Buying a single family home a good investment?

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Dog_Papa
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Buying a single family home a good investment?

Post by Dog_Papa » Fri Sep 07, 2012 5:17 pm

Is buying a home to live in still a good investment? The prices in some areas went up so much, from 2000 to 2007, that I would question if they
have corrected enough, to make buying a single family home a good investment. I also feel interest rates are so low, that prices are being
artificially propped up. Long term mortgage money for less than 4%, that's very low. Sooner or later reality will have to set in, and interest
rates will go up a housing prices will head down. People have to be able to afford it after all.

Another problem is that families tend to be smaller now, but houses have gotten bigger. I don't think all this has been worked out yet, by
any means. Prices went up during the 1970s inflation and again when the economy boomed in both the 1980s and 1990s. In other words,
there has been about 35 years of price growth without much of a break. It's going to take a long time for all this to work itself out I have a
feeling. I'm talking about residential properties, commercial ones didn't boom and bust to such an extent. Not yet anyway.

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mickeyd
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Re: Buying a single family home a good investment?

Post by mickeyd » Fri Sep 07, 2012 5:23 pm

I have owned 7 homes so far and I have never considered any of them to be an investment. I spend those dollars on housing consumption and if I eventually make money on the deal at the end, I guess I win.

Of course, I will be dead; so who wins? :oops:
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NYBoglehead
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Re: Buying a single family home a good investment?

Post by NYBoglehead » Fri Sep 07, 2012 5:26 pm

1. You should look at a single family home as a place to live, not an investment.
2. Your mortgage payment remains fixed unless of course you are stupid enough to apply for a variable in today's environment. Your rent will always go up. It might not every single year, but over time it will (and I am feeling the pain of this, 10% increase from last year...salary increase 0%)
3. Mortgage interest and property taxes are tax deductible. Especially in the early years it can help to reduce your tax liability

Over the course of 30+ years owning a home will be cheaper than constantly paying rent. You will own something at the end of the mortgage, whereas never owning means that you will always have to pay rent. Home ownership also provides a degree of freedom that does not exist for renters.

Your logic about home prices is off the mark. As the population grows, so does the demand for housing. Granted, 2007 was silly season as far as prices goes but that doesn't mean there is a permanent ceiling on home prices that cannot be breached.

yeledbed
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Re: Buying a single family home a good investment?

Post by yeledbed » Sat Sep 08, 2012 12:34 pm

NYBoglehead wrote:1. You should look at a single family home as a place to live, not an investment.
2. Your mortgage payment remains fixed unless of course you are stupid enough to apply for a variable in today's environment. Your rent will always go up. It might not every single year, but over time it will (and I am feeling the pain of this, 10% increase from last year...salary increase 0%)
3. Mortgage interest and property taxes are tax deductible. Especially in the early years it can help to reduce your tax liability

Over the course of 30+ years owning a home will be cheaper than constantly paying rent. You will own something at the end of the mortgage, whereas never owning means that you will always have to pay rent. Home ownership also provides a degree of freedom that does not exist for renters.

Your logic about home prices is off the mark. As the population grows, so does the demand for housing. Granted, 2007 was silly season as far as prices goes but that doesn't mean there is a permanent ceiling on home prices that cannot be breached.


Can you elaborate on the freedom homeownership provides? I argue that renters have more freedom and flexibility. They are able to move whenever they want, without worrying about selling their home.

stan1
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Re: Buying a single family home a good investment?

Post by stan1 » Sat Sep 08, 2012 12:46 pm

yeledbed wrote:Can you elaborate on the freedom homeownership provides? I argue that renters have more freedom and flexibility. They are able to move whenever they want, without worrying about selling their home.


Home owners can hang a photo on the wall, own a pet, or paint a room without getting permission or a bill from the landlord (or losing part of a deposit).

It's a different type of freedom. What's important to you is an individual preference.

Gardner
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Re: Buying a single family home a good investment?

Post by Gardner » Sat Sep 08, 2012 1:50 pm

NYBoglehead wrote:Over the course of 30+ years owning a home will be cheaper than constantly paying rent. You will own something at the end of the mortgage, whereas never owning means that you will always have to pay rent. Home ownership also provides a degree of freedom that does not exist for renters.


I rented for seven years, then owned a house for seven years, and then last year switched back to renting. I love it. Renting provides a degree of freedom that does not exist for home owners. Think about going down to the basement and finding a big puddle on the floor as a renter vs. owner and you'll know what I mean. While owning there was always the constant stress of that to-do list hanging over my head. If I ever had a free weekend I felt like I should spend it catching up on something, or trying to get ahead. Now that's all gone and my quality of life is markedly improved.

Yes, homeowners pay a mortgage (most of the time), and at the end of the 30 years they own something. But on top of that mortgage they are paying prop tax, insurance, maintenance, painting, replacing roof/carpets/HVAC, etc. which they have nothing to show for at the end of the 30 years. I ran some quick numbers and estimate that when I was living in the house I owned I was paying about 30% on top of my mortgage payment (P&I) on these throwaways, and I did most of the repairs/maintenance myself. I think that should be factored in to the cost/benefit analysis.

Having said all this, I'll probably go back to owning when I move back to the US in a couple years, but it's not the no-brainer it used to be.

One other point, I think the issue of social status should be mentioned in the discussion too. I think everyone I know with a good stable job, at least 5 years out of school, owns their home. Maybe that is not others' experience. I'm not saying you should buy for social status, but I think consciously or unconsciously that weighs in to people's analysis of the benefit of home ownership and the decision of whether to buy.

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Re: Buying a single family home a good investment?

Post by Default User BR » Sat Sep 08, 2012 1:54 pm

yeledbed wrote:Can you elaborate on the freedom homeownership provides? I argue that renters have more freedom and flexibility. They are able to move whenever they want, without worrying about selling their home.

The freedom to stay. When you rent, there's a chance you'll get a letter saying, "We won't be renewing your lease, please vacate by XXX."


Brian

PacNorWest
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Binocular Vision when buying a home

Post by PacNorWest » Sat Sep 08, 2012 2:18 pm

Now is probably the best time to buy in recent years.
Material prices have not dropped - it costs more to build a new home now than it did ten years ago.

Still - jobs are what matter and jobs are how people make money to buy homes.
So, considering that this is an election year, "things" should look pretty good - but are they really?
No, it's not a risk free investment.
And it is an investment - an investment of your time (is that worth anything?), your hopes, your fears, your logic and emotion.

Personally, I would buy now - but I'd steer clear of those big McMansion style homes.

Binocular vision:
When you make your purchase, you might want to consider how well the house would rent if you ever needed to rent it.
Would the house make a good rental? Would it require a LOT of yard maintenance, does it have fancy carpeting or other high maintenance features? (pool, spa, water features, etc.)
Would you want to live in it?
(These are thoughts from a personal perspective from a worker bee (and saver bee) that has yet to buy that big fancy house on the hill overlooking the ocean.)

Dandy
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Re: Buying a single family home a good investment?

Post by Dandy » Sat Sep 08, 2012 3:05 pm

Don't buy a home with the main idea being that it is an investment. Home ownership is costly and often time consuming. You should own a home because that is the way you and your family want to live. As an investment home prices have had some wild swings especially over the last decade. Over time I believe home prices have not been great from a purely investment basis.

dickenjb
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Re: Buying a single family home a good investment?

Post by dickenjb » Sat Sep 08, 2012 3:13 pm

Piling on - buying a single family home has never been a good investment. It is a place to live with some tax benefits thrown in.

In the long run, homes appreciate at about the inflation rate. Stocks return about 6% over inflation. One is a good place to live, the other a good place to invest.

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Phineas J. Whoopee
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Re: Buying a single family home a good investment?

Post by Phineas J. Whoopee » Sun Sep 09, 2012 12:00 pm

Dog_Papa wrote:Is buying a home to live in still a good investment? ...


Hi Dog_Papa,

I bought an apartment, not a single family home, but contrary to many others here I did then and do now consider it an investment. Here's why:

While staying in the same metro area and keeping the same job, I moved from a rental apartment in one vicinity to an ownership apartment in a less expensive vicinity. There's nothing wrong with the neighborhood. It just isn't fashionable at the moment. The apartment I bought is much nicer inside. The commute is longer, but not significantly so, and costs no more because I use public transportation. I regarded the tradeoff between location and comfort as about a wash, in terms of their values to me. The market thought differently, and in fact it was that realization which compelled me into action.

By buying what I did, I shaved $X off my monthly housing expense (taking everything into account, including property tax, homeowners insurance, and saving up for future maintenance issues).

To see how much that was worth, I asked for quotes on immediate, CPI-linked annuities which would pay enough that, after taxes, I would wind up with $X monthly. The least expensive one cost $Y.

The all-in amount I paid for the apartment, including the purchase price, closing costs, carpeting, blinds, furniture because I was moving to a significantly larger space, and moving costs was approximately a quarter of $Y.

Because I valued things differently than the market, in effect I bought a single premium CPI-adjusted immediate annuity at a 75% discount. Break-even is 12 years.

Plus, it came with a free apartment.

PJW

rec7
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Re: Buying a single family home a good investment?

Post by rec7 » Sun Sep 09, 2012 12:48 pm

Great story from the WSJ.
How Houses Eat Money. Just remember he wrote this story at the top of the boom.
http://online.wsj.com/article/SB111852419690557157.html
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magneto
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Re: Buying a single family home a good investment?

Post by magneto » Sun Sep 09, 2012 1:13 pm

dickenjb wrote:

In the long run, homes appreciate at about the inflation rate. Stocks return about 6% over inflation. One is a good place to live, the other a good place to invest.


Haven't noticed stocks returning 6% real since 1999. Still here's hoping.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Valuethinker
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Re: Buying a single family home a good investment?

Post by Valuethinker » Mon Sep 10, 2012 7:36 am

magneto wrote:
dickenjb wrote:

In the long run, homes appreciate at about the inflation rate. Stocks return about 6% over inflation. One is a good place to live, the other a good place to invest.


Haven't noticed stocks returning 6% real since 1999. Still here's hoping.


UK Data (Dimson and Marsh -- see Barclays Equity Gilt study, various editions) is about 4.1 per cent. long run (4.1 per cent above the long term gilt return, which is about 1.0 per cent.). They used 111 years of data. For shorter periods the data is much more volatile-- range from negative (last 12 years) to 8% real or so (Thatcher).

Since 1999 stocks in the UK have had a negative real return. If you paid tax on your dividend income it will look quite a bit worse than that (dividends are 3-4% pa of returns). You are paying 32% tax on dividends (at the higher rate).

UK houses have appreciated about 0.5-1% pa in real terms (see Neil Monnery's book ?Safe as Houses?). However there are long periods where they did not appreciate at all. If you take housing price increases after improvements (the big move to indoor plumbing in late Victorian times, then central heating in the 1960s etc.) to fabric, it's questionable whether UK houses have increased in real terms.

Obviously the last 20 years a striking exception-- real gains of something over 5% pa. Depends where you live of course: London still seems to be going up, rest of country is down at leasst 15% from peak. Taking into account inflation, the UK is having a slow motion housing price crash but *not* generally in London (there are further out less desirable bits of London like Barking & Dagenham, where you have seen significant price falls, I think)-- Central London is foreigner-land and it's gone nuts (Knightsbridge, Chelsea, Notting Hill, Holland Park, St John's Wood etc.). Up c.40% since the bottom, 20% say since 2007.

I live in a Victorian terraced house (1890s we think). They *cost*. To maintain, to heat-- my heating and electricity are over £160 a month (about £110 and £50). I reckon you average out c. £10k pa on maintenance and improvements (in the long run).

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Re: Buying a single family home a good investment?

Post by Valuethinker » Mon Sep 10, 2012 8:06 am

Dog_Papa wrote:Is buying a home to live in still a good investment? The prices in some areas went up so much, from 2000 to 2007, that I would question if they
have corrected enough, to make buying a single family home a good investment. I also feel interest rates are so low, that prices are being
artificially propped up. Long term mortgage money for less than 4%, that's very low. Sooner or later reality will have to set in, and interest
rates will go up a housing prices will head down. People have to be able to afford it after all.

Another problem is that families tend to be smaller now, but houses have gotten bigger. I don't think all this has been worked out yet, by
any means. Prices went up during the 1970s inflation and again when the economy boomed in both the 1980s and 1990s. In other words,
there has been about 35 years of price growth without much of a break. It's going to take a long time for all this to work itself out I have a
feeling. I'm talking about residential properties, commercial ones didn't boom and bust to such an extent. Not yet anyway.


Treat a house as a home, a consumption decision. Enjoy the benefits of home ownership.

If you make money in nominal terms (ie 0 real return) then you have done OK.

If you make money in real terms over the time of your ownership, then kismet, good fortune. There are always places that go up, but after what most Americans have gone through on their houses, probably making money in real terms is now just a dream.

In the very long run you get something like 0.5-1.0-% pa real, but it's questionable after home improvements whether that is real (the house of today is a very different beast from the house of 1970 eg things like Central Air are almost universal). some places (New York, San Francisco) of course you got a lot more. There, there is a genuine scarcity of land. Whereas in the middle of America, generally, there is not.

The data that we do have over very long runs (eg Paris since 1300s, Amsterdam since 1630) suggests that houses don't increase much in price after improvements, and if you don't improve them, they depreciate about 1% pa.

Go around any established neighbourhood where the old people are dying or moving to care homes. Their houses, typically not improved in 20-30 years, are worth 20% or so less than the best houses on the street. say something like 0.6-0.75% pa devaluation, relative.

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Re: Buying a single family home a good investment?

Post by NYBoglehead » Mon Sep 10, 2012 8:16 am

yeledbed wrote:
NYBoglehead wrote:1. You should look at a single family home as a place to live, not an investment.
2. Your mortgage payment remains fixed unless of course you are stupid enough to apply for a variable in today's environment. Your rent will always go up. It might not every single year, but over time it will (and I am feeling the pain of this, 10% increase from last year...salary increase 0%)
3. Mortgage interest and property taxes are tax deductible. Especially in the early years it can help to reduce your tax liability

Over the course of 30+ years owning a home will be cheaper than constantly paying rent. You will own something at the end of the mortgage, whereas never owning means that you will always have to pay rent. Home ownership also provides a degree of freedom that does not exist for renters.

Your logic about home prices is off the mark. As the population grows, so does the demand for housing. Granted, 2007 was silly season as far as prices goes but that doesn't mean there is a permanent ceiling on home prices that cannot be breached.


Can you elaborate on the freedom homeownership provides? I argue that renters have more freedom and flexibility. They are able to move whenever they want, without worrying about selling their home.


The landlord can also raise the rent every year if they wish. Don't like the raise? Move out. I've also rented where renewing the lease was not even an option to me as the owner sold the place so I found myself being told by someone else that it was time to find a new place. People that own their own homes can do as they wish, not having to worry about landlords/management companies telling them to pull in the lawn furniture at night, whether flags are allowed, dog breeds, etc. You can re-model a kitchen, bathroom, living room if you own. The walls need not be painted white if you are trying to sell your home, but when renting they better be the same color that they were when your lease started when you move out.

I'm still a renter right now. Nothing wrong with it, but looking forward to buying a home. My mortgage payment in Month #1 will be the same as Month #360. My rent check this month was 10% higher than it was last year. I won't even venture to guess how much higher it will be next year if I decide to renew. I'll take having to pay for a broken water heater or the occassional flooded basement over the annual rent hikes and the possibility of getting priced out of a home or told that staying is not even an option.

Owning your own home eliminates a monthly expense in retirement as well. Obviously there will always be insurance and property taxes as well as maintenance expenses, but not having to cut a rent check every month when you are no longer working is nice.

SDBoggled
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Re: Buying a single family home a good investment?

Post by SDBoggled » Mon Sep 10, 2012 4:23 pm

I don't mean to be rude... but the question is almost like asking is buying a large cap stock a good investment.

It depends on so many factors: I think the top ones might be where you live (employment growth, demand, median price, taxes), how long are you going to hold it (purchase, sale and finance costs can be significant), how particular you are about the property, how handy you are, rental rates, how are you going to finance it, which home....and the price you pay.

I have bought, sold (2 in the last 3 years), and continue to hold single family homes as part of a total asset allocation. Maybe the asset allocation is a good place to start... I expect mine to return better than bonds... but they aren't liquid and they do require some work. I also endeavor to buy something I could resell in 6-12 months and profit, but generally intend to hold for 10+ years... and leverage is what gives me a margin of error.

As others have pointed out, operating costs on a home are significant: some say 40-50% of rent (excl interest!). Depreciation schedules and rental estimations sometimes come with the valuations for loans.

In summary, I think you should aim to reach the point where you can figure cashflow, expected return in a spreadsheet... Bogleheads may not be the best resource for such details... and the hard part is that at least some of the return comes from the big unknown - capital appreciation (I think a conservative view is that the investment should work without assuming > inflation ) :-)

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