In addition, we have affordable margin loans, mortgage interest tax deduction, property tax deduction to juice the system, not to mention additional legsilation like 1031 exchanges, prop13, etc.
Many of these were put in place as public policy promoting homeownership driven by the idea that homeownership would be less costly / beneficial to society compared to long term tenancy. That thought doesn’t seem to necessarily be wrong per se. but if you help out demand side legislatively while restricting supply legislatively, sometimes you’ll get cases of imbalance like we see in the coastal cities.
Given what we’ve observed in the last couple of decades around the world, a managed system like Singapore where property appreciates at a ~2% rate a year (and if demand suddenly shoots up, they’ll add transfer taxes or stamp duties or inject supply into the market) seems much more stable for society.
There are apocryphal stories of studies purporting to find that the best performing investment accounts are those that belong to people who are either dead or had forgotten about their account:
* https://www.marketwatch.com/story/why-the-buy-and-play-dead-...
* https://twocents.lifehacker.com/the-best-investors-literally...
Generally, even if one invested lump sums right at market peaks, just before crashes, you'd still get a decent returns as long money was not withdrawn:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Though the best strategy for most people seems to be to just put away a little every money in a total market passive index fund:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
I believe that the purpose for homeownership in the US was primarily to foster a competitive housing environment. That way landlords wouldn't control the majority of the housing market and people could help keep housing prices down per month by being able to have the ability to qualify for housing just as easily as tenancy.
On the flip side, it also makes it harder to sell when it is booming.
The potential return is intrinsically higher from 0 to 1 for PE, than it is from 1 to N in public markets
https://www.bloomberg.com/opinion/articles/2019-04-18/privat...
Build more housing? Build more land? One-child policy?
Or were you talking about just shooting people?
I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares.
Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund.
For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way.
I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move.
Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
Add to that property taxes continue to accumulate on buildings. There are quite a few ways to drive a house to worthless. I used to live in a region where houses were <$10k because they were condemned shells in crime-ridden areas.
A house provides a basic human necessity (shelter) and can be insured. It stands to reason that it can be mostly financed with very long-term, cheap, debt capital. Other than mass-scale depopulation, not much will cause a house to dramatically lose value, especially to a first-lien lender.
Stocks are a different animal. Even assuming a company performs well, which it may or may not, there are all sorts of crazy things -- trade tensions, interest rates, valuation changes, investor sentiment for/against various sectors, completely leaving aside rational changes in value due to company performance -- which cause price swings far detached from company fundamentals. US equity markets went up ~30% in the past year. They could fall as well. If anything like this happened in housing, you'd literally get riots in the streets.
I don't think it's an accident that the financial system provides so much credit for housing. Yes, it should probably be a little more expensive (thank Fannie and Freddie for that) and yes, maybe we could use a little more equity, 20%, or 30%. But suggesting houses should be 100% equity-financed like most stock purchases? Doesn't make sense.
I agree 90% is extreme. However, the nice thing about owning a home is that even if it loses value, more often than not, other homes will also lose their value.
Say you buy a 1 bedroom place for 500k, and 5 years later you have 2 children and need a 3 bedroom place, but your home lost value and is now only worth 400k. The good news is that the 3 bedroom place also probably lost value. So even though your home decreased 20% in dollar value, the 3-bedrooms also did too, so your house (as far as in-kind value) is worth the same.
In fact, in some cases you could go further and say it's good if your real-estate loses money. Suppose that you bought that 500k place, and had 100k left in your bank account afterwards. Now 5 years later the real-estate market sinks 20% and your home is worth 400k. Suppose you didn't invest your 100k and it's still all cash. When the housing market sinks 20%, your in-kind trade value plus your existing cash is actually worth more than if the real-estate market did the opposite.
For the above reasons, it's better to think about your primary residence as planting a flag in the area that you want to live rather than a financial investment.
Owning a house is expensive, even after your mortgage is fully paid off. People like to simplify the model so they can feel good about owning a "paid" piece of land.
* The housing loan is non-recourse (you can't lose more than your home), while brokerage is not.
* A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines.
All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
I put 3% down when I bought my house. That's 30x leverage.
The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years.
If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal.
As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out.
Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.
Now imagine a 20X ETF that invests in a single property, with high maintenance costs, extremely low liquidity, zero diversification, and high transaction costs. That is basically what some of these mortgages are.
It is absolutely intoxicating when the asset price goes up and I am not surprised in the least that people love it as an investment. Even if it explodes, you walk away and your losses are minimal. You only risked 5% of the price and sure you made some payments along the way, but the risk asymmetry completely rewards being as reckless as possible.
I see this argument all the time but once you do the math, it comes down close to the same with the house being leveraged and index funds without leverage (also known as the 5% rule)
With it often comes property taxes. There's the time and cost of maintenance. There's the friction of being able to easily relocate for a better paying job.
Worst of all, past performance is no indication of future returns. That is, it's possible your property won't appreciate, at least not sufficiently. For example, think Detroit. Or beachfront property in say 25 yrs. Or McMansions. Will smaller less consumption-minded families in the future want them?
Housing works as an investment because everyone is in on the scheme. The gov. The banks. Everyone. And it's still a roll of the dice.
- Incredibly low liquidity—takes months of effort to buy or sell
- Very complex to buy/sell (usually requires lawyers, lots of inspections, documentation, etc)
- High fees to both buy AND sell it
- It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)
- It's constantly falling apart, and requiring upkeep maintenance
- It's completely undiversified: subject to not only one country, one state, one city, one neighborhood, but a single tiny plot of land at one specific location that could be hit by any sort of natural disaster, get bad neighbors, have the local economy collapse, etc. Its pool of potential buyers is also limited to this very tiny location.
- Returns are relatively low, roughly in-line with inflation
- It's almost always leveraged (often good, but that cuts both ways, and you have to pay the interest on it regardless of what happens)
Sounds like a wonderful deal, eh?
I wish. The problem with housing is that the returns are not low, they're reasonably high and really safe.
You can buy a property in basically any city, sit on it for 5-30 years, and be guaranteed to beat inflation by at least a small margin -- often a wide one. Sometimes this is true, even if you never maintain the place, even if you level the existing structure, and it's just an empty grass lot.
I wish housing was not a good investment. If housing could depreciate the way a car does, that alone would solve like 40% all problems in the housing market today.
[1] https://en.wikipedia.org/wiki/Case–Shiller_index#/media/File...
ETA: I wonder why this is such a common belief? Is it because most HN (myself included) readers live in booming real-estate markets like NYC and SF? Those markets have done very well in the past 10 years. But remember: places like Detroit, Atlanta, Chicago, and Cleveland also exist.
An actual high yield savings account right now gives around 2% nominal interest which is less than inflation.
The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.
The inflation rate in 2019 was 1.76% [1]
> The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.
Ok, then look at it from 1970... The results are even worse
Every coping strategy has it's limit. You can't commute more hours than there are in the day. YOu can't have more than 3 people living per room (at least not legally). Once you move in with your parents, you can't do it again. etc. I think we've reached that limit in the bayarea (at least the core bay area) so we can look forward to housing returns of roughly inflation.
Even with the severe dystopian restriction on supply, it will just force more and more people out of the bay area.
Maybe some of the outskirt areas still have room to go up, like Tracy, antioch, brentwood, etc. some of those places haven't yet been gentrified.
Why do you think houses are going for 2 m$ in the bay area? Because the expectation that it goes up is already priced in. Also a good reminder that the return of the past are not an indication of future returns.
Buying in the bay area is de facto a speculative investment as rents are comparatively way cheaper. The only incentive for buying at those prices is the hope to sell it for even more to someone else later (see also, the greatest fool theory).
Housing in SF was pretty much flat from 1990-1998. It went down by ~30% in 2008 and took 10 years to match the peak in 2006.
As others point out, houses can be easily setup in and around the metros to give a steady 3% return not including appreciation. Considering dense living is the future and the house will materially remain through a market downturn, why wouldn't you diversify your portfolio with a few?
FWIW, broad-market index funds hold REITS, which give you a market-weighted chunk of the RE market. No need to "diversify" into RE. Doing so only skews your portfolio to be overweight in RE.
Housing is NOT always a good investment from an economic perspective. It depends on the location, market events and most importantly what price you bought it at.
Sure, agreed, but let's think that through a minute. So your housing has 'only' beaten inflation by ~25%, and that if you sold it today, you would have 'only' gotten 7 years of effectively-rent-free living?
Imagine if you had actually had to rent a house during that time. I don't know what rates are in NJ, but you would have spent about $1200/month in rent (or ~$100k over 7 years) to have done something like that in Michigan.
The common "bad" scenario I hear about is one like yours, where you got 7 years of housing, and the appreciation "only" covered almost all of that maintenance/upkeep, but didn't also cut you a free-money bonus check on top of it.
That's where the "housing is always a good investment" line comes from. Yes, you had to take out a loan and front all the other money out-of-pocket yourself (and not everyone can afford to do that). But if you get it most-to-all of it back when you sell the house, then even in your "bad" example, you came out ~$100,000 ahead of any regular person who had not owned.
But yes, if you are wealthy enough to afford a 20% downpayment on a house, you are wealthy enough to potentially have opportunity costs from other investments at your disposal. Agreed.
So essentially, it is a HELOC. But it's at the same rate as your home loan, which is usually quite a lot lower than the margin rate if you borrowed to buy shares. Of course, this offset loan cannot go higher than the equity you've already paid back, so unlike a margin loan (which can go up to 10x!?).
So they are able to afford what they normally can't afford because of the tool (i.e., lower down payment) which helped make homes unaffordable.
Not in NJ. Property taxes quickly eliminate any illusion of free. Factor in maintenance, including time, and you're barely breaking even.
Owning provides a sense of stability and community. But investment in many areas is highly overrated.
It’s a very idiosyncratic risk you’re taking buying a home. Looking at a primary residence as an investment is silly in my opinion. Treating it as consumption makes more sense.
Where? In high demand areas? Sure. Supply is limited in NYC or SF. But those areas are becoming outliers where buying in (so to speak) is less available.
Or what about trying to sell in 2009 or 2010? People weren't foreclosing because they were in the black.
> It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)
Property tax is generally lower than your imputed rent. In the US at least, there is a huge advantage of being shielded from capital gains taxes (up to $500k if married)
> Returns are relatively low, roughly in-line with inflation
This is market dependent. SF Bay is something like 5.4% nominally over the past 30 years, which crushes inflation. Housing prices in the Bay Area in fact imply heavy future price appreciation. [1]
Also, the high leverage position (which you point out cuts both ways) does drive expected returns above inflation. Especially with, in the US, interest being somewhat tax deductible.
Also strongest advantage of owning a house over renting is the stability you get. My rent can always go up, potentially above my ability to pay; my ownership costs (esp. in CA with prop 13 limiting property tax rise) only barely goes up. (and far less than inflation)
[1] https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
Yes, but this is cherry-picking. In the US as a whole, RE typically matches the inflation rate. Some physical and temporal locations over- (or under-) perform. But in aggregate, that's the reality. There's no way of knowing ahead of time which market will out-perform. Investing in Bay Area real-estate today very well could continue to out-pace inflation. But that seems as big a risk as dumping $1M into Tesla stock today.
From:
https://www.zillow.com/homedetails/3203-Benton-St-Santa-Clar...
Neighborhood home value
95051 home values have fallen 8.3 % over the past 12 months. One-year prediction
Zillow predicts the home values in 95051 will fall 9% in the next year.
http://www.stock-market-crash.net/wp-content/uploads/2012/06...
And AFAIK, generally rents are lagging behind house prices and are more sticky. If you're a prospective buyer and houses are loosing and are projected to loose hundreds of thousands of dollars each year, that's pretty big incentive to stick around in your rental and wait.
And "forever" often turns into couple of years because of health problems, job opportunities, personal events, and so and so.
The only reason why houses cost as much as they do is historically low mortgage rates https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate... . And if this (mean reverting) trend is to revert any time soon...
I don't know what actually is going to happen. And maybe FED will eventually decide to hyperinflate the crashing credit bubble which would be great for people with big mortgages. But people that live in oblivion thinking that's the safest investment ever, are completely clueless. But maybe they'll be lucky. :)
Meanwhile here I am in my little city with barely more than 100k people spending less than 1/3 of my income per month with the help of a stable government job. I could get more if I wanted simply by working at the largest employer in town. So why move?
I’d say that upkeep and taxes on a house will be much greater than the management fees on a similar investment. In addition you have to deal with multiple government agencies (health dept, municipal tax dept) if you want to continue to live in or sell your house.
Much of the new houses I see being built are prefab hardeeboard which will look atrocious well before the mortgage is paid off.
We should really just get 3D printed high-density concrete houses down and be done with it. This is a solvable problem but everyone with the 1.2mm loan will freak out when you can get a better quality apartment that won’t rot for 200k.
It's worth pointing out that hedging inflation is a valid goal for investing, whether or not the investment involves real estate.
As a renter, you may not pay directly for property tax and repairs, but they do come out of your rent, unless your landlord's business is unsound. Maintenance costs the renter time and hassle too, although depending on the work done, perhaps less.
Certainly, relocation friction is higher, although some turn that into an opportunity to be an absentee landlord in a way that's more satisfying than subletting.
Yes, but what the landlord is paying may be very different from what you'd be paying if you bought.
For example, I know a landlord charging $3,000 per month for a place that would rent for $5,000 (rent control) or have carrying costs of $6,000 if purchased today.
He does just fine since he bought 15 years ago, so his mortgage is $1,500 and his property taxes don't go up more than 1% per year.
So yes, rent must cover the cost of ownership, but not the cost of ownership today.
That is, if we raised everyone's property taxes by 0.2% or so, approximately speaking, no one's rent would go up.
Leverage is the biggest benefit, I would imagine. Although paying half as much in rent sounds really nice these days :).
Glad it worked out for you.
Yes, absolutely. A 20% downpayment of $40k suggests a $200,000 purchase price. A 6.5% annual return over 25 years suggests the house is presently ~$950,000, because that's usually how people frame things (appreciation on the value of the asset, not their equity), unless they say otherwise. (Correct me if I'm wrong.)
So the house appreciated $750k, which is theirs to pocket. And based on the $40k downpayment, that's a ~13% annual return. But even if you base it on the purchase price, nobody cares about a lower annual return if you have a higher absolute figure you would't have been able to achieve otherwise.
(If you're not paying a mortgage, you're paying rent, and rents are typically approximately the current price of houses plus maintenance. There's a ton of variance, of course.)
We live in an intensively capitalist society, for better or worse. If you're not in debt, using money to make money, you're losing. Houses can be a risky investment, and for most people a mortgage is just what you have to do to maintain an average standard of living, especially in your later years when you can draw down equity and any appreciation. But if you don't have a mortgage you're at a serious disadvantage.
Rich people, or people who have the time and energy to trade derivatives, don't need home mortgages because they have other ways to make leveraged investments. For the vast majority of people, the first and only opportunity is a home mortgage.
This is why I think it's insane that we're building low-income housing with exactions and public expenditures. It's like buying Cadillacs for everyone too poor to buy a car on their own. You either buy older buildings (used cars) and refurbish, or better you get banks to finance construction of new properties in which they and the low income residents can have a property interest, similar to Singapore and (I think) some places in Honk Kong. The property interest may have constraints (can't sell for 5-10 years, some appreciation has to be rolled back into the program, etc), so it would take some public expenditures to cover the gap. But you're still playing the capitalist game, leveraging assets, and digging into the pockets of global wealth (not just the local tax base). Of course, the potential for abuse and bad planning is immense, but there'd have to be a ridiculous amount of abuse to burn money faster than buying Cadillacs for everybody. And when you consider the wealth building potential for residents (no longer just a handout, but the opportunity to build assets, like the middle classes), it makes even more sense.
A couple of years ago there was some press about some non-profits doing this in Oakland and elsewhere in the U.S. But the programs are just too small to matter, and the constraints far more onerous. If you don't permit such properties to eventually enter the free market and "gentrify", you risk creating ghettos. Do it right in a place like the Bay Area you need billions on the line.
This is all very general, and doesn't apply to every area equally, but it is a very rare situation where selling after less than five years makes sense on its own. Renting is a great option for people planning to move again in that time frame.
I've talked to people who bought a house at $200K, then sold at $300K 5 years later. Crazy return right?
Then you account for maintenance, opportunity cost of the down payment, transaction fees, etc. Then you realize the actual return was 8% when the market has returned 12% since then.
Suddenly it doesn't seem like such a great return.
And, so long as you don't any old house on the market, but instead take your time, do your research, and expect to hold it for longer than 10 years, your risks are substantially lower. Which is true for a lot of investing. Time in market is king. And it doesn't matter how long you spend in the market if you buy ignorantly for well over market value.
* Very few high paying companies in the area and they were less likely to move due to owning.
* They made about 3.3k/year in appreciation for 20 years. That's on the order of a 13 hour per month side gig.
* Any gains definitely erased by the amount of labor they put into things such as mowing the lawn, shoveling snow, having the washing machine hose disconnect and leak water down into the basement. All of these little things added up to many man hours across.
Does that not apply to most investments? The stock market, aftre all, only works as an investment because everyone is in on an elaborate confidence game.
I don't think this is true?
As far as I can tell, there is no reason for housing prices to increase on their own. I suppose you can make the argument for increased population growth but we haven't reached the point where this is a problem, at least in the US.
On the other hand, businesses exist for the sole purpose of making money. Literally everyone in the company is (supposed to be) working towards the goal of increasing profits.
> Paying your mortgage feels more urgent than contributing to a brokerage account
Of course it does, because if you spend your monthly brokerage allowance on a fancy dinner and booze, nothing too bad will happen. If you spend your mortgage payment on booze and steaks, you lose your house.
That's not a "mind trick", that's a real problem with serious repercussions. Housing is not just an investment for most people, it's THE investment, with life-changing, family destroying consequences if you don't keep it afloat.
Also getting kicked out of your owned house generally takes six months not six hours as you imply here. Which again is longer than you will get if you rent which is also not zero time.
If you paid cash for a house, you're losing the risk free rate of a treasury bond (or the rental rate). That's a cost most people don't count, but only because they dont know how to do financial valuations properly.
Making it appreciate is very problematic.
nobody is "making it appreciate" - it's a natural consequence of people desiring a home, and the supply not keeping up (whether by physical constraints, or by political/policy constraints).
> political/policy constraints
You just found exactly who is making it appreciate
But policy should never treat it as an asset. For policy, it should be a consumable good that only happens to take a very long time to consume.
Money in your house ends up abusing the inability of people to reason about compound interest and inflation.
Making 2x inflation per year on your house is not a terrible rate of return, but it leaves you at the backend believing you've doubled your money when you haven't, and you lose much of that to property taxes. At the beginning when you own 20%, your property taxes are 1% of the assessed value of your house, which is going to be between 3-5% of the purchase price. And that's at the beginning before inflation and compound interest.
Then 6% for the purchase and sale... and now taxes if you don't roll it into a new house...
And then there's home improvement. I figured out at one point that renting an apartment for a few hundred bucks more a month for a nicer kitchen/bathroom was cheaper and potentially less disruptive to my life than having someone tear apart my kitchen for weeks at a time and the dust and noises and people around all day.
If the value of your stocks tank, you have nothing to show for it...
If one isn’t living in the house then it’s not a home and they aren’t a homeowner, they’re in the property management business.
My point is that obtaining a mortgage on a house is not necessarily an investment, particularly if one plans on living in it. Yet I often hear from homeowners that their home was a “good investment” despite never having realized a gain on it, and never planning on selling it.
For some people. Others really don't care one way or another about a sense of home-ownership, they just buy because "it's what you're supposed to do, financially".
If they buy a house, they can no longer "cheat" themselves out of the savings and instead their home becomes a type of forced long term investment.
It's just a meme that needs to die.
A primary home is an asset, not an investment.
Home prices were stable (in real dollars) until Greenspan kicked off this train of asset bubbles in the 1990s.
so weird that this venn diagram only has one circle on it
A house is something you own. It can appreciate or depreciate, but it does not generate value. You might get lucky and realize a capital gain by selling it after it appreciates (if it appreciates and you can time the sale correctly), but it does not create value.
An investment is ownership of something that generates value.
All investments are assets, but not all assets are investments.
Even with that fictionally higher standard and procedurally generated definition of "investment", renting out a part of the house is generating value.
The stock is still generating value. The house is not generating value unless you go out of your way to rent part or all of it.
You could just as easily rent out bicycles or hammers, but no one would go so far out of their way to class a bicycle or a hammer as an investment.
All assets generate a return, some just do so badly (or negative returns). Anything that's not an asset is a consumable (like food).
And how is the rent "income" not offset by an equal rent expense?
yes, in a sense. The fact that you're not getting paid a rent from somebody else doesn't mean there isn't value. You could think of it as opportunity cost - owning a property but not getting rent from it.
> And how is the rent "income" not offset by an equal rent expense?
it is exactly offset-ed if you lived in that property.
Once you know those things, you can rig yourself similar safeguards around other asset classes (automatic payroll contributions, tax sheltered accounts with early withdrawal penalties, etc).