Housing is not an investment but what if market behaves like it is?

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PURPLEHAZE_IHB

PURPLEHAZE_IHB

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I have heard this argument in a lot of debates and discussions - that housing is not an investment, houses are meant to be lived in. You got to think long-term etc. etc. etc. However, what if the majority of people out there - speculators, realtards, mortgage lenders view it as an investment and design their policies around the belief that it is an investment. Can the noble belief of a buyer over-power the sheer majority who considers housing to be an investment? I think not because the minority has to deal with the problems created by the majority belief. Whether you like it or not the majority considers housing to be an investment and you will take a hit on the value of your personal assets because of this belief. If the lendors do not have any morality why should the borrower have any? Why should the borrower not walk away from mortgage obligations?
 
I think a lot of the question about whether or not a house is an investment comes from the buyers time perspective of how long they wish to own a home. Also you need to remember that each investor and lendor exists in a world of imperfect information and can/will make bad choices.



There is a TON of mathyness on this site about how renting * a factor = the cost of home ownership with mortgages should be in line with each other (including tax breaks, savings effects, etc). And while I agree that it is good mathyness for evaluating the basic question of are you overpaying on a mortgage or getting shafted for renting it misses some long term issues.



The problem is that it assumes housing is a conventional asset that fully depreciates into a pile of dust at the end of 30 years when the mortgage is paid off to some extent which is not quite accurate.



If you look forward a few decades to when you will be old and infirm and ask the question of rent or own you will get a very different answer. Fixed income + scaling rents = bad news. If you buy a home when you are say 25 and pay off your conventional loan when you are 55 ask your self how much longer you will live after 55. 65? 75? 105?



As a country we are living longer and longer and you may want to consider what is the net present value of "rent free" housing 30 years from now until the day you die. That value is the "investment" that exists in the minds of many (even though it may not be there last house so it is an irrational idea).



If you miss a rent payment when you are old you become homeless, if you fail to upkeep your house you end up with a crappy house, but by in large you still have a somewhat leaky roof over your head and 4 walls to muddle around in until you shuffle on to better things. If you are especially frisky you can then pull off one of those new fangled reverse mortgages where you drawn down the value of your asset leaving nothing for your kids after you die giving the property even more value as a long term investment for some.



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As to morality of lendors / borrowers ... I would say there are good deals and bad deals. If it makes business sense to you to take a hit on credit with the black mark of walking away then do so. Its not a moral decision, just a business one. Still .. just like in moral dilemmas getting advice helps before you act.
 
The false belief that houses is what works to create a bubble.





<strong> <a title="Permanent Link to What is a Bubble?" rel="bookmark" linkindex="222" set="yes" href="http://www.irvinehousingblog.com/2007/12/03/what-is-a-bubble/">What is a Bubble?</a></strong>


And





<a title="Permanent Link to Houses Should Not Be a Commodity" rel="bookmark" linkindex="18" set="yes" href="http://www.irvinehousingblog.com/2007/06/25/houses-should-not-be-a-commodity/">Houses Should Not Be a Commodity</a>





That being said, the view of housing as an investment will probably return in due time and inflate another real estate bubble unless laws are passed and enforced that prevent this situation from developing again.


<em>


"you will take a hit on the value of your personal assets because of this belief."</em>





There are a great many people who are going to take a bit hit because they believed houses were an investment. Once bitten twice shy.


<em>


"Why should the borrower not walk away from mortgage obligations?"</em>





This one has been addressed in other posts and threads:





<a href="../../../discussion/1326/2/the-morality-of-walking-away-from-debt/#Item_25" linkindex="212" set="yes">The morality of walking away from debt</a>





<a title="Permanent Link to America?s Debtor Prisons" rel="bookmark" href="http://www.irvinehousingblog.com/2007/12/18/americas-debtor-prisons/">America’s Debtor Prisons </a>or <a title="Permanent Link to Are Short Sales Moral?" rel="bookmark" linkindex="15" set="yes" href="http://www.irvinehousingblog.com/2007/12/12/are-short-sales-moral/">Are Short Sales Moral?</a>
 
I completely agree with IrvineRenter on his bubble and commodity analysis.



However I submit that IrvineRenter does not address the net present value aspects I mentioned.



Even so, those invesment opportunites should not factor into most peoples decision unless they are going to stick in one place long enough reap those benefits.



Trading up homes, resetting debt for another 30 years with refi's, moving to new cities, etc ... all of that chips away at the "investment value" I mention.
 
Shade, your assumption is that when people rent they blow the difference. What if someone rents and saves the difference? Is your assumption still valid given the current market circumstances?






 
Actually I would say that the saving of renting compared to a fixed 30 year mortagae is a short term gain.



You can find better data elsewhere but it kinda goes like this.



Year 1 - 10 = Renter has clear savings compared to fixed mortgage

Year 11 - 20 = Renters annual growth of rents pulls about even with mortgage

Year 21 to 30 = Renter pays more than the homeowner



One of my inlaws was happy to pay off their last payment of their 30 year fixed in LA. The payment was well under 500, and you couldnt rent anything in their neighborhood with comp specs for under 1,500 a month easy.



Now where it gets intresting is after.



Year 31 to 60+ = Renter continual has growing rents, the home owner still has upkeep costs and prop tax but the mortgage payment is long gone and they are doing much better at this point.



Flip to your favorite investment site on the web and pull up a Net Present Value calculator. The money saved per year in this last period becomes the investment bundle. What makes it odd is that the value of this investment is largely in the head of the owner. It how long the owner feels they will live and stay in this house makes the value gained more and more.



just like everything else in a world of imperfect information the home owner frequenlty misvalues this and as a result probably "over bids" on a home when they first buy in.



If you only stay a short stay in a house or constantly upgrade, flip, refi and keep that mortgage payment fat then the renter is always going to come out ahead though.
 
Okay... simple question, does anyone remember the last housing bust? Seriously? I am not talking about just the job loss years of 91, 92, and part of 93, but 95 and 96, when there was job growth.





You can beat the rent vs. own to death all you want, but the reality is renting is better, at least right now. Take this from a stage 5 homeowner. I sit back and watch, as people try to justify buying now. And, really I hate to laugh at anyone's mistakes, because I am being hurt in the process, but I will laugh nonetheless. Hopefully I can take the longer term outlook on this, and I will come out ahead. But, there are so many who buy to upgrade later. So, fine compare the home of someone who lives there from day one, until payoff, duh... they should be ahead, way ahead. But, seriously, how many people do that now? And, how many people can buy a home, as a renter, that they could honestly see themselves in for the rest of their lives? Of the 18 homes on my cul de sac, only 2 are the original owner. That is 11% of homeowners in the tract, and probably high for most. Yeah, those 2 have beat rent big time, but what about the other 16? And they haven't been her for more than 30 years. Saying you are going to own a home for 30 years, is about as good of a chance you will own a car for 15 years. The reality is, and the likelihood of either happening, is about as likely I will shoot a rabbit. Lucky for the rabbits, the odds are highly in their favor.





No offense, but arguing the likelihood of an 11% chance, is... well... a really dumb argument.
 
Shade, whether renting or owning is the best choice over the long run depends on the prices. During the past few years, even with the longest-term view, owning has been a loser. Right now homes in the OC are getting to a price point where you have a long-term breakeven. Considering that owning a) forces you to make an enormous and constant saving (the principal plus inflation on the loan, effectively), b) sticks you with a large risk factor and c) adds a big cost to moving it's still not a good idea. More to the point, prices will continue to fall for a while so it's dumb to buy now regardless of your time horizon.



In regards to the original point about investment, owned housing *is* an investment. You put a lot of money in, pay a lot over time, and will have a loss or gain at the end. Housing is also housing. A rational person needs to consider both the housing and investment aspects of a house purchase. The bubble problem was not that people treated houses as investments, but that they didn't understand how a house investment works and had very inaccurate assessments, leading to very poor investments. This is the same as the 90's stock bubble. There too, the problem wasn't that a non-investment was treated as an investment, it was that the investments were grossly overvalued, leading to a lot of money wasted and thus a lot lost.
 
<img height="317" alt="Brush Rabbit Picture" width="420" border="1" src="http://www.popularpets.net/rabbits/pictures/brush-rabbit/brush-rabbit.jpg" />
 
it's certainly not dumb for everyone to buy right now. i think i'm fairly smart.... i bought my first home 9 years ago. it's paid off now and my renters are paying half my mortgage on my new home. i know so could my investments if i would sell that first home and put it in stocks... but investments in this market can be risky, but i always will be able to rent out my home...



yes prices will fall more, but i have received at my new purchase a decent downside protection and a wonderful location, a location that would not be availible in 2 years... i have a fixed below 5% mortgage and less the $3k out of pocket cost... the way inflation is going right now my mortage is close to be interest free... my brake even point right now is that my home can loose $30k a year in value, because that's how much i am saving versus renting



in my special situation buying even makes more sense because my gas price per gallon(for my car) will be at round $1.50-$1.75 and at 500-600 miles per week that adds up...



i know i will stay at my home for at least 10 years and chances that i will ever sell are very small...



so call me dumb or call me the exception... one has to do the math for yourself and then make a good decision, for me it's a good decesion to buy now...
 
If the choice is "buy now or buy never" it can be a reasonable decision to buy. Marginal from the financial standpoint but particular life circumstances could easily make it worth the cost. I have to say, though, that unless you want a particular house I'd be surprised at any neighborhood having no vacancies in the next 5 years or so.



Also, where the heck can you find a $550,000 house which is better than a $5,500 rental? At a GRM of 100 I'd buy as an investment! If you're in a neighborhood like that it does make sense to buy.
 
just to clearify... i am buying because i like the place and the neighbourhood, not as an investment... but for me the numbers work out that i barley pay more than a rental within that neighbourhood and size of the place... but in the long term i believe it's a good strategy to have property and investments (in the stock market) to ensure a decent retirement... or i might die before i get there and at least i lived in a great place and enjoyed it.
 
This is a handy dandy rent vs. buying calculator. Run some number and see for yourself





<a href="http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin">www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html</a>





Let me know what "magic" parameters you are running to get ahead with buying.
 
<p>Holy cow. Mine came out to "Buying is <strong>never</strong> better than renting" with the numbers I plugged in ! (and I graciously allowed for a modest +2% appreciation...)</p>

<p> </p>
 
Did you even increase the rate of return on your investments? It defaults to 5% ... add a more up-to-date inflation figure and it looks even worse for buying.
 
<p>Adjust your tax rate too.</p>

<p>I upped my tax rate to 40% marginal. I assumed a modest 8% CAGR on investments. Left inflation alone, left home appreciation at 2% and upped the rental increase to 10% annual. I then dropped the buying cost from 4% to 2%, added a $200/HOA (could be mello roos), dropped the mortage rate to 5.25%.</p>

<p>Net result, buying is better than renting in 10 years. </p>

<p><strong>10 years...</strong></p>

<p>And of course, if I don't average a 6% annual rent increase, buying is never better than buying over the next 30 years.</p>

<p>I can play a little more, when home appreciation and rent increases both are at 5% a year, it still takes three years at my current rent to get to breakeven for buying. </p>

<p>And the most important part, at my current rent, 5% appreciation and 10% rental increases, it still takes two years...</p>

<p> </p>

<p>Pretty much paints a solid picture of plenty of time to find a place.</p>
 
<p>I plugged in the info from when we bought the house in '03. Depending on my range of variables, buying was better after 2-7 years. </p>

<p>Someone did a lot of work with that--It's a pretty comprehensive calculator and the graphic interface is slick. The only shortcoming is that it's a single-scenario calculator. What if I think housing will drop 10% a year for 4 years, and then appreciate 1% for 5 years, then go up 3% thereafter? Or how about changing tax rates over time as my income grows?</p>
 
not bad... depending on the numbers put in i'm getting between 3-8 years... but there is so many varibles that are hard to predict...
 
<p>I believe in renting and am thankful for those who do. Its a big part of the reason that I no longer have to work for a living. Although being a landlord is work it beats being out in the day to day world. </p>

<p>enjoy!</p>
 
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