Your House Doesn't Add Up The Way You Think

[jyl]

I looked at California house price data over several decades, and found that over the long term it only paces the stock market. And that's not counting taxes, insurance, maintenance, improvements, etc. If those consume, say, 3% of the home value each year, then houses are much worse than stocks as long term investments.

http://www.washingtonpost.com/wp-dyn/content/article/2007/04/07/AR2007040700075.html

"Your House Doesn't Add Up The Way You Think
By Martha M. Hamilton
Sunday, April 8, 2007; Page F04

In areas like metropolitan Washington, where real estate values have soared dramatically during the past decade, buying that house 20 or 30 years ago often seems like the smartest investment you ever made.

But was it? And -- if we view the roof over our heads as an investment, what role should it play in planning for retirement?

Coming off the recent housing boom, it's hard to think of investing in real estate as anything but a slam dunk. Even if you lived through a dip in prices in the early 1990s, and are watching prices settle now, the trend seems almost unrelentingly up.

But a recent study by Fidelity Research Institute offers a longer-term dose of reality, noting that inflation-adjusted returns on a dollar invested in residential real estate from 1963 to 2005 have been only slightly better than returns on low-risk Treasury securities over the same period. Stocks performed much better as an investment, averaging a return of 5.95 percent versus 1.35 percent for residential real estate. Even in the Northeast and the West Coast, where the growth in real estate values has been the highest, stocks and bonds beat real estate.

If that seems surprising to you it may be because we often use selective memory when we think about our homes as an investment. I've often bragged about buying my house -- now valued by the city at $730,740 -- for $42,000 in 1972. That makes me feel pretty smug, until I think about all the additional money I've invested. There was the nearly $100,000 loan in 1978 for renovations; the assets I gave up in return for my ex-husband's share of the real estate, and many thousands of dollars spent over the years for insulation, appliances, windows, doors and other upkeep. On top of that, there's the interest I've paid on the mortgage and home equity line of credit. After several refinancings, my current mortgage is for more than five times the original price of the house, albeit at a low-interest rate.

Dallas L. Salisbury, the head of the Employee Benefit Research Institute, says it's fair game to count your house as part of retirement assets as long as you also factor in related expenses. And "if you count it, you have to make sure you're focused on the fact that, when push comes to shove, you still need a place to live." A new home, though smaller, may wipe out most of your gains.

The fact is, most current retirees don't use the equity in their homes to support themselves in retirement, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. They either reinvest it in a new home or leave it to their heirs.

But that trend may be coming to an end, she said: "I think, going forward, that is a luxury people are not going to be able to afford anymore, and it may be prudent to think about the house as an investment to tap in retirement."

People who are retired now are probably fine, she said. But those who retire 10 years from now "are going to be in trouble," because they will be less likely to have traditional pensions, will get less of a salary replacement benefit from Social Security and will pay more for Medicare. And they may not have enough time between now and retirement to save enough to cover the shortfall.

Although it may be painful to think about, more retirees may need to turn to reverse mortgages, Munnell said. Reverse mortgages provide cash that allows the homeowner to stay put. Once the homeowner leaves or dies, the loan is repaid, usually from the proceeds from the sale of the house.

But homeowners may not be able to tap as much value as they anticipate, she said. Many people have used home equity lines of credit in recent years to take money out of their real estate holdings for other purposes. That might not leave as much equity to take advantage of through a reverse mortgage. "You need to be careful how much you tap into it while you're working," she said.

Younger buyers especially should be mindful of the longer-range data on returns on investment in housing and not be swayed by periodic run-ups in real estate values, said Munnell. "It's not a killer investment," she said.

There are many other good reasons to buy a house, though. You need a place to live, you will build equity, and you'll get to exercise your creativity shaping your home to suit your own tastes and desires. But buying less house and more stocks might serve your long-term financial interests better than overextending yourself to buy a bigger house than you can afford.

Imagine yourself sitting in the swing on your back porch, opening your mail and looking at those big balances in your retirement savings accounts. That would be the best of both worlds."

[on-ramp]

i posted something similar a while back. your primary residence is never a good investment. it's an asset for the bank. for you a liability...maybe it's a good investemet for your kids, after you croak, and then they sell it.

[fintstone]

The way I see it is that anyone coming into retirement with a paid-off house will not need very much to retire on...or at least a lot less than they would have. It is quite the security blanket and serves as both a tax write-off and a somewhat inflation adjusted investment. If the house payments were approximately the same amount as rent (as it is in most places), it seems a great deal. Obviously if you did not need a place to live, you could have invested the money elsewhere...but how many renters invest such a significant sum each month? My first house was paid off about the time I hit 40. If content to live in that house, I could have easily retired that day and continued to live the same lifestyle...but I opted to make more mone and chose not to. That is a choice that most folks with moderate income rarely get to make.

[Porsche-O-Phile]

I agree completely.

Here's an example: I pay about $1,300 a month for a 2BR apartment with two garage spaces. The building right next to us is a "conversion" building - my neighbor living there in a comparable unit (about 900 sq. ft., ONE garage space, upstairs unit, etc.) is paying over $2,300 a month on an interest-only mortgage to "own" his place.

Neither of us is building any equity. So who's the fool?

The way I see it, the only way a house is a "good investment" nowadays is if you hit the lottery or have a trust fund whereby you inhereit about $100k - then it can serve as a stable place to "bank" your money until you're ready to sell years hence by taking a CONVENTIONAL, 20%-down, 30-year fixed only (all "funky" loans do not apply). Even then, I'd say it's only a "stable" investment right now if you're planning on holding it for at least 10 years. The market is far too volatile right now. I'm putting my money into stocks, futures and options right now and kicking the crap out of the rate-of-return I'd see with RE. Yes it sucks to write a rent check every month, but ultimately I think I'll laugh all the way to the bank versus the throngs of suckers out there that are "homeowners" in name only - effectively paying (overpriced) rent to a bank for nothing.

We shall see.

[tabs]

Thats why Mother is a Securities Broker...she told me years ago that the Stock Market has out performed RE as an investment. Re is also an ill liquid asset. Whereas Stocks and Bonds are completely liquid as they are priced 24/7. Discussing illiquidity she said there is no way to know the value of RE until you sell it.

However we all do need to live somewhere and that has a COST. We don't live for free, so if that cost is subtracted out, RE will at least return your costs. U also have something that is of value at the end of the day, which U can sell to raise liquidity. So I would be an advocate of being an owner, however I would not be a buyer when a market is overpriced and is giving every indication of taking a tumble.

[Zeke]

And, Wayne has stated the same many times. Not only that, but an attorney who was also a financial wizard more or less prove this to me many years ago. Nevertheless, he bought a trophy home on the water and drove a Rolls. He still made more money with the market even though the home became worth a million and some, over 5 times what he paid for it. But, he was crying the blues big time on that big market melt down a scant few years back. I think he even doubted he would be back the way he is now. He just held on, that's all. And, we're not talking pennies here, he had built up millions over the years and took a big hit on the dive.

[fintstone]

I have never paid more to buy a house than to rent a similar home except for here in Las Vegas. The examples cited really only exist in California and other greatly overpriced areas. In most areas of the country, it costs little more to buy than rent, often less...so you are taking nothing from what you would invested in other instruments. Even if there is no increase in value of the home over time, you pay down the mortgage and eventually own the asset (likely worth hundreds of thousands) for the same price as renting the same home (where you would have nothing).
For example, I bought a house in Albuquerque about 10 years ago. I paid $235,000 with about $10,000 down payment. I have a fixed rate 15 year mortgage. The payments are about $2k per month. About $1000 of that goes to principal each month. Rent for a similar home would be about $1800-$2000 (If you could find one for rent) and the house is now worth about $450,000. I owe much less than $200,000 and the home will pay off in just a few years. If I had stayed in my rental which cost almost as much and not nearly as nice Smaller, only 2-car garage, etc), I would have likely lost my $10,000 that I put down in the last stock market crash as I did the rest of my stock portfolio. I also would not have been able to take advantage of the mortgage and property tax writeoff that were included in the mortgage payments. I have had similar experiences with every other home I have purchased. The only way I could have made a better choice, would to have been to buy two houses.

If landlords were not getting a good deal and making money on the homes they rent you, why do you think they do so? Should we assume that landlords are financial neophytes or are they just generous enough to be happy to contribute to your lifestyle by losing money each month they rent to you?

[tabs]

Originally posted by milt
, he was crying the blues big time on that big market melt down a scant few years back. I think he even doubted he would be back the way he is now. He just held on, that's all. And, we're not talking pennies here, he had built up millions over the years and took a big hit on the dive.

The melt down was the 50 year storm...the 2000 to 2003 meltdown was the worst Bear Market since the Great Depression. The 2003 to 2006 period was more or less a sorting out period, where other asset classes were the star performers. Now the Equities markets are poised to do well over the 4 years or so.

[sammyg2]

I bought my house 13 years ago, it's now worth 3 1/2 times as much as I paid for it. I challenge the stock market to match that. If you actually look at how much I put down ($20k) and compare that to the increase in equity, the return on investment is staggering.

(BTW, in the same period my stocks (VLO, TSO) are up 12 times as much as original purchase price, lets see a mutual fund do that )

[fintstone]

With my house, I was able to own/benefit from a $200+k investment for $10K, live in it, and deduct most of my payment (rent) from my taxes. It just doesn't get much better. Even if you get a 2 or 3 percent return per year on the $200k, you are doing pretty darned good if you only invested $10K...the leverage multiplies the return by 20.

[tobster1911]

Originally posted by Porsche-O-Phile
I agree completely.

Here's an example: I pay about $1,300 a month for a 2BR apartment with two garage spaces. The building right next to us is a "conversion" building - my neighbor living there in a comparable unit (about 900 sq. ft., ONE garage space, upstairs unit, etc.) is paying over $2,300 a month on an interest-only mortgage to "own" his place.

Neither of us is building any equity. So who's the fool?

Both. The person collecting your rent check is the smart one. If your apartment is so much better, how much do you think it is worth to the current owner should they sell? They obviously paid a LOT less or are you suggesting that they are renting at a loss or below market value for some reason?


While I don't look at buying a home as an "investment", I do look at it as a choice.
1.) Potentially put money back in my pocket. (via appreciation, ect)
2.) Guaranteed to put money in someone else's pocket.

[Porsche-O-Phile]

I don't disagree with you. But since I'm not the one who bought the apartment building 20-odd years ago, there's not much I can do about that. Currently the situation is what it is - there aren't any viable options to change it or build any real wealth in RE unless one has a LOT of money to put down - and I guarantee I can out-perform the rates of return you'll see in RE elsewhere. Ergo, it's just not worth it - right now. In time that may change (probably will) but not without significant market changes.

FOR NOW, RE is a lousy place to put one's money. Even old 944s are probably better.

[Moneyguy1]

sammy:

The only problem is, within your neighborhood, other houses have gone up 3 1/2 times inmarket value as well. So, buying another house in the same area is a wash. It still is a paper gain.

[tobster1911]

Originally posted by Porsche-O-Phile
there aren't any viable options to change it in California

I agree with you with one small addition. Even in Colorado (not the most cost effective RE markets) it is still very achievable to get into a starter home. I did it with 0 dollar down using first time buyer programs. (El Paso County Bond program)

[Porsche-O-Phile]

Sure, hook me and my wife up with a job making what I'm making now with the same perks/benefits and I'll be all over it like a bum on a ham sandwich.

See what I mean?

People love to beat on CA, but there ARE reasons people are attracted here (and stay here). Sometimes the overall positives outweigh the negatives. I'm with ya' though - I certainly wish the CA RE market WASN'T so f*cked up and my wife and I could attain what virtually everyone else everywhere else SHOULD be able to attain based on our incomes and work ethics, but such is life. I guess I'd rather rent and be happy than "buy" and be miserable.

[Porsche-O-Phile]

Originally posted by Wayne at Pelican Parts
Nope, not the smart one. The CAP rates for California here are so bad that you could easily sell the property, put the money in Treasuries, and make the same amount or more per year with zero risk.

The place I'm renting sold for $880K to the current owner in September. I'm paying $2950 in rent each month. Prop taxes are 1.1% or $800/mo. If this person paid cash for the house, then their ROI on this investment is a scant 3%. Even if they didn't pay cash and financed it, with the cost of money at well above 5%, there is no room to make any money. Considering that prices seem to be flat or declining, it's silly to own property in California at this particular time.

-Wayne

I'm printing this post out and putting it on my wall. It'll be better than Zoloft for making me feel better about the current situation. Thanks for that.

Well-put.

[jyl]

Originally posted by Moneyguy1
sammy:

The only problem is, within your neighborhood, other houses have gone up 3 1/2 times inmarket value as well. So, buying another house in the same area is a wash. It still is a paper gain.

Plus sammy is measuring trough to peak RE appreciation, which is misleading unless he plans to be a timer - sell his house right now and move out of CA or rent. Measure the S&P trough to peak over a 15 yr period and you get similar appreciation, with no carrying costs like maintenance, property tax, insurance, etc.

It is true, though, that with RE you can lever up 10:1 or more, and have tax benefits, which you can't do w/ stocks. But leverage works against you on the way down too.

In general I think RE is a good LT investment, but not so good that you can forget about cycles or take on crazy debt to buy it, which is what too many people did in the last few years.

[tobster1911]

Originally posted by Wayne at Pelican Parts
Nope, not the smart one. The CAP rates for California here are so bad that you could easily sell the property, put the money in Treasuries, and make the same amount or more per year with zero risk.

The place I'm renting sold for $880K to the current owner in September. I'm paying $2950 in rent each month. Prop taxes are 1.1% or $800/mo. If this person paid cash for the house, then their ROI on this investment is a scant 3%. Even if they didn't pay cash and financed it, with the cost of money at well above 5%, there is no room to make any money. Considering that prices seem to be flat or declining, it's silly to own property in California at this particular time.

-Wayne

I think that you are assuming that they put a lot of their own money into the rental house.

Person A has $XX extra each month on top of their primary residence. You are saying that they could put it into investments like your Treasuries ect, OR they could purchase a rental property. I think that they do both. Unless they are renting it for a loss, then the renter is paying to purchase the house for the owner. Especially if they used a 0down loan. Is it VERY risky? Sure. But unless the owner is subsidizing the renter, they can use their own money to invest elsewhere and have someone else front the money for the RE "investment".

I don't know much about CA but that is what the people around here are doing. Me? Nope, I am too risk adverse. But for my primary residence, I would rather Potentially put money in my pocket than a Guarantee to be putting money in someone else's. (regardless of if they make a profit with it)

[kjb]

Originally posted by tobster1911
Unless they are renting it for a loss, then the renter is paying to purchase the house for the owner.

Wayne's point is that people are renting it for a loss.

/ Johan

[Rot 911]

I think you need to separate the areas like CA, NYC, Miami, etc. from the rest of the U.S. when forming your opinions. Here in mid-Missouri there is not such a huge disparity in costs between renting and buying. As for the investment portion I just see it as part of my retirement. My house will be paid off so housing costs will not be a factor. A renter can't make the same claim unless they have set enough aside to either keep paying rent or buy a house. Most of the people on this board make more than the average person who is not able to put that much money aside.