ERN: See that house over there? It’s an investment!

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tomsense76
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ERN: See that house over there? It’s an investment!

Post by tomsense76 »

Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
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Re: ERN: See that house over there? It’s an investment!

Post by geerhardusvos »

tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
Huge ERN fan here. His analysis is sound and the idea of imputed rent makes sense. Long-term homeownership makes sense in most markets. I think the key to success is to properly assess the total cost, and to not over consume housing, regardless of whether you rent or buy. Total cost of owning long term is likely less than renting long term, while renting is likely better in the short and mid term. But there are markets that are more favorable to owning and and some that favor renting, so it also depends on the current market valuations in my opinion. 2010 was a great time to buy a house in the current HCOLAs. We will see if 2020 is / was a good time to buy when we look in the rearview mirror 10-20 years from now. In general, you can’t time the market, and it’s good to understand your needs and how long you plan to stay somewhere.

I personally don’t see housing as an investment, but any asset you own can be considered some sort of asset for diversification.

Check this out for house consumption/buying principles that I have compiled
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Re: ERN: See that house over there? It’s an investment!

Post by willthrill81 »

geerhardusvos wrote: Sun Nov 29, 2020 5:15 pm
tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
Huge ERN fan here. His analysis is sound and the idea of imputed rent makes sense. Long-term homeownership makes sense in most markets. I think the key to success is to properly assess the total cost, and to not over consume housing, regardless of whether you rent or buy. Total cost of owning long term is likely less than renting long term, while renting is likely better in the short and mid term. But there are markets that are more favorable to owning and and some that favor renting, so it also depends on the current market valuations in my opinion. 2010 was a great time to buy a house in the current HCOLAs. We will see if 2020 is / was a good time to buy when we look in the rearview mirror 10-20 years from now. In general, you can’t time the market, and it’s good to understand your needs and how long you plan to stay somewhere.

I personally don’t see housing as an investment, but any asset you own can be considered some sort of asset for diversification.

Check this out for house consumption/buying principles that I have compiled
I largely agree, especially regarding the fact that the key is not get more house than you need, which is sadly the norm for Americans. The median newly built home has more than double the sq. ft. per person in the median household as compared to 50 years ago. That's completely unnecessary, and many of those who think that they need that much space are, unconsciously or otherwise, trying to keep up with the Jones.

That said, while a house isn't an investment in the sense that you own it to provide you with an explicit income stream. But if we take it as a given that you must live somewhere, then the imputed rent from owning a home does make it an investment. No one, not even J.D. Collins, would say that a home that you rent out to someone is not an investment, so 'renting it to yourself' should not disqualify it from that status.
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Re: ERN: See that house over there? It’s an investment!

Post by nisiprius »

1) "A dollar saved is a dollar earned! In other words, I think of a primary residence as generating rental income."

I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments."

2) I am skeptical of all arguments that say "let's think of this thing as being just like some completely other thing." Social Security is just like a bond? No. An individual stock in the Berkshire Hathaway corporation is just like a mutual fund? No. Commodities are just like insurance? No.

3) I buy a house as shelter. I can't sell a fraction of it. I can't rebalance it. I can't quickly liquidate because other members of my family might still need it as a place to live in. If it is an investment, it is very different from the other things I call investments.
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Re: ERN: See that house over there? It’s an investment!

Post by willthrill81 »

nisiprius wrote: Sun Nov 29, 2020 5:54 pm 1) "A dollar saved is a dollar earned! In other words, I think of a primary residence as generating rental income."

I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments."
You don't pay income tax on investments held in a taxable brokerage account either; you pay long-term capital gains tax. Does that make them not investments?

Does such a fine distinction really matter?
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Re: ERN: See that house over there? It’s an investment!

Post by 000 »

nisiprius wrote: Sun Nov 29, 2020 5:54 pm 1) "A dollar saved is a dollar earned! In other words, I think of a primary residence as generating rental income."

I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments."
Imputed rent is a very real thing.
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Re: ERN: See that house over there? It’s an investment!

Post by CurlyDave »

nisiprius wrote: Sun Nov 29, 2020 5:54 pm
I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments." ...

3) I buy a house as shelter. I can't sell a fraction of it. I can't rebalance it. I can't quickly liquidate because other members of my family might still need it as a place to live in. If it is an investment, it is very different from the other things I call investments.
Even back when the middle ages were just ending and I took economics as an undergraduate (mid 60s), imputed rent was a mainstream concept. And it still is. The fact that the government includes it in GDP should be a big convincer here.

Stocks, bonds, rental real estate, physical precious metals, gemstones, livestock and even intellectual property (such as patents) are all considered investments. All of these things have different characteristics -- while we tend to concentrate on stocks and bonds that doesn't mean the other things aren't valid investments. Just because I am living in it doesn't mean that my house isn't an investment. I agree it has special characteristics, but a herd of cattle is also very different from stocks and yet it is an investment.
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Re: ERN: See that house over there? It’s an investment!

Post by luckyducky99 »

000 wrote: Sun Nov 29, 2020 6:22 pm
nisiprius wrote: Sun Nov 29, 2020 5:54 pm 1) "A dollar saved is a dollar earned! In other words, I think of a primary residence as generating rental income."

I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments."
Imputed rent is a very real thing.
So real that some jurisdictions do tax it.
First, in Luxembourg and the Netherlands owner-occupiers have to include an imputed rental income in their taxable income.
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Re: ERN: See that house over there? It’s an investment!

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general discussion).
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Re: ERN: See that house over there? It’s an investment!

Post by Ben Mathew »

Agree that owning a home is a tax advantaged investment with

dividends = rent saved (tax free)
capital gains = price appreciation (tax free up to $250K for singles, $500K for married couple)

I wrote about the benefits of home ownership in this thread: Renting vs Owning Your Home

However, I am skeptical about extrapolating the price appreciation over the recent past (a few decades). I don't expect price growth to be as high in the future. There was a thread a while back about a study that showed that price growth in Manhattan and/or Amsterdam(?) has been very slow over centuries, even though these citi(es) grew like crazy. The spectacular performance of housing prices everywhere in recent decades is IMO likely an anomaly and may not be a reasonable estimate for future appreciation.
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Re: ERN: See that house over there? It’s an investment!

Post by tfb »

tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I disagreed in the comments. Following that logic to the extreme can turn everything into an investment, which makes it meaningless. Your cooking pan is an investment because it produces cooking. Buying something that can be rented for consumption is still consumption, not an investment. It may be a more economic way to consume but the primary purpose is still to consume. Buying a home can turn out to be a good investment if you buy in the right place at the right time, but unless you're buying for the purpose of flipping it's still primarily consumption.
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Re: ERN: See that house over there? It’s an investment!

Post by firebirdparts »

I choose to think of my house as a lifestyle expense and I act accordingly. It's just a choice, and the key thing is I'm not one bit confused about it. I have chosen. I think it makes for better decisions, but that that only applies in my personal situation, and believe me, it does not apply to everybody. There are potential other expenses which are offset by my lifestyle. I'm happy about that.

I don't really see the appeal of reading "arguments" by perfect strangers so I don't really address that sort of thing. Each house is unique, and I hope everybody innately knows that. Karsten might not understand my lifestyle even if he met me.
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Re: ERN: See that house over there? It’s an investment!

Post by ScubaHogg »

tfb wrote: Sun Nov 29, 2020 10:14 pm
tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I disagreed in the comments. Following that logic to the extreme can turn everything into an investment, which makes it meaningless. Your cooking pan is an investment because it produces cooking. Buying something that can be rented for consumption is still consumption, not an investment. It may be a more economic way to consume but the primary purpose is still to consume. Buying a home can turn out to be a good investment if you buy in the right place at the right time, but unless you're buying for the purpose of flipping it's still primarily consumption.
The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
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Re: ERN: See that house over there? It’s an investment!

Post by Schlabba »

tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
It seems to be a very theoretical question. In reality you have to live somewhere, so if you do any kind of calculations, you would be calculate renting vs buying.

Of course a house has the potential to appreciate/depreciate, but that is also included in the renting vs buying calculation.
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Re: ERN: See that house over there? It’s an investment!

Post by Valuethinker »

ScubaHogg wrote: Mon Nov 30, 2020 2:09 am
tfb wrote: Sun Nov 29, 2020 10:14 pm
tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I disagreed in the comments. Following that logic to the extreme can turn everything into an investment, which makes it meaningless. Your cooking pan is an investment because it produces cooking. Buying something that can be rented for consumption is still consumption, not an investment. It may be a more economic way to consume but the primary purpose is still to consume. Buying a home can turn out to be a good investment if you buy in the right place at the right time, but unless you're buying for the purpose of flipping it's still primarily consumption.
The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
The depreciation of houses is often quite understated. For various reasons my parent's house, which has been in the family for nearly 60 years, has not been updated much since the 1970s. Believe me, that shows up in any valuation of it. Easily 20-30% less than more up to date houses in the 'hood (this is the land of "teardowns" so there are some quite modern behemoths around).

Physically houses burn, I would guess, 1-2% of value every year unless maintained and kept up to date.

BUT

- cost of new construction rises generally with inflation (cost of repairs definitely rises faster than inflation - shortage of skilled workers) - so your shelter is going up in that respect (even while it is depreciating, as above)

- land of course rises, and often faster than inflation. At least with local real GDP growth, I would guess
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Re: ERN: See that house over there? It’s an investment!

Post by Valuethinker »

CurlyDave wrote: Sun Nov 29, 2020 6:45 pm
nisiprius wrote: Sun Nov 29, 2020 5:54 pm
I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments." ...

3) I buy a house as shelter. I can't sell a fraction of it. I can't rebalance it. I can't quickly liquidate because other members of my family might still need it as a place to live in. If it is an investment, it is very different from the other things I call investments.
Even back when the middle ages were just ending and I took economics as an undergraduate (mid 60s), imputed rent was a mainstream concept. And it still is. The fact that the government includes it in GDP should be a big convincer here.
Nisiprius' background is not economics. To you and I that is "obvious". Where intuition does not agree with theory we need to think carefully re our explanations. I haven't drafted one back to him on this.
Stocks, bonds, rental real estate, physical precious metals, gemstones, livestock and even intellectual property (such as patents) are all considered investments. All of these things have different characteristics -- while we tend to concentrate on stocks and bonds that doesn't mean the other things aren't valid investments. Just because I am living in it doesn't mean that my house isn't an investment. I agree it has special characteristics, but a herd of cattle is also very different from stocks and yet it is an investment.
Your home equity is an investment. However it is not diversified or diversifiable in the way so many other assets can be.

Home is (somewhat) like your career. That's not a diversified asset either, unless you find it easy to switch careers. You are more likely to switch location rather than career, in my experience i.e. do the same job in Houston rather than New York, than change your job in New York.
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Re: ERN: See that house over there? It’s an investment!

Post by LFS1234 »

Valuethinker wrote: Mon Nov 30, 2020 6:07 am
CurlyDave wrote: Sun Nov 29, 2020 6:45 pm
nisiprius wrote: Sun Nov 29, 2020 5:54 pm
I don't recall paying any income tax on that "rental income," so I don't think it's really income and I don't think the argument holds. Similarly are lots of things I do "to save money" and I don't think any of them are "investments." ...

3) I buy a house as shelter. I can't sell a fraction of it. I can't rebalance it. I can't quickly liquidate because other members of my family might still need it as a place to live in. If it is an investment, it is very different from the other things I call investments.
Even back when the middle ages were just ending and I took economics as an undergraduate (mid 60s), imputed rent was a mainstream concept. And it still is. The fact that the government includes it in GDP should be a big convincer here.
Nisiprius' background is not economics. To you and I that is "obvious". Where intuition does not agree with theory we need to think carefully re our explanations. I haven't drafted one back to him on this.
Looking forward to seeing that draft.

Using Buffett's definition that an investment is "the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future", home equity would generally not qualify as an investment, because in most times and places the costs of taxes, upkeep, and transaction costs would cause the reasonably expected return to be at least somewhat negative.

On the other hand, home equity is clearly a reservoir of wealth, even if it generally can be expected to somewhat diminish in value. If I fall upon hard times and have to sell my hypothetical $1,000,000 house for $900,000, I will have lots of options that the otherwise similarly situated renter simply doesn't have.

Perhaps a new word needs to be coined for "reservoir of wealth", to distinguish it from "investment"?

Diversifiability has nothing to do with whether or not something is an investment.
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Re: ERN: See that house over there? It’s an investment!

Post by Maverick3320 »

ScubaHogg wrote: Mon Nov 30, 2020 2:09 am
tfb wrote: Sun Nov 29, 2020 10:14 pm
tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I disagreed in the comments. Following that logic to the extreme can turn everything into an investment, which makes it meaningless. Your cooking pan is an investment because it produces cooking. Buying something that can be rented for consumption is still consumption, not an investment. It may be a more economic way to consume but the primary purpose is still to consume. Buying a home can turn out to be a good investment if you buy in the right place at the right time, but unless you're buying for the purpose of flipping it's still primarily consumption.
The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
Are you including the maintenance, insurance, and taxes that come with that house?
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Re: ERN: See that house over there? It’s an investment!

Post by vineviz »

Valuethinker wrote: Mon Nov 30, 2020 6:07 am Nisiprius' background is not economics.
The same is obviously true of the blogger whose post we are discussing.
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Re: ERN: See that house over there? It’s an investment!

Post by Chicken Little »

nm.....
Last edited by Chicken Little on Mon Nov 30, 2020 7:13 am, edited 1 time in total.
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Re: ERN: See that house over there? It’s an investment!

Post by halfnine »

A house is an investment that might look something like:

3-8% dividend yield (imputed rent)(after tax yield)
1-4% ER (some of which is pre-tax, some post-tax)
3-4% transaction fee (per transaction)
0% expected real return (tax free to 250/500K)

The ER for a home could of course be greater than the ER of a house, but then that is a personal choice.
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

ScubaHogg wrote: Mon Nov 30, 2020 2:09 am
tfb wrote: Sun Nov 29, 2020 10:14 pm
tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I disagreed in the comments. Following that logic to the extreme can turn everything into an investment, which makes it meaningless. Your cooking pan is an investment because it produces cooking. Buying something that can be rented for consumption is still consumption, not an investment. It may be a more economic way to consume but the primary purpose is still to consume. Buying a home can turn out to be a good investment if you buy in the right place at the right time, but unless you're buying for the purpose of flipping it's still primarily consumption.
The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
FWIW, "Real Estate" often appreciates, and in many areas much faster than inflation (but broadly about the same as inflation). "Houses" do not, a house depreciates, it isn't an asset without the land, by example a manufactured home on a rented lot becomes near worth-less if it has to be moved.
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Re: ERN: See that house over there? It’s an investment!

Post by JoeRetire »

tomsense76 wrote: Sun Nov 29, 2020 4:31 pm Not sure if anyone saw this post from Karsten. It's a couple of years old. That said, read this recently and found it was a quite interesting take on home ownership. Namely the return on investment for owning your home comes in the form of "producing" housing. This is similar to how one might maintain a home garden to produce some food as opposed to buying it periodically at the store. Am curious what others think about Karsten's argument. Does this resonate or are there flaws in this argument? How does this affect how you look at home ownership (if at all)?

https://earlyretirementnow.com/2017/11/ ... nvestment/
I invested in a pumpkin pie last week. Apparently, it's an investment because it saves me from having to go to restaurants to order a slice of pie.
Unfortunately, the investment is now gone. It was delicious.

This is kind of like the "a mortgage is a negative bond" theory. If you squint hard enough, everything becomes an investment.

I think I've invested enough in this thread...
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

JoeRetire wrote: Mon Nov 30, 2020 7:24 am...
This is kind of like the "a mortgage is a negative bond" theory. If you squint hard enough, everything becomes an investment.
...
A mortgage is a bond and an investment, if you're the lender.
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Re: ERN: See that house over there? It’s an investment!

Post by absolute zero »

vineviz wrote: Mon Nov 30, 2020 6:56 am
Valuethinker wrote: Mon Nov 30, 2020 6:07 am Nisiprius' background is not economics.
The same is obviously true of the blogger whose post we are discussing.
He (the blogger) actually has a PhD in economics.
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Re: ERN: See that house over there? It’s an investment!

Post by EnjoyIt »

I don’t see anyone discussing that a home you own takes up your time to upkeep. If you don’t do the upkeep the value of your home diminishes. The land may go up in value, but the home depreciates. I find my time being used up very very very regularly because my home is very needy. Even the things I hire out still take my time and attention as well as my resources.

I would also not expect real appreciation in my land value. History has taught us that hot markets don’t always stay hot and sometimes drop significantly without ever returning. Most markets land value goes up with inflation.

Sure, a home provides imputes rent and one can put it on their personal balance sheet, but thinking it is some kind of investment that will go up in value above inflation is a personal finance mistake. This is especially true if you don’t put in more of your resources into the home. And yes, I realize some hot markets this may not have been the case in the recent past but I address that above.

I will end this with my own personal example. We spent a lot of money on our home over the years. Not just the mortgage, but replacing the HVAC, flooring, windows, etc. we paid year’s of property tax. I spent hours upon hours doing home maintenance and I value my time significantly. If instead of buying this house we rented and invested the difference we would be a whole lot wealthier. But, I chose to consume the resources above to own a place to live. I’m ok with that decision. Buying is a lifestyle choice although in my neighborhood storing money in our house is not a financially wise one. I’m ok with that I choose to be a home owner.
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Re: ERN: See that house over there? It’s an investment!

Post by vineviz »

absolute zero wrote: Mon Nov 30, 2020 7:59 am
vineviz wrote: Mon Nov 30, 2020 6:56 am
Valuethinker wrote: Mon Nov 30, 2020 6:07 am Nisiprius' background is not economics.
The same is obviously true of the blogger whose post we are discussing.
He (the blogger) actually has a PhD in economics.
Seriously? After reading some of his writing I have a hard time reconciling that, but if it’s true then ....
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

vineviz wrote: Mon Nov 30, 2020 8:08 am
absolute zero wrote: Mon Nov 30, 2020 7:59 am
vineviz wrote: Mon Nov 30, 2020 6:56 am
Valuethinker wrote: Mon Nov 30, 2020 6:07 am Nisiprius' background is not economics.
The same is obviously true of the blogger whose post we are discussing.
He (the blogger) actually has a PhD in economics.
Seriously? After reading some of his writing I have a hard time reconciling that, but if it’s true then ....
https://www.morningstar.com/articles/10 ... ding-rates
...Karsten retired in his early 40s, after a career in the financial world. He served as Director of Asset Allocation Research for Mellon Capital Management from 2008 through 2018, and before that, was a research economist at the Federal Reserve Bank of Atlanta for a decade. Karsten has his PhD in economics from the University of Minnesota and has taught undergraduate and PhD-level economics at Emory University. He's also a chartered financial analyst.
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Re: ERN: See that house over there? It’s an investment!

Post by dknightd »

LFS1234 wrote: Mon Nov 30, 2020 6:36 am
Perhaps a new word needs to be coined for "reservoir of wealth", to distinguish it from "investment"?
This actually makes sense to me. Perhaps the words are "bank account" ;) (but that is also a poor choice)

I did not buy my house as an "investment" in the traditional sense. Partly I bought it as a life style choice (I wanted to live close to work, I wanted to live in a single family home, I wanted to be in a good school district, I could find a "home" to buy, but not one to rent) and partly as an "investment in my future."

In my case. I "bought" my house 31 years ago. It has not quite doubled in value since then. I would consider that a horrible investment. But, if I wanted to rent out my house, or rent a similar one, it would cost me twice what I'm paying for the mortgage, taxes, and repairs. When the mortgage is paid off, and I've actually finished "buying" my house, then the numbers work out even better. So the house itself was a bad "investment" (did not even keep up with inflation), the imputed rent was a fair investment (kept up with inflation), add them together I'd consider it a good investment. In my case, most of the "gain" was the cost of this consumable went up more slowly than inflation.

But a house you live in is not an "investment" in the usual sense of the word. It is an investment in your future. Or maybe it is a way to prepay your future consumables in a way that you think will reduce costs in the long term. Kind of like buying products you expect to last a long time, rather than buying or renting throw aways. Maybe an "investment" that reduces your future expenses should be considered an asset class?????

On the other hand, buying a house is risky, which kind of makes it like any other investment. And you are only buying one house. Which means you might have too many dollars in a single investment.

It Bogles my mind. There is no right answer.
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Re: ERN: See that house over there? It’s an investment!

Post by dknightd »

Buying a home is risky. It might pay off, it might not. Sure sounds like an "investment" to me :)
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Re: ERN: See that house over there? It’s an investment!

Post by Valuethinker »

JoMoney wrote: Mon Nov 30, 2020 8:11 am
vineviz wrote: Mon Nov 30, 2020 8:08 am
absolute zero wrote: Mon Nov 30, 2020 7:59 am
vineviz wrote: Mon Nov 30, 2020 6:56 am
Valuethinker wrote: Mon Nov 30, 2020 6:07 am Nisiprius' background is not economics.
The same is obviously true of the blogger whose post we are discussing.
He (the blogger) actually has a PhD in economics.
Seriously? After reading some of his writing I have a hard time reconciling that, but if it’s true then ....
https://www.morningstar.com/articles/10 ... ding-rates
...Karsten retired in his early 40s, after a career in the financial world. He served as Director of Asset Allocation Research for Mellon Capital Management from 2008 through 2018, and before that, was a research economist at the Federal Reserve Bank of Atlanta for a decade. Karsten has his PhD in economics from the University of Minnesota and has taught undergraduate and PhD-level economics at Emory University. He's also a chartered financial analyst.
Minnesota is a temple of "Freshwater Economics"

Blogger will have been taught that markets are essentially 100% efficient and that recessions are caused by workers seeking to work fewer hours.
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Re: ERN: See that house over there? It’s an investment!

Post by EnjoyIt »

Is my hobby garden an investment? Do I get imputed food? Are my dumbbells and bike an imputed gym membership? Is an electric car imputed gas?

I don’t disagree with the term imputes rent. It’s obviously real, but it is also easy to blur the lines between an investment and a consumption.
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

Does a homemaker earn imputed income?
Is a babysitter/cleaner/cook an investment if you earn a higher wage doing something else?

If you give an interest free loan to a family member, is than an investment? Why are there tax implications if the forgiven interest rate is above the gift tax exclusion?
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Re: ERN: See that house over there? It’s an investment!

Post by JoeRetire »

JoMoney wrote: Mon Nov 30, 2020 7:39 am
JoeRetire wrote: Mon Nov 30, 2020 7:24 am...
This is kind of like the "a mortgage is a negative bond" theory. If you squint hard enough, everything becomes an investment.
...
A mortgage is a bond and an investment, if you're the lender.
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Re: ERN: See that house over there? It’s an investment!

Post by dknightd »

EnjoyIt wrote: Mon Nov 30, 2020 9:08 am Is my hobby garden an investment? Do I get imputed food? Are my dumbbells and bike an imputed gym membership? Is an electric car imputed gas?

I don’t disagree with the term imputes rent. It’s obviously real, but it is also easy to blur the lines between an investment and a consumption.
Double bonus. They are imputed expenses, and you enjoy them more than the alternative. I would call them both "investments" in your future. Win, win. I still think a penny saved is worth more than a penny earned. And if you enjoy it, and can afford it, who cares what it costs?
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Re: ERN: See that house over there? It’s an investment!

Post by dknightd »

JoMoney wrote: Mon Nov 30, 2020 9:18 am Does a homemaker earn imputed income?
Is a babysitter/cleaner/cook an investment if you earn a higher wage doing something else?

If you give an interest free loan to a family member, is than an investment? Why are there tax implications if the forgiven interest rate is above the gift tax exclusion?
I think there are some things that are worth more than money
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Re: ERN: See that house over there? It’s an investment!

Post by rascott »

EnjoyIt wrote: Mon Nov 30, 2020 8:07 am I don’t see anyone discussing that a home you own takes up your time to upkeep. If you don’t do the upkeep the value of your home diminishes. The land may go up in value, but the home depreciates. I find my time being used up very very very regularly because my home is very needy. Even the things I hire out still take my time and attention as well as my resources.

I would also not expect real appreciation in my land value. History has taught us that hot markets don’t always stay hot and sometimes drop significantly without ever returning. Most markets land value goes up with inflation.

Sure, a home provides imputes rent and one can put it on their personal balance sheet, but thinking it is some kind of investment that will go up in value above inflation is a personal finance mistake. This is especially true if you don’t put in more of your resources into the home. And yes, I realize some hot markets this may not have been the case in the recent past but I address that above.

I will end this with my own personal example. We spent a lot of money on our home over the years. Not just the mortgage, but replacing the HVAC, flooring, windows, etc. we paid year’s of property tax. I spent hours upon hours doing home maintenance and I value my time significantly. If instead of buying this house we rented and invested the difference we would be a whole lot wealthier. But, I chose to consume the resources above to own a place to live. I’m ok with that decision. Buying is a lifestyle choice although in my neighborhood storing money in our house is not a financially wise one. I’m ok with that I choose to be a home owner.
I find it highly unlikely you'd have rented a comparable (key point, comparable) home this entire time and come out a whole lot wealthier. Unless you found a total sucker for a landlord that was somehow subsidizing your cost of housing.

Landlords aren't in the charity business.
Last edited by rascott on Mon Nov 30, 2020 9:44 am, edited 2 times in total.
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

dknightd wrote: Mon Nov 30, 2020 9:38 am
JoMoney wrote: Mon Nov 30, 2020 9:18 am Does a homemaker earn imputed income?
Is a babysitter/cleaner/cook an investment if you earn a higher wage doing something else?

If you give an interest free loan to a family member, is than an investment? Why are there tax implications if the forgiven interest rate is above the gift tax exclusion?
I think there are some things that are worth more than money
:wink: :beer
There's a lot of funny business when we get to the matter of trying to denominate what we value in dollars, and compare that to the price someone else would put on it
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

rascott wrote: Mon Nov 30, 2020 9:41 am ...
I find it highly unlikely you'd have rented a comparable (key point, comparable) home this entire time and come out a lot whole lot wealthier. Unless you found a total sucker for a landlord that was somehow subsidizing your cost of housing.

Landlords aren't in the charity business.
FWIW, it's not that uncommon to find small landlords that as long as they have a good long-term tenant, don't keep the rates up to comparables. I know someone in that situation right now, fretting because the original owner passed away, and the inheritors are likely to pass the unit off to a management company to run.

There are regions in the U.S., and specific time periods, where the cost of housing has declined, and having a mortgage would have left you under-water.
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Re: ERN: See that house over there? It’s an investment!

Post by tfb »

ScubaHogg wrote: Mon Nov 30, 2020 2:09 am The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
Calling something an investment should distinguish it from something. Otherwise what difference does it make if it is or isn't an investment? To me, if something is an investment, you should in general want more of it when you have some spare cash to invest. From that angle, stocks, bonds, rental homes, gold, and even bitcoin are investments. The realized ROI may be positive or negative but you're doing it hoping for a good return. When you land some cash, do you buy five houses for personal use, not for renting out, as an investment for the imputed rent and future resale? Most people don't, because they understand doing so primarily increases consumption, not investment.
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Re: ERN: See that house over there? It’s an investment!

Post by willthrill81 »

LFS1234 wrote: Mon Nov 30, 2020 6:36 am Diversifiability has nothing to do with whether or not something is an investment.
+1

I can think of several investments that cannot be easily diversified or even at all. Many investments are also much less liquid than assets that are traded on the NYSE. But how diversifiable or liquid an investment is does not determine whether it is an investment in the first place.
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Re: ERN: See that house over there? It’s an investment!

Post by Shamb3 »

See my house over here, it is freedom to do what I want. I can have a wood shop, build a pizza oven, roast coffee on my grill, remodel the bathroom etc.

If I move, I am buying and selling in the same market. I don't see it as having a direct return on investment.

On the plus side, the cost of my mortgage is cheaper every year due to inflation.
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Re: ERN: See that house over there? It’s an investment!

Post by JoMoney »

Shamb3 wrote: Mon Nov 30, 2020 10:57 am See my house over here, it is freedom to do what I want. I can have a wood shop, build a pizza oven, roast coffee on my grill, remodel the bathroom etc...
Must be nice... there are parts of the country where owning a property doesn't give you the "freedom" to do any of that, and if allowed at all, requires working through a bureaucracy of permits... and even then, your ownership can be subject to eminent domain if it's deemed in the interest of the people to re-develop the land for something generating sales tax revenues...
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Re: ERN: See that house over there? It’s an investment!

Post by vineviz »

tfb wrote: Mon Nov 30, 2020 10:55 am
ScubaHogg wrote: Mon Nov 30, 2020 2:09 am The resell value of your used cooking pan doesn’t normally keep pace with / exceed the rate of inflation. Houses typically do.
Calling something an investment should distinguish it from something. Otherwise what difference does it make if it is or isn't an investment?
I think this gets at the heart of the problem.

If you're going to set up a semantic debate over whether a house is an investment or not, at the very least the author should 1) define what they mean by the term "investment" and 2) explain what they think the alternative or contrasting concept(s) is/are.

Generally, industrial economists contrast "investment" with "consumption". In financial economics, the distinction is usually tri-part: consumption, savings, and investment.

Either way, housing expenditures are generally some mixture of BOTH investment and consumption but the author of the original piece greatly muddies the waters by moving between definitions of "investment" without care. He seems to gravitate towards a fairly simplistic definition of an investment ("After all, shouldn’t an investment pay some sort of a return?"), migrates into economics with a nod towards "imputed rental income" ( which the BEA classifies as a "consumption expenditure", by the way, and not as "investment"), the confuses the issue even more by analyzing this consumption expenditure (imputed rental income) as a form of ROI.

In the end, the author is not even really "wrong". Mostly I'd say the whole article just adds to the confusion instead of clarifying it.
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Re: ERN: See that house over there? It’s an investment!

Post by michaeljc70 »

I don't see the importance of what label you put on a home. Though definitions of what an investment is vary, a common one is a purchase that has the potential to produce income or a profit. Though my primary goal of buying a home is to have a place to live, appreciation is a secondary goal for me. I view it as an investment. I've made money on every home I've owned, even after adjusting for inflation and transaction costs. A home doesn't have to go up in value....like any investment it can go down as ERN points out in the piece.
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Re: ERN: See that house over there? It’s an investment!

Post by willthrill81 »

I agree with others that whether we call a house an investment or not is irrelevant.

Instead, the question that each person must ask is whether it's better for them to either own or rent.
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Re: ERN: See that house over there? It’s an investment!

Post by EnjoyIt »

rascott wrote: Mon Nov 30, 2020 9:41 am
EnjoyIt wrote: Mon Nov 30, 2020 8:07 am I don’t see anyone discussing that a home you own takes up your time to upkeep. If you don’t do the upkeep the value of your home diminishes. The land may go up in value, but the home depreciates. I find my time being used up very very very regularly because my home is very needy. Even the things I hire out still take my time and attention as well as my resources.

I would also not expect real appreciation in my land value. History has taught us that hot markets don’t always stay hot and sometimes drop significantly without ever returning. Most markets land value goes up with inflation.

Sure, a home provides imputes rent and one can put it on their personal balance sheet, but thinking it is some kind of investment that will go up in value above inflation is a personal finance mistake. This is especially true if you don’t put in more of your resources into the home. And yes, I realize some hot markets this may not have been the case in the recent past but I address that above.

I will end this with my own personal example. We spent a lot of money on our home over the years. Not just the mortgage, but replacing the HVAC, flooring, windows, etc. we paid year’s of property tax. I spent hours upon hours doing home maintenance and I value my time significantly. If instead of buying this house we rented and invested the difference we would be a whole lot wealthier. But, I chose to consume the resources above to own a place to live. I’m ok with that decision. Buying is a lifestyle choice although in my neighborhood storing money in our house is not a financially wise one. I’m ok with that I choose to be a home owner.
I find it highly unlikely you'd have rented a comparable (key point, comparable) home this entire time and come out a whole lot wealthier. Unless you found a total sucker for a landlord that was somehow subsidizing your cost of housing.

Landlords aren't in the charity business.
Ahhh the wealthier comes from not having hundreds of thousands tied up in a house and instead invested at my desired asset allocation. So yeah, wealthier....much much wealthier.
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Re: ERN: See that house over there? It’s an investment!

Post by EnjoyIt »

dknightd wrote: Mon Nov 30, 2020 9:28 am
EnjoyIt wrote: Mon Nov 30, 2020 9:08 am Is my hobby garden an investment? Do I get imputed food? Are my dumbbells and bike an imputed gym membership? Is an electric car imputed gas?

I don’t disagree with the term imputes rent. It’s obviously real, but it is also easy to blur the lines between an investment and a consumption.
Double bonus. They are imputed expenses, and you enjoy them more than the alternative. I would call them both "investments" in your future. Win, win. I still think a penny saved is worth more than a penny earned. And if you enjoy it, and can afford it, who cares what it costs?
That's ridiculous. I know how you business types like a spreadsheet. I like excel a lot as well, but not everything in life is supposed to sit on a balance sheet. According to your thinking, my engagement ring and wife is an investment because now I don't have to hire a cook, a surrogate to birth my children, or hire an escort. That is insane and I am pretty sure she would take offense to that.
Last edited by EnjoyIt on Mon Nov 30, 2020 10:25 pm, edited 1 time in total.
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Re: ERN: See that house over there? It’s an investment!

Post by michaeljc70 »

EnjoyIt wrote: Mon Nov 30, 2020 4:39 pm
rascott wrote: Mon Nov 30, 2020 9:41 am
EnjoyIt wrote: Mon Nov 30, 2020 8:07 am I don’t see anyone discussing that a home you own takes up your time to upkeep. If you don’t do the upkeep the value of your home diminishes. The land may go up in value, but the home depreciates. I find my time being used up very very very regularly because my home is very needy. Even the things I hire out still take my time and attention as well as my resources.

I would also not expect real appreciation in my land value. History has taught us that hot markets don’t always stay hot and sometimes drop significantly without ever returning. Most markets land value goes up with inflation.

Sure, a home provides imputes rent and one can put it on their personal balance sheet, but thinking it is some kind of investment that will go up in value above inflation is a personal finance mistake. This is especially true if you don’t put in more of your resources into the home. And yes, I realize some hot markets this may not have been the case in the recent past but I address that above.

I will end this with my own personal example. We spent a lot of money on our home over the years. Not just the mortgage, but replacing the HVAC, flooring, windows, etc. we paid year’s of property tax. I spent hours upon hours doing home maintenance and I value my time significantly. If instead of buying this house we rented and invested the difference we would be a whole lot wealthier. But, I chose to consume the resources above to own a place to live. I’m ok with that decision. Buying is a lifestyle choice although in my neighborhood storing money in our house is not a financially wise one. I’m ok with that I choose to be a home owner.
I find it highly unlikely you'd have rented a comparable (key point, comparable) home this entire time and come out a whole lot wealthier. Unless you found a total sucker for a landlord that was somehow subsidizing your cost of housing.

Landlords aren't in the charity business.
Ahhh the wealthier comes from not having hundreds of thousands tied up in a house and instead invested at my desired asset allocation. So yeah, wealthier....much much wealthier.
You can look at this many different ways. If you buy a house for 20% down and it goes up in value 4% the first year you made 20% on your down payment. Obviously inflation and transaction costs play into this. As you pay down principal the leverage is less and less and the gains (by percent) are less and less.

I don't doubt that renting over the long term is financially better for some people (based on type of home, geography, investing the difference if there is one), but I doubt it is really a big percentage. This is assuming comparing apples to apples (not a condo on one side of town to a house on the other side of town) which often doesn't happen when this is discussed on here.
Last edited by michaeljc70 on Mon Nov 30, 2020 4:50 pm, edited 1 time in total.
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Re: ERN: See that house over there? It’s an investment!

Post by EnjoyIt »

michaeljc70 wrote: Mon Nov 30, 2020 12:03 pm I don't see the importance of what label you put on a home. Though definitions of what an investment is vary, a common one is a purchase that has the potential to produce income or a profit. Though my primary goal of buying a home is to have a place to live, appreciation is a secondary goal for me. I view it as an investment. I've made money on every home I've owned, even after adjusting for inflation and transaction costs. A home doesn't have to go up in value....like any investment it can go down as ERN points out in the piece.
Thinking the home is an investment is what real estate agents use as a selling pitch and get the homeowner to buy more house than they need. There is a real risk to thinking something is an investment when it is more of a consumptive item. We see many people today willing to pay 5x income on a home in VHCOL areas because they believe it is an investment and they will make money. Obviously they may, but plenty of people got burned with that thinking a little over a decade ago.
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