- 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.
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.