Long story short: My parents, who are in their 60s, have just come into possession of a windfall of money (decent-sized but not huge).
They insist that inflation in America is so severe, and will remain so for so long in the future, that we as a family must spend that money buying another house “because otherwise inflation will just eat the money away.” I pointed out that inflation may slow a lot in 2022, and that having a big chunk of money in savings and additional retirement money would be good, but they would have none of it.
So, are they right? Is the current U.S. inflation crisis likely to remain bad enough that buying a house is the only way to solidify that money and prevent the $$ from being lost? And/or are there other, better, alternatives?
Honestly? With the way the housing market seems well into another bubble, a house seems like a terrible investment right now. I mean, unless they’re going to use it as a rental property, but even then…
I’d just invest it in some kind of index fund and let it rise and fall (and rise again) with the stock market.
Sure, a house CAN be a great investment (it can also be a terrible one), but it’s not the only investment you can make and profit from. I think some people have been so indoctrinated with the “need” to own a house that they can’t see the alternatives.
I don’t know whether it’s a good idea or not, but there are definitely pitfalls.
One difference between houses and investment funds is – you can’t sell part of a house. One of my relatives did this, claiming the (huge) house would be her retirement. She can sell the house, but it’s now in a much older neighborhood and needs a lot of maintenance (eating into the equity). Also, she still has to live somewhere, and all the other “somewheres” have big price increases just like hers. It doesn’t seem to have been a great idea, but I don’t know all the details.
Obviously, it’s really hard to make solid predictions about this kind of thing, but …
Did you happen to notice this ?
WASHINGTON (MarketWatch) - The Federal Reserve on Wednesday voted to speed up a reduction in bond purchases to $30 billion a month so that the program could end in March instead of the original plan of June. The Fed also penciled in three increases in short-term interest rates in 2022, up from the one move projected in September. In new forecasts, the central bank raised its estimate for inflation next year to 2.6% from 2.2%, using its preferred PCE price gauge. U.S. economic growth was also projected to slow to 4% in 2022 from an estimated 5.5% this year. In its policy statement, the Fed dropped the word “transitory” to describe inflation and it left a key short-term interest rate unchanged near zero. The fed funds rate is expected to end around 0.9% in 2022.
What/how much effect will this have on inflation and housing prices ? Again: hugely difficult to say.
But ISTM the trendline isn’t likely to continue rising as sharply as it has been of late, and that this may very well cool the hot/overheated housing market in many markets.
This seem to be the time to sell the extra house/property and a horrible time to buy. It’s a hot market and houses are being snapped up in days or even hours of listing going for above asking price (at least in the NE of the US). So even if what they say is basically accurate the market timing is off.
But it does sound very much like a middle eastern influenced POV, I’m sure there are other such societies where property is the hold of value. It just hasn’t played out that was so much in the US compared to other investments.
It sounds like they already own a house, so buying one is not going to save on rent. Unless they live in a rare depressed housing market, I agree with everyone that now is a terrible time to buy.
If the money they god is enough to matter, why not consult an investment advisor to see all the possibilities? If they insist on real estate, a REIT would be a lot easier than being responsible for renting and managing another property. I’m not in any so this is far from a recommendation, not that anyone should listen to me.
Nick Murry, in his book Simple Wealth, Inevitable Wealth, argues that the absolute best way to beat inflation is to invest in the stock market. He goes so far as to stand the normal risk/safety paradigm on its head; he argues that, for longer timeframes, the stock market is actually the safest way to invest, because it beats inflation.
Why not spend it on something fun and enjoy the windfall? Investing in a second house sounds like a good idea, but as everyone has said the timing is all wrong. Plus renting out and maintaining an older home is a lot of work. They’re likely to lose money in the short run, and not live long enough to enjoy the appreciation in the long run. I don’t know how old you or your parents are, but my guess is they are old enough to see the inevitable down the road. Nobody says on their deathbed that they wished they had saved a little more money versus enjoying their final years. Assuming it’s a reasonable chunk of money, they should get an investment advisor to put the money where it can grow and has liquidity should they want to someday go on an expensive trip, buy an RV or boat, or purchase that car of their dreams. While it’s smart to save money for your old age, once you’ve reached old age that money is for spending on yourself or your family and friends.
Housing generally increases in value a bit faster than the rate of inflation. Once you factor in taxes and maintenance, the return is somewhere between zero and negative. The transaction costs are extraordinarily high, so even if you get some appreciation, much of it will be swallowed by broker and closing costs. The way to make money on real estate is with leverage but rates on investment properties are higher, loans are often shorter term, and interest rates are likely to increase over your holding period if inflation increases. The leverage to increase returns also increases risk.
You can also make money renting out the property but then you are running a business. Most people don’t really enjoy being a landlord.
Liquidity for real estate is poor, so if they need cash, they better be prepared to give up a good chunk of their potential gains and/or wait a long time. It’s also hard to diversify.
Stocks tend to earn returns that exceed the rate of inflation and are entirely passive. I would put my retirement money in stocks before I’d put it into a new business I wasn’t sure how to run.
The current inflation rate may be somewhere in the range of 5-7%.
Inflation has been very low for a very long time, because the plan was to keep inflation around 2%, but for a long time 2% was viewed as the maximum acceptable inflation, which wasn’t really the intention.
Recently the plan has changed to recognize that keeping it around 2% means that sometimes it may go over 2%, and that isn’t cause for panic or drastic measures.
If you’re relatives are in their 60s, then they’re probably fixated on the bad inflation of the 70s. It is extremely unlikely those days will return, as the US has much more sound economic policies now to manage inflation.
It’s still reasonable to invest money in something. There are no guarantees, though. Is housing in a bubble? Maybe, maybe not. In 10 years somebody who bought now might look like a genius. Same for the stock market. No return without risk. Of course, not all risk is equal, and sometimes greater risk is associated with greater potential return, but greater risk can also just mean greater stupidity.
One thing I can say, is physical real estate is work. Are they prepared to take on the costs and obligations associate with owning a rental property? Do they have a realistic idea of what those costs and obligations are?
For people in their 60s, I’d say they probably want safe investments, so they can pull the money out in 5-10 years for retirement.
One strategy, if they are set on buying a house, is to buy a house they intend to live in, and then rent out their current house (assuming they’ve owned it long enough to qualify for residential mortgage rates on the new loan).
That might actually be a very reasonable strategy, depending on their exact circumstances. Using the money to downsize now that the kids are gone, buy their “last” home, or move to a retirement community could all make sense.
Keeping the old place can provide some income, if rent is higher than the old mortgage, and avoids any issues of capital gains taxes (which generally aren’t an issue if they’re selling and then buying).
Your strategy makes good sense. They can try their hand at being landlords if that’s what they want. If it doesn’t work out in the next couple of years, they can sell it and still get the $500,000 home sale capital gains exclusion as long as they have lived in the house for two of the last five years. In the meantime, they have done the hard work of downsizing and deciding where they want to live out their days.
News to me. Real estate – as in, owning my own place, not as an investment – and subsequent downsizing, is the major reason I have a comfortable retirement. Of course, it’s all very variable depending on timing and geographic area, but I do have to point out that while such broad generalizations as you make may well be statistically true on some global scale, there are certainly notable exceptions. I remember looking at housing options when I was selling my last place, and the consensus at the time was that house prices had peaked and there were a dozen reasons why renting was the best option, complete with a story about a couple who had always rented and how delighted they were with their decision. I decided to go ahead and buy another house anyway. This was not quite ten years ago. Since then, it has tripled in value. This makes it perhaps the most lucrative investment I ever made, which is especially odd because “investment” was the last thing I had in mind when I bought the place.
Of course, this sort of screed could have been written in early 1929 about the glories of the stock market. Still, I’m amused by the fact that I’ve been reading about how “it’s too late now” to get into real estate and “the housing bubble is about to burst” for more than 40 years. No doubt there will be corrections, probably initiated by interest rate hikes, but housing is an essential commodity and IMHO the fundamentals are strong.
And, just as a random data point, an article I just saw recently …
Scroll down to the graph. Here in Ontario, house prices in November are up more than 24% over the previous year. Average house prices around here are between $1 and $2 million. This means that the average homeowner just made between a quarter and a half million dollars last year, at least on paper.
Now this I agree with. Never did it myself, but those I know who got into the landlord business pretty quickly got fed up with it.
I’d agree with the idea that buying a house is a bad idea.
In terms of becoming a landlord, I’d just note that you can effectively accomplish the same thing by investing in a REIT:
It depends on what state you’re in but, if you’re planning to be someone’s landlord, then you are going to need to understand the laws of your area and what you’re allowed to do and what you’re required to do. You may find that those immediately suck the fun out of the idea.
If you’re wealthy enough to afford lending out to a 100 different families and 2 of them fall short on their rent, and your state doesn’t allow you to kick them out, then you can safely adjust the price of rent to cover the dud renters.
If you’ve bought a tiny building that can only host 2-3 families and you get the unlucky draw of having 1 or 2 non-payers AND you’re not allowed to kick them out…well that’s really going to hurt. You can’t jack up the price on the good tenants and expect them to stay; you just have to figure out how to support several more mouths and work through the paperwork to be able to get rid of the bad tenants in a few months or years.
Add that on to the work of waking up at 3am to shut down a party or fix an appliance, and it’s really not that fun.
Being a landlord is only worth it at the scale where you can hire others to do most of the work and still make a good, comfortable profit.
Buy a REIT and you’re immediately in that business.
That said, the Fed is planning to start jacking up the interest rate and deflating the economy, in the coming year, and the government is dialing down most spending outside of infrastructure.
Inflation already happened. From here, there’s a good chance that it’s going to go back the other direction.
From an economic perspective, you rented the house to yourself. The biggest part of your return was likely the rent you didn’t pay. It certainly is for me. You can make money renting out a house and save money (versus rent) living in a house you own.
It’s actually hard to make money, in a way that exceeds returns on alternative investments, just by holding property, Take what you paid for your house, add in all the tax payments and all the interest on the mortgage. Add in the maintenance, repairs and upgrades, then figure out whether, when you sold, you had more than you would have made had you invested those same cash flows into an index mutual fund. My hunch is that the index fund would beat it by a country mile. That seems to be the rough plan for the OP’s parents.
I am a big fan of buying a suitable house to live in. I am a moderate supporter of buying rental property, which can also be profitable if it’s chosen carefully and managed well. I oppose buying empty properties speculatively and banking on appreciation alone to provide a worthwhile return.