Interesting segment on Home Ownership as an investment

[RhythmKats]

I listened to this segment on my local NPR station today. The guest, Catherine Rampell, is a journalist from the Washington Post who recently authored an article about home ownership in the US. I haven't had a chance to read the article, but I did listen to the radio interview and found it interesting. I know many readers here also read JL Collins and he has posted similar thoughts on this topic. Just thought I'd share. The segment and the original article are linked below.

http://www.wnyc.org/story/should-we-not-care-about-owning-home/

http://www.washingtonpost.com/opinions/catherine-rampell-americans-think-owning-a-home-is-better-for-them-than-it-is/2014/04/21/5e9f4dd2-c979-11e3-93eb-6c0037dde2ad_story.html

[frugalecon]

People just need to be realistic that, by and large, owning a home is a consumption activity, not an investment activity. The structure in particular depreciates every year.

For me and my partner, owning a home has made sense, because it has enabled us to have a house that is well matched to our tastes and needs. It is harder to find a rental house that lines up exactly to what a person is looking for. When we bought it, we anticipated owning it for at least 25 years.

[Spork]

Interesting.  I can't really disagree with the article.  IMO, the importance of home ownership (at least in the US) seems really tied to the government heavily promoting it through tax incentives, artificially low interest rates, etc. 

[Workinghard]

Glad most Americans view home ownership as an investment and important.  We will be putting our home on the market in January. Florida anyone? No state income tax and mild winters (unless you're a resident and then it gets cold).

[wtjbatman]

Just to look at things in terms beyond investments and rate of returns, areas with higher home ownership rates also have lower crime rates on average. The statistics are less obvious in neighborhoods populated primarily by minorities, but overall, home ownership seems to have a positive impact on the quality of life in a given area.

[thesinecure]

this is such an impossible assessment to do, though, as there are cases on both sides

in my specific example, home ownership was the best "investment" we made in the last 10 years, and the house we moved into 18 months ago is probably worth 20-30% more than what we paid for it

these sorts of broad analysis don't really delve into what is a very important part of real estate, whether investing or otherwise - location location location

i never considered our house an investment, it just worked out that way - but then again, i approached the purchase process similar to how i would evaluate an investment, as I believe thinking of it that way can help you reduce risk of decline and/or frame the economics of the purchasing decision in a better way besides just emotional

[Justin234]

this is such an impossible assessment to do, though, as there are cases on both sides

in my specific example, home ownership was the best "investment" we made in the last 10 years, and the house we moved into 18 months ago is probably worth 20-30% more than what we paid for it

these sorts of broad analysis don't really delve into what is a very important part of real estate, whether investing or otherwise - location location location

i never considered our house an investment, it just worked out that way - but then again, i approached the purchase process similar to how i would evaluate an investment, as I believe thinking of it that way can help you reduce risk of decline and/or frame the economics of the purchasing decision in a better way besides just emotional

I don't think it is unreasonable to make this analysis, even if it requires generalities. Just like we can say that investing in stocks tends to be a good idea in the long run, even though specific stocks could tank, and the stock market could tank (or do the opposite) over a given period; we can also say that real estate is not always as lucrative as stocks over the long haul. The point is that people consider home ownership an ideal form of investment - ala, "I want to buy because renting is just like throwing my money away" - when there are a lot of downsides and ways that your return can be sucked away (closing costs; interest; repairs/upkeep; being tied in geographically).

Also, regarding your own house: you can't really draw conclusions from anecdote; also, you home value may be worth 20-30% more than 18 months ago, but that means nothing until you sell. It could drop next year.  Meanwhile, you are paying interest and closing costs, repairs, etc. And there is opportunity cost involved with your down payment which could have been invested in the market over the last 18 months, and would have grown substantially. Speaking of which, the stock market increased a lot in the last 18 months, 20-30% increase in home value isn't comparatively much better.

This is not to say that your decision was not good, but these are thinks that people don't typically think about when buying a house. I think a lot of people (non-mustachians) use mortgages as a way of saving. If they were not saving that money, they'd be spending it. But if you are actually focused on saving/investing, then renting and then investing in stocks might be a much better choice.

[thesinecure]

Also, regarding your own house: you can't really draw conclusions from anecdote; also, you home value may be worth 20-30% more than 18 months ago, but that means nothing until you sell. It could drop next year.  Meanwhile, you are paying interest and closing costs, repairs, etc. And there is opportunity cost involved with your down payment which could have been invested in the market over the last 18 months, and would have grown substantially. Speaking of which, the stock market increased a lot in the last 18 months, 20-30% increase in home value isn't comparatively much better.

it's only anecdote because i haven't decided to sell, but that's fine.  not picking on you specifically, but this forum is WAY too caught up in that concept.  but fine, if you want real facts on this specific situation, let's just take the house i owned before.

i agree that it could go down the same as anything else, but my house is no different than any other investment until i sell it.  it's paper profit, regardless of asset class.  however, i'm sure we both agree the house is far less liquid than most other assets.

we bought the house for $220k in 2003 which included all closing costs, 5% down (so initial outlay of $11k).  total payments over the 10 years were $165k (principal was just shy of $71k).  We sold for $454k, which netted us $272k at closing.

We put out principal of $82k, got $272k back, so net gain of $190k.

to get the same out of another "investment", and giving those monthly principal payments the benefit of being fully invested at the beginning for an alternative investment, we'd have needed a recurring @ 9.8% return.  if i bump that over to monthly investment for the alternative, the required return jumps several more percentage points - you get the point I'm making.

of course I had property tax and maintenance, but for simplicity if we just say those were equal to what renting would have cost me (and those are probably equivalent here meaning I could rent something for a similar cost in my market).

house wins hands down.

My main point?  Buying a house with a mortgage is more akin to investing with leverage, and i submit that investing with leverage is a MUCH different risk profile than buying a house.

(as I'm typing I see another post regarading leverage, which is also part of my point)

[thesinecure]

and to reiterate from my previous post, i approached our home buying like it would potentially be an investment (so I considered size, cost, location, school districts, all the types of things that could matter for a house, same as you would evaluate markets/balance sheet/income statement, etc for any investment you'd consider)

i believe that helped me make a much better decision that gave me potential for upside, that the "average" house in most markets won't necessarily give you

those broad generalities about home ownership can't really be done, because they're not differentiating each situation, or said differently they don't consider the different types of "asset classes" that exist between homes

they take broad statistics and make broad conclusions that aren't useful

[Poorman]

You can't live in a Vanguard account.  The ability to live in a house is a non-cash dividend that stocks just don't pay.

[dragoncar]

You can't live in a Vanguard account.  The ability to live in a house is a non-cash dividend that stocks just don't pay.

Factoring in imputed rent, I think it can be a good investment due to leverage.  Rough example:

Buy $100k house for $20k down at 4.3% interest, 1.2% property tax, 1% other expenses.  The house could be rented for $1000/mo (1% rule) and appreciates at average inflation of 3.2% (zero "real" appreciation).

First year, you pay $3440 in interest and $1200 in property tax, $1000 in other expenses.  You earn/save $12k in imputed rent, and the house appreciates $3200.  Your net gain is $9560, which is 47.8% return on equity.

Now I know I'm screwing something up because this looks too good.  Is it because a 1% rule house is already priced really well?  Even with $500/mo imputed rent the RoE is 17.5%. 

[Justin234]

it's only anecdote because i haven't decided to sell, but that's fine.  not picking on you specifically, but this forum is WAY too caught up in that concept.  but fine, if you want real facts on this specific situation, let's just take the house i owned before.

What I meant by anecdotal is that one person's positive experience (yours) doesn't mean that the message of the article is invalid. If I foreclosed on an underwater house a few years ago during the housing collapse, it would be equally anecdotal for me to say that that proves real estate is a bad investment.

Regarding the concept that you can only count a gain when you have sold it (I think that is what you meant this forum is way too caught up in) - I agree that it can be drawn out to absurdity - at a certain point you have to be able to "count" your gains as gains - but still, in the context of long-term stache-building and FIREing, 18 months is a very short time period to assess return.

i agree that it could go down the same as anything else, but my house is no different than any other investment until i sell it.  it's paper profit, regardless of asset class.  however, i'm sure we both agree the house is far less liquid than most other assets.

we bought the house for $220k in 2003 which included all closing costs, 5% down (so initial outlay of $11k).  total payments over the 10 years were $165k (principal was just shy of $71k).  We sold for $454k, which netted us $272k at closing.

We put out principal of $82k, got $272k back, so net gain of $190k.

to get the same out of another "investment", and giving those monthly principal payments the benefit of being fully invested at the beginning for an alternative investment, we'd have needed a recurring @ 9.8% return.  if i bump that over to monthly investment for the alternative, the required return jumps several more percentage points - you get the point I'm making.

of course I had property tax and maintenance, but for simplicity if we just say those were equal to what renting would have cost me (and those are probably equivalent here meaning I could rent something for a similar cost in my market).

house wins hands down.

My main point?  Buying a house with a mortgage is more akin to investing with leverage, and i submit that investing with leverage is a MUCH different risk profile than buying a house.

(as I'm typing I see another post regarading leverage, which is also part of my point)

You obviously made a good investment. I am not against buying a home, by any means - if the timing had worked out, I would have bought one in my area 2 years ago and it would have shown a similar increase in value (maybe we're in the same inflated market!) As it happened I couldn't logistically buy anything, and by the time I could, prices had risen a lot. Still, we were getting a lot of encouragement to buy buy buy at low interest rates, even as average prices for houses in our category went from $325,000 to $425,000 in asking price. Had we heeded the advice that buying a house is always a good investment, and bought high, I feel very confident that we would have regretted it. This is why I think the message in the original article is important.

[Justin234]

You can't live in a Vanguard account.  The ability to live in a house is a non-cash dividend that stocks just don't pay.

The basement of your Vanguard account can't flood, and it's sewer line can't break. The ability to not have to deal with flooded basement or broken sewer line is a non-cash dividend that houses just don't pay.

(see my previous comment where I say that I'm not against buying houses; I just appreciate that, right now, I don't have to think one iota about upkeep or expensive repairs since I'm renting and putting all my extra cash into stocks)

[waltworks]

Yeah, you are missing a few things.

-First, 1% maintenance is probably low. Not always, but often, especially if you're looking at a cheaper or older house.

-Second, you'll pay significant closing costs when purchasing. Exactly how much will vary some but figure a couple percent, minimum, once you include title insurance, all the damn fees, inspections, etc. Could be up to 3 or 4% easily.

-Selling costs will eat 6-10% depending on the situation, so when you buy that $100k house, it's paper value might be $100k, but it's only going to net you $90-95k if you sell it.

-Unless you satisfy the occupancy requirements (not super hard, but still relevant to the discussion) you'll pay capital gains tax on any increase in value when you sell, so that knocks another bit off what you'll net in a sale in some cases.

Of course there are (in the US) tax advantages if you itemize, you can think of a fixed mortgage house as an inflation hedge, etc. The calculation can get really, really complicated and we've both simplified it way too much.

So when you buy the $100k house, you will actually pay significantly more for it, and when you sell it, you'll take a big hit as well. Still could be a good deal if you run all the numbers (a 1% rule house is usually a pretty damn good deal - they don't even exist in many areas) but it's not the *immediate* slam dunk you are making it out to be.

-W

You can't live in a Vanguard account.  The ability to live in a house is a non-cash dividend that stocks just don't pay.

Factoring in imputed rent, I think it can be a good investment due to leverage.  Rough example:

Buy $100k house for $20k down at 4.3% interest, 1.2% property tax, 1% other expenses.  The house could be rented for $1000/mo (1% rule) and appreciates at average inflation of 3.2% (zero "real" appreciation).

First year, you pay $3440 in interest and $1200 in property tax, $1000 in other expenses.  You earn/save $12k in imputed rent, and the house appreciates $3200.  Your net gain is $9560, which is 47.8% return on equity.

Now I know I'm screwing something up because this looks too good.  Is it because a 1% rule house is already priced really well?  Even with $500/mo imputed rent the RoE is 17.5%.

[thesinecure]

What I meant by anecdotal is that one person's positive experience (yours) doesn't mean that the message of the article is invalid.

Still, we were getting a lot of encouragement to buy buy buy at low interest rates, even as average prices for houses in our category went from $325,000 to $425,000 in asking price. Had we heeded the advice that buying a house is always a good investment, and bought high, I feel very confident that we would have regretted it. This is why I think the message in the original article is important.

i agree with all of that, which is also why i was discussing some of my thought process of treating the house like it was an investment ultimately to try and help me make a better decision.  in our case, it made sense to sell the old and buy another, but maybe i should have added we shopped for 3 YEARS before we made the move and passed on probably 6 or more during that time.

i probably focused too much on the part of the article that said "The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either."

this is just not something i feel like in a category such as real estate anyone could really say with authority.  is it possible that it ended up not being a good investment?  sure, it's possible.  but it's equally possible the other direction as well (just ask ARebelSpy what he think about real estate, i'd love to have him go off on the "ignorance about the financial returns from real estate investments").

there are some good things to think about in the article, but there's a clear tone/bent toward saying it's not really a good idea and i just don't agree with that.  as with anything, everyone should educate themselves first, and then decide (and economics isn't the only factor in that analysis either - we much prefer having a house to an apartment, it does make our lives better - that's just us but it works)