Home Prices
Home Prices
Well written article on the topic:
https://www.urban.org/urban-wire/how-hi ... ome-prices
I think maybe helpful to many. Will particularly take note of 1979-82, a period of rapidly rising interest rates. Yes, home price appreciation decelerated, but home prices did not go down in nominal terms. The 80's ended up being relatively normal in terms of HPA. Something to think about for those waiting for a bubble to burst. There was much bad stuff written about how horrible houses were as an investment roughly a decade ago, in the wake of the mortgage crisis. Timing the market for anything can be a tricky game.
The article also touches on the inflation protection that a home provides, no doubt somewhat of an offset to the impact of higher interest rates. For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
https://www.urban.org/urban-wire/how-hi ... ome-prices
I think maybe helpful to many. Will particularly take note of 1979-82, a period of rapidly rising interest rates. Yes, home price appreciation decelerated, but home prices did not go down in nominal terms. The 80's ended up being relatively normal in terms of HPA. Something to think about for those waiting for a bubble to burst. There was much bad stuff written about how horrible houses were as an investment roughly a decade ago, in the wake of the mortgage crisis. Timing the market for anything can be a tricky game.
The article also touches on the inflation protection that a home provides, no doubt somewhat of an offset to the impact of higher interest rates. For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Re: Home Prices
There are just a lot of additional factors happening concurrently. For example, between 1950s and 2000s most households went from one wage earner to two wage earners. That gave many households a lot more income to spend, and plenty of that extra income went into demand for better housing which the construction, home improvement, and financial services industries took full advantage of. That's for the most part plateaued and barring repeal of child labor laws etc. it's not going to happen again.
A friend of mine bought a house in 1998 for $270K and sold it for $950K in 2021. That's a nice profit, but he also spent about $250K updating it. He replaced every visible surface in the house: doors, windows, floors, kitchen, baths doing a lot of the work himself so he made money, just not as much as it seems if the cost of ownership is left out. That's constant and with aging home stock probably even more of a consideration for the next decades.
A friend of mine bought a house in 1998 for $270K and sold it for $950K in 2021. That's a nice profit, but he also spent about $250K updating it. He replaced every visible surface in the house: doors, windows, floors, kitchen, baths doing a lot of the work himself so he made money, just not as much as it seems if the cost of ownership is left out. That's constant and with aging home stock probably even more of a consideration for the next decades.
Re: Home Prices
Indeed. I think a big one though is the lack of supply generally. Following the mortgage crisis, there were six consecutive years with housing starts below 1 million, with some years getting close to 500k. Prior to that there had not been any year below 1 million going back to the 50's. Rising interest rates and increased costs of construction almost assures that the supply situation is not going to be quickly remedied. it's possible that not everyone will be able to afford housing, but that is the problem with limited supply, not everyone has to be able to.
Re: Home Prices
True. Long term homeownership profits can be deceiving, considering all of the upkeep/carrying costs.quietseas wrote: ↑Fri May 27, 2022 4:01 pm There are just a lot of additional factors happening concurrently. For example, between 1950s and 2000s most households went from one wage earner to two wage earners. That gave many households a lot more income to spend, and plenty of that extra income went into demand for better housing which the construction, home improvement, and financial services industries took full advantage of. That's for the most part plateaued and barring repeal of child labor laws etc. it's not going to happen again.
A friend of mine bought a house in 1998 for $270K and sold it for $950K in 2021. That's a nice profit, but he also spent about $250K updating it. He replaced every visible surface in the house: doors, windows, floors, kitchen, baths doing a lot of the work himself so he made money, just not as much as it seems if the cost of ownership is left out. That's constant and with aging home stock probably even more of a consideration for the next decades.
I see houses that were built/sold in 2000-03 for $450-500k, now asking 850-900k. But when you look closer many have had recent renos and landscaping, decks, screenporch etc. Before long you starting add these items and the prices are more in line w/ inflation. Not that it's a bad thing- you need a roof over your head.
Re: Home Prices
swaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
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Re: Home Prices
I'd say just read the article. Laurie Goodman is no hack, she really knows her stuff. I think of folks with toddlers running around, thinking of settling down. The twin demons of high home prices and increasing mortgage rates could be daunting. I'd imagine a devil sitting on their shoulders telling them not to be idiots. I think the article offers reasoned perspective. The whole "houses are lousy investments" narrative is a magnet for bad math, and can be quite destructive.KlangFool wrote: ↑Fri May 27, 2022 4:25 pmswaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
Re: Home Prices
swaption,swaption wrote: ↑Fri May 27, 2022 4:55 pmI'd say just read the article. Laurie Goodman is no hack, she really knows her stuff. I think of folks with toddlers running around, thinking of settling down. The twin demons of high home prices and increasing mortgage rates could be daunting. I'd imagine a devil sitting on their shoulders telling them not to be idiots. I think the article offers reasoned perspective. The whole "houses are lousy investments" narrative is a magnet for bad math, and can be quite destructive.KlangFool wrote: ↑Fri May 27, 2022 4:25 pmswaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
"I think the article offers reasoned perspective. "
I offered a reasoned perspective too. Do not count on the house to keep up with inflation. It may not be true as per the house that you bought or buying.
" The whole "houses are lousy investments" narrative is a magnet for bad math, and can be quite destructive."
I disagreed. The house is not an investment at all. I had seen enough folks destroyed financially by their houses to know this. "The house as an investment" is destructive. And, we would see this again in the coming recession.
KlangFool
Last edited by KlangFool on Fri May 27, 2022 5:33 pm, edited 1 time in total.
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Re: Home Prices
Lol, that’s your argument to counter my premise of bad math?
Re: Home Prices
A house is almost definitely not a bond. A bond guarantees your principal at maturity while a house’s value depends on what the next buyer is willing to pay you.swaption wrote: ↑Fri May 27, 2022 3:49 pm
The article also touches on the inflation protection that a home provides, no doubt somewhat of an offset to the impact of higher interest rates. For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
A house generates an inflation-linked benefit but so do a lot of other businesses. Oil stocks, food stocks, REITs all generate some inflation-linked profits/dividends but nobody think of them as bonds.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Re: Home Prices
When a person's calculation is based on a wrong assumption:
The house's price/rent would keep up with the inflation. It won't matter what the calculation is. Bad input produces bad result.
KlangFool
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Re: Home Prices
Almost no one borrows 500k and put that into an sp500 index fund, but they do that when purchasing a house. It is for a very simple reason.
Most people don't see their primary residence as investment. A house has an emotional value attached to it.
Most people don't see their primary residence as investment. A house has an emotional value attached to it.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
Re: Home Prices
Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. It pays you the money you th n don’t have to pay in rent. It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
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Re: Home Prices
But I would say that paying rent is financially preferable for many people, particularly in the current environment when many mortgages require two wage earners and either/both may change jobs several times during their career which may require a move. If you know you can stay in one place for 20 years, then yes, there's less risk to owning a home. Otherwise you may be better off renting.swaption wrote: ↑Fri May 27, 2022 9:42 pm Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. It pays you the money you th n don’t have to pay in rent. It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
Re: Home Prices
swaption,swaption wrote: ↑Fri May 27, 2022 9:42 pm
Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. It pays you the money you th n don’t have to pay in rent. It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
" It pays you the money you th n don’t have to pay in rent. "
That is only true for folks that do not treat their houses as an investment. They only justify their house purchases purely on imputed rent. They reduces their housing expense when they buy as opposed to renting. Aka, they assume zero house appreciation and the mortgage payment is significantly lowered than market rent.
Most people increase their housing expense when they buy. Hence, the house takes more money away from them when they buy. They pay extra money that they do not have to pay when they rent.
So, please tell us. Does the article makes those assumption aka zero appreciation and the house/rent does not increase with inflation? If the answer is no, then, the whole calculation is pointless.
The house is not an investment if you assume zero appreciation.
"It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity."
If the solar panel costs you more in terms of ongoing costs versus the grid, the solar panel is not paying you money. It is taking money away from you.
Back to the basic question. Do you assume zero housing appreciation?
KlangFool
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Re: Home Prices
If the home is purchased as a primary residence it's not an investment property. If I pay rent, I'm living in an investment property. You can not depreciate a primary residence, nor can you claim losses on it.
Saying I'm investing in a house to live in is like saying im investing in a car to drive. Investing is being used pretty loosely.
Saying I'm investing in a house to live in is like saying im investing in a car to drive. Investing is being used pretty loosely.
https://www.merriam-webster.com/dictionary/abide
Re: Home Prices
This is not correct. A lot people who buys a house would not rent the same house that they bought. Because people are much more selective when they are buying a house. They look for the things they would not ask for in a rental home. Therefore, they stretch their financials when they are buying vs renting.swaption wrote: ↑Fri May 27, 2022 9:42 pm Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. BIt’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
Re: Home Prices
You are spot on.KlangFool wrote: ↑Fri May 27, 2022 4:25 pmswaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
I bought in August of 2005. Factoring in 2% average inflation over those 17 years, I am still underwater. That's without adding in repairs and additions to the house over that period.
With that said, my PITI is less than a "good" two bedroom apartment.
Re: Home Prices
I hope my house goes up in value, but I wasn't counting on it when I made the original purchase. I plan on living in my house for a very long time, and property tax goes up slowly in my state, so I figured the greatly increased initial annual costs of owning a home vs renting probably would be at least a break even proposition on the long run. The black swan pandemic made my purchase an amazing deal as I was able to refinance and rents have skyrocketed. But if the housing market declined for a decade I also would've been fine.
I never saw my house as an investment. It is a place I have to spend much of my life inside, and I want it to be comfortable, so I may occasionally upgrade parts of it. But the upgrades are never to make money long term.
May all your index funds gain +0.5% today.
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Re: Home Prices
While I agree with some of the points you have made, the line above is dangerous and needs to be refuted. I've seen people financially devastated by housing issues, such as buying a house that was thereafter found to be settling due to eroding limestone - It cost them hundreds of thousands to prevent the home from being a total loss. I will retain from boring you with countless other examples... Suffice it to say, find a few people whose financial wellbeing has been destroyed or heavily impacted by owning a home and it may change your perspective.
I think a home is generally a good investment, generally offers protection against inflation, and generally is a good idea. My family and I have made more money off real estate than stocks or bonds. However, there is a lot of financial risk and headache involved. It is in no way comparable to a bond.
For the record, I plan to own a home in almost all seasons of my life.
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Re: Home Prices
As long as you are not overly leveraged and forced to sell your house if prices fall, then i think it really doesn't matter much what house prices do. You will always just switch your current house with another house, because you need to live somewhere. For someone who doesn't have real estate yet (me), it is a different story. But I also don't hold my breath for a housing crash.
Re: Home Prices
Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
Re: Home Prices
I don't see buying a more expensive house as a purely consumption driven decision. I am one of those folks who rents less than I buy. I was a homeowner for about 25 years before renting for the last six years. When I have owned my principal residence I have never thought of it as a financial investment more consumption with hopefully a rebate at the end when I sell. Since I am tying up a lot of money in the house I want to do what I can to protect that capital so I might be willing to pay extra to be in a good school district (even though my son was going to private school), be near some mass transit, have features in house I don't personally care about but will increase appeal if I sell, etc. I would never buy the house I rent because my current neighborhood has a fair number of houses aren't the best maintained and there are (irony I know) a fair number of houses rented out. None of this bothers me as a renter but would as a buyer because I am making a long term commitment to the place. At this point my rent for a SFH is $2010/month my mortgage on a place I'd buy is just north of $3000/month at this point. I'll buy at some point but it is totally a lifestyle decision not a financial one.swaption wrote: ↑Sat May 28, 2022 6:58 am I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity.
Also to your inflation index. You don't need to have horror stories of houses falling down to show that houses can go a long time without any inflation adjustment. The houses I am looking to buy currently were often built between 20 and 10 years ago. Without exception all of them did not keep up with even our low inflation during that time. They were actually down in *nominal* dollars for years at a time nevermind inflation. With the run up in real estate over the last two years most are now around even inflation +/-. Interestingly my rent also has not gone up with inflation. My first five years of renting it went up 0% the last two 5% each year. In the 25 years of owning real estate all the money I made in it was made in the first five years in a HCOL area and I actually lost money (after accounting for ownership costs) in the 20 years I owned in a MCOL area. There is a lot of regional variation in real estate so do not extrapolate what happens once place to another.
At this time I don't personally expect a major correction but I am also in no hurry to buy and I am not in danger of being priced out of what I want to buy yet so I'll continue to watch and happily pay my now below market rent.
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Re: Home Prices
"Mortgage payment amounts have also risen—from $1,283 on a $300,000 home at the end of 2021 to $1,629 on the same home, a 27 percent increase."
I've mentioned this before. Mortgages can be thought of having ~13 year duration for a bond. I.e. for every 1% change in rates, affordability inversely changes by ~13%. Glad this author comes to the same conclusion. The effect on prices is in terms of loan affordability which works much faster on prices as rates decline and affordability increases. People are quick to raise prices, reluctant to decrease.
Whether or not it's an investment that keeps with inflation, it can be a muddied calculation. Especially in cases where it can be cheaper to rent and opportunity costs would preserve your saved capital better. We've recently ran through scenarios incorporating
1. Monthly house payment + taxes + maintenance;
2. House appreciation;
3. Monthly rent;
4; Rent appreciation
5; Monthly expenses w/ a home + inflation;
6. Monthly expenses w/ renting plus inflation;
7. Fed and state tax savings, potentially;
8. Opportunity cost of investing the DP and any addt'l monthly savings from 1-6 above if rented
Found that it can be hard to come out ahead in the first 10 years of owning. Largely due to things that have no bearing on my loan itself. At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
I've mentioned this before. Mortgages can be thought of having ~13 year duration for a bond. I.e. for every 1% change in rates, affordability inversely changes by ~13%. Glad this author comes to the same conclusion. The effect on prices is in terms of loan affordability which works much faster on prices as rates decline and affordability increases. People are quick to raise prices, reluctant to decrease.
Whether or not it's an investment that keeps with inflation, it can be a muddied calculation. Especially in cases where it can be cheaper to rent and opportunity costs would preserve your saved capital better. We've recently ran through scenarios incorporating
1. Monthly house payment + taxes + maintenance;
2. House appreciation;
3. Monthly rent;
4; Rent appreciation
5; Monthly expenses w/ a home + inflation;
6. Monthly expenses w/ renting plus inflation;
7. Fed and state tax savings, potentially;
8. Opportunity cost of investing the DP and any addt'l monthly savings from 1-6 above if rented
Found that it can be hard to come out ahead in the first 10 years of owning. Largely due to things that have no bearing on my loan itself. At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
Re: Home Prices
Which goes to the basic flawed assumption of the whole argument.swaption wrote: ↑Sat May 28, 2022 6:58 am Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
The house's price/rent increases with the inflation. If the particular house that you own does not do that, the whole idea of somehow the house/rent is inflation indexed or linked falls apart.
There maybe no relationship between the house's price/rent that you bought versus the inflation at all.
Please explain to us why the house that we bought must be related to inflation somewhat.
A person can be drown in a lake with an average depth of 3 inches. This is personal finance. We only buy one house at a time. If where we stand in the lake is 10 feet deep, we would be drown. It is pointless to tell us that the average depth of the lake is 3 inches. Statistic only comes into play if we buy at least 20 houses at the same time.
KlangFool
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Re: Home Prices
One thing that hasn’t been discussed is the impact of government intervention in a downturn. The memory of 2008 is burned into the collective consciousness. It seems likely the federal government and Fed would do things to backstop a major downturn impacting home prices. This stimulus would have profound impact on all home owners but it cannot be captured or quantified.
The way I look at it, the government wants people to own homes. They subsidize mortgage rates through FNMA and FMCC. You get a tax deduction on interest. You can put as little as 3% down. It’s a social good that is part of the “American Dream”.
The government also understands that a home is the largest expense of most individuals and represents the majority of savings for all Americans (unlike bogleheads).
If you wanted to capture this impact, you’d have to discount the downside. Most of the math here assumes a constant rate of inflation with no variance. A more appropriate one should consider Monte Carlo analysis like the other retirement calculators. That would allow you to play with the parameters and quantify a risk profile that fits for each person.
The way I look at it, the government wants people to own homes. They subsidize mortgage rates through FNMA and FMCC. You get a tax deduction on interest. You can put as little as 3% down. It’s a social good that is part of the “American Dream”.
The government also understands that a home is the largest expense of most individuals and represents the majority of savings for all Americans (unlike bogleheads).
If you wanted to capture this impact, you’d have to discount the downside. Most of the math here assumes a constant rate of inflation with no variance. A more appropriate one should consider Monte Carlo analysis like the other retirement calculators. That would allow you to play with the parameters and quantify a risk profile that fits for each person.
Re: Home Prices
In supply-constrained locations any real estate will keep up with inflation. It's very simple. If the location where you have more folks moving in than out then prices/rents keep rising otherwise all bets are off.KlangFool wrote: ↑Sat May 28, 2022 9:48 amWhich goes to the basic flawed assumption of the whole argument.swaption wrote: ↑Sat May 28, 2022 6:58 am Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
The house's price/rent increases with the inflation. If the particular house that you own does not do that, the whole idea of somehow the house/rent is inflation indexed or linked falls apart.
KlangFool
Will there be ups and downs in the uptrend, of course. But real estate can be a good part of anyone's portfolio.
Is there risk and whether it's compensated I think that's the real question. And I contend that in supply-constrained locations the risk is compensated.
As the adage goes 'in real estate location is everything'.
superstition: belief that market will one day come around to your concept of fair value
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Re: Home Prices
KlangFool, do you think that on average a house is more likely to track inflation or not track inflation? Do you assume other things do not go up with inflation, like healthcare, education, etc, or for some reason only houses? Can you explain why a tangible asset like a house would uniquely *not* track inflation?
Re: Home Prices
Young Boglehead,Young Boglehead wrote: ↑Sat May 28, 2022 10:32 am KlangFool, do you think that on average a house is more likely to track inflation or not track inflation? Do you assume other things do not go up with inflation, like healthcare, education, etc, or for some reason only houses? Can you explain why a tangible asset like a house would uniquely *not* track inflation?
Do you buy 20 houses at 20 locations at the same time?
If not, how does the average matters to you?
"Can you explain why a tangible asset like a house would uniquely *not* track inflation?"
Why should the house that you bought tracked inflation? My friend bought his house in Maryland at 2005. He sold his house in 2020 at the 2005 nominal price level.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Home Prices
SB1234,SB1234 wrote: ↑Sat May 28, 2022 10:21 amIn supply-constrained locations any real estate will keep up with inflation. It's very simple. If the location where you have more folks moving in than out then prices/rents keep rising otherwise all bets are off.KlangFool wrote: ↑Sat May 28, 2022 9:48 amWhich goes to the basic flawed assumption of the whole argument.swaption wrote: ↑Sat May 28, 2022 6:58 am Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
The house's price/rent increases with the inflation. If the particular house that you own does not do that, the whole idea of somehow the house/rent is inflation indexed or linked falls apart.
KlangFool
Will there be ups and downs in the uptrend, of course. But real estate can be a good part of anyone's portfolio.
Is there risk and whether it's compensated I think that's the real question. And I contend that in supply-constrained locations the risk is compensated.
As the adage goes 'in real estate location is everything'.
You had answered your question.
A person could be buying a house when people are moving in. Then, after the house is bought, folks starts moving out. This is called housing bubble.
Many folks overstretched to buy theirs houses. If the employment collapsed in that area, then, the demand would collapsed too.
"And I contend that in supply-constrained locations the risk is compensated."
Only if the demand side is growing and not collapsing. Supply versus demand. Basic Econ 101.
In many places, real estates go in cycles. And, the cycles could be very long (10 to 20 years).
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Home Prices
Yes there is risk in stock investments also. Markets can be down for 20 plus years. Spread your investments around and hope for the best. That's all anyone can do.KlangFool wrote: ↑Sat May 28, 2022 10:45 amSB1234,SB1234 wrote: ↑Sat May 28, 2022 10:21 amIn supply-constrained locations any real estate will keep up with inflation. It's very simple. If the location where you have more folks moving in than out then prices/rents keep rising otherwise all bets are off.KlangFool wrote: ↑Sat May 28, 2022 9:48 amWhich goes to the basic flawed assumption of the whole argument.swaption wrote: ↑Sat May 28, 2022 6:58 am Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
The house's price/rent increases with the inflation. If the particular house that you own does not do that, the whole idea of somehow the house/rent is inflation indexed or linked falls apart.
KlangFool
Will there be ups and downs in the uptrend, of course. But real estate can be a good part of anyone's portfolio.
Is there risk and whether it's compensated I think that's the real question. And I contend that in supply-constrained locations the risk is compensated.
As the adage goes 'in real estate location is everything'.
You had answered your question.
A person could be buying a house when people are moving in. Then, after the house is bought, folks starts moving out. This is called housing bubble.
Many folks overstretched to buy theirs houses. If the employment collapsed in that area, then, the demand would collapsed too.
"And I contend that in supply-constrained locations the risk is compensated."
Only if the demand side is growing and not collapsing. Supply versus demand. Basic Econ 101.
In many places, real estates go in cycles. And, the cycles could be very long (10 to 20 years).
KlangFool
superstition: belief that market will one day come around to your concept of fair value
Re: Home Prices
In fact it’s almost like saying because an in individual stock isn’t necessarily completely correlated with the market, that fact somehow nullifies any ability to formulate expectation and also eliminates its eligibility for consideration as an investment.SB1234 wrote: ↑Sat May 28, 2022 10:50 amYes there is risk in stock investments also. Markets can be down for 20 plus years. Spread your investments around and hope for the best. That's all anyone can do.KlangFool wrote: ↑Sat May 28, 2022 10:45 amSB1234,SB1234 wrote: ↑Sat May 28, 2022 10:21 amIn supply-constrained locations any real estate will keep up with inflation. It's very simple. If the location where you have more folks moving in than out then prices/rents keep rising otherwise all bets are off.KlangFool wrote: ↑Sat May 28, 2022 9:48 amWhich goes to the basic flawed assumption of the whole argument.swaption wrote: ↑Sat May 28, 2022 6:58 am Well, thanks for the confirmation as to the wisdom of sharing the article. While I appreciate the tragic stories of financial ruin, I think the article offers some valuable historical perspective. The response here I guess somewhat predictable. I think somewhere up there was the comment that people buy houses much nicer than what they would rent. This of course is a consumption decision, not unlike the choice between a Honda and a Mercedes. Folks also don't seem to like the inflation indexed bond analogy. Ok, let's call it an inflation indexed shelter perpetuity. Ultimately this is the goal of investing, as a bridge to ultimate consumption. Buying a house just does that more directly. Imagine if you could invest $1 mm to eat for the rest of your life, meeting that basic need of food, not unlike how a house meets the need of shelter. These are "real" investments, so by definition inflation indexed (i.e. real estate). It's kind of why we have investments like TIPS in the first place, and folks continue to innovate. I once had the opportunity to sit down and discuss with Robert Merton his project called SELFIES, cost of living indexed annuities. There is tremendous effort put into investing in such a way that parallels consumption needs. Buying a house is one of those unique assets that skips many steps along the way.
The house's price/rent increases with the inflation. If the particular house that you own does not do that, the whole idea of somehow the house/rent is inflation indexed or linked falls apart.
KlangFool
Will there be ups and downs in the uptrend, of course. But real estate can be a good part of anyone's portfolio.
Is there risk and whether it's compensated I think that's the real question. And I contend that in supply-constrained locations the risk is compensated.
As the adage goes 'in real estate location is everything'.
You had answered your question.
A person could be buying a house when people are moving in. Then, after the house is bought, folks starts moving out. This is called housing bubble.
Many folks overstretched to buy theirs houses. If the employment collapsed in that area, then, the demand would collapsed too.
"And I contend that in supply-constrained locations the risk is compensated."
Only if the demand side is growing and not collapsing. Supply versus demand. Basic Econ 101.
In many places, real estates go in cycles. And, the cycles could be very long (10 to 20 years).
KlangFool
Re: Home Prices
Nominal 5% increase in home price is 20% return on cash invested (if you put 25% down). In addition there may be tax benefits by deducting some of the expenses even past the standard deductionrunninginvestor wrote: ↑Sat May 28, 2022 9:31 am "At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
Home buying is a consumption decision. If your lifestyle benefits from mobility, getting tethered to one spot may not be the best choice.
However if you are going to stay at the same place, love the neighborhood, hate moving, have kids that are going to local schools, buying a home can reduce shelter costs over a long term. Comparison with cost of renting is comparing one dimension only in multi dimensional objects. In addition, it is usually impossible to find homes available for rent that are as nice as the homes you want to buy. So you get stuck living your years in sub standard housing, where rent increases and you are always looking for the next rental to go to.
AV111
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Re: Home Prices
KFKlangFool wrote: ↑Sat May 28, 2022 10:40 amYoung Boglehead,Young Boglehead wrote: ↑Sat May 28, 2022 10:32 am KlangFool, do you think that on average a house is more likely to track inflation or not track inflation? Do you assume other things do not go up with inflation, like healthcare, education, etc, or for some reason only houses? Can you explain why a tangible asset like a house would uniquely *not* track inflation?
Do you buy 20 houses at 20 locations at the same time?
If not, how does the average matters to you?
"Can you explain why a tangible asset like a house would uniquely *not* track inflation?"
Why should the house that you bought tracked inflation? My friend bought his house in Maryland at 2005. He sold his house in 2020 at the 2005 nominal price level.
KlangFool
You have often disparaged people from investing in RE because of your experience purchasing at the height of the 2000s housing boom. AFAIK your strong opinion has never been quantified. What type of loan did you purchase? Was it a no-doc loan? Were you aware that no-doc loans had become an issue? You were burned before but did you run head first into a burning building?
Re: Home Prices
Additionally buying a home also nicely solves the "problem" of housing for retirement years. Assuming you pay down the mortgage in the earlier years. Also it makes the expenses more predictable when you are earning as well as when you will be retired.av111 wrote: ↑Sat May 28, 2022 11:03 amNominal 5% increase in home price is 20% return on cash invested (if you put 25% down). In addition there may be tax benefits by deducting some of the expenses even past the standard deductionrunninginvestor wrote: ↑Sat May 28, 2022 9:31 am "At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
Home buying is a consumption decision. If your lifestyle benefits from mobility, getting tethered to one spot may not be the best choice.
However if you are going to stay at the same place, love the neighborhood, hate moving, have kids that are going to local schools, buying a home can reduce shelter costs over a long term. Comparison with cost of renting is comparing one dimension only in multi dimensional objects. In addition, it is usually impossible to find homes available for rent that are as nice as the homes you want to buy. So you get stuck living your years in sub standard housing, where rent increases and you are always looking for the next rental to go to.
superstition: belief that market will one day come around to your concept of fair value
Re: Home Prices
Yep, KF's right. Bought my new home in 2010 with the prices in the development going down. Thought I'd made a good purchase. Problem was, they kept going down for a few more years. Only got back to original value early during the covid surge.exodusNH wrote: ↑Sat May 28, 2022 12:36 amYou are spot on.KlangFool wrote: ↑Fri May 27, 2022 4:25 pmswaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
I bought in August of 2005. Factoring in 2% average inflation over those 17 years, I am still underwater. That's without adding in repairs and additions to the house over that period.
With that said, my PITI is less than a "good" two bedroom apartment.
Folks around the corner who purchased a couple years earlier than me were caught holding the bag. Only in the last six months have they returned to their 2008 purchase price, and that's after they added finished basements, decks, and other upgrades.
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Re: Home Prices
Yep, I never try and incorporate the risk-adjusted opportunity cost returns bc of the leverage in the home. Sure, if I used the savings and margined it, it'd likely increase my savings in renting over buying (if it was cheaper in rent v buy). But if I got margin called bc stocks fell, I could lose that asset. If housing declined, as long as I could still make payments to the bank, I won't have to sell and can keep my (depreciated) asset and consume it. Which is always nice.SB1234 wrote: ↑Sat May 28, 2022 11:18 amAdditionally buying a home also nicely solves the "problem" of housing for retirement years. Assuming you pay down the mortgage in the earlier years. Also it makes the expenses more predictable when you are earning as well as when you will be retired.av111 wrote: ↑Sat May 28, 2022 11:03 amNominal 5% increase in home price is 20% return on cash invested (if you put 25% down). In addition there may be tax benefits by deducting some of the expenses even past the standard deductionrunninginvestor wrote: ↑Sat May 28, 2022 9:31 am "At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
Home buying is a consumption decision. If your lifestyle benefits from mobility, getting tethered to one spot may not be the best choice.
However if you are going to stay at the same place, love the neighborhood, hate moving, have kids that are going to local schools, buying a home can reduce shelter costs over a long term. Comparison with cost of renting is comparing one dimension only in multi dimensional objects. In addition, it is usually impossible to find homes available for rent that are as nice as the homes you want to buy. So you get stuck living your years in sub standard housing, where rent increases and you are always looking for the next rental to go to.
Edit to add:
I'm not against homeownership. I have a mobility disability so there's added non-financial benefits of owning an accessible home if accessible renting options aren't available, coupled with the peace of not moving which is inherently annoying w/ a disability. I was just trying to convey that although home appreciation may keep up with inflation, there are other financial factors that can reduce the inflation protection. Property taxes here are high, basically 3% in perpetuity (diminishing tho after 65 since there is a senior freeze available in IL). That plus monthly homeownership specific expenses are heavy carrying costs that drag on the inflation protection, unfortunately. Although renting will see similar price increases, at least prop taxes and expenses get diversified and spread amongst units.
Re: Home Prices
If you are a "homebody" (like me), then owning a house on lots of acreage and trees is paradise, while renting an apartment is a nightmare. Different strokes for different folks.
There is no free lunch.
Re: Home Prices
Property tax regimes do not change overnight. So even in a high property tax location, the cost will not change as much as they can change if you rent.runninginvestor wrote: ↑Sat May 28, 2022 11:53 amYep, I never try and incorporate the risk-adjusted opportunity cost returns bc of the leverage in the home. Sure, if I used the savings and margined it, it'd likely increase my savings in renting over buying (if it was cheaper in rent v buy). But if I got margin called bc stocks fell, I could lose that asset. If housing declined, as long as I could still make payments to the bank, I won't have to sell and can keep my (depreciated) asset and consume it. Which is always nice.SB1234 wrote: ↑Sat May 28, 2022 11:18 amAdditionally buying a home also nicely solves the "problem" of housing for retirement years. Assuming you pay down the mortgage in the earlier years. Also it makes the expenses more predictable when you are earning as well as when you will be retired.av111 wrote: ↑Sat May 28, 2022 11:03 amNominal 5% increase in home price is 20% return on cash invested (if you put 25% down). In addition there may be tax benefits by deducting some of the expenses even past the standard deductionrunninginvestor wrote: ↑Sat May 28, 2022 9:31 am "At ~3% property taxes (welcome to IL) + 1% deferred maintenance + 5% interest rates, the gain of home appreciation has a hard time keeping up and coming ahead even as I'm comparing leveraged investment to standard savings.
The article's nominal home appreciation can maybe be eyeballed around 5%. Between 3% taxes, 1% maintenance, 5% int rates, in our state/locality that nominal 5% needs to be more if we are at to come out ahead between what it currently costs to rent vs buying. Owning a home would provide us with less money over time.
Home buying is a consumption decision. If your lifestyle benefits from mobility, getting tethered to one spot may not be the best choice.
However if you are going to stay at the same place, love the neighborhood, hate moving, have kids that are going to local schools, buying a home can reduce shelter costs over a long term. Comparison with cost of renting is comparing one dimension only in multi dimensional objects. In addition, it is usually impossible to find homes available for rent that are as nice as the homes you want to buy. So you get stuck living your years in sub standard housing, where rent increases and you are always looking for the next rental to go to.
Edit to add:
I'm not against homeownership. I have a mobility disability so there's added non-financial benefits of owning an accessible home if accessible renting options aren't available, coupled with the peace of not moving which is inherently annoying w/ a disability. I was just trying to convey that although home appreciation may keep up with inflation, there are other financial factors that can reduce the inflation protection. Property taxes here are high, basically 3% in perpetuity (diminishing tho after 65 since there is a senior freeze available in IL). That plus monthly homeownership specific expenses are heavy carrying costs that drag on the inflation protection, unfortunately. Although renting will see similar price increases, at least prop taxes and expenses get diversified and spread amongst units.
So even in high property tax places you will still get inflation protection. But I agree it is not absolute inflation protection. But even TIPS don't provide that.
Housing costs don't go to zero even if you own your home. They just become more predictable and hence make it easier to plan for.
The fact remains that If you own your home in retirement you will still be more resilient against unexpected inflation than if you did not own.
superstition: belief that market will one day come around to your concept of fair value
Re: Home Prices
I see many areas in my neck of the woods where 2005-2008 prices have only recently been surpassed (nominal). It really goes to show how completely out of control those years were back then. Some zips have far exceeded 05-08, but when everything is accounted for may have only kept up w/ inflation..they're the minority.Tdubs wrote: ↑Sat May 28, 2022 11:26 amYep, KF's right. Bought my new home in 2010 with the prices in the development going down. Thought I'd made a good purchase. Problem was, they kept going down for a few more years. Only got back to original value early during the covid surge.exodusNH wrote: ↑Sat May 28, 2022 12:36 amYou are spot on.KlangFool wrote: ↑Fri May 27, 2022 4:25 pmswaption,swaption wrote: ↑Fri May 27, 2022 3:49 pm
For me, a house is in many ways no different than an inflation indexed bond, where it pays you an annual real coupon in the form of imputed rent, The value of the coupon would be expected to increase with inflation as rents would be expected to increase with inflation.
Real estate is local. That assumption may be true or may not be true in your local area.
In my neighborhood, the house's price hit a peak near 2004/2005. It did not recover to that nominal value until 2019. Hence, it did not increase with inflation for 14/15 years.
It is entirely possible for someone to buy a house at the peak of a housing bubble. Then, the house's crash and did not recover for the next 10 to 20 years. Much less keeping up with the inflation.
And, a person buys a house. The person is not buying the whole housing market.
KlangFool
I bought in August of 2005. Factoring in 2% average inflation over those 17 years, I am still underwater. That's without adding in repairs and additions to the house over that period.
With that said, my PITI is less than a "good" two bedroom apartment.
Folks around the corner who purchased a couple years earlier than me were caught holding the bag. Only in the last six months have they returned to their 2008 purchase price, and that's after they added finished basements, decks, and other upgrades.
If you're confident you'll stay put for 10+ yrs - default is buy.
If not- default is rent
Everything else becomes a grey area, and really property dependent.
Re: Home Prices
Seems like bogus article. All correlation no causation. Doesn’t talk about home size increase.
A good strategy that worked for me is to buy a house where the initial interest portion of the mortgage is close to rent one would have paid, and the rest can be considered forced saving. Even though a home might just appreciate at the rate of inflation, you have leverage on your side.
If things go south, enough people have walked away from their houses so there is only limited downside.
When we bought our home in Redmond, WA in 2010, rent was $1600 for a 1100 sqft townhome.
We were able to buy a 2200 sqft home with a total monthly payment of $2400.
So for the same amount of ‘rent’ paid to the bank, we got a bigger home.
Got lucky too - home appreciated from 550K to 1.8M now.
Coming back to why correlation seems bogus - author isn’t taking of the delta in interest rates - isn’t looking for times where homes got insanely overpriced due to low interest rates + speculative froth in the market…
So I’d go back to my recommendation- buy a home if the interest will be the same as rent and hopefully things will pan out. Also - it’s forced savings - money that would be spent on frivolous stuff is now going into the home. And leverage.
A good strategy that worked for me is to buy a house where the initial interest portion of the mortgage is close to rent one would have paid, and the rest can be considered forced saving. Even though a home might just appreciate at the rate of inflation, you have leverage on your side.
If things go south, enough people have walked away from their houses so there is only limited downside.
When we bought our home in Redmond, WA in 2010, rent was $1600 for a 1100 sqft townhome.
We were able to buy a 2200 sqft home with a total monthly payment of $2400.
So for the same amount of ‘rent’ paid to the bank, we got a bigger home.
Got lucky too - home appreciated from 550K to 1.8M now.
Coming back to why correlation seems bogus - author isn’t taking of the delta in interest rates - isn’t looking for times where homes got insanely overpriced due to low interest rates + speculative froth in the market…
So I’d go back to my recommendation- buy a home if the interest will be the same as rent and hopefully things will pan out. Also - it’s forced savings - money that would be spent on frivolous stuff is now going into the home. And leverage.
Re: Home Prices
My son bought a 1br 675 sq ft condo 11 years ago for 165,000.
He sold it last week to an all cash buyer from HK for 500,000.
Location, location, location.
He sold it last week to an all cash buyer from HK for 500,000.
Location, location, location.
Last edited by hoops777 on Sat May 28, 2022 2:01 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.
Re: Home Prices
That is a lifestyle decision not the point OP was making. I think most folks would agree if you want to do x for lifestyle and can afford it go for it.
Re: Home Prices
We went from 1700 sq ft rental in a bad school district in city to 3400 sq ft house in top school district in the state. Our rent+city income tax is equal to mortgage + property tax. House is 10X better level in comfort, construction and design also. It was a no brainer for us.
Re: Home Prices
A house you own and live in is a hybrid of investment and consumption. Any method which tries to simplify it into just one of those two things is wrong. I agree though there's not a lot of detectable movement of particular people who insist it's just one or the other. Those mistakenly considering it just consumption are more numerous here, perhaps other way around to US society generally, and the 'house is not an investment' people seem to sometimes justify their incorrect position as a kind of counterweight to the other position because it's more common and more incorrect in their view.swaption wrote: ↑Fri May 27, 2022 9:42 pm Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. It pays you the money you th n don’t have to pay in rent. It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
But you can also just view it correctly. The house is an investment, a risk asset you own. You will absolutely benefit if it goes up in real price after tax (though that's not gteed, it's a *risk* asset, not gteed stocks will go up either). However you are consuming the owner imputed rent you'd collect if you owned it and rented it to somebody else, while still needing to pay for its upkeep (as you'd also do if you owned it and rented it to somebody else). The easy classic comparison is a) buy a $500k SFH or b) buy a $500 duplex in same market, assume same upkeep same appreciation rate: live in half, rent out half. You 'have to live somewhere' but if the somewhere could be a $250k house, there's a cost to living in a $500k house. That's the hybrid component in a nutshell. $500k house is an investment, but the $500k duplex is a better investment, as would be $250k house and $250k in financial assets with same price risk as a house. There's a discretionary consumption drag in choosing a house with imputed rent higher than what you'd be willing to pay in cash. That's neglecting tax effects, debt can change the specific risk, mortgage terms can change whether the whole house price or just the equity is at risk*, lack of diversification comes into play if the house price/equity* is very big in your whole portfolio but I believe if one gets the basic idea of the simple example then they are on the right track.
*if the mortgage is non-recourse as standard in some states then the leveraged asset 'home equity' is meaningful, a levered asset w/ value truncated at zero, 'mail the keys to the bank' worst case. If the mortgage is recourse as in most states (but excluding the 2 most populous among others) and you have significant other assets, 'home equity' is not a very meaningful concept. It's then more correct to think of the mortgage as levering your whole portfolio, since your whole portfolio is at risk to repay it if house prices drop drastically and you need to sell.
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Re: Home Prices
Im asking about the "average" specifically because you're using anecdotes to assume that no inflation in housing costs is a better input than assuming inflation. My cousin bought a place in socal for 2m a couple years ago and now its worth 3.5m. Would I tell people that they should assume a 50% appreciation in a couple years? No i wouldn't, but that's as unreasonable as what you're saying.KlangFool wrote: ↑Sat May 28, 2022 10:40 amYoung Boglehead,Young Boglehead wrote: ↑Sat May 28, 2022 10:32 am KlangFool, do you think that on average a house is more likely to track inflation or not track inflation? Do you assume other things do not go up with inflation, like healthcare, education, etc, or for some reason only houses? Can you explain why a tangible asset like a house would uniquely *not* track inflation?
Do you buy 20 houses at 20 locations at the same time?
If not, how does the average matters to you?
"Can you explain why a tangible asset like a house would uniquely *not* track inflation?"
Why should the house that you bought tracked inflation? My friend bought his house in Maryland at 2005. He sold his house in 2020 at the 2005 nominal price level.
KlangFool
It's like saying that you should assume 0 growth in US stocks because from 2000-2010 there was 0 growth. Yes, there are always outlier periods, but I think it would be foolish to assume that's normal. Practically though, I agree with you that people are more likely to overextend when they think of it as an investment, and buying a house should be looked at as a lifestyle choice and expense primarily.
Re: Home Prices
Is paying to install solar panels considered an investment? How is buying a house different?
Re: Home Prices
swaption,
Back to the question that we asked and you did not answer.
Do you assume that the house would appreciate?
A) If the answer is no, why would you consider the house as an investment?
B) If yes, how would a person knows that to be true? Hope to be lucky is not a strategy.
Please answer that first.
KlangFool
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Re: Home Prices
I apologize in advance if I misunderstood you. To be honest, I don't agree with your logic of comparing a 500k sfh with a 500k duplex and then saying that latter is a better investment. They are not directly comparable in my opinion in anything except one dimension. Nuance may not matter to someone and may matter to others. Yes duplex is a better investment but it is not a better living choice if you are looking for a sfh.JackoC wrote: ↑Sat May 28, 2022 4:03 pmA house you own and live in is a hybrid of investment and consumption. Any method which tries to simplify it into just one of those two things is wrong. I agree though there's not a lot of detectable movement of particular people who insist it's just one or the other. Those mistakenly considering it just consumption are more numerous here, perhaps other way around to US society generally, and the 'house is not an investment' people seem to sometimes justify their incorrect position as a kind of counterweight to the other position because it's more common and more incorrect in their view.swaption wrote: ↑Fri May 27, 2022 9:42 pm Kind of speechless folks. Been involved in these forums now for decades and the wisdom on this topic has seemingly not evolved one iota. Of course housing is consumption, but it’s not discretionary. Allocating capital to a house is very much an investment. It pays you the money you th n don’t have to pay in rent. It’s not unlike investing in solar panels, it pays you money you don’t have to spend on electricity.
But you can also just view it correctly. The house is an investment, a risk asset you own. You will absolutely benefit if it goes up in real price after tax (though that's not gteed, it's a *risk* asset, not gteed stocks will go up either). However you are consuming the owner imputed rent you'd collect if you owned it and rented it to somebody else, while still needing to pay for its upkeep (as you'd also do if you owned it and rented it to somebody else). The easy classic comparison is a) buy a $500k SFH or b) buy a $500 duplex in same market, assume same upkeep same appreciation rate: live in half, rent out half. You 'have to live somewhere' but if the somewhere could be a $250k house, there's a cost to living in a $500k house. That's the hybrid component in a nutshell. $500k house is an investment, but the $500k duplex is a better investment, as would be $250k house and $250k in financial assets with same price risk as a house. There's a discretionary consumption drag in choosing a house with imputed rent higher than what you'd be willing to pay in cash. That's neglecting tax effects, debt can change the specific risk, mortgage terms can change whether the whole house price or just the equity is at risk*, lack of diversification comes into play if the house price/equity* is very big in your whole portfolio but I believe if one gets the basic idea of the simple example then they are on the right track.
*if the mortgage is non-recourse as standard in some states then the leveraged asset 'home equity' is meaningful, a levered asset w/ value truncated at zero, 'mail the keys to the bank' worst case. If the mortgage is recourse as in most states (but excluding the 2 most populous among others) and you have significant other assets, 'home equity' is not a very meaningful concept. It's then more correct to think of the mortgage as levering your whole portfolio, since your whole portfolio is at risk to repay it if house prices drop drastically and you need to sell.
Also people who want to compare rent with PITI also make the same mistake. Quality of the shelter is not directly comparable. Ask your friends who own their homes if they can find and move into a similar rental at less cost. I get it that we make choices for our lifestyle but consumption is the only reason most people buy the home they live in. Don't care if the price appreciates or falls they just care about the payment. Home is unique for them. If it stops being good or money is not there, they find another shelter. Loss or profit at that time is just a number because the decision is driven by need
AV111
- HMSVictory
- Posts: 1710
- Joined: Sun Nov 01, 2020 6:02 am
- Location: Lower Gun Deck
Re: Home Prices
You can't live in the bond!
I think higher rates will dampen home price appreciate but I do not think values will go down for one simple reason; demand is very high and supply is limited. The cost to build new is extremely high and in my area there is not a lot of available land to build on unless you want to commute 45 mins each way (unless you are 100% remote - then who cares). WFH and crime has driven many people from the City centers and they have fled to the suburbs. I don't see this trend reversing but who knows?
I bought my first house in the depths of the GFC for $385k and sold it 6 years later for $434k.
Bought my second house for $565k and just sold it for $750k. Building my new place for just under $1M.
So I'm up around $234k (minus upgrades, Interest, taxes, transaction costs, fee, ect, ect)..... most people do not include these in the numbers.
First house IRR was 2% and the second one was around 4% so I beat inflation but not by a lot. My equity index funds have destroyed these returns as I'm around 10% per year on average. YMMV
I think higher rates will dampen home price appreciate but I do not think values will go down for one simple reason; demand is very high and supply is limited. The cost to build new is extremely high and in my area there is not a lot of available land to build on unless you want to commute 45 mins each way (unless you are 100% remote - then who cares). WFH and crime has driven many people from the City centers and they have fled to the suburbs. I don't see this trend reversing but who knows?
I bought my first house in the depths of the GFC for $385k and sold it 6 years later for $434k.
Bought my second house for $565k and just sold it for $750k. Building my new place for just under $1M.
So I'm up around $234k (minus upgrades, Interest, taxes, transaction costs, fee, ect, ect)..... most people do not include these in the numbers.
First house IRR was 2% and the second one was around 4% so I beat inflation but not by a lot. My equity index funds have destroyed these returns as I'm around 10% per year on average. YMMV
Last edited by HMSVictory on Sat May 28, 2022 6:17 pm, edited 3 times in total.
Stay the course!