Why do so many think their home is a foolproof investment?

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nobsinvestor
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Why do so many think their home is a foolproof investment?

Post by nobsinvestor » Sat Sep 13, 2014 8:54 am

Why do so many people believe that owning/buying a home is a surefire way to make money on it down the road?

Robert Shiller found that between 1900-2000 the real return on home appreciation (residential real estate) was just 20 basis points. So basically there was no real return; home prices simply kept in line with inflation.

Does anyone think this is pretty much solely based with the rise of easy credit and mortgage-backed securities (Wall Street: Homes for everyone!) starting in the 1970s/1980s that led to a boom in demand for homes in the USA?

That's my theory as to what created the demand for homes, which then boosted the prices of all homes as a whole until the 2008 mortgage crisis and market crash.
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Re: Why do so many think their home is a foolproof investmen

Post by tainted-meat » Sat Sep 13, 2014 8:55 am

I think it was demographics as well (baby boomers).

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Re: Why do so many think their home is a foolproof investmen

Post by flyingaway » Sat Sep 13, 2014 9:06 am

I do not even consider my home as an investment.

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Re: Why do so many think their home is a foolproof investmen

Post by Rodc » Sat Sep 13, 2014 9:08 am

Why do so many people believe that owning/buying a home is a surefire way to make money on it down the road?
Hoe many is "many" and what evidence do you have to support this claim? I suspect many did think this before 2007, though I also suspect "many" did not at least in the short run (like if you had to sell after only a few years, as the late 1980s to early 1990s showed so well on the east coast).

I suspect "many" no longer believe this as we have not even finished getting over the last housing bust. I don't have any data so I am open to the same question I pose to you.
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: Why do so many think their home is a foolproof investmen

Post by nobsinvestor » Sat Sep 13, 2014 9:11 am

Well, I believe it's mainly those born after 1960, who grew up in the 70s, 80s, and 90s, and early 2000s, and saw nothing and heard nothing but crazy tales about their friends or family buying houses in year X and in year X+Y they sold it and made a huge profit.

My theory is that if it weren't for Wall Street's easy credit and mortgage-backed securities business, many less people would have mortgages, and the aggregate demand for homes from say 1980-2007 would have been much, much less, thereby reducing price appreciation.

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Re: Why do so many think their home is a foolproof investmen

Post by YttriumNitrate » Sat Sep 13, 2014 9:15 am

Until the rise of cash-out refinancing / interest only loans, homes were often good investments simply because they forced people to save a bit every month.
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Re: Why do so many think their home is a foolproof investmen

Post by nisiprius » Sat Sep 13, 2014 9:16 am

I think it is salesmanship, pure and simple. They think it is a foolproof investment because the realtor tells them it is. Worse yet (a common phenomenon) they hear this propaganda, not only directly, when their guard may be up, but also filtered indirectly through trusted friends who've bought houses and bought the propaganda along with it. Someone who has been convinced that the expensive house they have just bought is not only a nice place to live, but also a good investment, is not going to go around saying to friends "We just bought a nice new house which is probably a rotten investment but we like it and we hope we can afford it." They are going to parrot everything they were told that confirms their decision.

ALL expensive purchases are described by salespeople as "investments," in hopes of reframing the purchase not as a luxury, but as a shrewd self-justifying financial move. Luxury cars have "traditionally high resale values" so it is almost as if they were cheaper than cheap cars (not!). Diamond jewelry is touted as an "investment." A recent posting apprised me that stamp dealers have created what I think must be bogus "rare stamp indexes" (according to which, the value of the indexed collection has NEVER EVER EVER gone down year-over-year).

Houses are big expenses and give salespeople and mortgage brokers excellent opportunities to spew a lot of impressive-sounding financial talk. People hear what they want to hear, and what they want to hear is "you can afford this expensive house because..."

(We bought our house a couple of years after the passage of Truth-In-Lending, which among other things required every purchaser to be given a statement in writing of the life-of-loan interest cost in grand total dollars. By the way, nowadays how do they comply with that on adjustable-rate mortgages? The funny part was that at the closing, where you are supposed to read and sign the statement, nobody at that table but us wanted us to read it! They pushed it at us and said just-a-formality-sign-here. EVERYBODY was alarmed when I insisted on reading it through, because everybody thought the simple knowledge of the plain facts was going to queer the deal! Our own lawyer was telling us it was OK and we didn't really need to read it!)

If you think Shiller's chart is sobering, look at what I think is the longest known financial data series, the inflation-adjusted real price index of real estate in the Herengracht district of Amsterdam:
Image
Like gold, you can say truthfully that it held real value over almost four centuries, maybe even gained although it depends on endpoint charge and doesn't amount to much annualized. You can also say truthfully that if you were unfortunate enough to buy in the late 1700s there was a crash that took over a century for recovery, so by no means a foolproof investment if you aren't Methuselah.

It's now long enough for people to have forgotten 2006 (!) and as people get nervous about stocks, it is a sales opportunity for anything that is not stocks.

The big mistake, of course, is that even if you accept a diversified portfolio of real estate as a decent long-term investment, the house you live in is not a diversified portfolio, and there is a huge element of luck in what happens to the value of your own house. For example, we live within three blocks of an elementary school, that is a good one (I'm not aware of neighborhood-income-related differences in school quality in our small city), but it is also an old and problematical 1930s building. As school enrollments have waxed and waned, it is periodically on the chopping block as the school most likely to be closed if they close a school. So far it has always escaped. If that school closes, I imagine it will affect the value of our house much more than any Case-Shiller index trends.
Last edited by nisiprius on Sat Sep 13, 2014 9:27 am, edited 5 times in total.
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Re: Why do so many think their home is a foolproof investmen

Post by rixer » Sat Sep 13, 2014 9:17 am

Your home may not be a foolproof investment but it's a valuable asset to own once it's paid for. Especially when it's time to retire.
At any rate, timing is everything and many people have made fortunes in RE. I wouldn't want to 'not' own a home.

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Re: Why do so many think their home is a foolproof investmen

Post by nobsinvestor » Sat Sep 13, 2014 9:28 am

Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.

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Re: Why do so many think their home is a foolproof investmen

Post by rixer » Sat Sep 13, 2014 9:31 am

nobsinvestor wrote:Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.
Right but if you're renting, wouldn't the landlord figure the taxes into the amount of rent he charges you? You'll likely be paying the tax one way or the other.

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Re: Why do so many think their home is a foolproof investmen

Post by nobsinvestor » Sat Sep 13, 2014 9:32 am

rixer wrote:
nobsinvestor wrote:Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.
Right but if you're renting, wouldn't the landlord figure the taxes into the amount of rent he charges you? You'll likely be paying the tax one way or the other.
Sure, but at least you're not deluding yourself into thinking you own your house as an investment, and take out a 800k mortgage to do so.

Many people are ignorant of basic economics/math and don't take into account simple things like high property taxes nixing annual appreciation.

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Re: Why do so many think their home is a foolproof investmen

Post by rixer » Sat Sep 13, 2014 9:35 am

nobsinvestor wrote:
rixer wrote:
nobsinvestor wrote:Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.
Right but if you're renting, wouldn't the landlord figure the taxes into the amount of rent he charges you? You'll likely be paying the tax one way or the other.
Sure, but at least you're not deluding yourself into thinking you own your house as an investment, and take out a 800k mortgage to do so.

Many people are ignorant of basic economics/math and don't take into account simple things like high property taxes nixing annual appreciation.
When you rent for 10 years and decide to move, how much money does your landlord give you back?

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Re: Why do so many think their home is a foolproof investmen

Post by Tycoon » Sat Sep 13, 2014 9:39 am

Foolproof investment? I do not believe foolproof investments exist. History shows that anything you own can be taken from you.
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Re: Why do so many think their home is a foolproof investmen

Post by nobsinvestor » Sat Sep 13, 2014 9:49 am

rixer wrote:
nobsinvestor wrote:
rixer wrote:
nobsinvestor wrote:Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.
Right but if you're renting, wouldn't the landlord figure the taxes into the amount of rent he charges you? You'll likely be paying the tax one way or the other.
Sure, but at least you're not deluding yourself into thinking you own your house as an investment, and take out a 800k mortgage to do so.

Many people are ignorant of basic economics/math and don't take into account simple things like high property taxes nixing annual appreciation.
When you rent for 10 years and decide to move, how much money does your landlord give you back?
Fair point. But if you're going to be somewhere for 10 years and you know it ahead of time, I believe conventional wisdom says buying is okay. But what if you're only somewhere for 1-5 years, or its unknown when you might be moving in the foreseeable future? I think renting has huge advantages that many people often overlook.

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Re: Why do so many think their home is a foolproof investmen

Post by Wildebeest » Sat Sep 13, 2014 9:57 am

A home a foolproof investment?

The short answer is that so many people are fools. I include myself among the fools ( may be a reformed fool, who has seen the light only as far as home ownership).

Nisiprius nails it. We succumb to the propaganda. A large part of our economy depends on people owning a house, they can not afford.

The leverage you get by buying a house is tremendous. The risk of owning a house, you can not afford, is a hole you may not be able to dig yourself out of as far as saving for retirement.
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Re: Why do so many think their home is a foolproof investmen

Post by bertilak » Sat Sep 13, 2014 9:57 am

If the return you expect from your investment is a place to live, your home is a pretty good investment.

Any other benefit you get is just gravy.
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Re: Why do so many think their home is a foolproof investmen

Post by rixer » Sat Sep 13, 2014 9:58 am

Wildebeest wrote:A home a foolproof investment?

The risk of owning a house, you can not afford, is a hole you may not be able to dig yourself out of as far as saving for retirement.

My advice would be to not buy a home you can't afford.

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Re: Why do so many think their home is a foolproof investmen

Post by uncertainty » Sat Sep 13, 2014 10:01 am

rixer wrote:
nobsinvestor wrote:Interesting replies so far.

Let me add another thing most people overlook:

Property Taxes.

In my state, Texas, it averages around 3% annually of the value of the home! (at least in Dallas/Austin/Houston)

Even if you predict your home will earn a 3% nominal return (not sure why just throwing that out there as some people also mistakenly believe in slow but sure appreciation)...guess what, in states like Texas, property tax just killed your appreciation because it cost you 3% to own it.

To me, it makes more sense to own a home in Nevada or California, where property taxes are far lower.
Right but if you're renting, wouldn't the landlord figure the taxes into the amount of rent he charges you? You'll likely be paying the tax one way or the other.
Won't they charge what the market will bear? I'm not sure the calculation gets any more complicated than that for some landlords, but I may be wrong.

Or in a multi-unit property, do they charge every tenant the entire real estate tax bill or is it split up amongst the tenants?

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Re: Why do so many think their home is a foolproof investmen

Post by Wildebeest » Sat Sep 13, 2014 10:09 am

rixer wrote:
Wildebeest wrote:A home a foolproof investment?

The risk of owning a house, you can not afford, is a hole you may not be able to dig yourself out of as far as saving for retirement.



My advice would be to not buy a home you can't afford.



Rixer,

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Re: Why do so many think their home is a foolproof investmen

Post by HardKnocker » Sat Sep 13, 2014 10:49 am

Real estate can be a great investment if you buy right. Very poor if you buy wrong. Take it from someone who has done both.
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Re: Why do so many think their home is a foolproof investmen

Post by Kenkat » Sat Sep 13, 2014 10:55 am

A home also provides a return in the form of imputed income - in other words, because you own the home, you don't pay rent to someone else. Of course, the imputed income (rent avoided) is offset by expenses related to upkeep and taxes, but I have to think there is some positive benefit there as landlords are typically not providing housing "at cost" as a charitable venture.

If you had an asset that was generally expected to keep up with inflation plus perhaps a 2% return on top of that in the form of imputed income, would you think that was a bad deal? A house is first and foremost a lifestyle choice, but it's not a bad asset to hold either (I would not personally classify it as an investment).

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Re: Why do so many think their home is a foolproof investmen

Post by flyingaway » Sat Sep 13, 2014 10:57 am

Again, a (rental) house may be an investment, a home is not. You do not consider your car as an investment. Your meals are not an investment.

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Re: Why do so many think their home is a foolproof investmen

Post by berntson » Sat Sep 13, 2014 11:04 am

^Imputed rent is a real financial benefit. You could own a rental property, collect rent, and then pay rent on your house. Or you could just own a house and "rent" it out to yourself to get the same thing (in fact, this is a better arrangement because you don't have to pay any additional tax on the "rent" you pay yourself). Buying yourself lunch is not a real financial benefit.

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Re: Why do so many think their home is a foolproof investmen

Post by dbr » Sat Sep 13, 2014 11:06 am

flyingaway wrote:Again, a (rental) house may be an investment, a home is not. You do not consider your car as an investment. Your meals are not an investment.
I don't know. I know someone who had a particularly desirable out of production model of an elite make of car who had the car stolen and had to pay capital gains tax on the insurance settlement that was for more than the purchase price of the car. Of course at that point we are really talking about collectibles, which is a whole different ballgame, even if the car was in fact everyday transportation.

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Re: Why do so many think their home is a foolproof investmen

Post by Harold » Sat Sep 13, 2014 11:23 am

It runs far deeper.

Vast numbers of otherwise smart people view housing under an incorrect financial framework where they consider a mortgage payment as their rent -- hence since a mortgage payment “builds equity”, renters are “throwing money away”. That leads them to viscerally feel that buying a home is a smart financial decision and renting a home is a foolish financial decision.

It’s pretty much ingrained in the American psyche. Because it’s so deep in their perceived understanding of finance, they’ll vigorously argue that they’re right – because acknowledging they’re wrong would rock them to their financial core.

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Re: Why do so many think their home is a foolproof investmen

Post by jstrazzere » Sat Sep 13, 2014 11:34 am

Why do so many people believe that owning/buying a home is a surefire way to make money on it down the road?
Because so many people have been told that by their parents, grandparents, etc?
Because so many people don't know any better?
Because so many people forget (fairly recent) history?

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Re: Why do so many think their home is a foolproof investmen

Post by VictoriaF » Sat Sep 13, 2014 11:45 am

nobsinvestor wrote:Why do so many people believe that owning/buying a home is a surefire way to make money on it down the road?
  • * Real estate agents collect their commission every time you buy and sell.
    * Furniture, home decoration, etc., companies get your business every time you move. (Renters are much less likely to customize their new homes.)
    * Friends and family expect you to hold parties and invite overnight guests.
    * Everyone else is brainwashed.
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Re: Why do so many think their home is a foolproof investmen

Post by Call_Me_Op » Sat Sep 13, 2014 11:50 am

Let me live in something that keeps pace with inflation and I will be quite pleased.
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Re: Why do so many think their home is a foolproof investmen

Post by TomatoTomahto » Sat Sep 13, 2014 12:01 pm

My home isn't an investment, so it can't be a foolproof one.

The way it seems, I will get back what I've put into the house (ex. property taxes). I consider that fine, considering I got to live there for 20 years. A fair bit of what we put into the house was done for our pleasure and not to increase the resale value.
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Re: Why do so many think their home is a foolproof investmen

Post by Johno » Sat Sep 13, 2014 1:13 pm

Harold wrote:It runs far deeper.

Vast numbers of otherwise smart people view housing under an incorrect financial framework where they consider a mortgage payment as their rent -- hence since a mortgage payment “builds equity”, renters are “throwing money away”. That leads them to viscerally feel that buying a home is a smart financial decision and renting a home is a foolish financial decision.

It’s pretty much ingrained in the American psyche. Because it’s so deep in their perceived understanding of finance, they’ll vigorously argue that they’re right – because acknowledging they’re wrong would rock them to their financial core.
I somewhat agree with this, but I also think 'a (n owner occupied) house isn't an investment at all' is another incorrect financial framework, though h perhaps coined as a well intentioned attempt to corrrect the views of the same kind of low info investors you speak of 'in terms they can understand'.

An owner occupied home is obviously an investment. That's clear every time the discussion turns to costs like maintenance and taxes and how a landlord would (attempt) to pass those costs through to a renter. A landlord is investing in the home seeking to pass through all those costs and make a profit on top, but taking the risk he will fail to do so. It stands to reason that on average the landlord succeeds and there is a positive expected return to the landlord. The renter is reducing risk (of property price volatility and unpredictable operating costs) in return for giving up that expected return. But if the owner becomes the landlord, then *nobody* is investing in the property? That's clearly wrong. The owner occupier is then investing. This basic common sense conclusion is not IMO altered by changing the subject to cars or food.

But an owner-occupied home a 'fool proof' investment? Also obviously not. And I agree there's a big cultural element in beliefs about this either way, going with the conventional wisdom or bucking it. There are people with, IMO, naive attitudes against home ownership also as in 'taxes are high here, so you should rent', though they aren't as numerous as those with naive biases in the other direction. It doesn't depend how high taxes are, but how high rents are relative to prices, also including expected changed or risk of unexpected changes in each. Taxes are more of a reason to pick a particular location or not to live, not directly whether to own or rent. But many places with high taxes as well as high rents and prices have nearby access to desirable things like lots of high paying jobs, etc. There's all kinds of reasonably priced and/or low tax places in depressed areas or the middle of nowhere. The way it works out, you'd almost think it was a market or something. :wink:

Since my house is old, though not like that section of Amsterdam, I calculated the appreciation since 1940 (when it was already old) and since I bought in early 1990's, ~7.75%pa and ~7.25%pa respectively. Past performance is no gtee, etc but it's interesting. Inner NY area. I'm not counting on the house providing that level of return from now. However I personally expect the trends that have caused greater than CPI appreciation to more likely than not continue for awhile, in this area. In other less differentiated places than NY, especially areas oriented toward distant suburbs and w/ plenty of rural land to convert to suburban tracts, also lower quality construction (where houses really do depreciate to zero over decades and you're left with just land, our house may stand for centuries unless it burns), it could be a very different story. I'm not sure IOW if Shiller's general finding is that useful for any particular home buyer though perhaps accurate in aggregate.
Last edited by Johno on Sat Sep 13, 2014 1:48 pm, edited 2 times in total.

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Re: Why do so many think their home is a foolproof investmen

Post by Harold » Sat Sep 13, 2014 1:18 pm

Johno wrote:An owner occupied home is obviously an investment.
I didn't say it wasn't. What I wrote holds whether one considers it an investment or not.

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Re: Why do so many think their home is a foolproof investmen

Post by Johno » Sat Sep 13, 2014 1:22 pm

Harold wrote:
Johno wrote:An owner occupied home is obviously an investment.
I didn't say it wasn't. What I wrote holds whether one considers it an investment or not.
You didn't, but a number of others did, in so many words. And it's a investment whether one 'considers' it so or not.

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Re: Why do so many think their home is a foolproof investmen

Post by TomatoTomahto » Sat Sep 13, 2014 1:41 pm

Johno wrote:
Harold wrote:
Johno wrote:An owner occupied home is obviously an investment.
I didn't say it wasn't. What I wrote holds whether one considers it an investment or not.
You didn't, but a number of others did, in so many words. And it's a investment whether one 'considers' it so or not.
I'm not an economist and also not one who spends time fine-tuning terms and what they mean before I use them -- it's a good thing I'm not a lawyer. I bought my house to live in, just the same way that I bought my car to drive, music to listen to, food to eat, etc.

I can see where a house can be a store of value and a form of "forced savings." I prefer not to "consider" it an investment, because I think I'd be disappointed in the ROR if I did.
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Re: Why do so many think their home is a foolproof investmen

Post by Ged » Sat Sep 13, 2014 2:07 pm

The meanings of words in the English language are pretty elastic. The word investment is no exception. When you buy a home you are making an investment in several ways, not just simply in the financial sense. While the finances are important, the big picture is the total impact on your and your families' life.

Buying a home is not the best financial investment. But it may one of the top three investments you make in your life.

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Re: Why do so many think their home is a foolproof investmen

Post by rec7 » Sat Sep 13, 2014 2:43 pm

nobsinvestor wrote:Why do so many people believe that owning/buying a home is a surefire way to make money on it down the road?

Robert Shiller found that between 1900-2000 the real return on home appreciation (residential real estate) was just 20 basis points. So basically there was no real return; home prices simply kept in line with inflation.

Does anyone think this is pretty much solely based with the rise of easy credit and mortgage-backed securities (Wall Street: Homes for everyone!) starting in the 1970s/1980s that led to a boom in demand for homes in the USA?

That's my theory as to what created the demand for homes, which then boosted the prices of all homes as a whole until the 2008 mortgage crisis and market crash.
I think because they can touch and feel it unlike a stock. I am not saying it is right but people do become attached to a house.

Johno
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Re: Why do so many think their home is a foolproof investmen

Post by Johno » Sat Sep 13, 2014 2:48 pm

The reality that buying a home is an investment is not a matter of semantics or feelings or consideration. It's clear in the real world decision you make. You either rent and somebody else takes the risk and gets the benefit (of uncertain property appreciation minus uncertain operating expenses) of the investment, or you invest yourself. The house is a place to live in whether you rent or own it, that's not the issue so the comparison to food is not relevant. The issue is whether you take the operating cost/appreciation risk in return for possible upside, or pay a fixed* cost to have somebody else take that risk and get that variable return.

*relatively fixed, or less immediately volatile at least. Of course in the long run the renter is exposed to the risk of declining affordability of housing especially if they want to live in a particular area. In that sense the owner's position is hedged and the renter's naked. However I don't think that counters the basic conclusion that home purchase is an investment, it's just an investment that may also hedge certain risks along with taking other risks, true of many investments. And I'm in no way saying it's automatically a good investment. That's not semantics but just misunderstanding of basic English to conflate 'investment' with 'necessarily good investment'. The extra words in the language differentiate those two concepts, same in the few other languages I know; is there some language where 'investment' and 'good investment' are not differentiated?

TravelerMSY
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Re: Why do so many think their home is a foolproof investmen

Post by TravelerMSY » Sat Sep 13, 2014 3:29 pm

Harold wrote:It runs far deeper.

Vast numbers of otherwise smart people view housing under an incorrect financial framework where they consider a mortgage payment as their rent -- hence since a mortgage payment “builds equity”, renters are “throwing money away”. That leads them to viscerally feel that buying a home is a smart financial decision and renting a home is a foolish financial decision.

It’s pretty much ingrained in the American psyche. Because it’s so deep in their perceived understanding of finance, they’ll vigorously argue that they’re right – because acknowledging they’re wrong would rock them to their financial core.
If lenders required escrow for maintenance I'll bet a lot of this thinking would go away.

Rodc
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Re: Why do so many think their home is a foolproof investmen

Post by Rodc » Sat Sep 13, 2014 3:53 pm

Johno wrote:The reality that buying a home is an investment is not a matter of semantics or feelings or consideration. It's clear in the real world decision you make. You either rent and somebody else takes the risk and gets the benefit (of uncertain property appreciation minus uncertain operating expenses) of the investment, or you invest yourself. The house is a place to live in whether you rent or own it, that's not the issue so the comparison to food is not relevant. The issue is whether you take the operating cost/appreciation risk in return for possible upside, or pay a fixed* cost to have somebody else take that risk and get that variable return.

*relatively fixed, or less immediately volatile at least. Of course in the long run the renter is exposed to the risk of declining affordability of housing especially if they want to live in a particular area. In that sense the owner's position is hedged and the renter's naked. However I don't think that counters the basic conclusion that home purchase is an investment, it's just an investment that may also hedge certain risks along with taking other risks, true of many investments. And I'm in no way saying it's automatically a good investment. That's not semantics but just misunderstanding of basic English to conflate 'investment' with 'necessarily good investment'. The extra words in the language differentiate those two concepts, same in the few other languages I know; is there some language where 'investment' and 'good investment' are not differentiated?
That is a nice clear explanation.
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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nedsaid
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Re: Why do so many think their home is a foolproof investmen

Post by nedsaid » Sat Sep 13, 2014 4:01 pm

People think their home is a foolproof investment for several reasons. First, it is a long term investment. I never heard Paul Kangas on Nightly Business Report quote the amount that my home went up or went down in value on a particular day. Second, most of us have seen appreciating home prices for most of our lives and expect house prices to only go up. Third is the emotional investment that we all have from living in our homes.

A family member and spouse have talked with me about how much their home has gone up in value. They bought many years ago from a motivated seller who needed to move to take a job if I remember right. They negotiated a tough deal to the irritation of the seller but he didn't have much choice. Then they put into their house the approximate amount that I have been able to contribute to my retirement plans. Then factor in the many hours they and their children put into maintaining the house. If you factor in the value of their time, I am not sure that what seems to be a great investment at first glance really was a very good investment at all. But at least they were building equity in their home and not just collecting rent receipts.

Owning a home is a large financial and time commitment. There are a lot of labor costs in there that people don't consider. I think of it as a place to live and to raise a family. Whatever profit you make from it when you sell is just gravy in my opinion. Don't buy a home because you think you will make a killing on it.
A fool and his money are good for business.

Rodc
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Re: Why do so many think their home is a foolproof investmen

Post by Rodc » Sat Sep 13, 2014 4:11 pm

Then factor in the many hours they and their children put into maintaining the house. If you factor in the value of their time, ...
If one enjoys working on houses (cars, whatever) it counts more like an enjoyable hobby. If one dislikes it, then it is more like an expense. This can be a big differentiator between a housing being a good or not so good investment.

I would note though that like many landlords, there are owners who put a great deal less time into their houses than others.
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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xystici
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Re: Why do so many think their home is a foolproof investmen

Post by xystici » Sat Sep 13, 2014 4:24 pm

YttriumNitrate wrote:Until the rise of cash-out refinancing / interest only loans, homes were often good investments simply because they forced people to save a bit every month. It's easy to cut back on your retirement saving to buy the latest do-dad or whatchamacallit, but only the biggest spendthrifts would put a big screen TV ahead of their mortgage.
+1. Mortgage payments are the "forced savings" to the average paycheck-to-paycheck folks and therefore a good thing.
Trust yourself, Break the rules, Don't be afraid to fail, Don't listen to naysayers, Work your butt off. "It is in your moments of decision that your destiny is shaped. Choose now and well"

penumbra
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Re: Why do so many think their home is a foolproof investmen

Post by penumbra » Sat Sep 13, 2014 5:13 pm

It's not foolproof, but not a bad bet. Does have something to do with your location, as has been mentioned.
I paid $252,500 for mine in 1977. Now worth about $2,500,000. I'm in coastal California. I'm more than pleased.
Taxes $5200 yearly.

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VictoriaF
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Re: Why do so many think their home is a foolproof investmen

Post by VictoriaF » Sat Sep 13, 2014 5:39 pm

Johno wrote:The reality that buying a home is an investment is not a matter of semantics or feelings or consideration. It's clear in the real world decision you make. You either rent and somebody else takes the risk and gets the benefit (of uncertain property appreciation minus uncertain operating expenses) of the investment, or you invest yourself. The house is a place to live in whether you rent or own it, that's not the issue so the comparison to food is not relevant. The issue is whether you take the operating cost/appreciation risk in return for possible upside, or pay a fixed* cost to have somebody else take that risk and get that variable return.
Homeowners tend to compare apples to apples. They live in a house they have bought and compare it to the cost of renting an identical house. In reality, most renters live in lesser places than what they would own, and their overall housing cost, including the building owner's overhead, is about the same as the total cost of ownership--and frequently is less.
Johno wrote:*relatively fixed, or less immediately volatile at least. Of course in the long run the renter is exposed to the risk of declining affordability of housing especially if they want to live in a particular area. In that sense the owner's position is hedged and the renter's naked.
If a renter is determined to live in a specific place, he may in fact have to pay higher rent. However, a renter is free to leave and find a cheaper place, a place closer to his work, etc. A renter has a free option to move, an owner is tied to his place by high transaction fees of selling and buying houses. Frequently, a renter moves out because something has happened to the location, and an owner cannot move specifically because something has happened to the location. For example, after the dot-com bubble burst, many high-tech professionals in New Jersey became unemployed. As a renter, I found a job and moved to D.C. Many of my former homeowner colleagues are still in NJ, many of them are still underemployed. I don't know how to quantify the option to move, but for me it has resulted in significant monetary value.

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

Rodc
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Re: Why do so many think their home is a foolproof investmen

Post by Rodc » Sat Sep 13, 2014 5:44 pm

In reality, most renters live in lesser places than what they would own,
Is there any actual data to back that up?
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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VictoriaF
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Re: Why do so many think their home is a foolproof investmen

Post by VictoriaF » Sat Sep 13, 2014 5:51 pm

Rodc wrote:
In reality, most renters live in lesser places than what they would own,
Is there any actual data to back that up?
I don't have the data, it's an observation from having lived in rental apartments all my life and having many family members and friends homeowners. It's also logical. Homeowners are always working on some home improvement projects; renters do very little customizing.

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

kksmom
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Re: Why do so many think their home is a foolproof investmen

Post by kksmom » Sat Sep 13, 2014 5:54 pm

.... Its a measure of the success of the propaganda from FIRE (Finance, Insurance and Real Estate) industry... it benefits the industry.

Rodc
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Re: Why do so many think their home is a foolproof investmen

Post by Rodc » Sat Sep 13, 2014 6:03 pm

VictoriaF wrote:
Rodc wrote:
In reality, most renters live in lesser places than what they would own,
Is there any actual data to back that up?
I don't have the data, it's an observation from having lived in rental apartments all my life and having many family members and friends homeowners. It's also logical. Homeowners are always working on some home improvement projects; renters do very little customizing.

Victoria
Well, tons of people invest poorly in stocks and bonds, taking on too much risk, buying after something has been hot, selling after it has been cold, paying far too much for mutual funds. By this line of reasoning stocks and bonds are a very poor investment.

I think too your argument rests on the idea that folks do not get a return on their improvements. Enjoyment is hard to quantify in dollars perhaps, but that does not mean a nice house has no value other than the bare essentials of a roof and a few square feet of space. That is the return may be there, just not in dollars. I have known people who do not value niceties or extra space that many do value, and they go decades without upgrades.

The bottom line is either renting or buying can be a good deal or a poor one. The key is to go the route that best aligns with what one values.
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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dodecahedron
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Re: Why do so many think their home is a foolproof investmen

Post by dodecahedron » Sat Sep 13, 2014 7:24 pm

penumbra wrote:It's not foolproof, but not a bad bet. Does have something to do with your location, as has been mentioned.
I paid $252,500 for mine in 1977. Now worth about $2,500,000. I'm in coastal California. I'm more than pleased.
Taxes $5200 yearly.
Worked out much better for you than for me. Mine is worth less than we paid for it in 1990 (just a bit less in nominal terms, significantly less in inflation-adjusted terms.) Obviously stocks and/or bonds would have been a much better investment if I viewed it as an investment. And property tax rates are far higher here than where you are in California. A 250K home here in my upstate NY county would pay more than you pay on a $2.5 M home!

But I have no regrets. It has been an amazingly beautiful and serene place for my late husband and I to live surrounded by natural beauty and lots of outdoor space, which we both treasure, to raise our children, and to make wonderful memories. And although our tax rates are high, our town has excellent public services, a great bond rating, and fully funded pensions for its employees.

ASUGrad
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Re: Why do so many think their home is a foolproof investmen

Post by ASUGrad » Sat Sep 13, 2014 7:29 pm

Lets just apply common sense to it.

Why would a house go up in value? Its not magical... its bricks, wood, drywall, vinyl, etc. all built by semi skilled laborers. Unless the materials or labor skyrocket then the price to build a new home should remain pretty stable, with inflation. As long as you keep it up existing homes should last which helps keep them from depreciating, but really you are just paying maintenance instead of depreciation. So you are adding value to it in order to keep it up with inflation.

Now sometimes homes really do appreciate faster than inflation, or sometimes much slower. Why? Well thats not the materials or labor. Thats the land!

Physical structures themselves don't really appreciate, they either depreciate or you put money/labor into them(maintenance) to keep them in good condition. Its the land that appreciates, which brings us to the three Ls of real estate. Location, location, location. If the location keeps improving your house is worth more, if it degrades your house probably isn't going to do as well.

I would never think of a home as an investment unless I was renting it out.

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VictoriaF
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Re: Why do so many think their home is a foolproof investmen

Post by VictoriaF » Sat Sep 13, 2014 7:54 pm

Rodc wrote:
VictoriaF wrote:
Rodc wrote:
In reality, most renters live in lesser places than what they would own,
Is there any actual data to back that up?
I don't have the data, it's an observation from having lived in rental apartments all my life and having many family members and friends homeowners. It's also logical. Homeowners are always working on some home improvement projects; renters do very little customizing.

Victoria
Well, tons of people invest poorly in stocks and bonds, taking on too much risk, buying after something has been hot, selling after it has been cold, paying far too much for mutual funds. By this line of reasoning stocks and bonds are a very poor investment.
I am not saying that all home ownership is wrong. I am saying that in many cases, including mine, renting is a better financial decision.
Rodc wrote:I think too your argument rests on the idea that folks do not get a return on their improvements. Enjoyment is hard to quantify in dollars perhaps, but that does not mean a nice house has no value other than the bare essentials of a roof and a few square feet of space. That is the return may be there, just not in dollars. I have known people who do not value niceties or extra space that many do value, and they go decades without upgrades.
People derive different types of value from different features and opportunities. Some enjoy making home improvements; others enjoy living without having to make home improvements. Some enjoy living on a large piece of land; others enjoy living in a NYC apartment.
Rodc wrote:The bottom line is either renting or buying can be a good deal or a poor one. The key is to go the route that best aligns with what one values.
I agree.

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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