Housing one more time

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Calhoon
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Housing one more time

Post by Calhoon » Sat Nov 28, 2015 9:43 am

Often seen threads here and elsewhere how housing is a horrible investment as it doesn’t keep up with inflation.

Certainly seems to be the case with me. Lived in a house we bought in 2001 for 224,000, which factoring in inflation would be 300,000 today. I factored in: mortgage interest, maintenance and repairs, taxes, and the twenty thousand to sell the place. According to my estimate I would need to sell it for 400,000 to break even.

I paid the place off years ago so there's no remaining mortgage, clean that way.

Zillow tells me my house is worth about 275,000 (which indeed did not keep up with inflation).

So, looks like a bloodbath, not even close, horrible.

Until I factor in that I need to live somewhere. Lived here 169 months. Let’s say it’s 1,000 a month, which would be on the low side of what housing would cost for a family of 4 around here, and suddenly it’s not too shabby of a deal.

When they run these housing calculations not keeping up with inflation is the fact that you need to live somewhere factored in?

Or am I missing something here? I have: how much paid for house in today’s dollars, any maintenance, mortgage interest, taxes, estimated cost to sell on one side versus how much I sell the place for on the other. Gets messy as I didn't buy the house all at once but rather put 100,000 down and borrowed the rest, which simultaneously exaggerates how much I paid for the place, while at the same time ignoring the return I could have gotten if I invested the money.

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jfn111
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Re: Housing one more time

Post by jfn111 » Sat Nov 28, 2015 9:48 am

I think you're looking at it correctly, you have to live somewhere. Some people hit the lottery and bought in high demand areas and now their house is worth a million bucks. Most of us don't get that lucky.

badger42
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Re: Housing one more time

Post by badger42 » Sat Nov 28, 2015 9:55 am

You're missing opportunity cost.

By not having the $275k to invest, you are giving up on that potential return.

Model what you would have if you had invested the house price in stocks and bonds (something easy, say 60/40 tsm/tbm) and kept renting. See how you do. Buying might still have been better, and backtesting is no guarantee of future results - but its not a bad way to do "what if" scenarios.

cherijoh
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Re: Housing one more time

Post by cherijoh » Sat Nov 28, 2015 9:56 am

Calhoon wrote:Often seen threads here and elsewhere how housing is a horrible investment as it doesn’t keep up with inflation.
---
When they run these housing calculations not keeping up with inflation is the fact that you need to live somewhere factored in?

Or am I missing something here? I have: how much paid for house in today’s dollars, any maintenance, mortgage interest, taxes, estimated cost to sell on one side versus how much I sell the place for on the other. Gets messy as I didn't buy the house all at once but rather put 100,000 down and borrowed the rest, which simultaneously exaggerates how much I paid for the place, while at the same time ignoring the return I could have gotten if I invested the money.
I think what you may be missing is that some people consider buying a bigger house than they need as an "investment" that they will cash in by downsizing at retirement. These homeowners generally neglect to factor in inflation and the opportunity cost of not investing their excess payments elsewhere. Hence the threads that housing is a horrible investment.

IMO, the rent vs. buy decision is separate and has nothing to do with investing. That is highly dependent on your local housing market and how often you expect to move.

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TheTimeLord
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Re: Housing one more time

Post by TheTimeLord » Sat Nov 28, 2015 9:59 am

Calhoon wrote:Often seen threads here and elsewhere how housing is a horrible investment as it doesn’t keep up with inflation.

Certainly seems to be the case with me. Lived in a house we bought in 2001 for 224,000, which factoring in inflation would be 300,000 today. I factored in: mortgage interest, maintenance and repairs, taxes, and the twenty thousand to sell the place. According to my estimate I would need to sell it for 400,000 to break even.

I paid the place off years ago so there's no remaining mortgage, clean that way.

Zillow tells me my house is worth about 275,000 (which indeed did not keep up with inflation).

So, looks like a bloodbath, not even close, horrible.

Until I factor in that I need to live somewhere. Lived here 169 months. Let’s say it’s 1,000 a month, which would be on the low side of what housing would cost for a family of 4 around here, and suddenly it’s not too shabby of a deal.

When they run these housing calculations not keeping up with inflation is the fact that you need to live somewhere factored in?

Or am I missing something here? I have: how much paid for house in today’s dollars, any maintenance, mortgage interest, taxes, estimated cost to sell on one side versus how much I sell the place for on the other. Gets messy as I didn't buy the house all at once but rather put 100,000 down and borrowed the rest, which simultaneously exaggerates how much I paid for the place, while at the same time ignoring the return I could have gotten if I invested the money.
Did you factor in the realistic rent you would have paid, tax deductions and what you paid for insurance? Shelter is a necessity, comfortable shelter is desirable. Personally, I enjoy home ownership as opposed to renting so I see value in owning but as a pure financial investment I am sure it is dubious to some extent. I wonder how people with paid off homes felt during the financial crisis not worrying about rising rent or even paying rents during those tough times?
Last edited by TheTimeLord on Sat Nov 28, 2015 10:03 am, edited 1 time in total.
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TheTimeLord
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Re: Housing one more time

Post by TheTimeLord » Sat Nov 28, 2015 10:00 am

badger42 wrote:You're missing opportunity cost.

By not having the $275k to invest, you are giving up on that potential return.

Model what you would have if you had invested the house price in stocks and bonds (something easy, say 60/40 tsm/tbm) and kept renting. See how you do. Buying might still have been better, and backtesting is no guarantee of future results - but its not a bad way to do "what if" scenarios.
I doubt he would have been loaned the $224K without the home as collateral and if he had the rate would have been meaningfully higher and not deductible.
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Alto Astral
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Re: Housing one more time

Post by Alto Astral » Sat Nov 28, 2015 10:02 am

If you expect to recuperate taxes, maintenance etc, that means you lived for free for 14 years. I consider it like rentin but if you stay put long enough, you end up slightly ahead. Its rareley an inflation hedge nor a high performing asset, except if you are in a above/below average market. Excluding all other expenses, your $224k in 2001 is $300k in todays dollars.
Source: http://data.bls.gov/cgi-bin/cpicalc.pl? ... year2=2015

Calhoon
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Re: Housing one more time

Post by Calhoon » Sat Nov 28, 2015 10:40 am

Badger -- was wondering about the opportunity cost. Though seems to me it'd only be on the money I put down that was available for investment, which was 100k. Really should factor that in as well at a minimal return.

Timelord -- in my case the tax deduction was never all that significant. Only borrowed 125,000 and paid it off relatively quickly. Could see how it could make an impact in most cases though. Insurance missed. The 1,000 per month I used for rent is close but on the low side.

The most disturbing part of this exercise was totaling the taxes I've paid since I've lived here. Wow.

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TheTimeLord
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Re: Housing one more time

Post by TheTimeLord » Sat Nov 28, 2015 10:42 am

Calhoon wrote:Badger -- was wondering about the opportunity cost. Though seems to me it'd only be on the money I put down that was available for investment, which was 100k. Really should factor that in as well at a minimal return.

Timelord -- in my case the tax deduction was never all that significant. Only borrowed 125,000 and paid it off relatively quickly. Could see how it could make an impact in most cases though. Insurance missed. The 1,000 per month I used for rent is close but on the low side.

The most disturbing part of this exercise was totaling the taxes I've paid since I've lived here. Wow.
Living in a high property tax state I get a deduction annually. But that depends on your ability to itemize and your top tax bracket. But I freely admit I am a fan of the security owning has brought to my life.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Alto Astral
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Re: Housing one more time

Post by Alto Astral » Sat Nov 28, 2015 11:07 am

Calhoon wrote:The most disturbing part of this exercise was totaling the taxes I've paid since I've lived here. Wow.
We have around $10k/yr in property taxes. 60% of it goes to the local school district. In my case it will be 3 years before my kid starts going to school and 'utilize' some of those payments. If we stay for 15 years through my kids high school education, i would have paid $150k in property taxes, which is slightly below 50% of the current cost of the home. Yes, it sucks if you look at it financially.

Twins Fan
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Re: Housing one more time

Post by Twins Fan » Sat Nov 28, 2015 11:39 am

I think you're right to look at it as housing being a not so great investment. I look at it as a place to live and not an investment at all. It would be different if we were talking flipping houses or rental property... i.e. business like. But, for a primary residence home... hopefully the value goes up. Maybe it doesn't though. Maybe it goes down. Seeing as the OP bought in 2001, they likely rode that wave of the housing market ups and downs since then.

I don't think it's a good idea to look at mortgage interest, property taxes, or transaction fees as some things to hope to break even on.

Mortgage interest is a sunk cost. You borrow money and pay it back with interest. Who do you expect to help break even there? The cost of borrowing money is all... Also why I don't like the "hold on to the mortgage" point brought up often. Situations vary there though.

Property taxes is a cost for the services provided to the area while you live(d) there. Yes, we can argue that point 'til the cows come home, but... Who do you expect to help break even there? I don't think it's valid to say renting would make it so one wouldn't pay property taxes. If you don't think that's included in the rent and the landlord just picks up that tab out of the goodness of their heart.... You're just paying someone else property taxes if you rent. Hence, rents go up a good bit over time if taxes keep increasing.

Transaction costs... Again, who do you expect to break even there? That's just part of buying and selling. Don't move once you buy. :happy

This is a very area dependent thing also. Someone who bought a home in certain parts of CA 30 years ago would probably say a home is a great investment. Someone that bought in an area that did not skyrocket like that would probably say the opposite.

I think it really comes down to a lifestyle deal. People that like to own... own. People that like to rent... rent. Trying to look at where you live as an investment is just an exercise in frustration though. IMO

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burt
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Re: Housing one more time

Post by burt » Sat Nov 28, 2015 6:28 pm

How stable is your job ?
When stuff hits the fan, a house can be a very heavy anchor.

burt

Valuethinker
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Re: Housing one more time

Post by Valuethinker » Sun Nov 29, 2015 9:01 am

Calhoon wrote:Often seen threads here and elsewhere how housing is a horrible investment as it doesn’t keep up with inflation.

Certainly seems to be the case with me. Lived in a house we bought in 2001 for 224,000, which factoring in inflation would be 300,000 today. I factored in: mortgage interest, maintenance and repairs, taxes, and the twenty thousand to sell the place. According to my estimate I would need to sell it for 400,000 to break even.

I paid the place off years ago so there's no remaining mortgage, clean that way.

Zillow tells me my house is worth about 275,000 (which indeed did not keep up with inflation).

So, looks like a bloodbath, not even close, horrible.

Until I factor in that I need to live somewhere. Lived here 169 months. Let’s say it’s 1,000 a month, which would be on the low side of what housing would cost for a family of 4 around here, and suddenly it’s not too shabby of a deal.

When they run these housing calculations not keeping up with inflation is the fact that you need to live somewhere factored in?

Or am I missing something here? I have: how much paid for house in today’s dollars, any maintenance, mortgage interest, taxes, estimated cost to sell on one side versus how much I sell the place for on the other. Gets messy as I didn't buy the house all at once but rather put 100,000 down and borrowed the rest, which simultaneously exaggerates how much I paid for the place, while at the same time ignoring the return I could have gotten if I invested the money.
You are correct in this way:

-- a property owned and lived in gives you 2 services:

1. the avoided rental cost of that property

2. potential for capital increase LESS taxes (which would be wrapped up in the rent if you didn't own a place), repairs & maintenance

PLUS any tax protections (eg capital gains tax rollover/ exemption on personal residences - for someone who has lived in their house for 40-50 years that can be a huge chunk of the return).

To compare like for like you'd have to work out a "rental return" for your house since you bought it. If you bought it and rented it out, what would be the total income less taxes, less any expenses like repairs, maintenance etc.

At which point, in most places, houses don't look like a great bet. Although several large funds have been buying single family dwellings since 2008 and the crash (and in some cases making good money), Sam Zell, who has made billions in Real Estate, feels that if it was that easy, the RE industry would have been doing it for years. Multi-unit dwellings are far more efficient and that's what apartment property REITs hold (see the Canadian one CAPREIT for an example)-- you can significantly save on management costs if the units are concentrated. Whereas SF homes are widely scattered, have more external surface area (means more repairs) etc.

The long run evidence seems to show that capital appreciation in SFH, less maintenance expenditures, etc., is less than 1% real pa. It may even be negative if you take into account the way houses "date" (for example, top spec in the 1980s would now need a massive refurb now: standards of home entertainment systems, lighting, insulation and energy efficiency, kitchen equipment and countertops, etc. have changed totally in 30 years). Having renovated a house which was only "done" 10 years earlier, I can tell you it is significantly more expensive than building a new house (the project sizes are smaller so the total bill is less, but the cost for what you are doing is at least 2x what it would be as part of a new build).

A house is a place to live. Owning it gives you more control and potentially more security. I got lucky (bought into a 5x move upwards in housing prices over 25 years in Greater London, although I haven't made that kind of money on my transactions).

Calhoon
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Re: Housing one more time

Post by Calhoon » Sun Nov 29, 2015 12:13 pm

Twins Fan. Think we're on the same page, a house is a place to live, not an investment, but I do disagree about taxes, mortgage interest, transaction costs. I think you're tricking yourself believing that these aren't costs of home ownership, given that they really are the cost of home ownership. If I didn't live in this place, I can tell you right now I wouldn't be sending in a five thousand dollar check to the Town of Lisbon every year (granted I'd be paying something anywhere I live, but could be much, much lower). Further, I don't think it's a bad exercise seeing how much much something you're paying for costs. Anything else in life that I buy I demand to know how much it costs -- I don't hand over my credit card, and say surprise me -- so why should a home be any different? As a matter of fact, given that it's the most expensive thing I'll ever buy in my life it's even more important. It's not necessarily between owning and renting, maybe I'll come to the conclusion that for it to make sense in my life I need to downsize, move to lower property tax state as retirement approaches, etc.

Reason I'm going through this exercise now is because I'm planning on putting my house up for sale this Spring. Know it doesn't matter, hindsight and all that, but I'm curious to see if it was a dumb move buying this place. More importantly might help trying to figure out if I want to do it again, rent, condo, small place, big place. Right now everything's on the table.

Value thinker --
"Sam Zell, who has made billions in Real Estate, feels that if it was that easy, the RE industry would have been doing it for years" -- that's most interesting.

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Re: Housing one more time

Post by Twins Fan » Sun Nov 29, 2015 12:39 pm

Calhoon wrote: but I do disagree about taxes, mortgage interest, transaction costs. I think you're tricking yourself believing that these aren't costs of home ownership, given that they really are the cost of home ownership.
I never said they weren't costs of ownership. They definitely are. But, they are your costs not the next person to buy your home from you. Adding them in to a "break even" scenario is only going to cause frustration about home ownership.

And yes, you should definitely know and pay attention to how much you're paying for those areas of home ownership. Just realize once they're paid and gone.... they're gone.

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Re: Housing one more time

Post by Valuethinker » Sun Nov 29, 2015 12:52 pm

Calhoon wrote:
Value thinker --
"Sam Zell, who has made billions in Real Estate, feels that if it was that easy, the RE industry would have been doing it for years" -- that's most interesting.
Zell is infamous for problems at the helm of The Tribune Company.

BUT he made billions in RE. And he said (I am sure you can find the quote) that whilst these Single Family Home REITs were successfully floated by various Private Equity houses (Blackstone in particular I think) he didn't think there was a viable long term business model there (but conceded he could be wrong).

The problem is as he outlined: single family homes *cost*. They are physically spread out (which means one manager can cover fewer units) and they have higher maintenance bills. And the "ready market" is not there the way it is for 1-3 bedroom places which always rent to: young people coming into the area to work or study, people newly divorced or separated from their partners, older people who don't own their own homes, (can be difficult renters) young families or couples without enough income or credit record to buy.

From my London experience I would add:

- there is a premium in SFH (probably about 85% of houses in London are either terraced (row) or semi detached (the favourite British suburban form)). My SFH would rent for about the same as my previous 2 bed flat (apartment) but cost perhaps 30% more to buy. And all the bills (maintenance, heating & water etc.) are correspondingly larger.

Rental "yields" (net rent/ gross capital value) are as high as 6% for small apartments close to public transport, and as low as 3% for prestige properties in the centre or suburban homes like mine.

I don't have any reason to believe that is any different in "boom" markets like NYC or San Francisco.

Besides all the costs of owning a home, in rental terms you are only going to get 3-4% return on your capital. In other words, banking on price appreciation.

The low rental yields (an American would call that "cap rate") on SFHs reflect their desirability as places to *live* amongst middle class Americans, and the ready supply (a lot of areas zone only for various forms of SF housing) in the suburbs.

Alto Astral
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Re: Housing one more time

Post by Alto Astral » Sun Nov 29, 2015 5:16 pm

Calhoon wrote:If I didn't live in this place, I can tell you right now I wouldn't be sending in a five thousand dollar check to the Town of Lisbon every year (granted I'd be paying something anywhere I live, but could be much, much lower).

...Reason I'm going through this exercise now is because I'm planning on putting my house up for sale this Spring.

...but I'm curious to see if it was a dumb move buying this place.
So why did you buy this place in the first place? I would think you were aware of the complete PITI situation before you put an offer. Was it good schools, better neighborhood, bigger home? Your situation would have changed a lot in the past 14 years since you got this place. Maybe you had school going kids and the higher taxes mostly go towards a good school district? If its an empty-nest, then yes, the higher taxes may not be justified going forward and you could look to downsize, rent etc. I tend to agree with what many have said that its really more of a lottery than an investment if you end up getting more than what you put in. Knowing what you know now, would you have got this place if you had to do it all over again in 2001?

longinvest
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Re: Housing one more time

Post by longinvest » Sun Nov 29, 2015 6:56 pm

I did the exercise of calculating the "rent + invest" equivalent of owning our home as follows.

Input numbers:
  1. Home price (including closing costs and land transfer tax). Call this P.
  2. Current home value (you may want to subtract selling costs from it). Call this V.
  3. Total cumulative inflation over the period of ownership. Call this F. (Actual number based on CPI).
  4. Total cumulative return of a portfolio using our asset allocation over the period of ownership. Call this R. (Actual number based on period-specific historical returns).
  5. Tax rate on dividends and capital gains (given our current salaries).
  6. Approximate on-going monthly ownership costs (maintenance, HOA dues, city taxes)
Assumptions:
  1. No capital gains taxes on principal residence. (That's our situation).
  2. Taxable portfolio. (Our tax-advantaged accounts are full).
Simplifying assumptions:
  1. The rent is fixed in inflation-adjusted dollars.
  2. The monthly inflation is the average "monthly"ized inflation over the period. Call this f.
  3. The monthly portfolio return is the average "monthly"ized return over the period. Call this r.
With this, the calculation became relatively simple.

If I wanted to liquidate a taxable portfolio with a cost basis of P such that I get to keep V after capital gains taxes, I would need a portfolio with a final value (before liquidation) of:

- final_portfolio = P + (V - P) / (1 - capital_gains_tax_rate)

The above takes care of capital gains taxes (which are calculated in nominal terms).

Next, I need to know the average constant inflation-adjusted portfolio leakage or withdrawal (before tax). As I want an estimate in today's dollar, I need to convert P into a today's dollar amount:

- P_in_today_dollar = P * (1 + F)

Let's not forget to calculate f and r:

- f = (1 + F)^(1 / (years * 12)) - 1

- r = (1 + R)^(1 / (years * 12)) - 1

And now, we can calculate the leak using a financial calculator:

- n = years * 12, i = 100 * (((1 + r) / (1 + f)) - 1), PV = - P_in_today_dollar, FV = final_portfolio, PMT = ?

The value of PMT gives us the constant inflation-adjusted withdrawal before taxes. Depending on how the portfolio is set up, this could attract more or less taxes, depending on whether the portfolio throws out monthly distributions or not. It is up to the person doing the calculation to make the an estimate of taxes.

The monthly equivalent rent is thus:

- rent = PMT - taxes_on_PMT + on_going_monthly_ownernership_costs

In our case, it would have been impossible to rent anything close to what we own for that price, over the period.

Your mileage may vary!
Last edited by longinvest on Mon Nov 30, 2015 6:40 pm, edited 1 time in total.
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Calhoon
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Re: Housing one more time

Post by Calhoon » Mon Nov 30, 2015 5:52 pm

Longinvest --great this is going to come in handy. Paid off my mortgage years ago, and so if I sold, which is what I'm planning on doing this coming Spring, one possible scenario was that I'd rent and invest the money. Probably won't happen, but I enjoy thinking about it.

Alto Astro -- back when I first got the place, I remember running the numbers...but somehow it never occurred to me to factor in inflation. Regardless, I figured it wasn't as great as they made it out to be. At the time all I was hearing about what a great investment it was and how when you're renting you're just throwing your money.

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danwhite77
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Re: Housing one more time

Post by danwhite77 » Mon Nov 30, 2015 5:56 pm

Imputed rent is, I believe what you're missing. How much would it have cost to rent a comparable home for that time? That amount would offset some, or possibly all, of your loss. I say this as a person who is not a fan of real estate, but we all need to live somewhere so you can't analyze a house in vacuum the way you would analyze a stock or bond investment.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.

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Phineas J. Whoopee
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Re: Housing one more time

Post by Phineas J. Whoopee » Mon Nov 30, 2015 6:21 pm

Calhoon, I completely agree with your OP, and have been shouted down over it more than once.

People have, in my opinion, a pretty weird definition of the word "investment" if it doesn't include providing one's own dwelling.

I've bought housing so I don't have to rent it from somebody else. It reduced (at an equivalent standard of living) my monthly expenses, once I paid off the loan.

Not paying something is equivalent to after-tax income in that amount.

When I bought, I moved from a rental in a fashionable area, to a place that's nicer on the inside but in a less-fashionable area. There's nothing wrong with the neighborhood. It just isn't as popular.

I viewed the trade-off as more or less a wash. The market disagreed.

All told, all in, with the purchase price, closing costs, buying furniture (it's bigger), carpeting, blinds, interest, everything, my total cost for the place was $X.

I priced inflation-adjusted single-premium immediate annuities paying enough that after taxes I would clear the monthly cash flow improvement. The least expensive cost approximately $4X.

In effect, I got an inflation-adjusted single-premium immediate annuity at a 75% discount.

Plus, it came with a free apartment.

Break-even on cash flow alone is twelve years. That's about three and a half years out.

If we were talking about a portfolio likely to support renting housing for the rest of one's life we'd call it investing. How can providing one's own housing, as opposed to renting the equivalent from somebody else, be anything other than an investment?

You and I, at least with respect to your OP, agree. Others disagree.

PJW

letsgobobby
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Re: Housing one more time

Post by letsgobobby » Fri Dec 25, 2015 10:17 am

What does everyone think about the general state of the housing market?

The Wall Street Journal presents data from the 20 largest housing markets (based on Case Shiller) that in many cases, real prices have not risen at all in 25 years. There are exceptions to the downside (Detroit, Cleveland, where prices have fallen over 25 years) and the upside (San Francisco +50%, New York +125%, Denver +100%, Seattle and Portland + 100%), but many of these markets face severe and likely permanent supply constraints due to geography or politics or both.

I've lived well outside some of these major metro areas in the last 25 years as well as in some of the biggest, and currently do not see widespread distortions. For example, although SLC is not tracked by Case Shiller, I suspect SLC would look a lot like Denver, with large real price increases over the last generation as Gen X, Gen Y, and Millenials adopt a more active lifestyle and move to locales that enable those pursuits, while continuing to abandon rust belt cities with their crime, terrible weather, eroding infrastructure, and lack of economic opportunities. In other words, even some of the 'distortions' we perceive are really just secular shifts in the definition of what locations are desirable and which are not.

Any emphasis on cheap money from the Fed as a source of a new housing bubble misses the point that many of the hottest markets are attracting capital from around the globe, and international investors are as much to blame for skyrocketing prices as anyone. This won't be an issue in Denver, perhaps, but it is absolutely a real factor in Seattle, San Francisco, New York, Miami (and Vancouver, BC). In fact you could argue that as the Fed raises rates, even more capital will be directed to the United States, which could inflate these international markets even further.

Now of course cheap money has caused some misallocation of capital, but currently, it seems to have been directed as much into capital assets (stocks and bonds) as personal real estate. From here in most markets I expect housing to be relatively stable to perhaps a slight decline on a real basis over the tightening cycle. None of this should impact someone using the home as a place to live. In the most constrained and international markets - San Francisco, New York, Seattle - the sky is truly the limit as long as the economy does not experience a severe recession. Land in these cities is so limited that most if not all new construction is now vertical.

In the end, housing is very local but the data below don't seem to suggest widespread bubbles. Even in a suspicious case - say, Denver + 100% in 25 years - there seem to be cultural/lifestyle explanations which, after all, occur with great frequency over the course of a generation (the 25+ years tracked by Case Shiller).

http://blogs.wsj.com/economics/2015/12/ ... rry-about/

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Re: Housing one more time

Post by freebeer » Fri Dec 25, 2015 10:31 am

Calhoon wrote:Badger -- was wondering about the opportunity cost. Though seems to me it'd only be on the money I put down that was available for investment, which was 100k. Really should factor that in as well at a minimal return.

Timelord -- in my case the tax deduction was never all that significant. Only borrowed 125,000 and paid it off relatively quickly. Could see how it could make an impact in most cases though. Insurance missed. The 1,000 per month I used for rent is close but on the low side.

The most disturbing part of this exercise was totaling the taxes I've paid since I've lived here. Wow.
Not quite right about opportunity cost. It's 100K * the whole 169 months but as you paid down the other 125K you gradually added additional opportunity cost (since those funds would otherwise have been available for investment, less any amount you would have otherwise paid in rent excess of your costs in interest/taxes/maintenance).

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Re: Housing one more time

Post by KlangFool » Fri Dec 25, 2015 11:13 am

OP,

1) If you have to consider the house that you lived in as "investment", you had bought too much house.

2) A person in general do not rent the same house as the house that they buy. They tend to buy more house. Now, if they understand this and willing to pay the EXTRA HOUSING COST, there is no problem with that. It is a life style decision. They just choose to spend more on housing.

3) The problem only exist when they try to justify their additional housing cost as "investment". It is not. If a person do proper calculation, it will be negative return as compare to taking the down payment and mortgage payment and invested elsewhere.

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Re: Housing one more time

Post by KlangFool » Fri Dec 25, 2015 11:18 am

TheTimeLord wrote:
badger42 wrote:You're missing opportunity cost.

By not having the $275k to invest, you are giving up on that potential return.

Model what you would have if you had invested the house price in stocks and bonds (something easy, say 60/40 tsm/tbm) and kept renting. See how you do. Buying might still have been better, and backtesting is no guarantee of future results - but its not a bad way to do "what if" scenarios.
I doubt he would have been loaned the $224K without the home as collateral and if he had the rate would have been meaningfully higher and not deductible.
TheTimeLord,

You are correct. But, if the OP does not buy the house, he / she could invest the down payment plus the difference between the rent and mortgage payment every month.

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Re: Housing one more time

Post by KlangFool » Fri Dec 25, 2015 11:24 am

freebeer wrote:
Calhoon wrote:Badger -- was wondering about the opportunity cost. Though seems to me it'd only be on the money I put down that was available for investment, which was 100k. Really should factor that in as well at a minimal return.

Timelord -- in my case the tax deduction was never all that significant. Only borrowed 125,000 and paid it off relatively quickly. Could see how it could make an impact in most cases though. Insurance missed. The 1,000 per month I used for rent is close but on the low side.

The most disturbing part of this exercise was totaling the taxes I've paid since I've lived here. Wow.
Not quite right about opportunity cost. It's 100K * the whole 169 months but as you paid down the other 125K you gradually added additional opportunity cost (since those funds would otherwise have been available for investment, less any amount you would have otherwise paid in rent excess of your costs in interest/taxes/maintenance).
freebeer,

<< Not quite right about opportunity cost. It's 100K * the whole 169 months but as you paid down the other 125K you gradually added additional opportunity cost>>

Assuming a very conservative 6% return, that is worth 428K.

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Re: Housing one more time

Post by White Coat Investor » Fri Dec 25, 2015 2:53 pm

Calhoon wrote:Often seen threads here and elsewhere how housing is a horrible investment as it doesn’t keep up with inflation.

Certainly seems to be the case with me. Lived in a house we bought in 2001 for 224,000, which factoring in inflation would be 300,000 today. I factored in: mortgage interest, maintenance and repairs, taxes, and the twenty thousand to sell the place. According to my estimate I would need to sell it for 400,000 to break even.

I paid the place off years ago so there's no remaining mortgage, clean that way.

Zillow tells me my house is worth about 275,000 (which indeed did not keep up with inflation).

So, looks like a bloodbath, not even close, horrible.

Until I factor in that I need to live somewhere. Lived here 169 months. Let’s say it’s 1,000 a month, which would be on the low side of what housing would cost for a family of 4 around here, and suddenly it’s not too shabby of a deal.

When they run these housing calculations not keeping up with inflation is the fact that you need to live somewhere factored in?

Or am I missing something here? I have: how much paid for house in today’s dollars, any maintenance, mortgage interest, taxes, estimated cost to sell on one side versus how much I sell the place for on the other. Gets messy as I didn't buy the house all at once but rather put 100,000 down and borrowed the rest, which simultaneously exaggerates how much I paid for the place, while at the same time ignoring the return I could have gotten if I invested the money.
You're not including dividends- i.e. the saved rent. If that was $20K a year, you've got to add in another $300K.
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Re: Housing one more time

Post by unclescrooge » Fri Dec 25, 2015 4:52 pm

Histirically housing has been a lousy investment.

Over the long run, it can only keep up with inflation (replacement costs/wage increases).

Unlike companies which can improve their efficiencies by lowering their costs and improving their productivity, a house can only keep up with the market. (This assumes a passive investment in both stocks and houses, if you run a business of house flipping your mileage will vary).

The biggest benefit is the leverage and the tax breaks. However, if your income income over $150k, these tax breaks disappear unless you will in real estate full-time.

That being said, I really cleaned up in there last real estate bubble. Timing real estate cycles is considerably easier than the stock market.

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Re: Housing one more time

Post by joebh » Fri Dec 25, 2015 5:15 pm

Thinking about housing as an investment is the problem here. It's not an investment, it's an expense.

Just like an automobile isn't an investment. Clothing isn't an investment. Food isn't an investment. Housing isn't an investment.

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