Are homes *really* investments?

Factual Questions
21

Yeah, sorry, that’s what I meant.

Another way to look at it is that you have an asset that may sell for more or less than the amount you paid for it - generally, excluding the last few years - more. Sure beats a used car, unless you still have that 57 Chevy in mint condition…

Rent generally should approximately equal cost of owning, give or take - or you have some incredibly patient and optimistic landlords. The owner may have “invested” his savings in the down payment, thus the mortgage is for less than the market value of the house. It still needs to cover the mortgage and property taxes, and minor repairs, and the liability that your tenants cause damage and miss a few months before you can jump through the hoops to get them evicted…

The main reason rents would be cheap is “glut of supply” and/or the investment houses were bought before the local house prices went up. (ANd, of course, rent control).

Of course, another reason for the “investement” thought is that (a) it’s a huge asset that people may dispose of when the family’s gone, giving them a nest egg (b) it’s a huge amount of money unless they’ve been frugal and (c) in my experience, being a renter does not mean the person(s) saved a lot of cash in the bank, unless it was because they were amassing a house down payment.

22

Q: Why do property owners rent out their houses and apartments?
A: To make money.

The only way renting can cost less than owning is if you move frequently. When we moved where we are now we looked into renting, because we weren’t sure how long we’d stay. We ended up buying because we somehow managed to get a mortgage with less than 1500 up front. Our total house payment including taxes and insurance ended up about $20 a month less than the cheapest comparable rental. Even if we end up selling it at a loss we’ll still be way ahead (Pay $X/month for Y years and get nothing back versus pay <$1500 +($X-$20/month for Y years) and get something back.) There’s occasional repairs on top of that, but the key word is occasional, and most of the repairs we’ve done will likely increase the value of the house.

23

To clarify, I didn’t mean “is a house an investment” in a literal sense; clearly it’s an investment in real estate in the technical sense.

It’s the severely restricted liquidity in most people’s situations that makes me question the utility of conceiving of the house as an investment in the way that a lot of people do. You’d think most of them are planning on selling it that week they way they bitch about property value, etc… and then 15 years later, what do they do? They sell their house and immediately roll that equity right into another more expensive one, because they have to have somewhere to live. Their kids are the ones who will probably actually see that equity as spendable money when they sell the joint after their parents are dead.

Most other investments don’t have that kind of non-liquid nature and aren’t treated the same.

It’s not that I don’t own a house; it’s that I don’t conceive of it as something I expect to profit on like I would something like an equivalent amount of mutual fund shares or something like that.

24

Yes, we got kind of psycho about property being an “investment”. You seem to have a pretty healthy attitude, but even you think you’ll “likely get back all that I’ve paid in mortgage payments, and if I’m lucky, tax and insurance as well.”
The tax and insurance money is gone. Much of your mortgage payments was interest (nearly everything you paid the first year, for example). Unless your house appreciates, you are never getting that money back. And appreciation is NOT a given, it just became so common that we all seemed to think is was.

Now, that’s still better than renting, because you are never seeing ANY of your rent money again. So if you can own as cheaply as renting, owning is the better deal. Winding up with a cheeseburger after selling your house is still more than you’d have when you moved out of a rental.

However, folks worried about neighbors harming their property values may not be worried about the state of their investment. They may be worried about getting trapped.
Some folks don’t plan to live in their house for a generation. In fact, I’ve heard the average buyer of a newly built home will own it for ten years. So ten years down the line, their plan is to sell the house for enough to pay off the loan and get their downpayment back so they can use it on another house in another area.
If you got a 30 year mortgage at 5%, in ten years you’ll still owe like 75-80% of your principal. If your house has dropped in value by 20%, you’re not getting your downpayment back.
So they aren’t worried that their house isn’t appreciating like they hoped, they are worried about owing more than their house is worth, and thus being unable to sell it and move when they’d like.

25

Yeah, but your “5 years” were 1999 to 2004. A drunk monkey could have made money on houses during the growth of the bubble. Historically, rates have not risen at such rates. Had you build the house in 2004 instead, you’d almost certainly have lost money on the sale after the same 5-year gap.

26

Is that knowing what you’re doing, or getting phenomenally lucky by building just before, then selling near the peak of the largest housing bubble in the history of the United States?

27

For now. How will you feel in 20 years if over that course of time your neighborhood changes and when you’re finally ready to sell it HAS become the type of place that people who put their cars up on blocks in their front yard can afford? There is absolutely no reason why that can’t happen. It’s happened twice in my family: once to my grandmother, and once to my aunt. The nice middle class houses I played in as a child are now smack in a dangerous slum area. And both of my relatives lost quite a bit of money because they waited too long to get out (largely because, having lived in the area for a long time, they didn’t want to admit the neighborhood was in a permanent decline).

I think that’s what most people who talk about property values are concerned about. It’s not that they want to make a killing when the time comes to sell, it’s that they want the place to at least hold its value. I think most homeowners talk “investment” but really intend to say “means of forced savings and hedge against inflation.” Which a home usually is, most of the time. Just not all of the time.

28

One thing that I don’t think anyone mentioned is the tax advantages of owning. I don’t mean or don’t mean only the mortgage deduction, which doesn’t exist in Canada. But there are two and they are just as significant here as in the US. The obvious one is that there is no capital gains on the increased value. The less obvious one is that the imputed rent is not subject to income tax.

The latter was brought home to me a number of years ago. A friend traded his house in central Mass. for a similar house in Colorado. They each were spending sabbaticals at the other’s university. They traded even up; no money changed hands. Years after a tax accountant told my friend that each should have reported the fair rental value of his house as income. And no, the rental cost of the other house was not a deduction even though that rental cost was undoubtedly a necessary expense for the “rental income”.

It goes without saying that when one class of taxpayers get a tax break the complementary class is subsidizing them. In the present instance that means that renters–generally the poorer people–are subsidizing the homeowners–generally more affluent.

As for the OP, I bought my house to live in. That it has so far turned into a great investment is nice, but not why I bought it. I paid just under $32K 41 years ago and it is now worth at least $700K. Even allowing for inflation, that is a substantial increase. But data show that, on average, houses don’t appreciate faster than inflation. But that can be utterly wrong in a short run. Let Quebec separate and my house value will tank.

29

You’re overstating both of these tax benefits.

The “no capital gains” is thanks to Sec 121, which permits an exclusion of $250k single/500k married on capital gains for a primary residence only. This means that the exclusion does not benefit landlords or those with second or vacation homes - just middle-class homeowners who live in the property.

(I suppose there’s also Sec 1031 exchange, but these merely allow you to defer recognition of gain if you trade one property for another; the gain is still taxable eventually, though.)

Imputed rent is certainly subject to income tax, in cases where rent must be imputed. If I trade you a year of free rent for a $20,000 car, then I’ve got $20,000 of rent to declare as income. Or if I give you a free month of rent to compensate you for fixing the broken fence, I recognize that as income. (As with all tax issues, I could choose to omit that from my return, but that’s another issue). In the example you give, I can see reasoning that each one should claim rental income, but allowing people to house-sit rent-free is a common strategy that benefits the homeowner as well as the tenant.

30

Well the capital gains benefit certainly is great for MOST people - as most people only have one home. Of course you are totally correct if you are only buying a house for investment - don’t live in it - then it doesn’t help you.

As far as the not caring about property values - I don’t get that. If you never plan on moving - and don’t care about any heirs - then sure. Otherwise you are basically saying I don’t care if I lose money when I move. I don’t look at my car as an investment, but I still consider resale value when I buy it. It isn’t the only thing - and more people run their cars into the ground then do a house.

It’s hard to predict what the housing market will do, but not caring about the value of your house just doesn’t make sense to me. In reality - there isn’t much most people have to worry about, but no way in hell I would not care if my neighborhood went to crap if it didn’t affect me directly. To me I can’t separate the two. It does effect me - but luckily I live in a neighborhood that gives a shit - so by the time it would bother me - it will have already bothered someone else - and will be taken care of (so far).

It certainly isn’t liquid - but I certainly consider it an investment.

31

I can understand that; but a lot of people are just insane about it. They get all pissy because some guy decides to have a xeriscaped front lawn that’s not St. Augustine or Bermuda that he has to water at least once a week in the summer. Or they get cranky because some other guy decides he wants to paint his house in a tasteful but unconventional color.

Or, and my favorite (and the actual genesis of the thread) they get all torqued because their city zones a piece of land near them as commercial and the developers plan to put an assisted living facility for the elderly on it. I got to hear the “OMG! It’s going to ruin our property values between the commercial zoning and the extra traffic!”

I was dumbfounded; I can’t imagine that an assisted living facility out in the boonies where this co-worker lives is going to seriously negatively impact their property values. It’s not like it’s a huge Section 8 housing project with poverty and thuggery that’s moving in; it’s a bunch of relatively well off elderly people.

All I could think of is that misguided thinking about their house as an investment is what was leading them to this craziness- she and her husband actually spend hours at a city council meeting in their town to protest it, which seems more than insane to me.

32

I live in the UK.

My first property was a flat (= apartment in the US) which I bought for £30,000 ($47.000) in 1987.
I sold it a year later for £40,000 ($63,000.)
Admittedly this was an exceptional year for house price inflation.

My next property was a 3 bedroom house, which I bought for £60,000 ($94.000) in 1989.
It’s currently valued at £180,000 ($282,000.)
I’ve paid off the mortgage, so it’s mine. (All mine! :slight_smile: )

And of course I paid no rent during these times.

33

The value of the home can be useful if you borrow against the house and/or use the value of the house as collateral. Many people (my family) bought a new house but kept the original.

34

Preserving your property value is completely unrelated to viewing a home as an investment. Having a neighbor with behavior that makes your neighborhood undesirable has the same effect, financially, as someone denting your car. It makes it worth less, and that will be a realized loss when you sell it. Just because you don’t want to lose money because of someone else’s actions doesn’t mean you view buying a house as an investment.

The rate of appreciation of real estate on average in the U.S. over the long term is probably lower than if you invested the same money in the stock market. One source, for example, shows that an investment of $25,000 in 1970 in a house would be worth about $175,000 today. The same amount invested in an S&P index fund in 1970 would be worth about $420,000 today.

The people that I’ve seen that make the most on investment is buying an undervalued property, fixing it up, then flipping it. I don’t think these people are making long-term investments.

35

Yes, there are upfront costs (legal, etc.) to buying a house. The longer you stay, the more years you spread those costs over.
heck, if you are still there for a while after your mortgage is paid off, even more bonus!
There are tax breaks on paying the mortgage (in the USA) and selling the primary dwelling to take into account.

However, there can be a gap between rental and purchase; it may be higher mortgage rates or (more recently, before 2008) soaring purchase prices. A rental propety bought 10 years before the boom will have a lower mortgage than the then-current purchase prices - hence the measure of “boom” as the difference between purchase and rent. Also, many landlords might not rent to make a living rather, the tenant pays off the mortgage and the landlord reaps the benefit when the paid-off property is sold.

Plus, in some provinces in Canada, like a few places in the USA and many places in Europe, there is rent control. This can prevent the reverse, a tight rental market boosting rental rates. besides longer-term leases that set a price - Once you rent a place at a given price, it can be difficult to raise the rent significantly in response to current market issues. Worse, landlord-tenant laws make it hard to evict problem tenants. The discussion forums for Ontario complain that a clever person can play the system to make it take 6 months to a year to get evicted, all the while not paying rent. Such uncertainities can only be mitigated with a high volume (large apartment buildings) for big business, or by very hands-on attention for individual dwellings.

What you see instead is that the laws have the effect of driving away the desire to rent. (a recent article on SF-area rental properties made that point. Having an occupied apartment in your house significantly lowered the value; when one fellow got rid of his tenant, his property taxes went up. Severe shortage of rental housing, over one-third of SF rental properties vacant because it is less ahssle than renting, despite the income. Toronto, if you rent your dwelling, it becomes “commercial” and your property tax doubles, IIRC.)

But as the discussion so far points out -
-you have to subtract the imputed rent you would have paid from your house “investment”.
-you can get mortage payment deductibility.
-you don’t pay some/most of the capital gains on the final sale.
aLL these help make the house a decent investment, depending on circumstances like neighbourhood, market timing when you need sell, etc.

Since the house is the biggest “investment” many people make and likely for many the biggest part of their retirement nest egg, no surprise if they are anal about protecting its perceived value.

36

I think some of it comes down to “crazy people are crazy.” But I also think that a lot of people stretch their budget too much when they go to buy a house, and they don’t stop to ask themselves “how would I feel if the property value should go down?” BEFORE they commit to the purchase. As you’ve noted, a house is a rather illiquid investment. And so they panic whenever a change that MIGHT negatively affect the value of their property even a little bit comes up.

Man, I wish I could tell every first-time home buyer about my experience. Ten years ago I bought a brand-new home from a well-respected builder in a nice neighborhood for $259,000. After spending $26,000 to replace all the poorly-installed builder-grade windows with good Marvin windows following five years of dealing with intractable leakage problems, $12,000 in professional landscaping, and additional thousands in the usual home maintenance issues (adding a water softener and sump pump, repairing a broken air conditioner, replacing some bad siding damaged in a storm, repainting the exterior, etc.), what did my house appraise at when I refinanced this past fall? $259,000. What a GREAT investment! If I make many more like this one, I’m going to be spending my old age eating cat food and sleeping under a bridge. :smiley: But I was careful when I bought not to buy too much house and end up house-poor, and like you I bought my place primarily as a nice place to live and am not counting on significant appreciation, so I don’t need to panic. As long as the neighborhood stays reasonably nice so that I won’t have big problems when the day comes to sell, I’ll be happy. If in the future the neighborhood shows signs of declining, I’ll get out ASAP. In the end, it’s just a house.

37

Here are some charts and data that show average US housing prices adjusted for inflation since 1970. Many people don’t consider inflation when considering whether or not their house has appreciated in value.

A house bought in 1970 for $25,000 is worth somewhere around $175,000 today - a nominal return of 700% over 42 years.

However in real terms a house bought for $25,000 in 1970 is roughly equivalent to $150,000 in today’s dollars. This would translate into an actual increase in purchasing power of $25,000 (today’s dollars) over 42 years - a 16% return.

In comparison the S&P 500 US stock index was 93 in 1970. As of the second I type this, it is at 1636 - a nominal return of 1759%.

Inflation adjusted the 1970 S&P 500 was at 555. At the current level that implies a real return of 294%.

Of course there are certain parts of the country where housing prices have vastly outperformed the national average. Similarly there are many individual companies that have outperformed the market indices. However, one can pretty easily make an argument that a disciplined saver that rented throughout the 70s and 80s and invested in stocks rather than pay interest on a mortgage could have done quite well financially.

Edit: CookingWithGas beat me to it…

38

Your most definitely an investment…most likely the largest you can ever make. Making good decisions about a home can make you very wealthy-bad decisions can wipe you out. For example-I have a friend who bought an old house in a bad neighborhood-but one that was turning around (it was close to the city center, and young professionals were moving in). He did quite a bit of rehab work himself (painting, repairs, tiling), and now has a beautiful 3 bedroom house. It is now worth close to $600,000. He could sell it in a day. Of course, had things gone the other way, who knows?
Now the opposite-you buy a tract home in a development far way from the jobs (like the “Inland Empire” in SoCal). You pay top dollar (by at the peak of the boom). Now your neighbors have lost their jobs…many homes in the area are abandoned or foreclose. Did you make a bad investment? yes. Can you afford to wait it out? Who knows.

39

Let me break this down: a house is not a naturally-appreciating asset. That is, there’s no intrinsic reason to expect it will be worth more in the future than today. Corporate stock likely will - the purpose of a corporation is to grow and make money for you. A bond is by definition someone’s willingness to repay more than he or she borrowed from you. Even land in the long run is likely to appreciate in value in a reasonably predictable fashion based on probable population growth and commercial zoning and etc.

Homes, as such, do not. They are a physical asset that tends to decay without significant upkeep. Which isn’t to say that in a time of creasing demand (or a bubble), they won’t grow and grow quickly. But normally, decpreciable assets aren’t viewed as Investments (capital “I”) per se. Of course, a home may still be a good investments (lower-case “i”) for a particular person or family. If lucky, you may even make some money off of it in the long run. If you keep the housing stock in good condition, that would definitely help protect your value.

By way of comparison, cars and trucks aren’t generally viewed as investments but are the exact same thing financially: an asset that naturally depreciates, requires upkeep to slow value loss (let alone maintain it), and in which some unusual or very good models even increasing in value - but you probably can’t guess which ones ahead of time.

40

The catch, of course, is that disciplined savers are fairly rare. That’s one advantage of property ownership - it’s a means of forced savings. True, you probably won’t make the gains you could have made if you’d bought mutual funds, but most people would have spent the money they saved each by renting rather than investing it, and come out worse rather than ahead.