Shiller: Homeownership is a bad investment

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tadamsmar
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Shiller: Homeownership is a bad investment

Post by tadamsmar » Sat Oct 18, 2008 6:20 am

But what's ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends. Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on.
http://www.newsweek.com/id/163453

Is this true? I always thought I would pay about as much in rent as I did on my mortgage and have nothing to invest.

Shiller does not run the numbers to prove his point. Has anyone here analyzed this proposition, or does anyone know of an analysis?

Of course, there was no bubble and price collapse in my area of the country.

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Bruce
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Homeownership

Post by Bruce » Sat Oct 18, 2008 7:08 am

Scott Burns said it best

"(1) Home ownership is a life style decision, not an investment"

"It may be a life style decision but a lot of investment money is involved. Yes, buying a house is a life-style decision. First we decide whether to buy or rent. Then we decide the size, location, and style of the house based on our needs, wants, and the generosity of our lender. We never improve our stock or mutual fund shares in the same way we improve our condos and houses."

assetbuilder.com has much more on the topic.

best regards,
Bruce | | Winner of the 2017 Bogleheads Contest | | "Simplicity is the master key to financial success."

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Kenkat
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Post by Kenkat » Sat Oct 18, 2008 7:16 am

I'd be curious where Shiller lives - in a house he owns or an apartment?

It is difficult to rent something that provides all the amenities of a house. Especially if you are raising a family, where you need stability (imagine a landlord telling you in the middle of a school year that your lease is not being renewed).

In many cases, the life considerations trump the economic considerations.

I've always considered my house an investment that will roughly keep up with inflation over a long period of time. The key is that I get to live in it while I own it and reap those benefits.

Ken

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Post by MOBoglehead » Sat Oct 18, 2008 7:17 am

I think Shiller is partly correct, but it is highly dependent on location. In the smaller cities of the Midwest and Great Plains and the South, I think buying may be better. But in certain large cities on the coasts, I have no doubt that renting is smarter than buying. But even in the best case scenario for buying, most people are not really aware of how much money they spend on their homes which never comes back to them in monetary terms - lawn care, painting, etc. These things do not add value, they merely maintain value. Plus all of the money spent on extra furniture for all of those rooms, higher utility bills, etc.

People say that renting is "throwing money away", but until you own your home free and clear, you are renting it from the lender. Mortgage interest is effectively the same thing as rent, except a small part of it is tax-deductible, and over time, more of it goes to principal. It is true that your rent increases over time, while your mortgage does not ( if it is a fixed rate ). However, property taxes and maintenance costs on a home also continue to go up, even after the mortgage is paid off. So you never really stop paying to live in your home.

A home represents far more than money to most people. This is fine. But I think it is a mistake to think of a home as an investment. Renting vs owning is really a lifestyle choice. I doubt that a renter who saves diligently will be much of any worse off financially in the long run than the typical homeowner, especially if the homeowner has a very large house.

Try this : http://www.bargaineering.com/articles/r ... -home.html

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Post by MOBoglehead » Sat Oct 18, 2008 7:25 am

A few other things I neglected to mention in favor of owning a home...

You could argue that owning a home does diversify your financial holdings, although home equity is illiquid. It is also true that the "return" on the typical home over the past 10 years has probably been slightly better than the S&P 500, but that is not typical. I suppose that could provide some comfort and added economic security to some people. And then there is the possibility of taking out a reverse mortgage at some point.

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Post by MOBoglehead » Sat Oct 18, 2008 7:28 am

I also agree with Ken....if you have a family, having a house is a no-brainer.

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Post by jeffyscott » Sat Oct 18, 2008 7:30 am

put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like
The problem with this overly academic economic argument is you can't really rent whatever you like. I like a single family home. The selection of rentals is very limited and likely none are as appealing as the house we built for ourselves. In addition, you can not do whatever you like to a rental as you can with your own home.


This:
Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on.
has absolutely nothing to do with renting vs. owning. A homeowner can also hire professionals to do whatever work they do not enjoy doing themselves. I know an economist would say, rather than me investing $500 in my lawn mower and spending 40 hours per year mowing, I should put in 40 hours of overtime at my job and I'd come out ahead by paying someone else to do it. But I'd rather cut my own grass and not spend even more time at my boring job.
Time is your friend; impulse is your enemy. - John C. Bogle

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Post by jeffyscott » Sat Oct 18, 2008 7:37 am

MOBoglehead wrote: Plus all of the money spent on extra furniture for all of those rooms, higher utility bills, etc.

This is not related to renting vs. owning, instead it is related to what you choose to rent or own. Shiller said "rent whatever you like" not rent a more modest home in order to save money.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Shiller: Homeownership is a bad investment

Post by yobria » Sat Oct 18, 2008 7:42 am

tadamsmar wrote:Is this true?
1. If you remain employed and live within your means, you will obviously be OK regardless of whether you rent or own.

2. You will almost certainly come out ahead by owning. Why? Homeownership forces you to do just that - stay employed and live within your means. Look around - do the smart, successful people you know rent or own on average? Are these people really all idiots making a huge financial mistake?

3. Owning offers a higher quality of life than renting. Compare the rental units to the homes in your area and I bet you'll see that. Who would put time and money into making a rental a beautiful home?

4. Shiller is an entertainer, and he entertains by being bearish on everything.

Nick

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Post by grok87 » Sat Oct 18, 2008 7:44 am

MOBoglehead wrote:I also agree with Ken....if you have a family, having a house is a no-brainer.
I agree but I think Shiller's advice is useful from another perspective.
If what he is saying is true, then maybe the thing to do (if you have a family) is to buy a house, but buy the smallest one that is practical. While this sounds like common sense advice, it actually is contrary to much of the "conventional wisdom" you hear (or used to hear) about buying a house. "Buy the biggest house you can afford!" is what everyone used to tell you- "It's the best investment you'll ever make!"

cheers,
RIP Mr. Bogle.

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Post by mithrandir » Sat Oct 18, 2008 7:47 am

The "solution" is simple. Buy a house, don't rent, but make sure your chosen property simply meets your needs and avoids extravagance. You'll get the benefits of homeownership yet you won't be signing your life away financially.

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Post by tadamsmar » Sat Oct 18, 2008 8:24 am

I still don't see the argument.

My house is worth about 400K and the morgage is paid off. It I sold it and invested safely, I would clear about 8K per year in real return. I don't see how I earn enough to cover rent. Perhaps the numbers work if I rent a small place.

Of course, I will have to replace the roof, HVAC system, and keep my house painted and maintained.

I guess I could rent a place for 1.5K per month or something like that.

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Re: Shiller: Homeownership is a bad investment

Post by Kevinaom » Sat Oct 18, 2008 8:26 am

yobria wrote:
1. If you remain employed and live within your means, you will obviously be OK regardless of whether you rent or own.

2. You will almost certainly come out ahead by owning. Why? Homeownership forces you to do just that - stay employed and live within your means. Look around - do the smart, successful people you know rent or own on average? Are these people really all idiots making a huge financial mistake?

3. Owning offers a higher quality of life than renting. Compare the rental units to the homes in your area and I bet you'll see that. Who would put time and money into making a rental a beautiful home?

4. Shiller is an entertainer, and he entertains by being bearish on everything.

Nick
Your number 2 fascinates me. Homeownership forces you to "live within your means"? What about this housing crisis have you not been reading? Actually, I believe it is the other way around. Renting is a simple calculation. You have rent, you look at your income, you easily know if the cash flow will work or not. With homeownership, you have had a bunch of crazy schemes like "interest only" or "Balloon payments" or "ARMS" which have made people not fully understand the cash flow. This then allowed them, and encouraged them, to do crazy things which are now crashing down.

I have always believed that owning is NOT an investment in dollars, but rather, lifestyle. I like my own house, with my own yard, etc. etc. However, for purely financial purposes, I would rent. Renting gives you far more options, makes you far more liquid, and generally costs less.

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Post by livesoft » Sat Oct 18, 2008 8:40 am

kenschmidt wrote:...I've always considered my house an investment that will roughly keep up with inflation over a long period of time. The key is that I get to live in it while I own it and reap those benefits.

Ken
My home's value has not kept up with inflation over the last 15 years. It is a nice place to live however. Investment it ain't.

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Re: Homeownership

Post by burt » Sat Oct 18, 2008 8:51 am

Bruce wrote:Scott Burns said it best

"(1) Home ownership is a life style decision, not an investment"
I agree with Scott Burns. After owning 3 homes over the past 25 years, I've now decided to rent. Some factors to think about.

Do a rent v.s. buy calculation to determine the number of years to break even. A big variable is estimated annual home appreciation. Anyone want to guess what that number is in today's market ?

Home maintenance. My experience is $400-500 per month. This is a conservative estimate for a modest mid west home.

Don't forget property taxes, insurance, and association fees.

What's your time worth ? I'm done with those sweat equity projects. You work a good chunk of the week to pay the mortgage then comes the precious weekend. Who want's to spend 4 weekends ripping into a bathroom remodel job ? I gave all of my sweat equity away for free on the sale of my last home.

How stable is your job and how easy will it be to get rid of the house ?

In summary: A home can be an anchor offering stability for your family....or it can be an anchor limiting your options and flexibility.

bert

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Post by Kenkat » Sat Oct 18, 2008 9:00 am

livesoft wrote:
kenschmidt wrote:...I've always considered my house an investment that will roughly keep up with inflation over a long period of time. The key is that I get to live in it while I own it and reap those benefits.

Ken
My home's value has not kept up with inflation over the last 15 years. It is a nice place to live however. Investment it ain't.
I bought my first house in 1992 and it appreciated around 30% before I sold it in 1998. My current house has appreciated around 20% over the past 10 years or so. The housing slump has affected my local market, but not to the extreme in other places.

Maybe you haven't waited long enough yet. :wink:

Ken

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Re: Homeownership

Post by Ron » Sat Oct 18, 2008 9:15 am

burt wrote: I agree with Scott Burns. After owning 3 homes over the past 25 years, I've now decided to rent. Some factors to think about.

Do a rent v.s. buy calculation to determine the number of years to break even. A big variable is estimated annual home appreciation. Anyone want to guess what that number is in today's market ?

Home maintenance. My experience is $400-500 per month. This is a conservative estimate for a modest mid west home.

Don't forget property taxes, insurance, and association fees.

What's your time worth ? I'm done with those sweat equity projects. You work a good chunk of the week to pay the mortgage then comes the precious weekend. Who want's to spend 4 weekends ripping into a bathroom remodel job ? I gave all of my sweat equity away for free on the sale of my last home.

How stable is your job and how easy will it be to get rid of the house ?

In summary: A home can be an anchor offering stability for your family....or it can be an anchor limiting your options and flexibility.

bert
I guess part of the "equation" is where you are at in your life. Being that I'm in my early 60's, retired, and not "humping" (e.g. job) anymore, I really get to enjoy the home we have (our fourth, since we've been married almost 40 years).

When I (and my wife) were young, all we could afford was a mobile home (e.g. trailer). As we went through life (and our income increased) we progressed from a twin (2-family), a small single, and finally our current home (4 br, 2.5 baths, 1+ acre) - enough for my wife and me :lol: ) along with our dogs.

Today, I enjoy just getting on my JD and mowing the lawn, "tinkering" in our small garden, and just "enjoying life". Now, since I have the $$, I can afford to have someone else do the maintenance (little that there is). I have someone else paint (very little paintable surfaces) or repair as needed. When I was younger, I "had" to do it myself (and hated it). That along with other "normal maintenace" (such as "coating the driveway") are left to others. Could I do it myself? Sure. Do I need to do it myself? Nope :lol: ...

My wife and I have discussed the future (as related to housing). We realize that if/when we downsize, a lot of our "treasures" accumulated over many years of travel (acutally trinkets) will wind up in the "quarter box" (e.g. a box of "unknows" that are sold at auction for $.25 at an estate sale.)

For us, it comes down to a couple of simple questions....

- Is our house an investment? (Nope - never was, and is not expected to provide income, nor "leverage on loans" in the future).

- Are we happy where we are living (regardless of any "outside considerations" of expenses or "alternative investment returns")? - Yes!

- Do we look at our home as an investment, or a place (lifestyle) to "hang our hats"? - Most certainly, it is "food for our soul", but certainly not looked at as an investment (e.g. we do not require some "ROI").

- What would we have done in the last 40 years to change our view of our (numerous) home in order to "maximuize our investment"? Nothing.

- Finally, "are we happy" (e.g. with our home)? - Yes.

Home "ownership" is a bad investment (per the OP's title).
However, as a "place of comfort", it can't be beat!

Just a view from some "old folks"...

- Ron
Last edited by Ron on Mon Nov 03, 2008 8:45 am, edited 1 time in total.

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Post by ascenzm » Sat Oct 18, 2008 9:28 am

kenschmidt wrote: I've always considered my house an investment that will roughly keep up with inflation over a long period of time. The key is that I get to live in it while I own it and reap those benefits.

Ken
I agree with you. Owning one's home provides stability and you don't have to worry about dealing with a land lord. However, it seems to me that many of today's homeowners are looking at their homes as investments that should appreciate in value well above the rate of inflation or the rate of wage increases.

When I take my Sunday walk I pass by a new condo development. These units sold for around $400K new. One was for sale recently and I stopped to pick up the realtor's flyer for the property. The owner purchased the condo new in Sep. 2006 for $414K. He put the unit on the mark in March of 2008 and was asking $699K. He's looking at that unit as an investment. Good luck to him trying to sell the condo.

Housing prices will need to decline until they're in line with people's wages. Perhaps the old metrics of putting 20% down, getting a fixed rate 15/30 year mortgage, having a stable job and buying a house costing no more than 2.5X your annual income will come back into favor.

Mike

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Post by canucknyc » Sat Oct 18, 2008 9:30 am

tadamsmar wrote:I still don't see the argument.

My house is worth about 400K and the mortgage is paid off. It I sold it and invested safely, I would clear about 8K per year in real return. I don't see how I earn enough to cover rent. Perhaps the numbers work if I rent a small place.

Of course, I will have to replace the roof, HVAC system, and keep my house painted and maintained.

I guess I could rent a place for 1.5K per month or something like that.
hey tadamsmar-

someone else may be able to speak to this more intelligently, as i'm certainly no expert, but i think what your description of the situation misses is the return on investment you could have been making while paying off the mortgage on your home. i don't know that many (any?) would argue that renting is better than owning once you own your home free and clear.

but i can't help but wonder how much you would have to invest right now if you had rented this entire time (rather than worked to pay off a mortgage). would it be more than $400K after factoring in all of the factors listed in posts above (i.e. investing the difference between rent and mortgage payments, increasing cost of renting, maintenance costs, property taxes, etc, etc, etc)? unfortunately, only hindsight is 20/20 :)

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Re: Homeownership

Post by Gregory » Sat Oct 18, 2008 9:48 am

Ron wrote:
I guess part of the "equation" is where you are at in your life. Being that I'm in my early 60's, retired, and not "humping" (e.g. job) anymore, I really get to enjoy the home we have (our fourth, since we've been married almost 40 years).

When I (and my wife) were young, all we could afford was a mobile home (e.g. trailer). As we went through life (and our income increased) we progressed from a twin (2-family), a small single, and finally our current home (4 br, 2.5 baths, 1+ acre) - enough for my wife and me :lol: ) along with our dogs.

Today, I enjoy just getting on my JD and mowing the lawn, "tinkering" in our small garden, and just "enjoying life". Now, since I have the $$, I can afford to have someone else do the maintenance (little that there is). I have someone else paint (very little paintable surfaces) or repair as needed. When I was younger, I "had" to do it myself (and hated it). That along with other "normal maintenace" (such as "coating the driveway") are left to others. Could I do it myself? Sure. Do I need to do it myself? Nope :lol: ...

My wife and I have discussed the future (as related to housing). We realize that if/when we downsize, a lot of our "treasures" accumulated over many years of travel (acutally trinkets) will wind up in the "quarter box" (e.g. a box of "unknows" that are sold at auction for $.25 at an estate sale.)

For us, it comes down to a couple of simple questions....

- Is our house an investment? (Nope - never was, and is not expected to provide income, nor "leverage on loans" in the future).

- Are we happy where we are living (regardless of any "outside considerations" of expenses or "alternative investment returns")? - Yes!

- Do we look at our home as an investment, or a place (lifestyle) to "hang our hats"? - Most certainly, it is "food for our soul", but certainly not looked at as an investment (e.g. we do not require some "ROI").

- What would we have done in the last 40 years to change our view of our (numerous) home in order to "maximuize our investment"? Nothing.

- Finally, "are we happy" (e.g. with our home)? - Yes.

Just a view from some "old folks"...

- Ron
Great post. Puts things into perspective.

A couple of other points:
When DW wants to remodel the kitchen in her own unique way, try doing that in a rental. ('If mama ain't happy, then ain't nobody happy' was one of my father's fav. refrains.)

More attention needs to be made of the point MOBoglehead brought about re: reverse mortgage. (Hopefully fees on these will drop in the future as well.)

A homeowner with a paid-off note can choose when to paint or perform other non-emergent repairs. But when rent is due, it's due.

As a landlord I can assure you that renters do indeed end up absorbing taxes, insurance, and maintenance costs. Renters may, on paper, have a gross or double net lease, but in the end a landlord will pass along costs to the renter.

Well-known financial author Jane Bryant Quinn puts it this way in Making the Most of Your Money: "For all the huffing and puffing of the doubters, a home of our own is still the rock on which our hopes are built. Price appreciation aside (and most houses will appreciate, eventually) homeownership is a state of mind. It's your piece of the earth....Homeownership is your only hope of living "free" when you retire. Rent goes on forever....You're landlord-free. You know the deep contentment of holding a spot of ground that others can enter by invitation only. You won't lose your lease. You can renovate to suit. Your mortgage payments build a pool of usable funds that you might not otherwise have saved. A house is collateral for a loan. House payments often cost less than rent." (pp. 474-474)
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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Post by tc101 » Sat Oct 18, 2008 9:49 am

Maybe long term the average house is not as good an investment as a stock index long term, but isn't it better than a bond index long term? I would think so. It is usually a better investment to put money into paying down the mortgage than to put money into a bond index fund.

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Re: Homeownership

Post by Ron » Sat Oct 18, 2008 10:01 am

Gregory wrote:[Great post. Puts things into perspective.

A couple of other points:
When DW wants to remodel the kitchen in her own unique way, try doing that in a rental. ('If mama ain't happy, then ain't nobody happy' was one of my father's fav. refrains.)

More attention needs to be made of the point MOBoglehead brought about re: reverse mortgage. (Hopefully fees on these will drop in the future as well.)

A homeowner with a paid-off note can choose when to paint or perform other non-emergent repairs. But when rent is due, it's due.

As a landlord I can assure you that renters do indeed end up absorbing taxes, insurance, and maintenance costs. Renters may, on paper, have a gross or double net lease, but in the end a landlord will pass along costs to the renter.

Well-known financial author Jane Bryant Quinn puts it this way in Making the Most of Your Money: "For all the huffing and puffing of the doubters, a home of our own is still the rock on which our hopes are built. Price appreciation aside (and most houses will appreciate, eventually) homeownership is a state of mind. It's your piece of the earth....Homeownership is your only hope of living "free" when you retire.
Thanks for the positive feedback (hopefully it did let you - and others know that a house can be considered as a "home").

As for the kitchen, my wife looked at the builders plans (which we altered anyway 8) ) and her "decison" was based upon the size/utillity of the kitchen (if momma isn't happy - nobody is happy :wink: ).

While I see upgrades in the future (as in any home) at least the "base" was there in our orignal build.

- Ron

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Re: Homeownership

Post by Valuethinker » Sat Oct 18, 2008 10:03 am

Ron wrote:
Gregory wrote:[Great post. Puts things into perspective.

A couple of other points:
When DW wants to remodel the kitchen in her own unique way, try doing that in a rental. ('If mama ain't happy, then ain't nobody happy' was one of my father's fav. refrains.)

More attention needs to be made of the point MOBoglehead brought about re: reverse mortgage. (Hopefully fees on these will drop in the future as well.)

A homeowner with a paid-off note can choose when to paint or perform other non-emergent repairs. But when rent is due, it's due.

As a landlord I can assure you that renters do indeed end up absorbing taxes, insurance, and maintenance costs. Renters may, on paper, have a gross or double net lease, but in the end a landlord will pass along costs to the renter.

Well-known financial author Jane Bryant Quinn puts it this way in Making the Most of Your Money: "For all the huffing and puffing of the doubters, a home of our own is still the rock on which our hopes are built. Price appreciation aside (and most houses will appreciate, eventually) homeownership is a state of mind. It's your piece of the earth....Homeownership is your only hope of living "free" when you retire.
Thanks for the positive feedback (hopefully it did let you - and others know that a house can be considered as a "home").

As for the kitchen, my wife looked at the builders plans (which we altered anyway 8) ) and her "decison" was based upon the size/utillity of the kitchen (if momma isn't happy - nobody is happy :wink: ).

While I see upgrades in the future (as in any home) at least the "base" was there in our orignal build.

- Ron
If you bought a home in NYC or San Francisco in the last 30 years, you are way, way ahead.

If you bought one in Cleveland or Detroit or Buffalo, you have not even kept up with inflation.

The problem with a house is it is not diversified equity. It pays a (not huge) return (the rental yield on your house).

Treat it as a lifestyle cost, and enjoy your lifestyle. Don't confuse it with an investment though. It's not reliable enough for that.

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Re: Homeownership

Post by Ron » Sat Oct 18, 2008 10:27 am

Valuethinker wrote:Treat it as a lifestyle cost, and enjoy your lifestyle.
Yes (you've got it, according to our "view").

BTW, our home is located 90m West from NYC, and has appreciated greatly since we built it.

However, since our estate (other than a portion allocated to a SNT for our disabled child) is going to charity, our "view" may be different than those that are using their estate to "fund" their "next generation".

- Ron

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Post by richard » Sat Oct 18, 2008 10:30 am

This is not a decision that can be made in the abstract. You need to look at the relative costs of owning and renting.

Shiller has published numbers that show that over the long term, the inflation indexed return from home ownership averages zero (average prices may rise, but that's because houses are getting bigger; you need to compare apples to apples). We went off trend not too long ago and return soared. However, return is going back to trend.

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Post by Met Income » Sat Oct 18, 2008 10:45 am

I'm a 25 year old with an above average income in the Northeast. I could've stretched out a 10-15% down payment for a condo or fix-me up home when all of my other friends were buying but I decided to rent until:

- I could get the full 20%
- I knew I wanted to be in this area for more than 5 years

The more I self-actualize as I age, the more I realize that I don't have a burning desire for a house right now. When I'm 35? Yes, I hope I have a house, unless somehow I break into a new industry and feel my calling is as a bachelor in NYC.

I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter. However, I think most people who sell houses overstate their gain. I think most people think:

Bought a house in 1990 for $150,000
Sold it in 2008 for $300,000

Therefore, I made a 100% gain. No, you must deduct your mortgage interest, real estate taxes, and maintenance from your gain. Plus, unless you are older, you might be buying a more expensive house.

I do not currently do not value home ownership that much. I do not desire to maintain a property. I do value cash flow and contributing the max to my 401K and IRAs. I don't have a house but am still saving 40% of my income and still have enough left over to live a fun, single lifestyle. Right now, it's good enough for me.

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Housing in "Spend 'Til the End"

Post by VictoriaF » Sat Oct 18, 2008 10:52 am

Chapter 13 of "Spend 'Till the End" by Larry Kotlikoff and Scott Burns discusses the advantages and issues of home ownership. Here are some excerpts.

"Indeed, when it comes to housing prices as well as other asset prices, economics defies gravity: what goes up doesn't necessarily come down."

"The important caveat here is that you must be highly confident that you will live in the house for a long time - like the rest of your life."

"So why does buying beat renting? Taxes and time."

On taxes:
"Of course, by age seventy they've paid off their mortgage. So why does buying the home save taxes at that age?

The answer is that when they buy, Andrew and Jessica have less taxable financial-asset income at age seventy. ... because they have fewer financial assets. ... because they did most of their overall saving when young in the form of paying off their mortgage. This leaves them with an asset at age seventy that yields a special form of income - housing services - that is in-kind, and thus, tax free."
(Bold is mine. VF)

On time:
"Because the number of dollars Andrew and Jessica pay each year stays fixed, while the rise in prices - inflation - makes those dollars worth less and less each year in terms of the real goods and services they can buy."

My comments:
- The book provides high-level "typical-case" guidance. Everybody's case, of course is different.
- Rather than making or following blanket remarks a la Shiller, I would recommend getting ESPlanner and doing one's own custom analysis (*). When Larry Kotlikoff met with the DC Diehards group he mentioned that he and Burnes were surprised by some of the modeling results. Some of us here may get our own surprises.

(*) I am not affiliated with ESPlanner in any way, except that I have been planning to buy it for the past two years :oops:

Victoria

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Re: Shiller: Homeownership is a bad investment

Post by dayzero » Sat Oct 18, 2008 11:04 am

tadamsmar wrote:
But what's ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends. Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on.
http://www.newsweek.com/id/163453

Is this true? I always thought I would pay about as much in rent as I did on my mortgage and have nothing to invest.

Shiller does not run the numbers to prove his point. Has anyone here analyzed this proposition, or does anyone know of an analysis?

Of course, there was no bubble and price collapse in my area of the country.
Stop reading financial porn.

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Post by Gregory » Sat Oct 18, 2008 11:08 am

Met Income wrote:....I don't have a burning desire for a house right now.

I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter.

I do not currently do not value home ownership that much....I do value cash flow and contributing the max to my 401K and IRAs.
Landlords thrive on this type of attitude. And it's true, home ownership isn't a good fit for everyone. Fortunately for your landlord, you're helping to fund his/her lifestyle/retirement. :wink:
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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Post by schwarm » Sat Oct 18, 2008 11:11 am

kenschmidt wrote:
I bought my first house in 1992 and it appreciated around 30% before I sold it in 1998. My current house has appreciated around 20% over the past 10 years or so. The housing slump has affected my local market, but not to the extreme in other places.

Maybe you haven't waited long enough yet. :wink:

Ken
Your second house appreciated less than 2% per year, I think that's less than inflation.

One other factor... in today's white collar job market, if you live where the cost of buy vs. renting is favorable, you may have to move several times in your career. So buy and hold for a house may not be an option.

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Re: Shiller: Homeownership is a bad investment

Post by yobria » Sat Oct 18, 2008 11:16 am

yobria wrote:
1. If you remain employed and live within your means, you will obviously be OK regardless of whether you rent or own.

2. You will almost certainly come out ahead by owning. Why? Homeownership forces you to do just that - stay employed and live within your means. Look around - do the smart, successful people you know rent or own on average? Are these people really all idiots making a huge financial mistake?

3. Owning offers a higher quality of life than renting. Compare the rental units to the homes in your area and I bet you'll see that. Who would put time and money into making a rental a beautiful home?

4. Shiller is an entertainer, and he entertains by being bearish on everything.

Nick
Kevinaom wrote:Your number 2 fascinates me. Homeownership forces you to "live within your means"?
It should be obvious, but I'll go through it. First, you have to save for the down payment and closing costs, then once you own the house you must continue to make payments (part of which is equity, eg forced savings) to protect your investment.
Kevinaom wrote:What about this housing crisis have you not been reading?
You seem to be suffering from recency bias. For the vast, (and I mean vast, including most homeowners today) majority of owners, homeownership has been a financial blessing.
Kevinaom wrote:Actually, I believe it is the other way around. Renting is a simple calculation. You have rent, you look at your income, you easily know if the cash flow will work or not.
Until the landlord raises the rent by some unknown percent...
Kevinaom wrote:With homeownership, you have had a bunch of crazy schemes like "interest only" or "Balloon payments" or "ARMS" which have made people not fully understand the cash flow.
Man those do sound crazy! Think I'll just stick to 30 year fixed mortgages.
Kevinaom wrote:However, for purely financial purposes, I would rent. Renting gives you far more options, makes you far more liquid, and generally costs less.
For purely financial purposes, over the long term, buying is generally better given common assumptions (eg 3% inflation and home appreciation), but you can play with the variables and get any result you want, proof is here:

http://www.nytimes.com/2007/04/10/busin ... APHIC.html#

And again, look around at the smart, successful, financially savvy people you know. Are they on average owners or renters? Or go ask the retirees you know. Did they regret buying homes on average?

Nick

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Post by Kenkat » Sat Oct 18, 2008 11:31 am

schwarm wrote:Your second house appreciated less than 2% per year, I think that's less than inflation.
Yes, but 10 years isn't long term. I will probably be living in a house of some form or another for 50+ years.

Housing prices temporarily got out of line - but I bought mostly before that happened (the first house appreciated 5+% per year) and will likely sell far into the future.
schwarm wrote:One other factor... in today's white collar job market, if you live where the cost of buy vs. renting is favorable, you may have to move several times in your career. So buy and hold for a house may not be an option.
Depends on your priorities, line of work, and where you live. In my case, I live about a mile from where I grew up and don't ever foresee a local job market so bad that I couldn't find a job in it (of course you never know).

Ken
Last edited by Kenkat on Sat Oct 18, 2008 11:34 am, edited 1 time in total.

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Post by Kenkat » Sat Oct 18, 2008 11:33 am

Met Income wrote:I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter. However, I think most people who sell houses overstate their gain. I think most people think:

Bought a house in 1990 for $150,000
Sold it in 2008 for $300,000

Therefore, I made a 100% gain. No, you must deduct your mortgage interest, real estate taxes, and maintenance from your gain. Plus, unless you are older, you might be buying a more expensive house.
These are living costs, just like rent. They don't affect the return on the asset value of your house.

Ken

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Re: Housing in "Spend 'Til the End"

Post by yobria » Sat Oct 18, 2008 11:34 am

VictoriaF wrote:Chapter 13 of "Spend 'Till the End" by Larry Kotlikoff and Scott Burns discusses the advantages and issues of home ownership. Here are some excerpts.
"The important caveat here is that you must be highly confident that you will live in the house for a long time - like the rest of your life."
Thanks for the excerpts, but this statement isn't quite right - almost no one stays in a single house their entire life, so using this logic we should all rent.

What they should have said is this: whether you stay in the *same house* makes little difference when it comes to the benefits of homeownership. You can start with a starter house, upsize when you have kids, then move to a condo when you retire.

Nick

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Re: Shiller: Homeownership is a bad investment

Post by Gregory » Sat Oct 18, 2008 11:36 am

yobria wrote: And again, look around at the smart, successful, financially savvy people you know. Are they on average owners or renters? Or go ask the retirees you know. Did they regret buying homes on average?

Nick
I agree, all those smart, successful, financially savvy people can't be wrong about home ownership.

Edit: My CPA is a homeowner, as is my financial adviser. They're more than capable of "running the numbers." :)
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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Post by dmcmahon » Sat Oct 18, 2008 11:41 am

Owning a home is one of the few ways you can control your inflation risk over long periods of time without risking the destruction of your wealth due to taxes and inflation. That's because the value of the house compounds in a tax-deferred fashion. The oft-cited mortgage tax deduction is not the source of the gain (otherwise those who own homes outright wouldn't have any reason to stay). I defy anyone to find a tax-deferred investment of equivalent risk that will track the inflation rate, let alone produce inflation + 1%. TIPS bonds held in a tax-deferred account might qualify, however, after you've maxed out your IRA and/or 401k contributions, what then? Answer: buy a house.

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Re: Housing in "Spend 'Til the End"

Post by VictoriaF » Sat Oct 18, 2008 11:42 am

yobria wrote:
VictoriaF wrote:Chapter 13 of "Spend 'Till the End" by Larry Kotlikoff and Scott Burns discusses the advantages and issues of home ownership. Here are some excerpts.
"The important caveat here is that you must be highly confident that you will live in the house for a long time - like the rest of your life."
Thanks for the excerpts, but this statement isn't quite right - almost no one stays in a single house their entire life, so using this logic we should all rent.

What they should have said is this: whether you stay in the *same house* makes little difference when it comes to the benefits of homeownership. You can start with a starter house, upsize when you have kids, then move to a condo when you retire.

Nick
Nick,

Of course, you are right. But please note:
1. I tried to provide minimum quotation. The very next sentence after the one I previously quoted was "If you move or are transferred every three years, this isn't a risk to take."
2. Kotlikoff and Burns wanted the book to appeal to wide audiences, and the style is somewhat folksy-joking. They did not really mean "like the rest of your life". They just wanted to invoke (provoke?) a certain way of thinking.

Thanks,
Victoria
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Post by Met Income » Sat Oct 18, 2008 12:00 pm

Gregory wrote:
Met Income wrote:....I don't have a burning desire for a house right now.

I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter.

I do not currently do not value home ownership that much....I do value cash flow and contributing the max to my 401K and IRAs.
Landlords thrive on this type of attitude. And it's true, home ownership isn't a good fit for everyone. Fortunately for your landlord, you're helping to fund his/her lifestyle/retirement. :wink:
You make it sound like I'm getting hoodwinked. I don't know I want to be in NJ in 5 years, so why would I buy a house? Renting is the best fit right now.

I buy groceries, so I'm helping fund the retirement of farmers. What's the difference? It's a mutually beneficial transaction, that's the market.

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Post by Met Income » Sat Oct 18, 2008 12:02 pm

kenschmidt wrote:
Met Income wrote:I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter. However, I think most people who sell houses overstate their gain. I think most people think:

Bought a house in 1990 for $150,000
Sold it in 2008 for $300,000

Therefore, I made a 100% gain. No, you must deduct your mortgage interest, real estate taxes, and maintenance from your gain. Plus, unless you are older, you might be buying a more expensive house.
These are living costs, just like rent. They don't affect the return on the asset value of your house.

Ken
Yes, they do. Your basis in your house is not what you bought it at. It's all of the costs you put into it.

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Re: Shiller: Homeownership is a bad investment

Post by tetractys » Sat Oct 18, 2008 12:03 pm

tadamsmar wrote:
... as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies.
Is this true?
tadamsmar,

Yes, this is true. From a purely economic perspective, the financial markets have historically provided greater dollar for dollar returns than housing over the long run.

One simple way to look at this, relatively and taking many things into consideration (including size preference and construction costs), is that US housing prices have historically tracked commodities, whereas market returns have far exceeded them.

Of course one's personal economy of life is an whole other thing!

So according to both prudence and history, one will gain the most over the long run by saving (including minimizing housing costs) and investing in capital markets.

But on the comparison of renting to owning; I think that is actually a smaller part of the real life equation, the greater part simply being to keep housing costs down.

An excel file of Shiller's data is here: http://www.irrationalexuberance.com/Fig2.1Shiller.xls

Very best regards, Tet
Last edited by tetractys on Sat Oct 18, 2008 12:06 pm, edited 1 time in total.
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Post by daryll40 » Sat Oct 18, 2008 12:04 pm

The equation is more complicated than here, but you're not totally wrong. What's missing the the equivalent cost to rent.

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Re: Shiller: Homeownership is a bad investment

Post by Met Income » Sat Oct 18, 2008 12:05 pm

yobria wrote:
And again, look around at the smart, successful, financially savvy people you know. Are they on average owners or renters? Or go ask the retirees you know. Did they regret buying homes on average?

Nick
Did the regret it? Probably not, because if you buy a house you can afford, it's not a terrible economic decision. I don't think anyone is making that assertion. However, did they crunch the numbers for the alternative possibility? The opportunity cost? Maybe the difference is not that much but I doubt most people have considered it.

Are the successful people smart because they bought the house or are they smart people who bought a house?

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Homeownership is a bad investment

Post by YDNAL » Sat Oct 18, 2008 12:05 pm

Met Income wrote:I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter. However, I think most people who sell houses overstate their gain. I think most people think:

Bought a house in 1990 for $150,000
Sold it in 2008 for $300,000

Therefore, I made a 100% gain. No, you must deduct your mortgage interest, real estate taxes, and maintenance from your gain. Plus, unless you are older, you might be buying a more expensive house.
Met,

That's an incorrect observation. You DID make $150K or 100%.

The carrying costs (interest, taxes, maintenance) are to be considered rent - you have to live somewhere. That said, today I'm considering that luxury cardboard box underneath the overpass as a possibility. :lol:

Seriously, nick, I own 2 homes free and clear and a 3rd with a mortgage (rented) waiting for the market to level-off.

Regards,
Landy
Last edited by YDNAL on Sat Oct 18, 2008 12:07 pm, edited 2 times in total.
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Re: Homeownership is a bad investment

Post by Met Income » Sat Oct 18, 2008 12:06 pm

YDNAL wrote:
Met Income wrote:I think home ownership is beneficial in the long-term because maintenance, real estate taxes, etc. will be passed onto the renter. However, I think most people who sell houses overstate their gain. I think most people think:

Bought a house in 1990 for $150,000
Sold it in 2008 for $300,000

Therefore, I made a 100% gain. No, you must deduct your mortgage interest, real estate taxes, and maintenance from your gain. Plus, unless you are older, you might be buying a more expensive house.
Met,

That's an incorrect observation. You DID make $150K or 100%.

The carrying costs (interest, taxes, maintenance) are to be considered rent - you have to live somewhere. That said, today I'm considering that luxury cardboard box underneath the overpass as a possibility. :lol:

Regards,
Landy
It's not 150K because the carrying costs are more than rent.

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Re: Shiller: Homeownership is a bad investment

Post by SkepticalGuy » Sat Oct 18, 2008 12:06 pm

Gregory wrote:
yobria wrote: And again, look around at the smart, successful, financially savvy people you know. Are they on average owners or renters? Or go ask the retirees you know. Did they regret buying homes on average?

Nick
I agree, all those smart, successful, financially savvy people can't be wrong about home ownership.

Edit: My CPA is a homeowner, as is my financial adviser. They're more than capable of "running the numbers." :)
Come on guys--we all know that smart, successful, financial savvy people can be wrong in large numbers about all kinds of things. Aside from the obvious fact that being smart about some things doesn't mean you're right about all things, I think you might be confusing "affluent" with "financial savvy". Lots of wealthy folks make their money by being professionally successful and then proceed to invest it in nutzoid brokerage schemes, flaky partnerships, and hedge funds. This is not a good line of argument.

The dispute about whether houses are good investments has some interesting history, though. Consider this paper about returns on houses in Amsterdam since 1628:

http://web.mit.edu/cre/research/papers/ ... hholtz.pdf

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Re: Homeownership is a bad investment

Post by YDNAL » Sat Oct 18, 2008 12:09 pm

Met Income wrote:It's not 150K because the carrying costs are more than rent.
How do you know that?

I'm a professional real estate investor, broker and property manager. Please don't make blanket statements like that.

Regards,
Landy
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Homeownership is a bad investment

Post by Met Income » Sat Oct 18, 2008 12:10 pm

YDNAL wrote:
Met Income wrote:It's not 150K because the carrying costs are more than rent.
How do you know that?

I'm a real estate investor, broker and property manager. Please don't make blanket statements like that.

Regards,
Landy
Okay, then you can't make blanket statements like carrying costs = rent. It does depend on the location.

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Re: Homeownership is a bad investment

Post by YDNAL » Sat Oct 18, 2008 12:14 pm

Met Income wrote:Okay, then you can't make blanket statements like carrying costs = rent. It does depend on the location.
Yes I can, because I have US data (with conclusive average numbers) for the last 40 years to prove it. Being that you are a Met fan, the same ballclub that choked against the Marlins, :lol: I see that you are limiting yourself to look at the NE or NYC or ?

Regards,
Landy

edit: to correct spelling and add the laughing guy - it's supposed to be a joke.
Last edited by YDNAL on Sat Oct 18, 2008 12:16 pm, edited 2 times in total.
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Post by Harold » Sat Oct 18, 2008 12:15 pm

Just a casual observation: those who insist on considering taxes, etc. as having been passed on to the renter should increase their mortgage (or whatever basis of comparison to rent) commensurately. Apples to apples and all that.

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Re: Homeownership is a bad investment

Post by tetractys » Sat Oct 18, 2008 12:15 pm

YDNAL wrote:... today I'm considering that luxury cardboard box underneath the overpass as a possibility. :lol:
Landy,

Consider an RV instead, which are going pretty cheap these days. A closer look at the bruised and beat up condition of those people under our overpasses might convince you that they are seldom there out of choice. And you will be able to hang on to a laptop and park near WIFI.

Best regards, Tet
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