced to act on a margin call.
This statement is where I disagree with you. At the time of a disaster you just don't know. The knowledge you gain in 13 years after the disaster is not relevant at the point when you live in the midst of a disaster. In the fall of 2001, Lower Manhattan was devastated physically, financially, and emotionally. The infrastructure was not working, the air was dirty, all surfaces were covered by soot. My friend did not sell because she was over-leveraged. She sold because in her (implied) risk assessment, continuing living in Lower Manhattan was more risky than taking a financial loss and moving out.

It's conceivable that people who were leveraged did not move because they could not sell their apartments at a price high enough to cover their mortgage. In the end, it turned out to their advantage, but not due to their foresight or the discipline to "stay the course."

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: The Worst Investment You Can Make: Buying a Home

Post by swaption » Tue Aug 26, 2014 10:01 am

VictoriaF wrote:This statement is where I disagree with you. At the time of a disaster you just don't know. The knowledge you gain in 13 years after the disaster is not relevant at the point when you live the disaster. In the fall of 2001, Lower Manhattan was devastated physically, financially, and emotionally. The infrastructure was not working, the air was dirty, all surfaces were covered by soot. My friend did not sell because she was over-leveraged. She sold because in her (implied) risk assessment, continuing living in Lower Manhattan was more risky than taking a financial loss and moving out.
I know it may be easier to view this in a different way than the stock market, but I would tend to lean towards Protaganist's perspective. Your friend may not have been over-leveraged, but her reasons for selling at the wrong time don't sound all that different than the reasons given by investors that sold out of equities in 2009. Sure there were fundamental reasons there was a genuine risk that the financial word was falling apart, but a long term investor in anything that is unable to see past those periods is just asking for failure. It's a reminder that risk in anything is very real. Prices don't generally fall in a vacuum.

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Tue Aug 26, 2014 10:18 am

swaption wrote:
VictoriaF wrote:This statement is where I disagree with you. At the time of a disaster you just don't know. The knowledge you gain in 13 years after the disaster is not relevant at the point when you live the disaster. In the fall of 2001, Lower Manhattan was devastated physically, financially, and emotionally. The infrastructure was not working, the air was dirty, all surfaces were covered by soot. My friend did not sell because she was over-leveraged. She sold because in her (implied) risk assessment, continuing living in Lower Manhattan was more risky than taking a financial loss and moving out.
I know it may be easier to view this in a different way than the stock market, but I would tend to lean towards Protaganist's perspective. Your friend may not have been over-leveraged, but her reasons for selling at the wrong time don't sound all that different than the reasons given by investors that sold out of equities in 2009. Sure there were fundamental reasons there was a genuine risk that the financial word was falling apart, but a long term investor in anything that is unable to see past those periods is just asking for failure. It's a reminder that risk in anything is very real. Prices don't generally fall in a vacuum.
swaption, thank you for your comments.

Let's distinguish two issues:
1. Deciding whether to sell or not to sell in the midst of a disaster.
2. Avoiding this decision all together by renting.

#1. I think my friend made the best decision for her, based on her own analysis at that time. She used the knowledge of her financial assets, her human capital, her risk tolerance, and her forecasts of the future to make that decision. I am not her, and I can't say what I would have decided. As a lifetime renter I never had to make such a decision. Which brings up the second point.

#2. Some disasters dissipate and even enhance cities and communities. Other disasters persist and communities spiral down. Sometimes, staying the course is the best option. Sometimes, one should activate Plan B. Sometimes, one should escape at any cost. For a renter, these decisions are far easier. And so, in line with the main topic of this thread, what is the price of the option to move out?

Victoria
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Re: The Worst Investment You Can Make: Buying a Home

Post by longinvest » Tue Aug 26, 2014 10:46 am

Victoria,

While I agree with most (if not all) of what you wrote, so far, I also think that you underweight the risks of renting. I might well be that you were lucky not to experience these risks, but they are very real. I have faced some of them in my life, and they led me to ownership (not my first choice).

Some risks include: bad landlords, unavailability of a suitable apartment/house to rent (quality, location, size, etc.), highly priced rents (in some markets), etc.

My wife and I would be unable to rent anything equivalent to what we own for a similar price (when computing imputed rent). In exchange, we do have much higher risks than a renter (difficulty to sell quickly for a reasonable price if we want to move, etc.), but we also won't get evicted from our home because a landlord wants to take it back for his immediate family.

I think that we all agree that renting vs owning is a very complex subject. It involves financial aspects, lifestyle choices, and various types of risks.
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Re: The Worst Investment You Can Make: Buying a Home

Post by protagonist » Tue Aug 26, 2014 12:38 pm

VictoriaF wrote:
protagonist wrote:
VictoriaF wrote:
protagonist wrote:I'm thinking of a friend who bought an apartment in Harlem with cash, 5th Ave on Central Park, around 2000 for $250K that is worth nearly $1M now. My friend's other assets do not amount to more than $10K maximum. Unlike most of us, my friend was hardly touched financially by the 2008 crash or 9/11, despite living in NYC. And my friend has a great place to live that brings my friend pleasure on a daily basis. You can't live in your stock or bond portfolio.
I have a friend who used to live in a large loft in Lower Manhattan. After 9/11, she has sold it at a large loss. From the 2014 perspective, she made a poor decision, but at the time, she felt fortunate to be able to sell at all. I lived in New Jersey and still remember the horror of that time.

Your friend was fortunate in his or her decision; my friend was unfortunate in hers. The point is that their "fortunes" were a matter of luck and not predictable at the time when they were making their decisions.
I agree with all of your points, Victoria.
I agree with your main point, Protagonist, i.e., that calling buying a home "the worst investment one can make" is excessive and frequently not applicable. Own vs. rent discussions are highly emotional, and each side uses exaggerated statements to prove its truth. The OP article illustrates the escalation of this war of opinions.

I tend to advocate renting, because it worked really well for me in terms of my career, professional development, pursuit of my interests, ability to live in urban areas, and financial success. I also realize that for many people and situations ownership works much better. My closest family members live in large houses and I like to visit them.
protagonist wrote:Your friend panicked and sold at the worst possible time after 9/11- if she "stayed the course" she would have probably done quite well. Perhaps she sold because she was over-leveraged and it was a necessity, just as one is forced to act on a margin call.
This statement is where I disagree with you. At the time of a disaster you just don't know. The knowledge you gain in 13 years after the disaster is not relevant at the point when you live in the midst of a disaster. In the fall of 2001, Lower Manhattan was devastated physically, financially, and emotionally. The infrastructure was not working, the air was dirty, all surfaces were covered by soot. My friend did not sell because she was over-leveraged. She sold because in her (implied) risk assessment, continuing living in Lower Manhattan was more risky than taking a financial loss and moving out.

It's conceivable that people who were leveraged did not move because they could not sell their apartments at a price high enough to cover their mortgage. In the end, it turned out to their advantage, but not due to their foresight or the discipline to "stay the course."

Victoria
I advocate neither for renting nor buying. I agree it is a personal choice.
Yes, it was hard to say where NYC would go after 9/11. But to sell NYC real estate then was, in my mind, equivalent to selling all your stocks during the 2008 crash. It represents a panic during a crash vs "staying the course" and riding things out (which usually, but not always, works to one's benefit). I also agree that many could not cover their mortgage and thus were forced to sell, and that was my point regarding buying things one cannot afford (including homes). If people bought their entire stock portfolio paying 30% down and 70% on margin, think of the desperation that would have ensued in 2008-2009. Fortunately for homebuyers, real estate prices tend to fluctuate a lot less than stock prices. But things like 9/11 in NYC do happen, and if you buy things you cannot afford, the devastation can be even greater than a margin call since it involves the place in which you and your family live. The home I inherited from my mom in FL was appraised at $260K when she died. Today it is still not worth much more than $100K. On the other hand, the home I bought (with cash) in 1997 tripled in value when I sold it in 2009, whereas my financial portfolio was down significantly in real terms over that 12 year period. My home went a long way to counterbalance my equity loss.

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Re: The Worst Investment You Can Make: Buying a Home

Post by swaption » Tue Aug 26, 2014 1:21 pm

VictoriaF wrote:
swaption wrote:
VictoriaF wrote:This statement is where I disagree with you. At the time of a disaster you just don't know. The knowledge you gain in 13 years after the disaster is not relevant at the point when you live the disaster. In the fall of 2001, Lower Manhattan was devastated physically, financially, and emotionally. The infrastructure was not working, the air was dirty, all surfaces were covered by soot. My friend did not sell because she was over-leveraged. She sold because in her (implied) risk assessment, continuing living in Lower Manhattan was more risky than taking a financial loss and moving out.
I know it may be easier to view this in a different way than the stock market, but I would tend to lean towards Protaganist's perspective. Your friend may not have been over-leveraged, but her reasons for selling at the wrong time don't sound all that different than the reasons given by investors that sold out of equities in 2009. Sure there were fundamental reasons there was a genuine risk that the financial word was falling apart, but a long term investor in anything that is unable to see past those periods is just asking for failure. It's a reminder that risk in anything is very real. Prices don't generally fall in a vacuum.
swaption, thank you for your comments.

Let's distinguish two issues:
1. Deciding whether to sell or not to sell in the midst of a disaster.
2. Avoiding this decision all together by renting.

#1. I think my friend made the best decision for her, based on her own analysis at that time. She used the knowledge of her financial assets, her human capital, her risk tolerance, and her forecasts of the future to make that decision. I am not her, and I can't say what I would have decided. As a lifetime renter I never had to make such a decision. Which brings up the second point.

#2. Some disasters dissipate and even enhance cities and communities. Other disasters persist and communities spiral down. Sometimes, staying the course is the best option. Sometimes, one should activate Plan B. Sometimes, one should escape at any cost. For a renter, these decisions are far easier. And so, in line with the main topic of this thread, what is the price of the option to move out?

Victoria
Victoria, I can speak to both of your points above. In terms of #1, obviously without knowing your friend or her circumstances, I'd place a fairly heavy bet that her thought process was not quite as orderly as what you describe. I was a renter in NYC at the time, so I get it. There were people that simply wanted out of the city, with the primary factors being fear and emotion. This is not to be confused with an assessment of risk tolerance.

In terms of #2, clearly flexibility is a big advantage of renting. Honestly, not all that different than investing in cash versus say stocks or bonds. But the flipside is that giving up that flexibility does not come without risk. In my view, both in theoretical and empirical terms that risk among others is priced into housing such that a long term holder should expect to earn a premium. At the end of the day, much like cash, renting is certainly the safer more flexible choice, and either of those are perfectly fine alternatives. But I do think that one is kidding themselves if they think that either of these options (cash or renting) don't come at some cost. Of course in the context of the recent housing cycle, an alternative view is getting much broader acceptance than what I believe is warranted. This too shall pass.

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Tue Aug 26, 2014 1:45 pm

protagonist wrote: I also agree that many could not cover their mortgage and thus were forced to sell, and that was my point regarding buying things one cannot afford (including homes).
My point was not that one should not buy a home one can't afford. This is an important principle, but it's not applicable to the case I described. My friend was able to sell her home precisely because she had enough equity in it to afford the loss. My related point was that people whose mortgages were underwater could not sell their apartments, and the circumstances have saved them from taking a loss.

Victoria
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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Tue Aug 26, 2014 1:56 pm

swaption wrote:Victoria, I can speak to both of your points above. In terms of #1, obviously without knowing your friend or her circumstances, I'd place a fairly heavy bet that her thought process was not quite as orderly as what you describe. I was a renter in NYC at the time, so I get it. There were people that simply wanted out of the city, with the primary factors being fear and emotion. This is not to be confused with an assessment of risk tolerance.

In terms of #2, clearly flexibility is a big advantage of renting. Honestly, not all that different than investing in cash versus say stocks or bonds. But the flipside is that giving up that flexibility does not come without risk. In my view, both in theoretical and empirical terms that risk among others is priced into housing such that a long term holder should expect to earn a premium. At the end of the day, much like cash, renting is certainly the safer more flexible choice, and either of those are perfectly fine alternatives. But I do think that one is kidding themselves if they think that either of these options (cash or renting) don't come at some cost. Of course in the context of the recent housing cycle, an alternative view is getting much broader acceptance than what I believe is warranted. This too shall pass.
I agree with your take on #2, but not on #1. While my friend's "risk assessment" was not as orderly as I presented it here, it was real. In liquid investing, there is a concept of selling to your "sleep level." If she could not sleep, she had to sell. She could not sell 20% or 40% of her loft; she could only sell the entire thing.

As for #2, it's actually something I am considering now. I have two choices:
A. Rent in the area of my choice for about $20k/year
B. Buy in the same area for $500k + $500/month in condo fees + $5k/year in taxes. (Let's assume that I would pay $500k in cash.)

The last time I ran a rent vs. buy calculator, it was in favor of renting. But even if my case were close to break-even, I would need to price in the option of being able to move for some happy or unhappy reasons.

Victoria
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Re: The Worst Investment You Can Make: Buying a Home

Post by Lynette » Tue Aug 26, 2014 2:46 pm

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Tue Aug 26, 2014 2:54 pm

Hi Lynette,

Your sense of humor is fine even if what you wrote is the remnants of its pre-house glory {laughing}. I have to ask. What was worse a large man or a small dog? And why did you decide to buy a house rather than rent in another place with a small man and a large dog?

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: The Worst Investment You Can Make: Buying a Home

Post by goodenyou » Tue Aug 26, 2014 4:22 pm

When I owned a house, there are many times that I wished that I was renting. When I was renting, there were times that I wished that I owned. Right now, I wish I was renting, so I could be rid a huge money pit of upkeep that is wrapped around my neck. And, my house is paid off. Liquidity offers choices, and when you want to move, you would be glad you were renting.
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Re: The Worst Investment You Can Make: Buying a Home

Post by Lynette » Tue Aug 26, 2014 5:23 pm

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Re: The Worst Investment You Can Make: Buying a Home

Post by rsterbal » Thu Aug 28, 2014 7:07 am

People seem to buy more house than then are willing to rent, so that makes part of the argument difficult to analyze

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Thu Aug 28, 2014 7:42 am

rsterbal wrote:People seem to buy more house than then are willing to rent, so that makes part of the argument difficult to analyze
That's a great point; I frequently make it too {smile}. A home buyer must keep in mind the resale value of the home and thus buy in an established area with an architecture generally acceptable in that area. If all houses in a desirable neighborhood have large kitchens and multiple bathrooms, a home buyer can't find a house with a small kitchen and one bathroom. And even if he found one, he would be concerned about eventually selling it.

Buy vs. rent comparisons are based on similar properties, e.g., buying or renting a 3-bedroom house. Such comparisons may, in fact, favor buying. A more relevant comparison is of the homes one would buy or rent, and considering that these are not the same types of homes, the results are more likely to favor rent. In an example of my own decision making I gave above, a $500k condominium is larger and nicer than a $20k/year apartment. The $20k apartment suits my needs, but if I decided to buy it would be a newer and nicer place.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Bustoff » Thu Aug 28, 2014 7:50 am

If I sell my house and use the proceeds to pay for an equivalent rental, the money disappears after 11 years. Then what?
Last edited by Bustoff on Thu Aug 28, 2014 7:52 am, edited 1 time in total.

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Re: The Worst Investment You Can Make: Buying a Home

Post by billyt » Thu Aug 28, 2014 7:51 am

Sell your house. Invest the money. Use the earnings to pay for rent forever.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Bustoff » Thu Aug 28, 2014 8:01 am

billyt wrote:Sell your house. Invest the money. Use the earnings to pay for rent forever.
Average real return on a 50/50 portfolio won't pay rent. Maybe it did when bonds provided a return, but not now or anytime soon.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Rodc » Thu Aug 28, 2014 8:17 am

billyt wrote:Sell your house. Invest the money. Use the earnings to pay for rent forever.
If my house was owned free and clear, and I sold it and used a 4% withdrawal rate, the proceeds would be modestly short of enough to rent the same house.

The economics of buying vs renting are very location and even property specific. Not surprising as if one were vastly superior to the other the market would readjust. Real estate does not adjust to market forces as fast as the stock or bond markets, but will in mostly adjust towards some more or less reasonable equilibrium.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Rodc » Thu Aug 28, 2014 8:22 am

A more relevant comparison is of the homes one would buy or rent, and considering that these are not the same types of homes, the results are more likely to favor rent.
That is like valuing containers of yogurt without paying attention to the fact that one is 6oz and the other 5.3oz. Maybe you don't care that one is smaller because all you want is a quick snack and so for all practical purposes the difference does not matter. On the other hand if you are really hungry you might care.

If the extra room, quality of the kitchen appliances, or whatever will bring you some enjoyment or utility then you really should take that into account.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The Worst Investment You Can Make: Buying a Home

Post by VictoriaF » Thu Aug 28, 2014 9:18 am

Rodc wrote:
A more relevant comparison is of the homes one would buy or rent, and considering that these are not the same types of homes, the results are more likely to favor rent.
That is like valuing containers of yogurt without paying attention to the fact that one is 6oz and the other 5.3oz. Maybe you don't care that one is smaller because all you want is a quick snack and so for all practical purposes the difference does not matter. On the other hand if you are really hungry you might care.

If the extra room, quality of the kitchen appliances, or whatever will bring you some enjoyment or utility then you really should take that into account.
5.3oz yogurt and 6oz yogurt are much closer in size and price than rented and purchased homes. Let's consider another analogy, an analogy of men's suits. For his normal needs, a man may be happy with a $1,000 suit. But when he is buying a suit for his wedding he looks for a $4,500 Zegna Suit. Zegna's quality of fabric and the fit bring higher enjoyment utility than the regular suit does.

In both decisions, buying a home and buying a suit for a wedding, the decisions are guided not as much by the actual needs as by the uniqueness of an event and its social context.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Rodc » Thu Aug 28, 2014 9:31 am

VictoriaF wrote:
Rodc wrote:
A more relevant comparison is of the homes one would buy or rent, and considering that these are not the same types of homes, the results are more likely to favor rent.
That is like valuing containers of yogurt without paying attention to the fact that one is 6oz and the other 5.3oz. Maybe you don't care that one is smaller because all you want is a quick snack and so for all practical purposes the difference does not matter. On the other hand if you are really hungry you might care.

If the extra room, quality of the kitchen appliances, or whatever will bring you some enjoyment or utility then you really should take that into account.
5.3oz yogurt and 6oz yogurt are much closer in size and price than rented and purchased homes. Let's consider another analogy, an analogy of men's suits. For his normal needs, a man may be happy with a $1,000 suit. But when he is buying a suit for his wedding he looks for a $4,500 Zegna Suit. Zegna's quality of fabric and the fit bring higher enjoyment utility than the regular suit does.

In both decisions, buying a home and buying a suit for a wedding, the decisions are guided not as much by the actual needs as by the uniqueness of an event and its social context.

Victoria
While that is an interesting analogy I think it is way off. And at any rate it is getting lost in the weeds and missing the forest (for another analogy. :) )

The point is, that you really need to think about both cases. In the case you advocate, that only makes sense if any extra room or quality has no value to the person in question. In general the extra room and quality do have value.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The Worst Investment You Can Make: Buying a Home

Post by interplanetjanet » Thu Aug 28, 2014 4:35 pm

VictoriaF wrote:A more relevant comparison is of the homes one would buy or rent, and considering that these are not the same types of homes, the results are more likely to favor rent.
I find this interesting.

When we rented, we rented what fit our needs - 3-4 bedroom single family homes with yards (we had small children and pets). When we bought, we bought the same type of housing (slightly smaller, actually). Renting gave us a mobility advantage at the time, owning will be slightly more cost-effective in the long term.

I admit that when I was buying I did more due diligence on the location and tried to ensure that I bought in an area where values weren't likely to be depressed in the near term - I also paid more attention to flood risks. In the end, though, I stuck with the same sort of housing and can't really see why I wouldn't have.

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Re: The Worst Investment You Can Make: Buying a Home

Post by technovelist » Thu Aug 28, 2014 4:48 pm

To me a lot of the difficulty with home ownership is still the undesirable allocation tilt, illiquidity, etc. that it introduces into my portfolio if the "amount at risk" is any significant fraction of my whole portfolio. Luckily, in my case that is not a big problem at the moment, due partly to the non-recourse nature of my mortgage ("Texas home equity loan") but it is something to think about pretty seriously.
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Re: The Worst Investment You Can Make: Buying a Home

Post by wilked » Thu Aug 28, 2014 6:02 pm

interplanetjanet wrote:
I admit that when I was buying I did more due diligence on the location and tried to ensure that I bought in an area where values weren't likely to be depressed in the near term - I also paid more attention to flood risks. In the end, though, I stuck with the same sort of housing and can't really see why I wouldn't have.
Really?

When people buy they have to 'foresee' their future needs. Family sizes do not always stay static...

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Re: The Worst Investment You Can Make: Buying a Home

Post by interplanetjanet » Thu Aug 28, 2014 6:37 pm

wilked wrote:
interplanetjanet wrote:
I admit that when I was buying I did more due diligence on the location and tried to ensure that I bought in an area where values weren't likely to be depressed in the near term - I also paid more attention to flood risks. In the end, though, I stuck with the same sort of housing and can't really see why I wouldn't have.
Really?

When people buy they have to 'foresee' their future needs. Family sizes do not always stay static...
They do not, but I had my children young (three by the time I was 25). They're teenagers now, I don't foresee more (it would be a miracle), and even if they do leave I want to have enough space so that they can come back for a while if they need to in the next decade.

I was renting during the time I had them, and I think it made sense to - I could get bigger housing easily when I needed to (though I only really moved up in house size once).

Until they're 4 or 5, children really don't take up that much space. That seems like plenty of time to make a decision if needs really do change.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Sunny Sarkar » Thu Aug 28, 2014 10:34 pm

I don't need any calculations, I know that owning is better. My Dad owned our family home, and I never had any housing costs as long as I stayed in my home country. By contrast my peers whose Dads always rented had to pay through their nose for housing, some still do, and it keeps going up.

All "owned" houses are paid off eventually, and after that the only housing for every own vs. rent calculator is the trash can.
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Re: The Worst Investment You Can Make: Buying a Home

Post by wander » Fri Aug 29, 2014 4:39 am

thx1138 wrote:A home that is your residence is not an investment, it is an expense plain and simple. If you make the mistake of viewing it as an investment you'll make a number of behavioral errors, the most common one being buying too much house.
+1. When I started living independently, I looked for a place that I can settle down before anything else. So I bought the house just so it would be my permanent residence for a long time. My rule of thumb was simple: stable job, affordable house then everything else would come into place. After buying a house, I didn't pay attention to real estate market anymore since I am going to keep it for a long time.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Rodc » Fri Aug 29, 2014 8:20 am

wander wrote:
thx1138 wrote:A home that is your residence is not an investment, it is an expense plain and simple. If you make the mistake of viewing it as an investment you'll make a number of behavioral errors, the most common one being buying too much house.
+1. When I started living independently, I looked for a place that I can settle down before anything else. So I bought the house just so it would be my permanent residence for a long time. My rule of thumb was simple: stable job, affordable house then everything else would come into place. After buying a house, I didn't pay attention to real estate market anymore since I am going to keep it for a long time.
So, if you think of stocks as an investment you will over buy stocks (and under buy bonds)? Or vice versa?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The Worst Investment You Can Make: Buying a Home

Post by wander » Fri Aug 29, 2014 8:23 am

Rodc wrote:So, if you think of stocks as an investment you will over buy stocks (and under buy bonds)? Or vice versa?
I own a lot of stocks and bonds in my MFs and ETFs.

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Re: The Worst Investment You Can Make: Buying a Home

Post by Rodc » Fri Aug 29, 2014 10:53 am

wander wrote:
Rodc wrote:So, if you think of stocks as an investment you will over buy stocks (and under buy bonds)? Or vice versa?
I own a lot of stocks and bonds in my MFs and ETFs.
The question was: did you over buy one of them because you thought it is as an investment.

I can answer for myself: no.

I also did not over buy on my house even though I do think of it as an investment.

This concern strikes me as a poor reason to pretend real estate is not an investment.

To me it is like setting your alarm clock ahead to "trick" yourself into getting up early; just a behavioral gimmick that only works if somehow you pretend to forget you did it.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The Worst Investment You Can Make: Buying a Home

Post by swaption » Fri Aug 29, 2014 11:21 am

Rodc wrote:To me it is like setting your alarm clock ahead to "trick" yourself into getting up early; just a behavioral gimmick that only works if somehow you pretend to forget you did it.
:happy

But honestly Rodc, I think your creative efforts are being put to waste here. At this point on this topic, you might as well be trying to describe the color red to a person that is color blind.

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