Is a home an investment though? You would plan to live in it and probably retire in it. And even if you sold it eventually you would have to spread the profit (assuming appreciation) over the many years that you have lived in it.
If you are pretty sure you're going to stay in the house for 7+ years, I still think buying housing is a good financial decision. I max my 401(k) each year. We bought a house 10.5 years ago and (because of leverage) the appreciation on it dwarfs my 401(k) balance (max deferral and S&P-500-ish investment returns for 10 years).
Do I think the next 10 years will be as good as the last 10? I don't think so, because I don't think that housing can grow sustainably faster than wages [because wages are spent on housing] and as interest rates inevitably rise from the current low levels, that will put pressure on price appreciation as well. Nevertheless, we have a house that suits our needs and fully expect to be here in 10 years.
It was a struggle to afford the downpayment and payments when we first bought it. It forced a certain amount of financial discipline. It'd be a similar sized struggle now for us to buy the place for the Zillow WAG.
By all means, though, if you don't think your career/field is stable or think you're going to move in the next half-decade, don't buy a house to live in.
Nitpick, but I think housing can grow faster than wages by a couple mechanisms. First, if supply is heavily constrained and people are trying to move to the area, what they might do is start sharing homes. Average wage doesn't change, but the number of wage earners in a home increases. Second, speculative investors can raise prices indefinitely since they aren't even earning a wage in that area - but I do think it's often overstated how much of an influence this has had in actual cities that have had housing cost explosions like Vancouver
I'll adopt your nits, though the second one seems at least loosely capped by wages in the long-run.
The first one is also a valid (actually quite good) house-hacking strategy. My brother and my brother-in-law both afforded their first houses in large part by renting rooms in it to friends.
I think that's a generally bad idea for the buyer(s), but a fantastic idea for the real estate agents and mortgage originators. I wonder who's out there pushing that idea...
Buying a good future rental as an owner-occupant with the intention of moving out and renting it out later is fine. Buying a starter home gambling that it will appreciate fast enough to cover the transaction costs and aggravation is, well, gambling IMO.
What's the difference between buying a house, and buying an annuity that pays the rent on that house?
You don't even need appreciation to 'profit'. If the cost of buying and owning the house is less than the rent, that's profit (or outperformance at least).
For some reason they got 'balanced' responses rather than actually answering the question, is it worth buying a house, which is a bit unsatisfying.
> What's the difference between buying a house, and buying an annuity that pays the rent on that house?
Security of tenure. In the UK, the advantage is also the ability to repaint your walls, put up shelves, or install e.g. a functional, non-bottom-of-the-barrel shower without asking your landlord.
In London, with rare exception, you don't get to live in a nice place unless you buy it.
There are some luxury developments with porters and whatnot for trust funders which are fitted well. (They're not necessarily unaffordable, but they're a waste; a labourer will save and buy instead).
But generally, a privately rented flat is going to have multi-decade old everything, walls in the wrong place, crap carpets, bad or no storage, and just generally be suboptimal.
Every flat I'd lived in as a renter I could have trivially made far better if I owned it. It's not a matter of permission; it's about ownership; no-one is spending five grand on doing up their landlord's kitchen; no-one's installing high end shelving or fitted wardrobes and taking them to the next place that's a different physical size in 8 months.
Renting (as a majority thing rather than an option) is pernicious because it reduces investment in one's surroundings. It's not only internal stuff; you won't know your neighbours in six months, you don't care about the outside of the house or the lawn or whatever, etc.
The first home I bought was very much not a place I wanted to live until retirement age in. For one, it was on the 4th floor without elevators.
A couple of homes later, I'm now in a place where I can see myself living until retirement.
When I bought the first few homes I definitely had investment very much in mind, though not the overriding factor. Otherwise I might not have been able to upgrade.
Personally it's having the knowledge of 2008 still fresh on my mind, the uncertainty in the market, a possible coming recession and the speed at which unsustainable housing prices are currently increasing make it more attractive to Rent & Save rather than buy a home.
Six years ago was a buyers market and everyone knew it. That's not hindsight. I bought mine 5 years ago and it was still a buyers market and everyone knew it. Me included. Not sure who your people are.
I only see real estate as a good investment two reasons:
1. Capital/equity appreciation - the value of the home + land is worth more in the future. This is not a guarantee in most parts of the country. There are a few areas that are fairly resilient (usually within the metro area of the largest cities in the country) but the barrier to entry can be impossibly high for most people.
2. Hedge against inflation - the value of your mortgage stays the same, but rents (and, in turn, the value of the dollar) increase. This is the classic "rent vs buy" scenario. If rents / sq ft are more in your area than owning the home it's worthwhile. This may not always be the case but even if rents dip they may (will) rise again and the predictability of a mortgage payment over 30 years can offer stability. Again, though, it can require considerable upfront capital to secure that steady payment.
I suppose it depends where you live. But in general, in growing cities it's a matter of supply and demand. More and more people move to growing cities, and there is a fixed supply of zoned land to build on.
A few other reasons to add to your list:
- Preferential tax treatment. In the US and Canada, capital gains/appreciation on your home is completely TAX FREE. For comparison, any gains you make on the stock market 15-40% will go to taxes.
- Leverage. Try going to a bank and ask for a $500K loan to invest in stocks. Not going to happen. You can do this with a mortgage at incredibly low interest rate.
Nitpick.
The value of the house is the hedge (you would expect that to rise with inflation)
The mortgage is fixed (or at least decoupled from inflation). I wouldn't describe something fixed as a hedge?
Well it's a pretty common sense investment idea. If something's gone up a lot, there's less upside in it.
If you look at how many years' income it costs to buy a home, it's gone up by a lot in many places. Back when it used to cost 2-3 annual salaries it might have made a lot of sense to buy a place. Now there's parts of the world where it's 10x.
In general yes, it is about the stability of your job and you having to move somewhere else to find a job.
But, if you are in area where jobs are plentiful in your area of ecpertise, it’s not about the stability of your job but the ability to find another one quickly.
It really does not look like a good investment at this time, though individual houses and local markets could vary. Record low numbers of millennials also believe the earth is not flat, and they're right.
The best investments are those that are used to produce income. Passively investing in real estate means buying an asset that produces no income, costs taxes/maintenance/insurance, and the structure declines in value due to people wanting new things, not old things.
The net result is you're relying on increasing demand to make money, which only works for location, location, location.
That's right. But using a house, like driving a car, pushes its value down. Wear and tear.
I own my home because I like owning it and being able to use it the way I want to rather than asking permission from the owner. But I don't think I have illusions about it being an investment. It kinda sucks as an investment.
I suspect we see things fairly similarly. I bought our house because it was a great location, (potentially) lovely old house, with a yard and parking, and sized/designed that we might be able to live there 30+ years.
I bought it considering the ownership to be primarily an act of consumption; it's just happened to turn out to be a greater windfall than my actual/intentional investments. I accounted for it like consumption, but had pretty strong suspicions that it would have a strongly positive financial return. (Nice large, already old, single-family with a yard in Cambridge, MA.)
While buying will you save money on rent, studies have shown that, if your priority is building wealth, investing in stocks and bonds can have a higher overall return, even as you continue to make rent payments. The London Business School and Credit Suisse found that, between 1900 and 2011, housing offered returns around 1.3 percent per year, after adjusting for inflation. The average annualized total return for the S&P 500 index over the past 90 years, by contrast, is 9.8 percent.
"A single family home is not an investment," CFP Eric Roberge tells CNBC Make It. "It may gain money over time, but if you're looking to invest, buying a single family home and then living in that home is not the place to do it."
A few things to keep in mind:
Obviously location is important. Parents have done really well on their Bay Area homes ,averaging a compounded return of 7% since 1996 on home equity (or about 3.5% real), but other locations may be worse. That far exceeds the 1.3% figure quoted by the article and includes the 2008-2011 hosing bust.
The 1.3% figure may be abnormally low due to the exceptionally high inflation of the 70's and early 80's distorting the stats. It is exceedingly unlikely imho that we will see 10% inflation again.
The article downplays the erosion of potential wealth due to rent. Since 2009, rent, especially in booming areas like Seattle and Bay Area, has far exceeded inflation. http://greyenlightenment.com/bay-area-rent-prices-are-surgin... Also, many landlords require a huge deposit and a good credit score , which negates many of the advantages of renting such as not needing as much money and nimbleness. Otherwise, for short-term rents you're stuck with services like AirBnB, which is even more expensive on a per-night and inflation-adjusted basis.
Rent + stock market may beat home ownership, but when the market falls, rent does not fall. Also one must account for the fact a mortgage allows a lot of leverage, which magnifies those returns.
Home ownership allows cheap leverage and has generous payment and tax plans, which stocks do not have. With stocks, you have no negotiating power with the broker if you find yourself in a bind.
Yeah, rents dropped dramatically in the Bay Area, even faster than home prices. My first 1BR was $1400/month for the first 3 years I lived out here (2009-2011); the exact same complex had been renting these apartments out for $2000/month in 2007 & early 2008.
Smart millennials! Over almost all periods where we have enough data (1800 onwards) buying real estate has been a worse investment than buying stocks. A couple of exceptions are the decade leading up to the 2008 financial crisis (i.e. the swansong of the real estate bubble) and the decade from 1945-1955 as returning soldiers and the post-war boom increased the demand for property in the U.S.
Real estate produces rents but also costs (taxes, maintenance) and over long periods the investment only just keeps up with inflation. Putting your money in productive businesses (the stock market) has historically been a much better investment, beating inflation by something like 3-5%.
A home should not be considered as much of an investment as it commonly is. A home is a physical good you buy because you need a place to live, and generally the economics work out so that it's long term cheaper to buy a place than to rent it. Ideally home prices should be low for the reason you want any other physical good to have low prices: so you can spend your money on other things.
But, a home is generally the most expensive thing people own. For a lot of people (most?), it probably makes up the majority of their net worth. So in general the incentives are for policy to be passed to pump up home values because people want to make money without having to work. Basically, we have perverse incentives regarding housing prices due to the fact that they are expensive things.
A geographic breakdown of attitudes to home purchase would have made the survey more useful. Arguably, the economics of purchasing a home in NYC/SF are somewhat dubious. However, investing in a home outside of those areas and more particularly in areas, such as Texas or parts of the midwest, where housing is still affordable and the economy predicted to grow further, might be a good decision.
In other markets, homes aren't seen as investments by anyone. For example, in Japan, homes are considered depreciating assets, like cars. Homes are abundant, surprisingly cheap (even in dense urban areas, like Tokyo), and regularly demolished / rebuilt. The reason for this affordability is Japan's flexible zoning laws. In America, urban areas have very strict zoning laws, which do wonders to prop up real estate prices.
Investment is a terrible way of thinking about homeownership.
In the markets that are most affected by this phenomenon like London, SF, and so on, for the vast majority of individuals, it's the only thing that costs money anyway.
Anything else can either be binned as 'trivially cheap' (e.g. groceries+bills+transport combined) or 'luxury fun' (e.g. nice clothes, expensive holidays, etc).
To the point that money in the abstract is basically irrelevant (vanishingly small numbers of people have liquid wealth, but tons of families with modest jobs own 500K, 1M, 2M homes in London).
If you don't want a house or apartment to call your own, a place to make good and have suit your needs (with nice fittings, a layout that suits you, neighbours you know well and so on) then you don't want it.
Young people barely ever want this stuff (I sure didn't) and the Internet has only exacerbated that. Money has less to do with it than people think, I reckon.
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[ 2.7 ms ] story [ 115 ms ] threadDo I think the next 10 years will be as good as the last 10? I don't think so, because I don't think that housing can grow sustainably faster than wages [because wages are spent on housing] and as interest rates inevitably rise from the current low levels, that will put pressure on price appreciation as well. Nevertheless, we have a house that suits our needs and fully expect to be here in 10 years.
It was a struggle to afford the downpayment and payments when we first bought it. It forced a certain amount of financial discipline. It'd be a similar sized struggle now for us to buy the place for the Zillow WAG.
By all means, though, if you don't think your career/field is stable or think you're going to move in the next half-decade, don't buy a house to live in.
The first one is also a valid (actually quite good) house-hacking strategy. My brother and my brother-in-law both afforded their first houses in large part by renting rooms in it to friends.
Many people don’t. There’s an idea of a “starter home” that you buy and sell for a profit and trade up to the dream house later on in life.
Buying a good future rental as an owner-occupant with the intention of moving out and renting it out later is fine. Buying a starter home gambling that it will appreciate fast enough to cover the transaction costs and aggravation is, well, gambling IMO.
What's the difference between buying a house, and buying an annuity that pays the rent on that house? You don't even need appreciation to 'profit'. If the cost of buying and owning the house is less than the rent, that's profit (or outperformance at least).
For some reason they got 'balanced' responses rather than actually answering the question, is it worth buying a house, which is a bit unsatisfying.
Security of tenure. In the UK, the advantage is also the ability to repaint your walls, put up shelves, or install e.g. a functional, non-bottom-of-the-barrel shower without asking your landlord.
In London, with rare exception, you don't get to live in a nice place unless you buy it.
There are some luxury developments with porters and whatnot for trust funders which are fitted well. (They're not necessarily unaffordable, but they're a waste; a labourer will save and buy instead).
But generally, a privately rented flat is going to have multi-decade old everything, walls in the wrong place, crap carpets, bad or no storage, and just generally be suboptimal.
Every flat I'd lived in as a renter I could have trivially made far better if I owned it. It's not a matter of permission; it's about ownership; no-one is spending five grand on doing up their landlord's kitchen; no-one's installing high end shelving or fitted wardrobes and taking them to the next place that's a different physical size in 8 months.
Renting (as a majority thing rather than an option) is pernicious because it reduces investment in one's surroundings. It's not only internal stuff; you won't know your neighbours in six months, you don't care about the outside of the house or the lawn or whatever, etc.
A couple of homes later, I'm now in a place where I can see myself living until retirement.
When I bought the first few homes I definitely had investment very much in mind, though not the overriding factor. Otherwise I might not have been able to upgrade.
Possible? There definitely is one coming. It's just a question of when.
Many of my colleagues saw all their equity wiped out and were saddled with a multi-year process to unload their house.
So glad I ignored them because it is the best financial decision I've ever made. Literally changed life for me and my family.
Today is a sellers market and everyone knows it.
Really not too different from what you hear in the news right now ;)
1. Capital/equity appreciation - the value of the home + land is worth more in the future. This is not a guarantee in most parts of the country. There are a few areas that are fairly resilient (usually within the metro area of the largest cities in the country) but the barrier to entry can be impossibly high for most people.
2. Hedge against inflation - the value of your mortgage stays the same, but rents (and, in turn, the value of the dollar) increase. This is the classic "rent vs buy" scenario. If rents / sq ft are more in your area than owning the home it's worthwhile. This may not always be the case but even if rents dip they may (will) rise again and the predictability of a mortgage payment over 30 years can offer stability. Again, though, it can require considerable upfront capital to secure that steady payment.
A few other reasons to add to your list:
- Preferential tax treatment. In the US and Canada, capital gains/appreciation on your home is completely TAX FREE. For comparison, any gains you make on the stock market 15-40% will go to taxes.
- Leverage. Try going to a bank and ask for a $500K loan to invest in stocks. Not going to happen. You can do this with a mortgage at incredibly low interest rate.
It's quite easy for a coastal city home to appreciate by more than the $500K exclusion.
If I had to guess, I'd take the "over" on 5%.
They’ll be paying taxes on half of that appreciation.
If you look at how many years' income it costs to buy a home, it's gone up by a lot in many places. Back when it used to cost 2-3 annual salaries it might have made a lot of sense to buy a place. Now there's parts of the world where it's 10x.
It's not exactly an apples to apples comparison
But, if you are in area where jobs are plentiful in your area of ecpertise, it’s not about the stability of your job but the ability to find another one quickly.
The net result is you're relying on increasing demand to make money, which only works for location, location, location.
I own my home because I like owning it and being able to use it the way I want to rather than asking permission from the owner. But I don't think I have illusions about it being an investment. It kinda sucks as an investment.
I bought it considering the ownership to be primarily an act of consumption; it's just happened to turn out to be a greater windfall than my actual/intentional investments. I accounted for it like consumption, but had pretty strong suspicions that it would have a strongly positive financial return. (Nice large, already old, single-family with a yard in Cambridge, MA.)
"A single family home is not an investment," CFP Eric Roberge tells CNBC Make It. "It may gain money over time, but if you're looking to invest, buying a single family home and then living in that home is not the place to do it."
A few things to keep in mind:
Obviously location is important. Parents have done really well on their Bay Area homes ,averaging a compounded return of 7% since 1996 on home equity (or about 3.5% real), but other locations may be worse. That far exceeds the 1.3% figure quoted by the article and includes the 2008-2011 hosing bust.
The 1.3% figure may be abnormally low due to the exceptionally high inflation of the 70's and early 80's distorting the stats. It is exceedingly unlikely imho that we will see 10% inflation again.
The article downplays the erosion of potential wealth due to rent. Since 2009, rent, especially in booming areas like Seattle and Bay Area, has far exceeded inflation. http://greyenlightenment.com/bay-area-rent-prices-are-surgin... Also, many landlords require a huge deposit and a good credit score , which negates many of the advantages of renting such as not needing as much money and nimbleness. Otherwise, for short-term rents you're stuck with services like AirBnB, which is even more expensive on a per-night and inflation-adjusted basis.
Rent + stock market may beat home ownership, but when the market falls, rent does not fall. Also one must account for the fact a mortgage allows a lot of leverage, which magnifies those returns.
Home ownership allows cheap leverage and has generous payment and tax plans, which stocks do not have. With stocks, you have no negotiating power with the broker if you find yourself in a bind.
Why do you say that? Rents certainly dropped during the financial crisis even in hot cities like SF.
Real estate produces rents but also costs (taxes, maintenance) and over long periods the investment only just keeps up with inflation. Putting your money in productive businesses (the stock market) has historically been a much better investment, beating inflation by something like 3-5%.
But, a home is generally the most expensive thing people own. For a lot of people (most?), it probably makes up the majority of their net worth. So in general the incentives are for policy to be passed to pump up home values because people want to make money without having to work. Basically, we have perverse incentives regarding housing prices due to the fact that they are expensive things.
In the markets that are most affected by this phenomenon like London, SF, and so on, for the vast majority of individuals, it's the only thing that costs money anyway.
Anything else can either be binned as 'trivially cheap' (e.g. groceries+bills+transport combined) or 'luxury fun' (e.g. nice clothes, expensive holidays, etc).
To the point that money in the abstract is basically irrelevant (vanishingly small numbers of people have liquid wealth, but tons of families with modest jobs own 500K, 1M, 2M homes in London).
If you don't want a house or apartment to call your own, a place to make good and have suit your needs (with nice fittings, a layout that suits you, neighbours you know well and so on) then you don't want it.
Young people barely ever want this stuff (I sure didn't) and the Internet has only exacerbated that. Money has less to do with it than people think, I reckon.