http://en.wikipedia.org/wiki/Imputed_rent
http://www.mi.vt.edu/data/files/hpd%2011(3)/hpd%2011(3)_bourassa.pdf
http://www.taxpolicycenter.org/briefing-book/key-elements/homeownership/encourage.cfm
The reason people have faith in real estate as an investment is that it's one of the only ways in which "average" folks can have a leveraged investment. Real estate can't compete with stock market returns over the long-term, but who will loan you several hundred thousand dollars to buy stock?
So while 3.5% doesn't sound like a good return, it's 3.5% of, say, $350,000 (or $12,250). How much of your own cash would you need to invest in stocks making 6% in order to clear $12,250 a year?
And despite the current mess, real estate is more stable than stocks.
"Ignorning the current negative data point and the ten other instances in which the Case-Shiller Home Price Index trend was negative since 1870, everything is positive!!!"
Leverage is a great way to make money on the way up. But as anyone who lost 100% of their meager 5% down payment knows, it hurts just as much on the way down too. So while 5% doesn't sound like much of a decline in home prices, if that is all the skin you have in the game, you're flat out of luck. Ouch.
"who will loan you several hundred thousand dollars to buy stock?"
and therein lies the problem; this last cycle allowed every idiot in the world to buy a house without any skin in the game...
The one thing about real estate that you can't say about stocks (particularly in light of this most recent market crash and the internet bubble burst in the early 2000s) is that as long as you buy within your means and hold a property over a long period of time, you'll always have SOMETHING of value at the end. You have to live somewhere, so let's say the cost of buying vs. renting in a certain area is 33% greater (mortgage, taxes, insurance and upkeep). At the end of a 30 year mortgage, if you stay put you'll own that property outright - and presumably it won't be worth zero. So I don't consider real estate as an investment along the same lines that stocks and bonds are investments, but for many people they aren't bad as a long-term holding that you live in - even with the current zero or negative appreciation scenario.
I'm curious about people's thoughts on the long-term value of a decently-updated but well-located condo in a townhouse/brownstrone/rowhouse in, say, Back Bay/the South End area around Copley Square? Take for example the many buildings constructed years ago and updated in say the 1990's. They don't really compare to the new full-service luxury condo developments, but how do you think the smaller townhome values will hold (or will not hold) in the next 5-10 yrs?
A home that you live in is not an investment. At best, it is an inflation hedge. A home does not pay you a dividend. A home does not generate income. (The poster who talks about clearing $12,250 a year apparently gets a check. I'd like to know that trick.) On the the hand, a home that you rent out and which generates positive cash flow IS an investment.
A simple math exercise will prove the point. You buy a $350,000 home with 10% down at 6.5%. Your monthly PITI will be around $2,200. Over the course of 30 years, you will pay roughly $827,000 ($792,000 in PITI plus $35 K down payment). Add in say another $50,000 for maintenance. Grand total to own the home over 30 years: $877,000. At 3.5% appreciation, the home will be worth approximately $983,000. Your total profit on the home $983,000 - $877,000 = $106,000 on your $35,000 initial investment.
The fact that 91% of people surveyed believe a home is the best investment further proves the point. How many people couldn't see the bubble staring them in the face 5 years ago, drank the kool aid and bought a home they could not afford?
How many people buy high and sell low? You can argue that the stock market still has further to fall, but you can't argue that today is a better buying opportunity than a year ago, when prices were 50% higher. Yet, only 15% of people in the survey say now is a good time to buy stocks.
As for the leverage argument, well you can leverage stock investments too. It's called buying on margin. You can also trade options, which give you leverage many times over the leverage you can get in real estate. Of course, people praise the virtues of leverage when asset prices are going up, but leverage can wipe you out when asset prices fall (ask a hedge fund manager).
The recent stock market indices are uniformly negative, with most stock mutual funds about 40% negative over the past year. How many homeowners in the greater Boston area (within 495) seen their homes decline by greater than 40% in value in the past year? I agree with accidental landlord. One may debate the merits of stock ownership vs direct real estate ownership, but I would argue that for some of us, our homes have been a downward "hedge" against the recent downward stockmarket spiral.
John, you won't get a check from the increased value of a house, but the value of the asset has still increased. If you sold it tomorrow you'd realize the profit. So I don't see your point.
As for the rest, walk up to someone in the supermarket and try and make the argument that instead of buying a house for $350,000 which in 30 years will be worth $983,000, they should instead consider putting the $35,000 in stocks, including buying stocks on margin. Good luck with that. Buying stock on margin is something for saavy investors -- and I'm guessing it burns them pretty often. If I understand it right, if the value drops you get a "margin call" right, where they ask for some of the money back? That doesn't happen with a house. If the price drops then you....do nothing. Continue living your life exactly as before. No contest: our happy shopper is going to stick with what they understand.
@bostonrunner
You’re mixing apples and oranges. The rise and fall of a home's value is not the same as one's return on investment.
For example, if you have 10% down on a $400K property, your cash investment is $40K. If that home falls 20% and is now worth $80K less or $320K, you haven't lost 20% on your investment, you've lost 200%: your original $40K less another $40K.
Now, if you have only 5% down (given the above scenario), as many first time homebuyers have recently, then your loss is 400%: your original $20K less another $60K.
That's how leverage works: nice on the way up, not so nice on the way down.
So I wouldn’t call losing 400% on your home a "downward hedge" against losing 40% in the stock market.
decent analysis John, however two BIG factors in home ownership you failed to mention which are quite significant are one, the illiquid nature of real estate (as people are learning in this market, it can take well over a year and several price cuts to sell a house; also some people are carrying two houses because they purchased before selling their original house), and second transaction costs. Between closing costs and broker fees, one is looking at an 8% load. These factors have both significant psychological impacts as well as financial impacts in calculating "investment returns".
Wow. Just, wow.
As for the rest, walk up to someone in the supermarket and try and make the argument that instead of buying a house for $350,000 which in 30 years will be worth $983,000, they should instead consider putting the $35,000 in stocks, including buying stocks on margin.
People really have no idea what they're paying for a house with a mortgage, do they?
You aren't getting $983K for your $35K. You have to keep paying your mortgage, insurance, taxes, and maintenance for 30 years--a sum that adds up to $877,000 in John's example. That's what your total investment is. So your total profit in this example--which assumes appreciation, by the way--is $106,000. That equals an ROI of 12%. Not per year--over the whole thirty years. Not terribly impressive.
If I understand it right, if the value drops you get a "margin call" right, where they ask for some of the money back? That doesn't happen with a house.
Of course it does. With a leveraged investment, you can earn or lose more than you originally put up. As any of the hundreds of thousands of people who cannot now repay their mortgages could tell you. Over a long period of time, the chance of a job loss, illness or other event affecting your ability to pay your mortgage is not small. To get out, you either have to bring money to the table, carry a debt (MA is a recourse state), and/or pay lots of extra money in future borrowing due to your trashed FICO.
A home is basically a hedge against inflation, and a more-or-less secure place to live after retirement squeezes off your income stream--a benefit that most of today's homebuyers seem to have forgotten about.
Ask the average person in a supermarket if they were to puchase a $350,000 home with 5% down at 4.5% fixed on a 30 year mortgage what their sunk cost is at the end of 30 years and they'd pull the string of the discontinued Barbie that says, "Math is haaaaard."
Answer: A little over $600,000. Use a realistic (e.g., non-taxpayer funded mortgage of 7.00%) and the sunk cost is nearly $800,000. Add in property taxes and insurance (and lost opportunity cost of that down payment, and a new roof at 20 years) and you realize: you don't get rich buying a house unless you also get lucky. If holding a house was an easy way to make money, no one would ever sell them...and if it requires luck, it ain't an investment, it is speculation.
I am getting married in a few month and we are going to start saving more aggressively for a down payment. It will make sense for us to buy a home in a couple of years as first time buyers with historically low interest rates and a market in near the bottom.
The decision to buy a home however is not viewed by me as an investment. Simply stated, our other option is to continue renting. If we spend money on rent, that is money we never get back. With a house, even if it remains flat in price, at least you can sell it for something. It is also nice to not have to pay rent during retirement, but to have a paid off home.
Because we do not view the house as a primary investment, we will only look for something we actually need and that will satisfy our living requirements. An apartment or town house would be just fine. Any extra savings will not go into property but into a well diversified investment portfolio.
John, Your point about a home one lives in versus a house to rent out is well taken and it is an important distinction. But your cost analysis completely leaves out housing costs - the fact that you can live in your home (and not your stocks). While my PITI for that home may be $2200, rent for that same property will likely be about the same if not more. Over 30 years, I would have spent close to that $877k for rent anyway. As a landlord, my tenants have paid me over $268k and they have nothing to show for it. Of course, this is long-term, short term real estate "investing" is another matter entirely.
But this begs the question - why does a *home* have to be a good investment? It's a home and if it houses you at a price you can afford that isn't too distant from rental costs, why isn't that enough? It is this treating homes like ATMs, and treating appreciation like real money that has contribute to the current situation. Also, this insistence on treating one's home as a financial investment ignores what may be the best reason for homebuying- the long term financial, psychological and sociological stability of the individual, family and community.
#12 and #13 The equity after paying off the 30 year mortgage is certainly greater than that of a person renting, who has nothing to show, and the alternative to putting $$ into a home (renting) should be factored into your analysis since not all that mortgage money could have been invested. In the end, it all depends on how long you intend to live in the home. But times have changed, and today most people in white collar jobs move after 5-7 years. So when should people buy a home? Only during times when the value is expected to increase? How to tell? Well......... the decision is clearly more than just a purely financially motivated. It is possible that many of the people who are currently "underwater", will find themselves floating again if they can wait. Like stocks, you only lose when you sell. I do not pretend to know the "bottom" of the current market.
You have to live somewhere, either in a house or apartment. The government has decided to subsidize buying a house (by virtue of the interest and property tax deductions) such that the costs are nearly equivalent year over year. Sure there are extra maintenance costs with owning a house, but we are not talking orders of magnitude in difference.
So in the end, 30 years from now you can own a house worth hundreds of thousands of $$ or own nothing. And the bottom line is that you have to have lived somewhere for those 30 years. Really a no brainer, for the long haul (i.e. 30 years)...buy a house!
As for when, market timing in any investment is always hard. Everyone has their own opinions. I believe you should buy what you want and can afford as soon as you can. I am sure many others have different opinions. I have seen many analyses of the stock market that suggest that you will lose (unless you are truly an expert) trying to time the market.
Accidental, the point is I can buy a stock and realize a dividend payment once a year, once a quarter or once a month. Regardless of the stock price, and assuming the company does not cut the dividend, I can generate steady income from owning stocks. A home does not generate income unless you sell it and only if the selling price is greater than the amount you have spent to live there (PITI, maintenance, downpayment, commission, etc.). As for not getting a margin call on your home, fair enough. However, the foreclosure crisis is in effect a major margin call for those millions of Americans that bought with leverage, a home they could never afford
NancyG, yes when the cost to rent is equivalent to the cost to own, owning is essentially a no brainer. HOWEVER, the cost to rent over the past 10 odd years has been greatly less than the cost to own. That's why you could have run a buy vs. rent scenario during the bubble, and in many cases, the break even point for home ownership was beyond 30 years. I ran these scenarios many times myself.
The reason many people view a home as a great investment is because their view is clouded by the bubble years when homes were going up 10-20%. The notion of a home as an investment is a relatively recent (i.e. past 20-ish years) phenomenon. I'll wager that in another 10-15 years, once the real estate collapse has played itself, home prices have plunged another 30%, moved sideways, and started appreciating at their historical rate (i.e. about 0.5% over the rate of inflation), homes will not be viewed as a good investment (about the same time that the majority of the Boomers are ready to retire).
John, I don't think that the cost to rent is less than the cost to own. - perhaps that is true over the past ten years, but over 20 on 30 it's another matter. In my own case, over the past 20 years my rents have gone from $750 to 1800 (for a four bedroom), while my mortgage has stayed at $1409. Granted, I bought well before the bubble. Also, I think the rent-buy comparison is often not between equals. People tend to buy a larger, fancier home than they would rent.
But I think all this points to getting back to basics about buying. Buying ought to be about having an affordable home and creating stability in a community. We've gotten away from that to our detriment. A home being a good investment should just be gravy.
We are all renters. You are either renting from a landlord, renting from a bank (mortgage) or renting from the government (property taxes). Stop paying your rent, stop paying your mortgage or stop paying your property taxes and you are out on the street.
This is the best time to buy or best time to move up if that is what you would like to do. Although, a seller may have to take less on the sale of their home than they would have previously, as a buyer, s/he will gain incrementally more on the purchase. Interest rates are still low and there is a good amount of inventory. Why would a buyer wait to purchase until a time when sellers are willing to make fewer concessions or until prices start to rise? It doesn't make sense.
Many of the markets in the Metro west area have stabilized and the amount of inventory is dropping. National sales are up 1.4%.
If you can buy now - now is unquestionably the best time!
Would you please provide an analysis of who the suitors would be for the Realogy brands in the event of a bankruptcy? I hear a lot about the failures of Apollo's Fund VI, but very little about what the aftermath would look like after a total collapse of its holdings.
This is the best time to buy or best time to move up if that is what you would like to do.
Posted by Realtor December 8, 08 09:42 PM
no further questions your honor.....
no real analysis, just hype, "buy so I can earn a fee, I'm starving here!"
whoa. the pessimism is getting absurd. if your financial analysis is that buying a primary residence today and holding it for 30 years is a poor financial desicion it's time to reevaluate your analysis. the problem is whether you will be able to hold it for 30 years. inflation hedge is being thrown around like it's unimportant. am i missing something here? if i'm given the opportunity to lock in a major expense that is guaranteed to be there for the rest of my life at today's dollars for the next 30 years after which the expense disappears all together i can't even imagine the scenario where i don't take that even if it's currently overvalued. the real question is is there a time in the not too distant future when buying a primary residence makes more sense financially. buying today you have a short-term risk of holding a depreciating asset during tumultuous economic times. should a life change occur in the short term you will probably lose money if you're able to unload it at all without being foreclosed on. if you can hold the property through this down market it will appreciate again, even if it's ONLY at .5% over inflation. the dow has historically grown at 1.5% inflation adjusted generally with transaction and maintenance costs and infinitely more risk. to me the real issue is with the assumption that fear and greed influence the market and laziness is disregarded. if you believe that there is a magic pot that you can throw your money in and it magically makes you wealthy (whether your primary residence or in managed funds) you are the low hanging fruit lahde was speaking about. delaying consumption brings you return but does not make you wealthy and there are multiple industries aimed at chipping away at your small returns. if you want to give yourself a chance to be wealthy invest in yourself and be proactive about creating profit earning opportunities.
Interesting comments, and I might be a little late to the discussion, but I would like to add a couple points:
1. Renting is a better option for some people, buying is a better option for some people. Running a rent vs. own scenario is inherently personal, utilizing mostly personal assumptions (and hopefully some realistic market assumptions) to produce the answer that suits YOU.
2. In terms of investment, and this goes to JOHN’s point, you do in fact earn a dividend from your house. It's an implicit dividend, but it's a dividend nonetheless. By living in the house you own, you are foregoing paying rent for another place to live - so the money you are not paying elsewhere is your dividend. Or, in essence, you are paying yourself rent. How you want to factor that into your personal rent vs. buy scenario is another matter.
Marcus, yes I understand that you're not getting $983,000 for $35,000. I understand that the actual profit is only $106,000. My point is that "average" people think that check for $983,000 looks pretty good. And the alternative of buying stock on margin looks strange, complicated and risky. After all, they'll be paying for some kind of housing anyway, a house is something most people want, so that doesn't look so bad. Even if the actual profit is only $106,000. Does this make them brilliant investors? I suppose not. But would you advise most people to buy stocks on margin rather than pay off a house over thirty years?
"Of course it does...." Yes, you can lose more than you put up, if you have to sell. But as you know, having the value of your house drop is not the same as not being able to pay the mortgage. The vast majority of people can pay their mortgage. And before this moment, with a few regional exceptions, it was fairly rare to lose more than you originally put up on a house. Right?
"Over a long period of time, the chance of a job loss, illness or other event affecting your ability to pay your mortgage is not small." I'm not sure that's true. What's the foreclosure rate over a long period of time? Low single digits I believe.
"the real question is is there a time in the not too distant future when buying a primary residence makes more sense financially." And that is the whole point, you can never change the price you pay, so you might as well wait for the best price.
Why buy if there is easily another 30% downside in the cards? Foreclosures are through the roof, we've just gone through the biggest credit AND housing bubble in history and one is to believe that after a year or so, all the excess is gone??????
one more thing, look back at all the reasons being given for being bullish on housing in 2003. "Rates are low, housing only goes up, and everyone wants to be here". "The baby boomers will buy everything in sight." Of course none of it turned out to be inaccurate, yet the same spew is still being tossed around.
fuel prices down - good; food prices down - good; clothing prices down - good;
housing prices down - a national disaster!
Still waiting, the analysis is not that buying a home and holding it for 30 years is a poor financial decision, the point is that it is not the great investment that so many people believe. If home ownership was the path to wealth that so many people believe, we would be a nation of millionaires. Instead, at a time when more people have owned homes than at any other point in history, we are going through the worst financial crisis since the Great Depression.
Michael D.
By renting, you forgo interest payments, maintenance costs, sewer and water costs, taxes, etc. Your logic of receiving a dividend from owning a home because you forgo paying rent makes no sense. That's like saying because I didn't get pepperoni and sausage on my pizza, and therefore did not spend an extra $2, I received a dividend. What a wonderful world it would be if I could derive dividend income from pizzas.
John - Maybe I was a bit vague with my point. A better way to put it is this: As a home owner you could choose to rent your home rather than live in it. If you own a home that could be rented for, let's say, $2000 per month, then you must forgo that rent in order to live there. So that shows the home is worth at least $2000 to you for the value of living there (because you are, in fact, choosing to live there rather than receive $2000 for rent). So the point is that $2000 can be considered income that you are basically paying to yourself - or a "dividend". Basically I am trying to monetize the value of living in the home as best as possible as part of the investment analysis. If you disagree with that method, that's fine, you are free to make your own investment decisions. But if you're not accounting for that in some way, I do not believe that you are measuring your true "return" on investment. In fact, in some countries, this income you forgo is considered “imputed rent” and is taxable as income.
Posted by Michael DiMella
It's amazing the level of denial in the Boston area; housing prices will need to drop at least another 30% in order to reach equilibrium. We just went through the biggest credit bubble in history and nobody wants to face the music that housing is crashing. Of the course the shill realtors will always say "it's a great time to buy!"
in other words "I am starving and I need a commission!" Don't even think of buying for at least another two years, Boston pricing has a long way to go until it bottoms.