What the bubble?!?

[morekaos]

Managing money I have done this calculation a million times.  Real ex.  Had a client buy a condo for $100,000.00 in Redondo Beach in 1985.  Sold in 2008 for $800,000.00.  Nice!  Put the same $100m into a fund I like (SGENX) and the same $100m grew to $1,834,776.00...I'll take that on a cash flow or  a return basis.

 

[Ready2Downsize]

But he will pay cap gains on the entire 1.7 million and only 200K on the house which he got to live in.

You can't live in your mutual fund so how much of that money would he have spent on rent?

 

[Ready2Downsize]

And are you factoring in the tax deduction he got on the house? Granted in the beginning the costs would have been higher than renting.

 

[morekaos]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

 

[Irvinecommuter]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

1)  I would say that level of return is uncommon. 

2)  What would happen if the investment lost money?  What would your client have then?

Again...I don't know how we came down this road.  My point is that you shouldn't see a house as an investment. 

 

[nosuchreality]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

1)  I would say that level of return is uncommon. 

2)  What would happen if the investment lost money?  What would your client have then?

Again...I don't know how we came down this road.  My point is that you shouldn't see a house as an investment. 

Actually, over a 20 years period, stocks are remarkably reliable until our dotcom bubble.

 

[morekaos]

I was simply comparing a house to a fairly typical long term investment. I didn't mean to hijack the thread.  I own a house and stocks. IMHO Best to own both.

 

[nosuchreality]

Houses are a consumable asset. Unlike other assets, they come with quazi-mandatory cash outflows. Taxes, maintenance, insurance, utilities, etc.  They also replace another quazi-mandatory expense, rent.  They're further complicated by typical extraordinarily high leverage rates 4:1.

As an investment, homes have historically, been an inflation hedge and not much more, even in growth areas where appreciation over the long term runs 0.5-1.0% over inflation.

Stocks over the same terms run closer to inflation plus 5-8%.

 

[morekaos]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

1)  I would say that level of return is uncommon. 

2)  What would happen if the investment lost money?  What would your client have then?

Again...I don't know how we came down this road.  My point is that you shouldn't see a house as an investment. 

Actually that is a fund I have placed client (and my own) money in for over 30 years. I use it because it is has a long term track record, is consistant in its performance and anyone can buy it. 

What if the client lost money?  He did that very year in 2008.  The fund FELL almost $500,000.00 in value that year to the $1.8 million mark and still outperformed the condo over that period of time.  Volatility is just part of the game.

 

[Irvinecommuter]

Houses are a consumable asset. Unlike other assets, they come with quazi-mandatory cash outflows. Taxes, maintenance, insurance, utilities, etc.  They also replace another quazi-mandatory expense, rent.  They're further complicated by typical extraordinarily high leverage rates 4:1.

As an investment, homes have historically, been an inflation hedge and not much more, even in growth areas where appreciation over the long term runs 0.5-1.0% over inflation.

Stocks over the same terms run closer to inflation plus 5-8%.

As I stated earlier..the easier subject to grasp is a car.  99% of cars depreciate significantly yet all of us own cars because they serve a non-monetary purpose.  You can "rent" a car by leasing but there are non-economic factors why owning a car is better than renting a car. 

A house is even more valuable because each house is somewhat unique.  You can always buy/lease the same car but you can't necessary buy or rent the same house. 

 

[Irvinecommuter]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

1)  I would say that level of return is uncommon. 

2)  What would happen if the investment lost money?  What would your client have then?

Again...I don't know how we came down this road.  My point is that you shouldn't see a house as an investment. 

Actually that is a fund I have placed client (and my own) money in for over 30 years. I use it because it is has a long term track record, is consistant in its performance and anyone can buy it. 

What if the client lost money?  He did that very year in 2008.  The fund FELL almost $500,000.00 in value that year to the $1.7 million mark and still outperformed the condo over that period of time.  Volatility is just part of the game.

That's not losing money...that's having less profit.

 

[morekaos]

Again, you have to factor out the variables and look at just the raw dollars.  Had you kept both to today the Condo may be worth $1.5 million (still pretty good) but the fund went to $3.2 million.  It's a hard argument to say you would prefer half the cash.

1)  I would say that level of return is uncommon. 

2)  What would happen if the investment lost money?  What would your client have then?

Again...I don't know how we came down this road.  My point is that you shouldn't see a house as an investment. 

Actually that is a fund I have placed client (and my own) money in for over 30 years. I use it because it is has a long term track record, is consistant in its performance and anyone can buy it. 

What if the client lost money?  He did that very year in 2008.  The fund FELL almost $500,000.00 in value that year to the $1.7 million mark and still outperformed the condo over that period of time.  Volatility is just part of the game.

That's not losing money...that's having less profit.

I agree. My point was it was time and not timing that proved profitable on purely an investment standpoint when comparing the two.

 

[nosuchreality]

A house is even more valuable because each house is somewhat unique.  You can always buy/lease the same car but you can't necessary buy or rent the same house. 

Tell that to the people in Detroit and Flint.

The intrinsic value in owning a house is in predictability, not financial gain.

 

[paperboyNC]

Advantages of owning over renting:
- Occasionally you can own for less than rent (as I was able to do 18mo ago)
- You aren't going to be evicted due to the whim of your landlord
- You can customize the house more than you could if you rented
- You can stabilize expenses with a 30yr fixed mortgage, property taxes that only go up 2% year, etc. If you wanted to stabilize them further you could purchase a home/appliance warranty and set aside money every month for maintenance / repairs / remodels.
- You have a hedge against inflation. Over time rents will go up significantly while your mortgage will not.
- You can keep it up. Rented houses are often in bad shape because the owners don't update them, etc.
- Forces you to save. a 30yr fixed mortgage forces you to save up money while renting is like having an interest only loan for life. Sure - a renter can put money in the stock market, but it's easier to spend the money or to cash out stocks than it is when you own a home.
- Brings stability to your life (sometimes). I generally have moved every 2 years as an adult and I'm a little less likely to keep moving now that I own a home (though I haven't hit 2 years yet).
- Control over maintenance. It sucks renting and waiting a week for the landlord to fix a broken dishwasher. If you own you can call around and find the quickest repairman/etc.

I don't mention tax savings separately since they are part of #1.

Main downsides to buying:
- Transaction costs are around 10% so if you don't have appreciation and need to get out of the home, you could take a significant loss.
- Since you are generally leveraged, a small dip in home prices can wipe our your entire down payment.

 

[Irvinecommuter]

A house is even more valuable because each house is somewhat unique.  You can always buy/lease the same car but you can't necessary buy or rent the same house. 

Tell that to the people in Detroit and Flint.

The intrinsic value in owning a house is in predictability, not financial gain.

Maybe but the people in Detroit/Flint still have somewhere to live.  In similar hypothetical, what do you do if you put your money in Enron, Bear Stearns, Chrysler, some unlucky tech companies, etc...you are left with nothing.

Of course, no use of money is failproof...my point is that with a house you are acquiring something that has non-monetary benefits and that means something. 

Again, my original point is still that houses should not be seen as investments.  If you do, you will probably not like the return.

 

[socal78]

Maybe but the people in Detroit/Flint still have somewhere to live.

I read this post about 8 times. My brain exploded. Thought about replying. Knew from previous experience that I should just leave it alone. Went about my day. Came back. Read it another 5 times. Went against my better judgement, and...

What in the world are you talking about?!??!! I am no investment expert like some here but -- In what way would owning a home in blighted Detroit or Flint NOT represent a completely unattractive / failed investment through-and-through? You're saying the benefit is the owner would get a roof over their head. Ok, so, being the proud owner allows a person the "privilege" of paying property taxes (very small tax base w/ high taxes from what I've read, based on previous values) on a likely aging, dilapidated home in a crime-infested area that they are responsible for keeping maintained, up to code.... where police slowly, if ever, respond to calls, leaving you to fight off the junkies, drug dealers, and squatters on your own, hoping you don't get murdered standing on the sidewalk in front of your own home. The benefit is living in a ghost town of boarded-up homes and drug dens in the Rust Belt with no employment opportunities?... where you can count yourself blessed if you have your utilities turned on??? Why do you think there are so many $1 Detroit homes for sale? Razing the home is a whole 'nother can of worms and cost much more. Hey, maybe you can initiate a BOGO sale like they have at Payless and start up a TI Fund!

Coincidentally, I just finished watching another documentary on Detroit - the black youths pushing to clean it up and make it somewhat habitable. Scratching my head why anybody would see what is essentially being stuck there as an upside!

 

[qwerty]

the problem with looking at a home as an investment is that if you bought a home in say 2000 and in 2006 it had doubled, sold in 2006 to lock in the profits, if you bought another house in 2006 you are no better off than you were before. cause now you are buying another house that increased just as much as yours did (assuming you stay in the same area as most (not all) people will likely not leave the area they currently live in).  i guess you could have sold in 2006 and rented and bought again in 2009/2010, but lets be honest, if you did that it was just dumb luck. few if any could time the market to sell at its highest and buy at the lowest point.

 

[morekaos]

You may not believe me but We did sell in 2005. Many, including my wife, thought I was insane.  We rented till last year and then bought in our dream neighborhood for substantially less. We had augmented our funds with investments from our stock portfolios over those same years. I did that, bolstered from our good friends here and IHB.  Luck?  maybe, but it worked for us.

 

[Irvinecommuter]

Maybe but the people in Detroit/Flint still have somewhere to live.

I read this post about 8 times. My brain exploded. Thought about replying. Knew from previous experience that I should just leave it alone. Went about my day. Came back. Read it another 5 times. Went against my better judgement, and...

What in the world are you talking about?!??!! I am no investment expert like some here but -- In what way would owning a home in blighted Detroit or Flint NOT represent a completely unattractive / failed investment through-and-through? You're saying the benefit is the owner would get a roof over their head. Ok, so, being the proud owner allows a person the "privilege" of paying property taxes (very small tax base w/ high taxes from what I've read, based on previous values) on a likely aging, dilapidated home in a crime-infested area that they are responsible for keeping maintained, up to code.... where police slowly, if ever, respond to calls, leaving you to fight off the junkies, drug dealers, and squatters on your own, hoping you don't get murdered standing on the sidewalk in front of your own home. The benefit is living in a ghost town of boarded-up homes and drug dens in the Rust Belt with no employment opportunities?... where you can count yourself blessed if you have your utilities turned on??? Why do you think there are so many $1 Detroit homes for sale? Razing the home is a whole 'nother can of worms and cost much more. Hey, maybe you can initiate a BOGO sale like they have at Payless and start up a TI Fund!

Coincidentally, I just finished watching another documentary on Detroit - the black youths pushing to clean it up and make it somewhat habitable. Scratching my head why anybody would see what is essentially being stuck there as an upside!

Detroit is obvious an extreme example but my point is that if you took the same amount of money and placed in an investment that failed...you have nothing.  If you bought property in Detroit and value went to nothing, you would still have a physical house to live in.  You may not want to live there but it still has some non-monetary value. 

For example, for a family that lives in Detroit but cannot afford to move....having a house means some sort of shelter.

SoCal as for why people stay...there are many reasons but the biggest is probably that they have nowhere else to go.  Those people have minimal income, nonexistent credit scores, and barely enough money to feed themselves.  Where are they going to go?

 

[Vinster]

the problem with looking at a home as an investment is that if you bought a home in say 2000 and in 2006 it had doubled, sold in 2006 to lock in the profits, if you bought another house in 2006 you are no better off than you were before. cause now you are buying another house that increased just as much as yours did (assuming you stay in the same area as most (not all) people will likely not leave the area they currently live in).  i guess you could have sold in 2006 and rented and bought again in 2009/2010, but lets be honest, if you did that it was just dumb luck. few if any could time the market to sell at its highest and buy at the lowest point.

"Chance favors the prepared mind." - Louis Pasteur

Put me in the dumb luck group. Bought in 2000. Sold for double in 2007. Rented until last year and bought right before the big run-up.