gmaynardkrebs wrote: ↑
Thu Jul 12, 2018 3:19 pm
danielc wrote: ↑
Thu Jul 12, 2018 3:02 pm
Engineer250 wrote: ↑
Thu Jul 12, 2018 2:53 pm
The reason is basically, that they would have bought a house to begin with if they could have afforded it. They couldn't afford it, but could afford a condo somewhere. They see prices rising, but not their wages, and are worried if they don't buy now they will get priced out of the market for decades. So they buy a condo, count on prices going up and then gaining equity, and use that equity to afford the 20% on a house.
Well, I sympathize with that concern. Wages have been stagnant since the 1970s. All the GDP growth has gone into corporate earnings. My own view is that the best I can do about that is put what fraction I can of my own wealth into equities. So in the scenario you describe, instead of buying the condo I would have put the downpayment in equities for a few years.
Buying a home works better because it's leveraged.
Folks forget about the leveraged part when citing real estate appreciation. Consider this:
1. You buy a house for $250,000 with $50,000 down, i.e. you borrow $200,000.
2. The house appreciates at 3% over the next 10 years and is valued at ~$336,000.
3. You sell the house for $336,000, paying 6% commission, i.e. about $20,000.
4. The net gain is $66,000 ($316,000 - $250,000) on the initial $50,000 investment, which is about a 8.78% yearly gain.
Of course, this does not include a myriad of additional factors and expenses, including repairs, interest, and closing costs. But, the point is that the return (and the loss), since the investment is most often leveraged, is amplified.