Your Home is Not a Good Investment

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Tortoise Banker
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Your Home is Not a Good Investment

Post by Tortoise Banker »

I wrote this article today, thought I might share. . . basically details how buying a home is not necessarily a good investment when compared to index investing, but if a prospective homeowner were to have to pay rent, buying a home is a good move.

http://tortoisebanker.blogspot.com/2013 ... tment.html

I know this forum has discussed this topic at length, but felt some of the common sense math might benefit folks eager to buy a home. :happy
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stemikger
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Re: Your Home is Not a Good Investment

Post by stemikger »

I never looked at my home as an investment. In my case, my rent was the same as my mortgage so I figured I'd own the place I live in and pay off the mortgage as fast as I can and then all I have to do is pay the property taxes and insurance. In my case it worked out because my property taxes are not that bad compared to many in places like Jersey and Long Island.

If I lived in those States I think I would probably rent forever. So I do agree with you, but there are some circumstances that it makes sense to own. Right now I only pay about $350 a month for property taxes but if I was renting I would probably being paying about $2,000 for a two bedroom. I know many people that pay $12,000 and up a year in property taxes and I think that they never really own their home in that case.

My house was brand new when I bought it so I didn't need to spend a lot other then cosmetics. However now that it is 20 years old I can see where the extra expense of keeping it up is going to come into play.

Good Article. Thanks for posting.
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Re: Your Home is Not a Good Investment

Post by nisiprius »

1) Everyone should have the general characteristic of the Piet Eichholz Herengracht Index in their heads as part of their mental furniture. This must be one of the longest financial data series ever researched. It is the price of choice urban Amsterdam residential real estate over a period of not quite four, corrected for inflation:

Image

This is how real estate behaves in the long run. Long-term average holds value, no gain, no loss. And what's important is how wide the fluctuations are and how long they last. Note the drop in the late 1700s that stayed down for a century. Even if you feel that good Amsterdam real estate must surely always come back no matter what, a century could be an inconveniently long time to wait.

2) It's not an investment, it's shelter. Not everything in the world is an investment. A luxurious car, jewelry, or furniture is not an investment, it's just something expensive someone is trying to talk you into buying. College is not an investment, it's education. Families and couples used to consider financial prospects during the courtship and engagement procedures, a much better case could be made for regarding one's life partner as an investment; the dollar value of companionship can be computed just as accurately as the dollar value of hearing a mockingbird or reading "The Catcher in the Rye" for the first time. Indeed lawyers do it all the time when including "loss of consortium" in a lawsuit. Yet in this forum people do not customarily tally the net present value of their spouse in their asset allocation, or balance the cost of the wedding with the net present value of the beloved's future financial contribution, let alone value of "consortium."
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Re: Your Home is Not a Good Investment

Post by swaption »

Without getting into all the details, I don't agree. Almost by definition, your home is an investment. This is because any application of capital that can be expected to have a material impact on terminal wealth is an investment. The notion of imputed rent can't be relegated to a footnote. Consumption? All investment is in some form or another is value held for the purpose of future consumption. Whether it is a good investment or not? I think usually good over the long term, but certainly open to debate and some very conservative assumptions regarding appreciation and costs are likely necessary.
Last edited by swaption on Sun May 26, 2013 8:08 am, edited 1 time in total.
Allan
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Re: Your Home is Not a Good Investment

Post by Allan »

While I agree that in most cases a home is not a good investment per se, I do think there can be an investment aspect of a home just like there is with any real estate. In some markets and some economies there is appreciation and there is also the leverage aspect. When there is appreciation it is on a large asset with minimal cash down. If a $500,000 home increases in value 2% a year, $10,000, and your down payment was 20% or $100,000, the "return" of $10,000 is a 10% return (less operating expenses) on your cash outlay.

Allan
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beanstock
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Re: Your Home is Not a Good Investment

Post by beanstock »

However, if one purchased property in Amsterdam in the 1700s and each generation passed the property to the next generation, those who inherited the property paid nothing for it. The only time a loss or gain is realized is if the property is sold. But then one would have to either buy again or rent. Even if you break even on a sale after living in a property for 10 years, wouldn't that be better than renting? Say you buy a house for $200,000 with cash, and sell it for whatever price it would need to appreciate to break even. You are even. But say instead of buying you rent a similar property for 10 years with an average monthly rent of $1300 over the 10 years. You'd have paid $156,000 in those 10 years. Let's say the renter invested the $200,000 in a lump sum with a realistically modest 4% annualized gain. Before taxes, they'll have around $296,000 or a profit of $96,000 over ten years, but they're still down $60k.
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Re: Your Home is Not a Good Investment

Post by IlliniDave »

I never considered my house an "investment" (at least in the financial sense), but it is certainly an asset. I intend to downsize in a few years and add the leftover to my semi-retirement kitty, so in my case the house has a degree of overlap with investments. The excess equity I'm carrying arguably diversifies my overall position. To me a more important thing is that owning the house provides a measure of insurance in case of income interruption/major bumps in the road (no mortgage and tax/insurance is less than $275/mo, which is well below anything I could rent in the area).
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Re: Your Home is Not a Good Investment

Post by avalpert »

beanstock wrote:However, if one purchased property in Amsterdam in the 1700s and each generation passed the property to the next generation, those who inherited the property paid nothing for it. The only time a loss or gain is realized is if the property is sold. But then one would have to either buy again or rent. Even if you break even on a sale after living in a property for 10 years, wouldn't that be better than renting? Say you buy a house for $200,000 with cash, and sell it for whatever price it would need to appreciate to break even. You are even. But say instead of buying you rent a similar property for 10 years with an average monthly rent of $1300 over the 10 years. You'd have paid $156,000 in those 10 years. Let's say the renter invested the $200,000 in a lump sum with a realistically modest 4% annualized gain. Before taxes, they'll have around $296,000 or a profit of $96,000 over ten years, but they're still down $60k.
You are ignoring operating costs over those 10 years (maintenance, repair, replacement, taxes, insurance, transaction costs in the purchase/sale etc.), in order to 'break even' you need appreciation above inflation to cover your costs.
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Re: Your Home is Not a Good Investment

Post by Calhoon »

"...but if a prospective homeowner were to have to pay rent, buying a home is a good move."

Other than moving my family in with my parents, what are all these other alternatives to rent that I'm not aware of?\
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Re: Your Home is Not a Good Investment

Post by InvestorNewb »

Calhoon wrote:"...but if a prospective homeowner were to have to pay rent, buying a home is a good move."

Other than moving my family in with my parents, what are all these other alternatives to rent that I'm not aware of?\
I was going to say the same thing.
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momar
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Re: Your Home is Not a Good Investment

Post by momar »

nisiprius wrote:1) Everyone should have the general characteristic of the Piet Eichholz Herengracht Index in their heads as part of their mental furniture. This must be one of the longest financial data series ever researched. It is the price of choice urban Amsterdam residential real estate over a period of not quite four, corrected for inflation:

Image

This is how real estate behaves in the long run. Long-term average holds value, no gain, no loss. And what's important is how wide the fluctuations are and how long they last. Note the drop in the late 1700s that stayed down for a century. Even if you feel that good Amsterdam real estate must surely always come back no matter what, a century could be an inconveniently long time to wait.

2) It's not an investment, it's shelter. Not everything in the world is an investment. A luxurious car, jewelry, or furniture is not an investment, it's just something expensive someone is trying to talk you into buying. College is not an investment, it's education. Families and couples used to consider financial prospects during the courtship and engagement procedures, a much better case could be made for regarding one's life partner as an investment; the dollar value of companionship can be computed just as accurately as the dollar value of hearing a mockingbird or reading "The Catcher in the Rye" for the first time. Indeed lawyers do it all the time when including "loss of consortium" in a lawsuit. Yet in this forum people do not customarily tally the net present value of their spouse in their asset allocation, or balance the cost of the wedding with the net present value of the beloved's future financial contribution, let alone value of "consortium."
This is akin to saying farmland is not an investment, because the land doesn't necessarily appreciate in value.
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Re: Your Home is Not a Good Investment

Post by Rodc »

A penny saved is a penny earned.

Owning a house saves me from rent every month. The shelter the house provides has real value and real monetary value.

Ignoring the value of the shelter when thinking about is a house an investment or not is like ignoring the yield on a bond when deciding if a bond is an investment or not.

Now a house is not a bond and is not a stock, it is real estate, and a very particular type of real estate. But it seems clear to me that it is an investment. You pay money and get something of value in return. The same house could be rented to provide income to pay your rent on someplace else to generate shelter. Or it can provide shelter directly.

Unless you have a very unusual situation, you have to pay for shelter somewhere: most people have two options, renting or owning. So in evaluating whether owning a home is a good investment or a bad investment you have to compare to renting.

It is complicated as there are many factors that make an apples to apples comparison very difficult to impossible. There are emotional components (how much is having a stable place to live worth to your kids? How much is difficulty of moving to take a new job costing you?)

The graph nisi provides simply says the speculative component averages to zero over long enough time and is highly variable. But it is like a graph of the total market bond index fund NAV with dividends not included.

As to the op's article, you make some great points which I think many people fail to consider. But one really needs to include a comparison to renting the same house before deciding on the question of is buying a good deal or not.
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Re: Your Home is Not a Good Investment

Post by avalpert »

Rodc wrote: But it seems clear to me that it is an investment. You pay money and get something of value in return.
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.

Comparing the value of buying to renting for your shelter needs is certainly a worthwhile exercise which means accounting for the displaced rent and the opportunity cost of not putting the cash into a diversified investment portfolio with real returns - but when you start talking about mortgages as 'forced savings' or your house as your biggest investment decision you are mote likely to make poor purchase decisions than rational ones.
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Re: Your Home is Not a Good Investment

Post by Rodc »

Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.

Perhaps swaption put it better:
Without getting into all the details, I don't agree. Almost by definition, your home is an investment. This is because any application of capital that can be expected to have a material impact on terminal wealth is an investment. The notion of imputed rent can't be relegated to a footnote. Consumption? All investment is in some form or another is value held for the purpose of future consumption. Whether it is a good investment or not? I think usually good over the long term, but certainly open to debate and some very conservative assumptions regarding appreciation and costs are likely necessary.
I don't see that anyone mentioned forced savings, certainly I didn't, so not sure why you included that in your comment.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Your Home is Not a Good Investment

Post by staythecourse »

Not sure why this is so debated. The answer is IT DEPENDS.

If one lives 20+ years after paying the last mortgage payment with basically rent free living then yes it is a great investment. If one dies 4 days after their last 30 yr. mortgage payment then now it was not a good investments. Then of course you have to add in maintenance fees to upkeep one's house, property taxes (and if they stay deductible in the future, etc...

So the answer is who knows BUT WHO CARES. When one buys a home they are not doing it as a financial move (even bogleheads). People do it for sense of being, sense of community, sense of stability for the children, etc... I don't go on vacation as a financial move, but love to do it for personal/ emotional reasons.

My answer is always: Do what is right for you and your family, but make sure the finances of the mortgage to your paycheck makes sense (that is where all the trouble began and NOT because of wanting to own).

Good luck.
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Re: Your Home is Not a Good Investment

Post by sambb »

It is not a financial investment, but it is an investment!
For me, the home is an investment in my family with the memories, birthdays, and parties we share in it.

Could I live with my wife and kids in a 2 bedroom apartment? Sure.

Is that the memory I want? It's not a bad memory at all, but not what i want. I like thinking about the tree that my daughter and I planted in the back yard.

And yes, I know that memory costs me money. And I dont care that it does.

Similarly, a vacation is not a financial investment. But it is an investment in yourself and your loved ones.
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Re: Your Home is Not a Good Investment

Post by grabiner »

Allan wrote:While I agree that in most cases a home is not a good investment per se, I do think there can be an investment aspect of a home just like there is with any real estate. In some markets and some economies there is appreciation and there is also the leverage aspect. When there is appreciation it is on a large asset with minimal cash down. If a $500,000 home increases in value 2% a year, $10,000, and your down payment was 20% or $100,000, the "return" of $10,000 is a 10% return (less operating expenses) on your cash outlay.
But 10% isn't a good return for a 5x leveraged investment, particularly one with high risk. In fact, counting the cost of the leverage, you have a net loss. If that $400K mortgage is at 3% interest, then you paid $12,000 in interest, so your net worth is $2000 less after one year.

The real value of the home is that it provides you a place to live; if it would have cost you $50,000 to rent the home and only $20,000 in maintenance and taxes as an owner, that's an additional 6% return. Ignoring the mortgage, your net worth is $30,000 higher than if you rented the home, for a 8% return on your investment, which is about what yoou would get on a similar high-risk investment such as the stock market.

Even with an 8% expected return, a home is still inferior to stock as an investment because it is undiversified, illiquid, and indivisible, but if you continue to live in the home, the difficulty of selling it becomes irrelevant, and the risk is reduced because the home continues to be worth exactly enough for you to live in even if it loses value. (In contrast, if you rent and your stock portfolio loses value, you still have to pay just as much rent to live in the same house.)
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Re: Your Home is Not a Good Investment

Post by Allan »

grabiner wrote:
Allan wrote:While I agree that in most cases a home is not a good investment per se, I do think there can be an investment aspect of a home just like there is with any real estate. In some markets and some economies there is appreciation and there is also the leverage aspect. When there is appreciation it is on a large asset with minimal cash down. If a $500,000 home increases in value 2% a year, $10,000, and your down payment was 20% or $100,000, the "return" of $10,000 is a 10% return (less operating expenses) on your cash outlay.
But 10% isn't a good return for a 5x leveraged investment, particularly one with high risk. In fact, counting the cost of the leverage, you have a net loss. If that $400K mortgage is at 3% interest, then you paid $12,000 in interest, so your net worth is $2000 less after one year.

The real value of the home is that it provides you a place to live; if it would have cost you $50,000 to rent the home and only $20,000 in maintenance and taxes as an owner, that's an additional 6% return. Ignoring the mortgage, your net worth is $30,000 higher than if you rented the home, for a 8% return on your investment, which is about what yoou would get on a similar high-risk investment such as the stock market.

Even with an 8% expected return, a home is still inferior to stock as an investment because it is undiversified, illiquid, and indivisible, but if you continue to live in the home, the difficulty of selling it becomes irrelevant, and the risk is reduced because the home continues to be worth exactly enough for you to live in even if it loses value. (In contrast, if you rent and your stock portfolio loses value, you still have to pay just as much rent to live in the same house.)
I don't disagree with anything you're saying but I still believe there can often be an "investment" aspect and benefit of owning a house. Housing is generally a necessity, what other necessities hold their value or even appreciate and can be leveraged?

Allan
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Re: Your Home is Not a Good Investment

Post by swaption »

Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
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Re: Your Home is Not a Good Investment

Post by Rodc »

Come on Rod, you gave in too easily.
:) Didn't have the fight in me.

I do like the analogy.

*************

Back to houses and the op. In the end the question is not is a house an investment or not which is an argument about definitions, but "Is buying house a good use of your money?" Or if you wish, "Is buying a house the best use of your money?"

I can't see how one can begin to answer that question without factoring in the value of the shelter a house provides.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Your Home is Not a Good Investment

Post by Harold »

There really is a (conceptually) simple way to view owning a home. As with any investment not purely speculative in nature, it can be considered the present value of future cash flows. In the case of a home, that means the present value of future rents.

By buying a home, you are effectively prepaying your rent (with the resale value being the prepaid rent for after you are no longer the owner). In exchange, you are assuming the obligation for all costs associated with owning a property (taxes, insurance, maintenance, etc.) The purchase also means that you have decided to commit assets to real estate that could have been invested otherwise (e.g. a renter may choose to invest in stocks).

If a mortgage is used to finance the purchase, it merely serves as a liability (that increases your risk because your home asset is used as collateral) for the period it is held. Implicitly the presence of a mortgage means mortgage costs are viewed as an acceptable price for maintaining assets (home as well as other investments) rather than selling assets to pay off the mortgage. The actual amount of the mortgage loan or payment has nothing necessarily to do with rents.

Whether it is a good investment or not is going to depend on whether the market estimates (and discounting) of future rents implicit in the current price are accurate, the extent to which you are "overpaying" on rent for consumption (i.e. whether you are buying a more expensive home than you would otherwise be renting), and how much your ongoing costs reduce your effective returns.
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Re: Your Home is Not a Good Investment

Post by cherijoh »

OP - In the article you wrote:
Since you sold your home for $450,000, you could say your inflation adjusted return was only $46,825. When you factor this in with your actual return above of $109,959, you actually only made $63,134.
Huh? You have already stated that your inflation adjusted return was $46,825 - so what is the point of subtracting that from your "actual" return? I think you need to review the math here. The $63,134 you caclulated is the portion of "apparent" return that was due to inflation!

C
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Re: Your Home is Not a Good Investment

Post by avalpert »

swaption wrote:
Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
See I think you obliterate the distinction between investment and expenses here in a way that is a disservice to good decision making. It enables and possibly inevitably leads to people rationalizing their 'investment' with spurious notions like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'...

And I don't agree that serial car ownership has financial advantages over leading for all consumption patterns. For those who will maintain the car in a cost effective manner (regardless of what the dealer insists you should do) and run into the ground sure, but not everyone will consume it in that matter and for them leasing can make a lot more sense.
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Re: Your Home is Not a Good Investment

Post by momar »

avalpert wrote:
swaption wrote:
Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
See I think you obliterate the distinction between investment and expenses here in a way that is a disservice to good decision making. It enables and possibly inevitably leads to people rationalizing their 'investment' with spurious notions like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'...

And I don't agree that serial car ownership has financial advantages over leading for all consumption patterns. For those who will maintain the car in a cost effective manner (regardless of what the dealer insists you should do) and run into the ground sure, but not everyone will consume it in that matter and for them leasing can make a lot more sense.
Your point seems to be that bad investments are not investments. Or that investments must be equally suitable for all to be considered investments.
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Re: Your Home is Not a Good Investment

Post by avalpert »

momar wrote:
avalpert wrote:
swaption wrote:
Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
See I think you obliterate the distinction between investment and expenses here in a way that is a disservice to good decision making. It enables and possibly inevitably leads to people rationalizing their 'investment' with spurious notions like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'...

And I don't agree that serial car ownership has financial advantages over leading for all consumption patterns. For those who will maintain the car in a cost effective manner (regardless of what the dealer insists you should do) and run into the ground sure, but not everyone will consume it in that matter and for them leasing can make a lot more sense.
Your point seems to be that bad investments are not investments. Or that investments must be equally suitable for all to be considered investments.
No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
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Re: Your Home is Not a Good Investment

Post by swaption »

avalpert wrote:
swaption wrote:
Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
See I think you obliterate the distinction between investment and expenses here in a way that is a disservice to good decision making. It enables and possibly inevitably leads to people rationalizing their 'investment' with spurious notions like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'...

And I don't agree that serial car ownership has financial advantages over leading for all consumption patterns. For those who will maintain the car in a cost effective manner (regardless of what the dealer insists you should do) and run into the ground sure, but not everyone will consume it in that matter and for them leasing can make a lot more sense.
Now here is where perspectives like yours are doing the disservice. You take a perfectly nice discussion and start hurling around things like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'... The fact of the matter is that your insight that housing can be expensive and bad is of about as much use to people now as the notion of stocks being risky was circa 2009. People are far better served by a nice objective construct. There are young people out there right now that at some point in their lives in all likelihood on one given day are going to go from being net short housing to being net long housing. It is a huge investment and it will have a significant impact on their ultimate wealth. Your emotion driven rant above does nothing to help their cause.
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Phineas J. Whoopee
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Re: Your Home is Not a Good Investment

Post by Phineas J. Whoopee »

Please forgive me for quoting myself.
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
http://www.bogleheads.org/forum/viewtop ... 3#p1484833
PJW
Rodc
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Re: Your Home is Not a Good Investment

Post by Rodc »

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.
Sweet.

We should all find such nice investments.

Good job.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Your Home is Not a Good Investment

Post by avalpert »

swaption wrote:
avalpert wrote:
swaption wrote:
Rodc wrote:
Using that formulation a car would be an investment, as would pretty much anything. I don't think that makes for a useful definition of 'investment' or at least not one that differentiates it from 'consumption'.
You have a point. That definition could use some help. Nonetheless I think for this discussion I will let it stand as I don't think its weakness invalidates the point. Rent or not paying rent is so large and such a direct benefit/return that it simply cannot be ignored or hand waved away as done in the linked article.
Come on Rod, you gave in too easily. A car is absolutely an investment. Start with the assumption that you need a car (although you could theoretically get into walking, public transport, etc. as an alternative). So what are your options? You can buy, rent, or lease. Forget about renting. So is the decision to buy or lease a car an investment decision? Absolutely. The owner is making an investment and taking the risk related to the residual value of the car. Yet we don't have a hard time accepting the financial advantages of serial car ownership vs serial leasing. How is a house any different than that?
See I think you obliterate the distinction between investment and expenses here in a way that is a disservice to good decision making. It enables and possibly inevitably leads to people rationalizing their 'investment' with spurious notions like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'...

And I don't agree that serial car ownership has financial advantages over leading for all consumption patterns. For those who will maintain the car in a cost effective manner (regardless of what the dealer insists you should do) and run into the ground sure, but not everyone will consume it in that matter and for them leasing can make a lot more sense.
Now here is where perspectives like yours are doing the disservice. You take a perfectly nice discussion and start hurling around things like 'forced savings', 'real estate never depreciates', 'an interest only ARM makes sense since the payments are less than rent would be'... The fact of the matter is that your insight that housing can be expensive and bad is of about as much use to people now as the notion of stocks being risky was circa 2009. People are far better served by a nice objective construct. There are young people out there right now that at some point in their lives in all likelihood on one given day are going to go from being net short housing to being net long housing. It is a huge investment and it will have a significant impact on their ultimate wealth. Your emotion driven rant above does nothing to help their cause.
See, and I think it is your construct that does the disservice. In many (most?) people's minds investment implies profitable returns. People differentiate between expenses, which even if they have a residual value like a necklace are understood as costs, and investments which will lead to riches down the road. It is you, by ignoring how people see these words, who is making it more difficult to have a nice objective construct.

People are better served with an objective construct, so don't introduce terms that will bias them away from that. Housing is a huge expense that will have significant impact on their ultimate wealth. Your confusion of terms is what plays to their emotions - not my pointing that out. Until humans shed their emotional biases, the implications of words have meaning and should be chosen carefully.

Your primary residence, whether rented or owned, is an expense.
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Phineas J. Whoopee
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Re: Your Home is Not a Good Investment

Post by Phineas J. Whoopee »

avalpert wrote: See, and I think it is your construct that does the disservice. In many (most?) people's minds investment implies profitable returns.
...
Sadly, I think you're right. In at least many peoples' minds, and maybe even most as you say, the idea of investment leads inevitably to assumptions of profit. In a recent thread one poster's relative said, after two weeks, that TBM "stinks" because it happened to have decreased in NAV.

But if it wasn't that asset which was purchased it would have been another (even if nothing but stacks of $100 bills from the teller). If one didn't buy housing, what would one buy instead? All options are open.

Investments do not imply profitable returns. At best they imply the expectation of them. All too many of the people I've listened to confuse buying shares with putting dollars into a savings account. How could it go down? Well, it didn't. You still have the same number of shares; or the same airplane; or the same house you had last month. The dollars in those instances are only units of account. They are not media of exchange or stores of value.

That [ some | many | most(?) ] people don't understand is no reason to misconstrue the value of an asset.

PJW
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Re: Your Home is Not a Good Investment

Post by patrick »

avalpert wrote:No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
At today's interest rates, short term bonds have negative expected returns after adjusting for inflation.

Housing is certainly an expense. But even if you don't own a home you have to meet the expense by renting a home. Owning a home is not an expense itself. Rather, it enables you to meet the expense without having to pay rent. When you include the rent that you avoid having to pay as part of the returns then the expected returns on owning the home are positive (which of course is not to say that they are not necessarily better than other investments).
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Phineas J. Whoopee
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Re: Your Home is Not a Good Investment

Post by Phineas J. Whoopee »

patrick wrote:
avalpert wrote:No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
At today's interest rates, short term bonds have negative expected returns after adjusting for inflation.

Housing is certainly an expense. But even if you don't own a home you have to meet the expense by renting a home. Owning a home is not an expense itself. Rather, it enables you to meet the expense without having to pay rent. When you include the rent that you avoid having to pay as part of the returns then the expected returns on owning the home are positive (which of course is not to say that they are not necessarily better than other investments).
I agree. Housing is an expense. There's no question about that.

Maybe the expense is paying property taxes, insurance, interest, for structure maintenance, and to replace worn-out lawnmowers and washing machines and dryers and chest freezers you use to store the grass-fed half-cow you buy every year plus any more or fewer taxes you pay on renting out your extra parking space in your three-car garage less the bit it takes to store your boat and reserving room for the pony you plan to acquire. Whether you rent or own, you have to pay your housing expenses.

If you own, you are in business as your own landlord. The outgoes, taken over time and not naively calculated on a present-month basis, are your expenses. The increase in the value of your property, if any, partially offsets them. If your property declines in value, it accrues to them. Just like any landlord.

And like any other landlord, paying principal is nothing more or less than taking resources from one pocket and moving them to the other.

The rent you don't pay is the same as rent you would have collected. Who here can argue that lack of out-go is not exactly equivalent to the same in-come, on an after-tax basis?

I really don't see why this issue is contentious. There's what it costs to maintain the living expenses of your family. If you choose to own, there's what you paid, and there's any residual value. That's all.

People here say buying a home is a lifestyle choice. I can't see it. Choosing which home to live in is a lifestyle choice. If there's a cultural assumption that if one rents one will always choose a less expensive lifestyle than one would if one owns then let's expose that prejudice. But whether to pay somebody else to be your landlord, or to be your own landlord: how can that be anything other than an investment decision?

Yer pays yer money and yer takes yer choice.

PJW
swaption
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Re: Your Home is Not a Good Investment

Post by swaption »

Phineas J. Whoopee wrote:I really don't see why this issue is contentious. There's what it costs to maintain the living expenses of your family. If you choose to own, there's what you paid, and there's any residual value. That's all.

People here say buying a home is a lifestyle choice. I can't see it. Choosing which home to live in is a lifestyle choice. If there's a cultural assumption that if one rents one will always choose a less expensive lifestyle than one would if one owns then let's expose that prejudice. But whether to pay somebody else to be your landlord, or to be your own landlord: how can that be anything other than an investment decision?

Yer pays yer money and yer takes yer choice.

PJW
:happy Likely comes as no surprise I endorse this perspective. Nicely said.
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burt
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Re: Your Home is Not a Good Investment

Post by burt »

Currently I'm trying to convince my landlord that his rental investment is better than a 3 year CD paying 1.3 %.
Not sure if he is going to buy into that idea.
Serious foundation, related plumbing, and old AC unit may be causing him consternation.
Can't say I blame him. Ooooh the poor people who buy this place.

burt
cbeck
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Re: Your Home is Not a Good Investment

Post by cbeck »

There's an easy way to distinguish an investment from pure consumption by answering this question:
are you indifferent to the investment outcome of owning the house, i.e. the resale price? It's pretty clear that buying a pair of shoes is not an investment, but owning a house is, at least for most people who are not in the 1%.
avalpert
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Re: Your Home is Not a Good Investment

Post by avalpert »

patrick wrote:
avalpert wrote:No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
At today's interest rates, short term bonds have negative expected returns after adjusting for inflation.

Housing is certainly an expense. But even if you don't own a home you have to meet the expense by renting a home. Owning a home is not an expense itself. Rather, it enables you to meet the expense without having to pay rent. When you include the rent that you avoid having to pay as part of the returns then the expected returns on owning the home are positive (which of course is not to say that they are not necessarily better than other investments).
That depends, if you had to replace the roof, windows and doors in a house you lived in for 5 years you could easily be behind what rent would have cost before even talking about transaction costs in the sale. But that is why it is best seen as comparing the total cost for each consumption option.
Rodc
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Re: Your Home is Not a Good Investment

Post by Rodc »

avalpert wrote:
patrick wrote:
avalpert wrote:No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
At today's interest rates, short term bonds have negative expected returns after adjusting for inflation.

Housing is certainly an expense. But even if you don't own a home you have to meet the expense by renting a home. Owning a home is not an expense itself. Rather, it enables you to meet the expense without having to pay rent. When you include the rent that you avoid having to pay as part of the returns then the expected returns on owning the home are positive (which of course is not to say that they are not necessarily better than other investments).
That depends, if you had to replace the roof, windows and doors in a house you lived in for 5 years you could easily be behind what rent would have cost before even talking about transaction costs in the sale. But that is why it is best seen as comparing the total cost for each consumption option.
That does not have anything to do with is it an investment, only did it turn out to be a good or bad investment. That is simply part of the risk of this particular type of investment. Same exact risk if you bought a house as a rental property.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
avalpert
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Re: Your Home is Not a Good Investment

Post by avalpert »

Rodc wrote:
avalpert wrote:
patrick wrote:
avalpert wrote:No, my point is that not all financial decisions have positive expected returns - and those aren't investments at all, they are expenses. Trying to treat all decisions the same can and does lead to poor decisions - recognizing that different financial decision serve different purposes is one step in avoiding those bad decisions.
At today's interest rates, short term bonds have negative expected returns after adjusting for inflation.

Housing is certainly an expense. But even if you don't own a home you have to meet the expense by renting a home. Owning a home is not an expense itself. Rather, it enables you to meet the expense without having to pay rent. When you include the rent that you avoid having to pay as part of the returns then the expected returns on owning the home are positive (which of course is not to say that they are not necessarily better than other investments).
That depends, if you had to replace the roof, windows and doors in a house you lived in for 5 years you could easily be behind what rent would have cost before even talking about transaction costs in the sale. But that is why it is best seen as comparing the total cost for each consumption option.
That does not have anything to do with is it an investment, only did it turn out to be a good or bad investment. That is simply part of the risk of this particular type of investment. Same exact risk if you bought a house as a rental property.
Right, the post I was responding too was already enlightened enough to acknowledge housing is an expense and not an investment. What depends on things like what I mentioned is if owning has positive returns relative to renting. It is simply part of the risk with this particular type of expense.
rec7
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Re: Your Home is Not a Good Investment

Post by rec7 »

How Houses Eat Money by the WALL STREET JOURNAL
Keep in mind that he wrote this in 2005 the numbers would be worse today.
http://online.wsj.com/article/SB111852419690557157.html
Last edited by rec7 on Thu Aug 08, 2013 3:01 pm, edited 1 time in total.
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Random Musings
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Re: Your Home is Not a Good Investment

Post by Random Musings »

Everything one does in life is speculative, to an extent. And you live with the outcomes that come from your actions.

At a certain point, over analyzing probably has more negative effects than positive. It's one thing to dot your i's and cross your t's, but it's another world if one becomes paralyzed by analysis.

I really don't give a damn if my home is a good investment or not. However, it has met my expectations and works for me.

Next thing you know, someone will be blogging about IRR's on watches. Studies have shown It is far more cost effective to ask someone else what time it is.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
lecky7108
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Re: Your Home is Not a Good Investment

Post by lecky7108 »

I live in LA. My mortgage now for a 4 bedroom house is $2500, rent for the same is around the same.

It may not be a financial investment but to me it is a personal investment. Living in a house is waaaay different than living in an apt in my opinion. Both has it's pro's and con's but I prefer to live in a house.

In my point of view unless you keep on moving every year then yea might as well rent, but if you plan to stay in the house for a long time then buying is a better idea.
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Re: Your Home is Not a Good Investment

Post by White Coat Investor »

I get the point, that buying a house isn't always the right thing to do. But any evaluation of housing as an investment has to include the dividends- the free rent. If the house value keeps up with inflation, AND kicks out dividends every month, that seems like a pretty good investment to me. In reality, the house depreciates and the land appreciates at something close to inflation. One interesting aspect is that housing value increases as calculated by realtors are biased- they just take the average of home sold. Demolished homes don't count. The Case Shiller Index is more accurate (and less impressive) in that it uses the same properties.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Your Home is Not a Good Investment

Post by Allan »

There is also the favorable tax treatment of gains, basically no tax for married couple up to $500,000 in gains. Of course it can work the other way too, in bizarre markets and economies there can be losses but I think in most metropolitan areas over a long period of time, depending on location, gains can be very high. And tax free. I would never buy a house solely for potential gains but it can happen.

Allan
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Re: Your Home is Not a Good Investment

Post by HardKnocker »

Owning your own home is a luxury.
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avalpert
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Re: Your Home is Not a Good Investment

Post by avalpert »

lecky7108 wrote: It may not be a financial investment but to me it is a personal investment. Living in a house is waaaay different than living in an apt in my opinion. Both has it's pro's and con's but I prefer to live in a house.
Thus why many call it a lifestyle choice.
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Re: Your Home is Not a Good Investment

Post by avalpert »

EmergDoc wrote:I get the point, that buying a house isn't always the right thing to do. But any evaluation of housing as an investment has to include the dividends- the free rent. If the house value keeps up with inflation, AND kicks out dividends every month, that seems like a pretty good investment to me. In reality, the house depreciates and the land appreciates at something close to inflation. One interesting aspect is that housing value increases as calculated by realtors are biased- they just take the average of home sold. Demolished homes don't count. The Case Shiller Index is more accurate (and less impressive) in that it uses the same properties.
And the evaluation has to include all the costs for maintenance, repair, taxes, insurance etc. All of sudden it might not look like such a good investment since those can easily overtake the free rent.
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Re: Your Home is Not a Good Investment

Post by Caduceus »

First, a confession: The only reason I'm posting is because i learned so much from this thread and would like to archive it in my bogleheads account.

The point Phineas made about comparing houses to SPIAs was great food for thought - thank you.
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wander
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Re: Your Home is Not a Good Investment

Post by wander »

I don't look at my home as an investment. In my mind, I must have a house to live in regardless of my financial situation. So, instead renting from someone, I rather have my own space and do whatever I want with it. When I decide to sell it in the future, I then will get another house for the same simple reason.
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Re: Your Home is Not a Good Investment

Post by Coyote22 »

To quote William Bernstein from "The Investor's Manifesto:

"A house is most certainly not an investment, for one simple reason: You have to have a place to live somewhere, and you are going to have to pay for it or rent it. Always remember, investment is the deferral of present consumption for future consumption, and if anything qualifies as present consumption, it is a residence."
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Re: Your Home is Not a Good Investment

Post by Tortoise Banker »

Thank you for that GEM Coyote22!
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