The house investment is even better than it looks. The people in the OP perhaps put down perhaps $12K in their house. Their mortgage payments - which do not rise unlike rent - would covers some of the principal in that time, so their gain is more like 130x. If they paid in cash the gain would be as in the OP, but they could invest their rent equivalent, which will have to be included in the calculation.
My house has a bit more than doubled in value, but has tripled in value versus what we invested in it. (So low because we put in lots of equity.) Plus we are paying a third of an equivalent rental, or less, which counts property taxes. And for us we get to avoid having to move if the landlord wants to sell. That is a cost savings in itself.
My other investments have done well also, but the house is right up there with them.
Jorge, dividends reinvested is a fair point. The cost of renting vs owning though misses the very fundamental which almost has to be: it costs less per year to own an equivalent place than to rent it. LavenderBlue’s experience of similar housing costing much more to rent is the way it has to be as of course you are renting from someone who owns and who is paying their costs and then making some profit. Duh, owning costs less. Reinvest that dividend as well. (Yes in an index fund.)
If you know people who bought more than they would have rented and are struggling, or can’t refi at a lower rate, yeah sure. But people who are buying at today’s prices at today’s mortgage rates are doing well compared to today’s rents and very very likely will be doing better yet compared to rents in ten years’ time. Dividends will not likely increase as much as that difference will.
What will happen to housing prices over the next decades? I don’t know. What will happen to the stock market? Don’t know that either. If the whole house value though has kept up with inflation historically over the very long term then the performance of the leveraged 20% down has done 5x better than inflation, yes? Inflation long term has been 3.22% … averaging 16%?
Agreed that owning a home is not a way to get rich. But the choice is between renting a place and owning one when rental prices are high and expected to go higher and house prices are still significantly off previous peaks and mortgage rates are very low. I do believe that as smart as Dr. Schiller is he makes a mistake when he fails to consider the cost of the renting (especially as it is subject to inflation) in his analysis comparing the two as investment options. Then again since he owns his actions may speak more than his words.
Yes his point is valid: people have unrealistic expectations of the return they will likely see. For the similar housing putting 20% down and getting a mortgage at today’s rates and prices likely makes more sense than renting and putting that 20% in an index fund, that’s why Schiller does that too, but thinking that it will pay for your retirement is foolish.
My apologies that I merged in my mind yours and monstro’s posts, Jorge. Sorry.
Monstro makes excellent points about the risks, although careful planning can mitigate some of it.
I think buyers in today’s economy should also factor in:
-changing job markets and the likely need for quick mobility
-the effects of the western drought (if this continues, Phoenix housing might end up like Detroit’s)
But… if you can carefully weigh the costs and live in something you can actually afford, you’ll reach the day when you make that last payment. Our housing costs now (including repairs) are about 4% of our income. We can (quite literally) keep the roof over our heads with fast food jobs.
Mine hasn’t gone up quite that much, and it cost more. However, my mortgage payments were also less than my previous rental payments. Our decision was very much that we could give all our money to landlords forever and have nothing to show for it, or give the same money to the building society and have an asset.
Now that I have emigrated, the tenants are paying me 15% more each month than I am paying for the mortgage, all repair and maintenance costs are now tax-deductible, and the property is continuing to appreciate. In another 15 years or so I will own the house free and clear, be able to keep the whole rental payment, and have a nice capital asset as well. Meanwhile ‘safe’ investments have been yielding a couple of percent and ‘high-yield’ has been oscillating back and forth between about +15% and -15%.
monstro, something just occurred to me. As I read that professors interviews, it’s clear to me he’s talking about buying property for the purposes of making money, as opposed to being a primary residence and perhaps also appreciation.
When I read your posts, you seem to be saying that it is often smarter to rent your primary residence, and invest the money that would be used for a down payment in the market instead.
Which version are you arguing: that one should buy a primary residence but shy away from pure investment properties; or that one should strongly prefer renting and maximizing investment in the markets instead?
He certainly could re-invest … assuming, of course, he didn’t have to use any of that money to (say) rent a place to live in.
That’s why I say ‘it isn’t that simple’. There are too many factors to consider where one’s “investment” is in something one is also using, like your primary residence, to determine that it is always a good or bad decision.
Take two individuals who have $100 K. One (call him “A”) invests in a mixed portfolio; the other (“B”) in their primary residence. Let’s assume for sake of simplicity that their residence cost $100K. They both have the same income.
The one ‘investing’ in a primary residence has costs - house upkeep, taxes, etc.
However, the one investing in a mixed portfolio also has costs - namely, somewhere to live. Presumably, he isn’t living on the sidewalk while his or her investments multiply - he or she too needs a residence.
As a generalization, costs of renting are going to be considerably greater than costs of taxes and upkeep (I can vouch for that!). That means A is not free to reinvest everything, and have the same lifestyle as B. If you fail to factor that in, of course investing is going to look better: if A is willing to live over a sidewalk, A will have (on average) more money than B when A cashes out.
Now, that is not to say investing can’t be better - for one, liquidity; for another, not putting all one’s eggs in one basket.
I’m saying “real estate is a good investment” is not a valid reason to buy a house. Buy a house because you want to buy a house and you want all the perks that come with owning a home. DON’T buy a house because you think it will make you money. Because odds are you will be disappointed.
I plan to buy a house eventually, but that’s because I want to have a little greenhouse in the backyard. I’m under no delusion that I’ll profit from this decision. If I do, great. But that’s not what I’m banking on.
I’m not understanding where I have contradicted myself.
It seems to me that whenever we have conversations like this, the folks who have done well in the real estate market kind of dominate the conversation. But we all know that there are “losers” too. The losers of anything are always reluctant to acknowledge themselves, because losing carries a stigma even on an anonymous message board. And most people who buy real estate aren’t going to make a lot of money from it, simply because most people aren’t able to buy the property that appreciates a whole lot and most people make decisions that take away from the ability to fully capitalize on their investments. So, people would be best to assess whether they are more like “most people” before deciding to buy property for the sole purpose of making money.
That is all I’m saying, really.
You will get losers either way - because, typically, you have to either rent or buy, since you gotta live somewhere. You have to put money into rent, or into a house, and either course runs the risk of loss. As a financial decision, which makes more sense?
To my mind, there is, as I’ve said, no single “right answer” - it depends on a whole host of individual considerations, of which one is most certainly that in the end, a purchaser has equity in a piece of property.
I would never say that this consideration has to dominate, or that making money is the sole criterion; but, if making money is an issue, it is something to consider.
In my experience, the best aspect of property-ownership from a purely financial point of view is that it imposed financial discipline on me, when I lacked any otherwise (I was young!). I know that if I did not have a house to pay for, I’d have blown the cash in various ways on consumption rather than saving it and investing religiously in a mixed portfolio, which makes the debate over which is better kinda moot … but that is just me. Others are different.
Real estate CAN be a great investment. You just can’t take that for granted.
Now, here in Austin, growth has been spectacular for a long time. My house has doubled in value since I bought it 15 years ago. But… even so, there have been highs and lows in the local real estate market. If you’d bought a nice house here in 1980, and kept it, you should be able to sell it for a frtune now. But when I moved her in 1986, the real estate market had bottomed out. There were numerous empty apartment complexes, numerous unsellable new homes, numerous bankrupt builders. MANY people had to sell great houses on desirable land for a pittance.
If you’d had the resources to survive those bad times, you’d have made a fortune eventually. But many people can’t afford to live in the long run. Many of us have to live in the short run! And a lot of people lost a pile in Austin real estate, even though long-term conditions meant MOST real estate buyers have thrived.
It’s not a certainty. The only thing that is a certainty is that after the mortgage is paid off, a person has a place to stay that is theirs. If no one wants to buy that property from them, it’s worthless. If they end up putting more money into that property than what they make in the sell, then they haven’t “built” anything.
If someone just wants to make money, there are faster, easier ways to do it than buying a house they may or may not live in.
In my experience, people point to the investment potential of real estate because they simply don’t know anything else. I know that if I were talk to my parents about how I’ve invested my money, their eyes would glaze over. An index fund isn’t as concrete or as evocative of wealth as a suburban rancher with a white picket fence. For most people, it’s an emotional decision. Not financial.
Personally, I think I’d make a terrible homeowner just like you think you’d make a terrible renter. I don’t want to spend my weekends making repairs, so I wouldn’t. I’d let the front porch sag, the foundation crack, the paint chip. There’s a leak in the roof? Put down a bucket and forget about it. I don’t “keep up with the Jones’s”, so I wouldn’t be motivated to ever renovate the kitchen or the bathroom. And if Wal Mart wanted to move in next door, I wouldn’t care enough to stage a protest at the Board of Supervisor’s meeting.
You have to do these things to protect your house’s value. Other investment vehicles don’t require quite so much work and worry.
As a homeowner, I just don’t encounter these things happening at this sort of alarming rate.
Minor anecdote and YMMV.
Unless you live in downtown Detroit, it is unlikely your property will end up being worth nothing once it is paid off.
If you put more money into it than you can sell it for, it has still been “worth something” - namely, you have lived in it. Most home improvements don’t return 100 cents on the dollar as “investments” (I think the average is something like 60 per cent overall), but who cares - you get the “benefit” of having those improvements when you are using them.
No question. But that wasn’t a point in dispute. The points I have been making have all been in connection with a house that is also your own primary residence; and I’m not claimingh it is the easiest way to make money, merely that making money can be a nice bonus, and home-ownership not necessarily a bad decision.
Perhaps - but that doesn’t mean it is of necessity a bad financial decision.
Personally, I can’t say I’ve done too much of that. I have fixed up some stuff to be sure over the years, but I can’t say it has taken too much of my attention.
Several people have said this, and it’s true.
But the broader point is that even where the real estate is not your primary residence, the same equation holds. Because as long as that real estate is someone’s residence (or office, FTM), then the living costs need to be part of the equation. If it’s your residence, then you’re saving on rent. If you’re renting it to someone else, then you’re making income from that rent. Either way, looking at a real estate investment solely in terms of the percentage increase in the value of the property is missing a good part of the ROI.
That said, there are downsides to RE as well, most notably the lack of liquidity and the hassle (unless you can afford to pay a management company as part of the equation).
Bottom line is that it’s hard to compare it to something like putting money in a index fund.
And what did you pay in rent for 35 years? This must be factored in.
(I see I’m not the original thinker here… Yah, what everyone else said…
The bottom line on this, from my perspective: you have to look at a diversified portfolio with a variety of risk and return levels.
Real estate is a relatively safe investment. Because it is relatively safe, it will also tend to average lower annual return on investment. Find out how much of that kind of investment should be part of your portfolio. And like other parts of your portfolio, you need to compare return on investment to the management costs.
There’s a place for real estate there, just like there’s a place for cash, bonds, stocks, etc. If you put everything in its place, you should come out well.
If you’re just following grampa’s advice that they aren’t making any more of it… well, garbage in, garbage out.
First, thanks for clarifying with your earlier post. I understand what you’re saying.
But I disagree with this assessment of the house being worthless. Once the note is paid off, the value of the house isn’t just what it could be sold for, it’s also the cost avoidance of paying rent.
So if I bought a house for $200k, paid it off but let it rot so that it is now only worth $140k; and rent for a similar space goes for $2k a month, I’m probably still doing quite well on the whole deal because that’s $24 grand a year that isn’t coming out of my pocket.
My mortgage payments have risen because my property taxes have risen. The property taxes on my house were about $3800 a year when I first moved here about fourteen years ago. They are about $6200 a year now. We’ve also had about 10k in boiler repairs. So in a sense the mortgage has risen. Still, it’s worth it to us. The schools are excellent. My house is relatively spacious with two and a half bathrooms and four bedrooms as well as a backyard that gives us a great deal of pleasure for much of the year. I live in the NYC area and housing of any kind is notoriously expensive. Rents are not cheap either. My house will likely retain value because of these facts.
Our total house payment is less than it would cost us to rent even a smaller house. And our payment includes what is put in escrow for our taxes and insurance. We spend maybe an average of 2 or three hundred bucks a year for maintenance. If I were single and could get by with a one bedroom apartment it would make sense to rent, but not with a family.
People who own rentals rent them out to make a profit. You can’t profit if you don’t take in more than you pay out. With a house, the rent will almost certainly be more than the mortgage payment including taxes and insurance.
That’s not always true. Many people rent them out with negative cash flow, hoping to profit from increases in RE values.
[It’s actually somewhat more complicated than that, because some people are not just attempting to profit off this one house, but intend to build up equity in this house and use that equity - via refinancing - as the downpayment for other houses, and so on, over and over. Great fortunes have been made using this approach during times of rising markets, and great bacnkruptcies have come about from this same approach during times of flat or declining markets. But it’s commonly done.]