Why Land and Homes Actually Tend to Be Disappointing Investments
nytimes.com
nytimes.com
This is why the SP500 craps on real estate. Because it should. Hell, the only reason real estate has had the peaks it has, is because it was subsidized by the financial sector. And as you can see, that blip of misvaluation did much more harm than good.
Business make the world better than houses do. Businesses are where you get people the best benefits. More expensive houses, to the point of unaffordable are the enemy. If you have allocated a huge portion of your assets into a non productive asset (a house), then you are part of what is wrong with the world. Stop expecting your "only benefits you house" to pay the same as "benefits 10x + more people" businesses.
P.S. liquidity, capital surplus recycling, less bid/ask spread, less fees, less counterparty risk (eviction, destruction). The capital markets pretty much crap on the real estate markets. And they should.
I'll leave out the moralistic component. When it comes to value, some other considerations are the low interest rates we experience, the fixed 30-year loan, in the U.S. that is, and interest tax deductions. So one isn't pummeling 1M in investment that could otherwise go into a business. One is putting in 200k, even less with an FHA loan, and deducting the price of the loan.
Now we get more advanced. Buy a multi-family property, and you get rental income. This rental income is balanced against depreciation of the house, so your personal income bracket isn't affected. When you combine the tax credits, the low cost of loans, the increasing rents, the principal you're getting back, when the dust has settled you're light years ahead of those folks who rented and pumped their money into some seesaw investment vehicle like the stock market.
I pay out of pocket less than the price of a studio, and own a standalone house in one of the country's top three rental markets.
It gets better, because you can sell the property to purchase another, and defer all tax payments on the profit of the sale. 1031 exchange.
As someone else said, it's pointless to generalize nationally. We live in a big country, assuming you are US-based. I bet there's a similar dynamic in the UK or Canada, both of which have noises of a bubble.
I do agree with what you say though. With all the incentives that are in place, we shouldn't overgeneralize since housing can be a good investment.
Homeowners subsequently hire contractors for maintenance and upkeep which spreads that choice around vs firm ownership which will negotiate a single contract and extract price concessions from their position.
As it is impractical to have land ownership be a public good (centrally owned (or not owned depending on your take on the whole land ownership issue) distributing ownership appears to have the best effect on overall use.
It's the lack of banking competition, not mortgage.
Offer a tax deduction on mortgage interest and people can afford a higher price so competition drives prices up and everyone ends up in the same place. Same with lower interest rates, etc.
One could argue there is a period where housing is easier to purchase once a new subsidy is created, but shortly after that, the market reaches equilibrium and we're back in the same place.
Just imagine if there were no housing subsidies. Housing prices would be mich lower. And yes, I know that's a gross oversimplification, but I think the effect is still there.
Exactly: it's a tax subsidy to sales agents (and others whose income depends on the transaction price). Homeowners don't get anything out of it except that their house has a larger $ on their list of assets. It doesn't help them buy a better house (since everyone in the same income bracket can afford the same house).
It's pitched as a middle class benefit though, so simplifying the system would be greeted with howls of dismay.
It does screw those of us who pay cash for our houses BTW.
Furthermore, land is one of the few intrinsic assets of a sovereign state. With their intervention, they can enable diversified, private ownership of land, rather than a widely-recognized concentration of the state's land in a few hands.
The moralising started well before HappyFunGuy2's comment.
Actually, I don't read his comment at moralising at all -- that's a tone argument, and is frequently nonconstructive. He's parried it well, that's rare.
Addressing your low interest rates: the question is why that should have driven massive investments in investment-class assets (including real estate) rather than productive capital. Secular declines in productive return on capital investment beginning in the 1960s suggest exeptionally deep structural issues in the real, nonfinancial economy, as many have been arguing, including increasingly economists and economic analysts (see Robert Gordon's The Rise and Fall of American Growth, or Deloitte's "Shift Index").
The world needs more houses with more people in them. That requires lower house prices, or richer people. I do not like the attitude home owners have that their future must be paid for by the pain of others not being able to afford homes. And that the profit they make on that low production asset subsidises their leisure lifestyle. Building is better than speculating, for speculating is 1 layer removed from production.
Really? Is it impossible to have a fun and healthy society without a rising population? That sounds like a pyramid scheme.
Despite that, many projections of human population expect a peak this century: https://en.wikipedia.org/wiki/Projections_of_population_grow...
What with "thousand year" projects turning dictatorial and even "hundred year plans" looking obsolete and becoming laughing stock a few decades after they were devised.
I don't see how one can purport to be the judge on how future generations should live for them, and what the end goal should be millions of years ahead.
Besides, the Sun's death is a really minor issue. It's avoiding the heat death of the universe that will take really good planning...
Which planets and moons in our solar system could support human life? Apart from the Earth, the answer is none. We may be able to build small colonies on Mars and/or Europa but the difficulty in building sizeable colonies in/on these places would be huge (cost of transport, cost of base building and maintenance, differences in gravity, decreased sunlight, transforming local resources into forms we can more easily use, etc...), the effort would be much better spent securing the life-support mechanisms of our own planet.
IMO, until savers max out tax advantaged retirement savings options, mortgaging a primary residence isn't close to a sound investment. And that's really what this article is about: your home is not an investment, and you'd be better off renting one (or taking out an interest only loan) and investing the principle payments you would be making into the broader market.
I'm guessing what you meant to say was, all things being equal, investing principal payments is worse than some tax-deferred savings account.
But I'm not really sure that's ever really the tradeoff for most people? Like I stated above, I pay out of pocket for my primary residence, after tax deductions of interest, principal payments (which come back to me), and rental income from the portion of my home I rent out, LESS than what I would be paying for a tiny studio in a bad neighborhood. If I were a renter, and renting the portion of the house I live in now, I'd be paying more than triple, to some landlord who is taking advantage of these benefits. I prefer to pay myself.
Is it fair that there are all these tax deductions? I didn't even mention that improvements to the house can be factored in, and part of my utilities.
The following is a tangent. I regularly come across people who are huge proponents of savings for retirement as a priority 1. I'm in my 30's and am on my path towards independence already (though I have a way to go). The idea that I should defer risk and investment today, so that I can reap the benefits when I'm 67, is beyond comprehension to me, but it must be a personality thing.
Correct.
> But I'm not really sure that's ever really the tradeoff for most people?
It's a lot harder to separate out rent from the various home owner expenses involved in a 30 year mortgage than anyone, including myself is willing to engage in in this thread. And it's rare that you'll find enough chances to either rent or buy the exact same property to come up with a solid formula for which side is better.
> The following is a tangent. I regularly come across people who are huge proponents of savings for retirement as a priority 1. I'm in my 30's and am on my path towards independence already (though I have a way to go). The idea that I should defer risk and investment today, so that I can reap the benefits when I'm 67, is beyond comprehension to me, but it must be a personality thing.
You're assuming a retirement date of 67. My spreadsheet projection suggests my investments will be earning more at age 40 than I currently live on, and at age 47 will be earning more than I currently make gross. To get there I actually have to take defer some pleasures and take risk today -- high exposure to equities volatility, etc. I personally view buying a home as the "normal," "safe" option.
The important thing to me is that the money is liquid; it's not locked in a house where transaction fees are 6 percent of the asset. I can pull a chunk of money out of my Roth IRA for anything I want at any time, and the earnings are also lootable for a downpayment should the math turn in my favor. I can also take out loans against my 403b, for down payments or for a variety of causes. My 457b is doesn't have a minimum age for distribution, I just have to employed elsewhere, providing early retirement access.
How do I invest the principal payments in the market when I need that money to pay my rent?
places where your mortgage payments are a bit cheaper than your rent would be
If I rented out my units and moved out, I'd make 2K a month over and above my mortgage payment and taxes. I regard the negativity towards housing above with a lot of amusement. I could withstand a housing crash, a job loss, and a lot more now. I am much more worried about a fire, or crime in my neighborhood, or construction next door.
Celebrating high housing prices is the civilizational equivalent of giving a toast as you sit down to a banquet of your seed corn.
One day, when robots build houses, owning can replace renting. Or when everyone stops the cargo cult of HOUSES MUST GO UP IN PRICE OR LIFE SUXORZ!!!
It's funny how owning something distorts ones perception. What else in the world MUST GO UP IN PRICE! Notice I say price and not value, for it is truly only the price going up. Their utility remains static, or decreases as the view is blocked by high rises.
Paperclips must go up in price! I own some!
Here in the UK, at least in the south/east where the jobs are, monthly rents tend to be the same order of magnitude as monthly mortgage payments on a 25-year loan for a home of the same size in the same location.
The choice therefore is not between low rent or high purchase cost; it's between making about the same payment for 25 years then never again, or making it for your whole life (while your landlord keeps it for their nest egg).
Since you have to live somewhere, if you are able to get a loan at all, and barring expectation of massive disaster, buying seems to be a no-brainer.
Two things could change that equation. We could add vast numbers of rental properties to the market, enough that the competition forces down rent prices by a very significant amount. The private sector is certainly not going to shoot itself in the foot in this way, and conservative UK governments have been pushing hard in the other direction, so this seems unlikely.
The other alternative would be to reduce the need for homes in expensive places by having more people live together, in cheaper areas. We're seeing this happen by default now as young people are priced out of the market, but widespread telecommuting has the potential to make this a plausible deliberate choice rather than a forced decision.
No idea how the US situation compares, natch
> No idea how the US situation compares, natch
Speaking as a US citizen in a small midwest city, it's basically the same in most areas.
I can rent a 2bed/1car/700sqft apartment for (X) dollars per month. Or I can own a 4bed/2car/1800sqft single-family home for the same (X) dollars per month, on a fixed 30yr mortgage.
The main difference (besides the tons of extra space) is that the apartment is guaranteed to cost 5-15% more every single year for life. But the house mortgage payment only rises maybe 1% each year.
If I leave an apartment, I have to pay them one or two thousand dollars (on top of any rent owed). If I leave my house, it's equity usually covers any realtor listing fee and gives me a few thousand to cover moving expenses.
I hate home ownership, and no one really does condos in my state, so renting is the only other option. But I can do basic math. Even if we move every four years, it's still much cheaper to own rather than buy, in most situations.
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Every single person and organization in the entire nation, is doing everything possible to inflate housing costs as high as possible, in literally every market. Owning is the only way I know of to keep my head above water -- otherwise, I'd be fighting the entire national economy every day, for life.
It tackles two problems in one go. First of all, many more people would be in a position to buy a home without taking on a mortgage. They would then be in a better place to save their money in order to move to a bigger place (if they so wished). Secondly, because mortgages would no longer be as great a requirement to purchase a house, mortgage lenders would be incentivised to offer people attractive mortgage rates in order to encourage people to borrow money.
In addition, microhomes need not result in large compromises. There are some great microhome designs on the market that offer attractive features whilst still coming in at a lower price than most existing UK houses. I quite like the Dwelle designs, but there are plenty of other options available.
As a side note, I have a book on economics called 'The Grip of Death'. The title of the book comes from the meaning of the word mortgage, which I found interesting... Mort = Death, Gage = Pledge ('Grip' is accurate if the pledge becomes an obligation). I personally believe long term mortgage arrangements to have a tendency to damage personal enjoyment of life, so the name seems apt.
That said, in parts of the world (cough Japan) it is expected that you demolish the old building and build your own when you buy a property (and you build cheap and light, accordingly), so perhaps this is another UK-centric concern.
Another UK consideration: we have a tendency here to build housing outwards rather than upwards. In a country with relatively little land, if we're considering alternatives, IMO it's well worth considering more high-rise buildings in place of low-density sprawl - not only do they not carry the stigma elsewhere in the world that they do in the UK, but they're even now losing it in the UK; check out the "luxury apartment" blocks going up like mushrooms in the London docklands and around rail stations in sleeper towns.
The bulk of the cost of buying a house in the UK seems to be land price. In fact, those microhomes are _more_ expensive buildings than a traditional build - from this calculator (http://www.jewson.co.uk/working-with-you/for-self-builders/p...) the price of a 100m2 build might be ~112k, compared to the microhome 70m2 'lifetime' model.
Microhomes are a nice idea, but they wouldn't help me in East of England.
Sure, this hasn't bitten anyone for the last 20 years, but it happened in the 80s.
Separately, I'm not sure I understand your point about price vs. value. In SF or London, apartments have high value (evidenced by people willing to pay high rent to live in them). Maybe in some places (Beijing?) apartment prices are hard to justify based on rental yield. But what makes you think home prices in general are divorced from home 'values'? What would make prices go down that would not also not decrease whatever measure of 'value' you're using?
Interesting observation, does make sense. I suspect a strong relationship to the land the house is built on. The value of the house itself should go down indeed, because the house deteriorates from the moment it is built.
However, the house makes that land usable and the land underneath it might become more valuable, because more people want it in dense areas.
Accordingly, house prices fall in less desired areas.
Pretty much everything. The stagnation and zero inflation of many economies is a problem.
Bad thing 2 is that they cop an attitude, and affect legislation which causes their "investment" in owning a home to rise in price. Executed by preventing competition (zoning laws) and being more costly for everyone else to buy, because they demand and fight for it. *Homestead tax exemption, etc. Their choice to own a home makes them want others to have a harder time to get what they themselves have, through the vehicle of higher prices, and tax benefits to the capital class.
Thus intelligent, useful people, become cockblockers. Houses must become more and more unaffordable for everyone else, because they happen to own one. :( How selfish. Sadly, the idea that high house prices screw over more people than they benenfit is undermarketed, and its impossible to teach a man a thing he profits by not understanding... We end up in a world where no young person can afford to own the home they live in. And if you try to build some new supply, the local captured regulatory agency, vetos you. The zoning board of people who already have nice houses, cock blocks you. Not in my backyard!
Stop cock blocking. Stop expecting your future to be paid for by your non productive, benefits only you "asset." Go forth and benefit others at scale if you desire riches.
In particular as secondly, house ownership means I'll save on rent, rather than to pump money into someone else's pocket I'm accumulating the value. It's a simple calculation that this is in most cases in my benefit if I expect to be in the same spot for 5+ years. Real house value could even decrease over time, the rental costs I'm saving could still make it a good investment.
Thirdly, first house owners are unlikely to try to influence policy just to increase house value. Not sure how you can have such an idea, for most owners this would be unlikely to be worth the time& effort required just to increase house value 1℅ or so. But you can be sure they will fight for their quality of life (think parks, no planes, etc). That coincides with house value but for most average citizens the only (conscious/driving) reason to affect local policy is quality of life.
And lastly I think you're somehow too far from reality if you argue it is in an individual's interest to serve the wider economy. I'm not going to use my money just to benefit an imaginary wider economy - what is the benefit then for me? Why be rich if life sucks (and why risk all my money just to start a company if I have already a good income & life?) Do I live just to nudge Gdp up by 0.00001℅ over my lifetime? Or do I want a healthy life, a garden for my kids to play, etc.
Buying a house is a very rational decision and I"m not sure what you can see as selfish (in particular considering point 1). Your argument really is somewhat absurd and I find it hard to believe you make all your life decisions or buying decisions with such an approach (leasing your laptop? Living in a polygamous commune as keeping an attractive partner to yourself would keep potential value from the rest of humanity?).
I want more people to own homes.
my distates for homeowners
Home owning is passing the buck around.
How could I invest the equity elsewhere, other than the down payment? I have a monthly payment for housing either way, and with rent it will be larger unless the local market is crashing.
> plus you are spending money on maintenance, which you don't fully recoup when you sell
Owners and renters both pay maintenance and taxes. The difference is that owners pay those bills directly and renters pay them indirectly. The idea that owners pay things renters don't is a fallacy.
If that was the case the landlord would be taking a loss on the property, since rent is the only appreciable form of revenue the landlord gets for the property. How do you think the landlord can avoid passing on the full cost of maintenance and still make money? Don't forget that the landlord still has to pay some amount of maintenance even when the property is unoccupied.
> Yes, the downpayment. The downpayment could be invested in a diversified basket of assets instead.
So it really depends on how much the down payment is then, and how much the down payment reduces the cost of housing. You can't make a blanket statement either way.
There is no fallacy here. For all maintenance done, either the renters cover the costs of the maintenance or the landlord loses money on the property. Trying to avoid performing the maintenance in the first place doesn't change that.
The normal background trend is for home prices to rise at about the rate of inflation. We don't really have a special name for this other than "appreciating asset".
This is a limited view. For this one needs to include debt opportunity and tax. Try and get a $1mil loan at 95% LVR on shares. Good luck with that. With property this is often fine. Property lets you work at high leverage points due to its safer nature. In this way your $100k of shares might have a higher return but once you leverage to a $1mil house at that capital level, the smaller percentage return pays more overall.
Also in many countries you dont pay tax on residential property you live in which adds 15%-40% value as you take profits.
Completely agree on the heavy deployment of capital in many of today's property markets. The business and society cost of high house pricing is not discussed enough. I feel its a great way to stagnate an economy if we continue this.
Entrepreneurship has a 90-95% chance of failure...Bay Area homes have doubled since 2011..the choice seems obvious to me (provided you have enough money to buy a Bay Area home).
Business make the world better than houses do.
You're comparing apples an oranges here. Businesses very often lease real estate..guess who ends up making most of the money in that deal..
More expensive houses, to the point of unaffordable are the enemy.
Where is the incentive to invest in urban development if there is no return. If a private equity firms wants to buy a bunch of blighted homes and improve them, why should they not profit from the land value?
They don't. The money you invest in them doesn't disappear into a Scrooge McDuck cash vault. The seller then spends or invests it.
Also, an asset that servers as collateral for a loan serves to creates the money for the loan.
I agree that homes don't make for great investments for many reasons, but they aren't a drag on the economy.
Consider my Tiny House project. I estimate it shall cost me 50-70k. The average house price in my area is quarter of a million euros and the total life long cost of a loan brings that up to half a million euros.
Instead of working for an employer to obtain either 180k (if I save) or 450k (if I borrow) I can begin my own business instead.
Lets flip this around...if two people came to Palo Alto in 2009 with a $2 million fund, one doing a starup and the other buying a home...the one doing a startup would have a 90% chance of failure with a 0.1% chance of tripling their money...the other who purchased a home would have had a 99% chance of at least doubling their money, and a 100% chance of making at least a 25% gain. Who is the smart one?
The difference between consumption and investment?
I want a nice shelter, not a 3 bedroom house I don't need or want on the off chance I'll sell at a profit some day. I'm not interested in that.
> Lets flip this around...if two people came to Palo Alto in 2009 with a $2 million fund, one doing a starup and the other buying a home...the one doing a startup would have a 90% chance of failure with a 0.1% chance of tripling their money...the other who purchased a home would have had a 99% chance of at least doubling their money, and a 100% chance of making at least a 25% gain. Who is the smart one?
I could give a similar example of literally any class of assets.
Investing is not arithmetic. These things aren't baked in like Newton's Laws of Thermodynamics. Corelations can look solid for decades and then totally disappear.
I can tell you for free though, that my generation and the ones behind it cannot afford your houses.
I don't live in a city, everybody around me already uses private means to obtain water, sewerage, waste disposal and even power and I'll be doing the same.
Not every solution has to be scalable. In fact the majority are not.
Just don't kid yourself that it's an 'investment', don't sink in more money than you need to.
Remember, we are all born with short position of one residence, and buying a single residence takes us back to being flat. Buying any more than we need to is going long on housing as an asset class, which may not be the best idea.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
Unfortunately, if you play around with it, you will see that future appreciation is one of the most sensitive variables in the equation. My guess is that housing will decline in price, potentially quite seriously, but no one has a crystal ball.
I own right now, but I would not buy right now. If it were convenient, I would sell.
EDIT: Wow. I have just used the NYT's calculator with numbers to the best of my knowledge (assuming 0% house price growth). Per them, I should rent. I'm paying $840 in mortgage plus about $180-200 in utilities etc. Their estimate is that I should rent if I can rent a house for less than $1800 a month. That's definitely possible here. Way to make me rethink my investment!
If I assume a 3% growth in house prices, I should definitely buy, by a 300$ margin.
What are these business needs that will be met if I reallocate my capital? Do we need another car company? Can Amazon.com not raise enough capital to grow AWS? etc etc
People who invest in homes in good markets understand supply and demand pretty well.
For most people, a home is an investment they understand which delivers utility every day they live in it and augments their retirement when they downsize. It isn't very complicated.
I think the subtext here, for better or for worse, is that regular folks have made a lot of money off of real estate since the 2009 crash. Startup people like to think of themselves as smart, and it bothers many of them that regular folks have actually done quite well while they are rolling the dice. Smart people are supposed to have better outcomes than regular folk, apparently.
Even the investment in farmland is not taking the production of the business into account. Wouldn't that be similar to investing in some servers, but letting them sit and hoping they appreciate in value, rather than being involved in what the servers are doing?
This article seems so at odds with land/home investment, I am wondering what Schiller's real motivation is with it, or if it is taken out of context...
What am I missing?
Compare this with an established early 20th century neighborhood in the central part of a city. You have classic Craftsman architecture and homes built by people with real carpentry skills, using hardwoods, brick, stone, and other durable materials. These homes, properly maintained, will last another hundred years. Chances are (in 2016, anyway), it's a gentrified or gentrifying neighborhood. If you can pick up a home in this neighborhood, you've probably made a good investment.
Now, in X years when it's dated and some things needing repairing, you've got cashflow to cover that, factored into your money model. Multiply that by a few properties, and even if the "investment" hasn't budged a dime in value, you're making money. At a scale where you can hire a management company to take care of the details for you, it's even simpler.
I also think you gloss over the difficulties of being a landlord. Great tenants are the exception, not the rule. There is good money to be made in the rentals game but the markets in which you can do this are limited and strongly favor the landlord who has owned for decades and bought in at 1970s prices (SF, LA, etc.). For most people in average American cities, the best you can hope for is to cover expenses and build a little equity. It's no slam-dunk for the average Middle America landlord.
Heck, subtract out all the interest you paid on your mortgage, and you're nearly guaranteed to be in the red, if you're not buying places for cash.
The only way to look at a house as a monetary investment is to actually seek to make money directly off of it; namely flip it or rent it. Don't sit on it and think it's going to be a significant financial positive for you. Value it as your home, and as an expense you deem worth it.
It really depends. In Australia, tax concessions and negative gearing often mean making an operating loss on your rental is preferable, as you can deduct those losses from any other taxable income sources.
In fact modern architects and builders here have a really negative attitude towards Craftsmen and similar styles: as far as they're concerned it's all old and boring. The result is predictable; neighborhoods are razed flat for profitable high density dwellings which frankly are one notch above Soviet Brutalist style, usually clad in the least durable and cheapest exterior possible.
Houston has incredibly low urban density and I'm not above improving that in places. But it should done with an eye towards a beautiful legacy. The only thing beautiful about block upon block of stucco and aluminum siding townhomes is the builder's bank balance.
What neighborhoods are you talking about? I don't see anything near the Brutalist style anywhere in the city. A lot of the older parts of Houston have those three story townhomes, but they all look pretty nice. A lot of the homes that those places are replacing were pretty rough.
But I'm not exactly alone in criticizing the recent architecture found in Houston townhomes and condos. Check out this graffiti http://i.imgur.com/AxxvkU1.jpg and the discussion of it on the Houston sub-reddit https://www.reddit.com/r/houston/comments/4td1y7/found_this_...
This is the major factor that makes rents so insane in prewar parts of cities, where the few remaining dense old neighborhoods in city cores are targets for gentrification. People want to live there -- and demand is rising as large numbers of millenials reject the suburbs -- but there cannot be any new supply built due to zoning laws.
For example, almost all of the expensive dense old Boston inner suburb of Somerville would be illegal to build today under its present zoning laws: http://cityobservatory.org/the-illegal-city-of-somerville/
You realize the burbs can become highly desirable areas right? I've lived in a number of cities where the butbs in 1960 became hot areas in 1990 due to population growth.
People who bought houses here for $100-200k in the 1980s can sell them for more than $1 million today.
Of course if you buy houses and rent them out you can make money. Being a good landlord takes work though, and it's by no means a guaranteed way to riches. Having unused rooms in your house or land that's idle? Lousy investment. Summer home? Lousy investment.
Indeed, being a landlord is work, but I think that being your own landlord and pocketing the tax deductions and "imputed rent" is quite manageable for a family.
- Just because some gets you a positive return, doesn't mean it's an ideal investment. If you can get a 6% return, then an investment getting you 3% isn't that great.
- Real estate is local. Schiller is looking at average across the entire country. Areas appreciate at different rates. If you're lucky enough to buy in an area where prices are rapidly appreciating, then it can be a great investment. If you're buying at the top, then it can be a really bad investment.
If you're lucky enough to buy red on the right spin, roulette is a great investment.
Which is silly because you'd never invest that way.
As an individual investor you probably don't care about other people's returns, but an economic analysis has to look at the average case and not at what lucky/sophisticated investors get.
Which is same conceptually as "investing on average across the entire country". So, while I'm not encouraging real estate investing, what you are saying runs completely against the generally accepted conclusions of Finance Theory.
However, the average rate of return on real estate is pretty consistent. That would argue that although areas appreciate at different rates, over a long enough time period, they returns are all pretty small.
As to your second observation, I look for cashflow, appreciation is just a side (but not necessary) benefit. Appreciation gains depend on selling to the market, and with a shorter timespan for the deal, is usually referred to as flipping.
To me, flipping is similar to speculation.
Cashflow is similar to investing in a business/going concern. The value of the business can go up or down, but the monthly payments keep showing up in my bank account.
The article talked about investing, but I would rarely consider one's personal home an investment for reliable financial gain. Far too many costs involved that are not offset by income, until the final sale. And the sale _might very well_ depend on timing and other people's (market) opinion to get the most return - Not something I want to depend on.
So for me, the way I invest, real estate has been a rewarding investment.
Have you actually looked at the Schiller time series data? It's an average of regional data. It's entirely appropriate to consider Schiller's subindexes if you live in one of the 20-30 metro areas they pull from.
He completely ignores the effect of mortgages (leverage) and the expense of renting instead of buying. He ignores investment property (as you highlighted), the ROI of building on vacant land, tax advantages of owning, and numerous other factors.
Thank you.
Real Estate works for us, more than paper assets, and less day to day time requirements than building a business for sale (exit plan) or that someone else operates for our profit. Everyone is different, YMMV.
Education is key. If you would hire a coach for exercise/strength training in a gym/fitness club, then I would highly recommend hiring a coach for real estate investment. As I stated elsewhere in comments, we went over the same material (and more) in 6 months with a coach that it took me 3 years to piece together on my own.
Patience - We were not ready to actually purchase our first piece of property until almost 4 years after we started preparing. Preparations for us included making our credit report as beneficial to us as possible, learning about the responsibilities of being a landlord, learning about the job duties of a property manage (even though we sub that out, we still want to know what is appropriate and what is not), learning about negotiations (did you know you can include almost anything in a buy/sell contract? "We'll pay $x and this 320i BMW in return for that piece of property" is a deal I heard referred to by another real estate investment expert), learning about the legalities of business entities with respect to real estate ownership, and so on. Now we just save up for the next down payment, then start looking for the next deal. And although there are ways to get into deals without a large (or any) down payment, they usually require considerably more effort and time, and I have a service business to keep going. So we do it the more lazy/easy way, with cash and financing.
Due diligence - It is better to walk away from a deal that I just can't make cash flow enough, than to get stuck with a poor/sub-performing investment. We walked away from quite a few deals, even though there were several I was relatively sure I could make work. On-site inspections have uncovered many potential gotchas that would have been financially painful. Some landlords extract the most profit out of an investment they can, and this can frequently result in much deferred maintenance, which can get very expensive very quickly. And like a start-up, you can only sustain a given burn rate for so long, before the deal crashes.
Teamwork - Although I have been gifted with what intelligence I have, it is not a good thing if I am the smartest person on my team/in the room. We all have different strengths, and I am not good at everything, so I try to surround myself with teammates that provide those missing/weak areas I have, as well as mentors who have already gone down that road. Having a good property manager go over a property will help me identify concerns, see places for improvement, etc. Having a reliable contractor (I am still looking for my next one, last one wasn't a good fit for us) can keep me out of those large up-front costs. A knowledgeable attorney for real estate investment in the area I am investing in is very important - It would be terrible to build up a portfolio then lose it all because I did not adequately protect ourselves (entity + insurance + operating practices).
Okay, enough. Sorry for the deluge, but I really _like_ the process of real estate investing.
There is also a large contingent who make a profit by coaching, so there is a sizable pool of those types of people/firms, as well. As long as I know from the outset what the motive is from the potential coach/firm, I can weigh what I am told to decide if it has value or not. Example: Free class? Usually has something hidden. Class on xyz for $399? Material more likely to be upfront, and of course a possible "up-sell" to more classes.
A sad fact (to me) is so many people do not _do_ what they learn about, that I do not worry very much that I may lose a prospective deal to a fellow student/coach. In fact, I would benefit from more people practicing investments like this in an ethical way, improving my community, as well as possibly conditioning people to expect proper deal making practices in my area.
Also, as I just alluded to, real estate is a very _local_ endeavor, so a mentor/coach may be from a different area and may have little interest in opportunities in the area you look in - Which may or may not be the area you reside in.
Two of the coaches I have hired in the past come from The Rich Dad contingent. Kiyosaki has garnered much attention, negative and positive, so if you pursue them, do so with your eyes open. I think he is sometimes a jerk in some of his presentations, but most of the time he is conveying basic knowledge, and I have found much of this knowledge from other sources, outside of his organization. It is one of my tenants that if I get the same information from multiple distinct sources, there is a higher probability it is an underlying truism or is at its base likely sound (or at least based on sound information). But do keep in mind they run a for profit company, and one of their items for sale is more classes/coaching.
I live in California, so another source I have looked at for like minded people (and their source of coaching/information) is the California Apartment Association, as well as North Coast Rental Housing Association. There are very likely similar agencies in your area/country to find other people who share your interests.
I periodically stay in touch with some of the people I have shared online classes with, so those communities can be built and be a source of information, as well.
I have heard it repeated that there is a large amount of money chasing business deals right now, one way of being involved (and earning some of it) is learning how to put those deals together.
But I have only gotten out of it what I put into it...
To me it's not so much about building wealth in real estate, as saving money on living accommodations in order to build wealth elsewhere.
But based on my experience, I would recommend you just keep looking. We have a fourplex in California, it cashflows about $200 per unit, but part of that is due to the healthy down payment we put up. And this is in an economically depressed county, the work environment is so-so, _contrary_ to my research mentioned above.
Due diligence is the key for us. I optimized on "most income potential for the down payment," then ended up paying extra because the previous owner had a firm line in the sand and someone else was also interested in the same property.
Thanks to phantom cashflow (depreciation) and the repairs we make here or there, we put money in our pockets but are able to show the IRS a loss during _some_ years, based on the US tax code (conservatively legal).
I have been corrected before on HN about "too good to be true" numbers, so I do need to point out YMMV. We were beneficiaries of being in the right place at the right time, but we also spent the previous years getting ready: reading books on residential rental real estate investing (note the specific angle there - many ways to make - and lose - money on real estate, be specific), cleaning up our credit reports, building up a down payment, learning the local markets so we could buy something local and keep an eye on our first property, learning about property management and being landlords, meeting and interviewing prospective property managers, meeting and interviewing prospective real estate agents, and then setting up the correct legal entity to hold the property in. We hired a coach after the first purchase, and had much of the same learning material, but far more compressed - We went over in 6 months what it took me 3 years of research to get on my own. And that does not include the invaluable tips one can get from someone who already walks the talk.
We also evaluated at least 10 properties in person that did not pass muster, and that was after weeding out scores of properties that we did not even bother to visit.
We had a few deals fall through, but usually because something was not good enough, usually not enough return on investment, or too much deferred maintenance (requires deeper pockets to get in, but can be more profitable in the end - IF you know what you are doing. And have a good team.).
This specific deal earned us %13 - Not great, but definitely better than other deals. I have a friend who would not look at deals unless they had %28 ROI or more in them, but then he also talks a big game :)
But it IS possible. In fact, thanks to the elastic property of real estate negotiations, it is a place where you can still get in with nothing down every once in awhile, but one really has to be prepared for those deals when they come through.
Besides location, location, location, I think the bigger catchphrase should be financing, financing, financing. There is a lot to be said about the art of negotiation, when it comes to a buy/sell agreement.
But again, YMMV, and I only got out of it what I put into it in sweat equity, as well as capital.
And, we are still learning...
We also own a rental in Florida, but that is a whole other story...
10-year REIT returns: 7.59% annually
10-year US stock market returns: 7.54% annually
Looks similar, except that remember: 2006 was the peak of the real estate bubble. This would be like judging 10-year US stock returns by starting at the year 2000 - it'd be negative.
Since its inception in 2004, VNQ has returned an annual return of 10.04%, approximately 3% higher annual return than the stock market.
I don't think this should be the case - buying property and sitting on it shouldn't give you a higher return than investing in the real economy. But, with our anti-development government policies, this is what ends up happening.
Sources: https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
On the flip side, there is a "financial economy" side to it too. They're leveraged (as is an individual mortgaged homeowner). If property values do go up, and if interest rates do fall, then yeah, the REITs are going to be extra juiced -- this has happened over the time period you highlighted.
But not without risk, too. In 2007-2009, the maximum drawdown (peak to trough) in VNQ was -73%; that's a lot worse than the -55% for VTI.
Land in fast-growing cities goes up in value quickly. Land in dying cities goes down in value. Investing in land (and any associated cash-producing activities like buildings) is primarily a bet on the outlook for economic activity in the surrounding area.
Long term farm prices is a poor proxy for real estate investing generally.
The real estate market in Vancouver no longer at all - even remotely - represents the present or future expected economic activity in the surrounding area.
One of the core issues with real estate is that in an ideal state they are priced to reflect their surrounding conditions, many (if not most) have had their prices divorced from any foundational economic growth expectations. Real estate becomes priced on a benchmark of other real estate, not underlying industrial or commercial activity.
If Vancouver's real estate pricing reflected the surrounding economy there should be much cause for celebration - per capita income should be rising by several hundred percent, and the city's economy would be growing by double-digit percentages annually for some time to come!
*Not including the coupon payments
The price of 30 year coupon-only bonds have increased by 30%+ in the last three years alone, because a constant coupon stream becomes more valuable if interest rates are lower. (The parallel to a rental real-estate investment is obvious.)
As population in developed countries levels out and starts to decline, overall property values should decline. That happens, but not in a helpful way. What seems to happen is that population concentrates more. This is very visible in Japan. Tokyo and Osaka are doing fine, while small towns are winding down as young people leave. It's true for parts of the US - Detroit, Cleveland, Youngstown - where the heavy industry left and nothing replaced it.
[1]: https://en.wikipedia.org/wiki/Home_mortgage_interest_deducti...
Even still, though, I am taking on a risk of not being able to sell the house if I ever change jobs. It's appreciating rapidly right now, but everyone knows this can change in months.
OTOH, pretty much everyone's social group is full of people who bought a home that has significantly appreciated in value if they've held it 20+ years (and also saved them a ton in housing costs). What gives?
- Is there a huge chunk of homes pulling down the average?
- Is the home appreciation understating the return, after you account for interest/maintenance/tax costs?
- Is our recent experience dominated by anomalously large returns that aren't likely to continue?
- Is it an artifact of the calculation, which excludes relevant things like the imputed rental income (and not having to pay current rates)?
Does this statistic really translate into "don't worry, you won't be priced out of any booking metro area"?
For example, if somebody had bought a house for $100K in 1986, and sold it yesterday for $219K, they would probably be crowing about their great investment on Facebook. But in fact the cost increased by slightly under inflation, and they probably spent tens of thousands on taxes, insurance and repairs in that time.
Now, they may have derived enough utility from using it as a home that it was still a good idea. But ignoring that and examining it solely as an investment, it's a money loser.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
I analyzed it by looking at the difference between buying and renting, assuming that the difference is invested. So, let's assume that you have a 20% down payment. Scenario 1: buy a house at reasonable interest rate, 30 year fixed. Scenario 2: invest the downpayment and rent, and invest the difference between rent and mortgage payments.
There are a lot of factors to consider here - return on investment, increase in rent, tax considerations, maintenance. I did model these factors, and yes, they make a difference.
But overall, there's one thing that emerges from the model - unless you assume extremely powerful rent control that endures for decades, eventually the mortgage costs less than the rent. As a result, a transition occurs where the owner is now able to invest more than the renter - it can take a while before this happens, but even with relatively favorable inputs for a renter, it does eventually happen. It is possible that the owner won't catch up within this lifetime - if property taxes and maintenance costs are very high, tax benefits to owning are low, investment returns are very high, and the down payment is substantial, it's possible that the renter will build an insurmountable lead. Even if you relax these assumptions a bit, it can take a long time for the owner to surpass the renter in net wealth.
But under most scenarios, I'd say it is better to own, long run. The owner often ends up with a higher net worth even without considering the equity in the house, because eventually the investments catch up once the owner's mortgage is lower than the renter's rent (again, remember we're assuming the difference is invested). The time frame here is very long. You're not going to stop needing a place to live when you turn 50, 60 or 70, after all.
There's also risk to owning: prices could drop, you could have major maintenance issues (hurricane, mold, foundation issues, whatever), the neighborhood could go to hell, etc. So it's not all bubblegum and roses there either.
Point being that there are pluses and minuses to both. The best answer depends on a lot of factors, many of which are specific to a person's situation, and some of which are unknowable.
As for interest and PMI (assuming you need to pay it), I'd say housing prices falling far enough where rents start looking attractive compared to these qualifies as "something deeply wrong".
Also, the monthly rent?
$200K house than can rent for $20K per year has a rent to price ratio of 10. It would be wise to buy in this market.
Sice housing prices should be linked to what they can rent for, it's a check to see if the two are aligned.
Bingo. Homes bought for capital gain are best thought of as leveraged credit bets.
Where were interest rates "20+ years" ago? Where are they now? What fraction of the original investment was invested up front, i.e. down? (The last number speaks to leverage.)
A) Inflation adjustment. Yes, the I grew up in hasn't quite doubled in value since 1989. In the mean time, the SP500 has grown 500 percent. B) Interest expenses add up. Renters don't pay principle or interest on principle. C) Some markets are hotter than others, and more volatile than others. SFBay for example, has had huge swings. D) Tax subsidies aren't calculated for long term returns. Mortgage interest deductions and capital appreciation are the two big ones.
> Does this statistic really translate into "don't worry, you won't be priced out of any booking metro area"?
It translates to "don't worry, you're better off renting a house anyways."
Also, there are more options for homeowners who use leverage vs. stock traders who use leverage and are at the mercy of the awful brokers. For mortgages, payments can be deferred, etc.
In Canada at least, homes that you live in are not subject to capital gains taxes. So if my home increases in value, it was a tax-free investment.
On top of this, I'm reducing my expenses. My rent used to go up every year, following inflation. My mortgage is a fixed amount, and I pay a very stable fixed amount of it every two weeks. Once inflation is factored in, I will pay less and less over time to live where I do.
Extra money you earn is taxed. Extra money you save isn't. When taxes are high, this factor is important.
Overall, I suspect I could make a bit more money investing and renting- but not all that much more. I consider the difference a little fee I pay to never have to deal with some shitty landlord again.
With that said, I disagree with the author because he's failed to examine the long term security of buying land. Buying a parcel of land can pay off in ways not completely obvious in the present tense. It can be used as collateral on the purchase of a home. It can be used to build a future home on, or if all else fails, pitch a tent and count your blessings.
Registered securities can more readily be used as collateral on account of their liquidity.
It used to be very different. A year after I graduated from college I bought my first home in the mid 1970s, and it is still a good income-generating rental property. Back then, most of my friends and I all had the same goal: own our own home and one or two rental properties. Back then, this was a great strategy.
If I were 25 right now, I would probably rent in a beautiful city, probably not own a car, and seek other investments, and keep investing in my own training/education.
All things being equal, buying parks some of your money until some point in the future when you can recover it, instead of just giving it to somebody else to park.
In general, since the population of the Earth is growing, and we're not adding much more land to the planet (in fact, we may be doing the reverse), the inventory of available land shrinks and property is likely to increase in value at at least the rate of inflation, but often slightly higher over decades.
Not great if you think of it as investment, but far better than showing it as a raw expense.
What he meant was, you have to live somewhere NOW. If you make some money at some undefined future point all the better, but right now you need a roof. But even if you lose money selling it later, unless things really go to hell, you'll probably lose less than you would have paid in rent over an equal period of time.
And there's intangibles to owning a place that you can say is yours. I don't have to worry about drunken parties above my head, or finding parking, or my neighbor catching the building on fire trying to cook. If stuff breaks I can fix it, not have to wait for maintenance to get there "sometime" (my last apartment before I bought the house, the AC went out. In Alabama. In August. It was 90 degrees inside for 4 days before maintenance finally got around to fixing it).
As they say, 'location location location' , which Shiller ignores, in favor of the quote that fits his thesis, 'they can't make more land'.
So tired of the generalizations and lazy thinking that passes for journalism these days, and even NYTs and Nobel Prize Winners are not immune
Bay area prices don't invalidate what Schiller said. If you can time the market then of course you can make a ton on real estate. Same thing with the market.
Just because someone bought in a market where prices rapidly went up doesn't make them an investing genius.
Clinton, IA.
Stockton, CA.
Real estate actually tends to be the best investment for most normal people. It's fairly easy to understand and doesn't go bust like tech stocks. It keeps up with inflation unlike bonds or bank accounts. You can borrow and leverage up without margin calls unlike almost all other investments.
I've got a friend in London with a normal job who just bought a few flats for like £90k mortgage, £10k down and the equity in them is now well over £1m. No other regular investment performs like that with little risk.
From the numbers you quoted, I assume (s)he got started in 1999/2000? It seemed less risky then, because:
1) Rental income on a 100k flat (~10k/year) would easily cover the interest cost (5-7k/year, depending on the mortgage deal).
2) Although prices were already higher than historical prices, there was no sign that they were becoming unaffordable. Many people in London earned >=30k or had joint income of >=36k, so they could easily get a 90k mortgage.
3) Management fees on flats were low (less than 10% of the monthly rent).
Only (1) is still true today, but could reverse if interest rates go up a little.
Today's buyers do not face the same environment your friend did.
How much money have you invested and how much time have you spent on the rental property? What would your returns have been had you invested that money and the money gained from using that time at some job in a stock portfolio instead?
Now, it's possible, depending on where you are, that you got lucky and your real estate investments outperformed the market. But that's not always going to be the case, and it no more makes real estate a "good investment" than any other undiversified portfolio.
Because of the leeching rent-seeking class like him (who is probably in favor of current zoning), home ownership is becoming increasingly unaffordable for new entrants.
Remember, housing/land is a zero-sum game, unless you're planning to move out to the middle of nowhere and live off the land and/or work remotely.
I'm actually quite surprised there are so many people here who have gone the landlord route - it just shows how widespread this problem is. Taxes need to go way up on rental properties.
Summarising many studies on the matter, across countries and over long time horizons, houses appreciate at the cost of inflation. Short-term swings are primarily driven by credit; a bet on house prices rising is a leveraged bet on credit quantity increasing, i.e. rates falling.
[1] http://www.newyorker.com/magazine/2006/10/30/safe-as-houses
Your interest costs will be proportional to your leverage so you need the asset to outperform your interest rate to realize anything.
I can either live in the home, saving livings costs (rent), or I can rent it out and generate income, which will pay for the interest on the loan.
Homes are also less portable. If you're worried about runaway inflation you're at risk of political failure. Makes no sense being anchored to the risk you're seeking protection from.
It is rather unfortunate that such mythology and conventional wisdom around real estate being a wonderful "investment" has built up, to the extent that it's now challenging to have a sensible discussion with anybody on the topic. Who knows how many young adults have been pressured into real estate by their families, partners, and others, rather than following their passions in other areas.
I've bought and sold a number of homes over the years, and I prefer owning to renting, for practical reasons. Still, it's frustrating that everybody encourages one to put much more money that is necessary into a home.
Right now, I live in a 50-year old property with an original bathroom and flooring. In talking to architects, contractors, neighbors and the like, nobody really seems to get the concept of renovating these items, bringing them up to modern standards and catching up on deferred maintenance, as opposed to overcapitalizing. The general assumption seems to be that this kind of thing is an "investment", and therefore the more money spent, the better, despite mounds of evidence to the contrary.
Before i bought the house everyone talked about how great of an investment homes were, but nobody talked about how expensive home ownership was and how much deeper in debt you need to get in order to fix a house up.
The funny thing is that I could buy a house but couldn't get credit or loans to fix the house up. Worst possible situation you can be in.
Even though the bank and realtor were liars and pushers, I don't blame anyone but myself for falling for it. I hope you take this in mind before you buy your first home
The S&P is something like 7%. It's not insanity if you can fund an investment with close-to-inflation debt and 20% or less deposit.
Bingo. This is always what's missing from this conversation. Yes, it's true that real estate is not a great investment when compared to other asset classes. However, for your average American, it's one of the only asset classes where leverage is readily available, which means it's one of the few ways for average people to build real wealth.
And of course, I'd be remiss if I didn't also point out that leverage can easily cut the other way as well (it can greatly magnify losses).
Why would you want the houses of the world to cost more, so less people could have them?
Low house prices and low land prices allow humans to actually use them. Stop seeing what is good, as bad. Dirty capital class casuals.
There is no conspiracy to make homes expensive
There's no "conspiracy" -- but there is a blatant attempt to make homes expensive.
In fact, in the US I'd argue that every single person and organization in the entire nation, is doing everything possible to inflate housing costs (or "property values") as high as possible, in literally every market. Either directly, or indirectly. The entire US economy seems built around raising property values.
Some examples include :
- Attend a local school board meeting. They want to improve an particular area school. Why? For better educational results, or safer student experiences? Eh, sort of. Then they mention how, if they can improve the perceived quality of the school, more families will prefer to live in that school district, raising demand which raises property values, increasing the funding for the school....
- Attend a local police neighborhood meeting. They want to divert some regular patrols to a specific neighborhood to be a visible show of force there. Why? To make the area safer for residents? Eh, sort of. They mention how the area's makeup often 'incites' crime, because the buildings are old, run down, or abandoned, and the people who live there are almost exclusively poor. If they can convince people the area has improved in safety, by overstating police presence, wealthier people might be less nervous about moving in to a poor neighborhood. They might increase demand for high-scale trendy businesses or replace old homes with fancy urban condos, both driving property values up. Wealthier people have higher incomes, pay more in city income tax, which partially funds the local police force...
- Attend a "friends of the parks" meeting. These guys have no authority, they're just fans of the parks. But they're trying to convince the neighbors to vote for a new tax millage to improve the parks. Why? To provide more a nicer experience to residents using parks? Eh, sort of. They mention how well-maintained parks improve the perception of a neighborhood, and how the tax millage costs money, but adds significantly more in property value than it costs in taxes, so effectively residents would be voting themselves free money...
- Attend my own HOA meeting. Property developer wants to build rentals in the neighborhood, wants the HOA to vote to allow them to build this. They predict a 20% increase in property values due to the businesses/amenities the extra people will attract. HOA board wants to block this and build more single-family homes. Because they believe by reducing supply, their own houses will get a 30% increase in property values. The two go back and forth trying to convince people, using the basis of "how much free money your 'investment' will gain, and how quickly."
- Attend the local chamber of commerce. Local business owners are all excited about a new datacenter being built one town over. Do they like the company, or will they ever use the service? Not really. Will they get more business from the new employees? Not really (they'll only have maybe 30-40 people on site each day -- it's a drop in the bucket for them). They're excited because the area will have to house those new people, which will likely prompt the construction of a new neighborhood, sending the value of nearby commercial properties up, which they can use to reduce their debt load or borrow against to expand their business....
When you start thinking about it, almost every single decision and action in the entire economy can be traced back to someone somewhere inflating property values. And it's impossible not to contribute to this somehow -- the act of housing yourself (an essential need) is a direct contributor to this, no matter whether you rent or buy.
Anyone not on the treadmill is effectively waging a quixotic battle against the entire economy. It's not a "conspiracy" (no one is hiding this. If anything, it's being championed publicly as a good thing). But it definitely seems like a problem -- the world isn't making wealthy people fast enough to let this happen forever. All these poor and middle class people have to live somewhere.
Disclaimer, I am a proud member of the capital class.
I feel like it requires somewhat of an intellectual leap to see home ownership as a form of investment.
I grew up in Vancouver, BC and when you suddenly see a $500,000 home sell for $2,000,000 a few years later, real estate starts to look like a pretty good investment.
Just wait for flooding / earthquake to happen. Wondering what those naive Chinese investors would do.
Just for the information about Richmond, BC: 10,000 houses are investment properties (stay empty) in the city of 160,000 residents. If to assume that each house is a living place for at least 4 people then it means 25% percent of its population has gone somewhere. 40,000 of Canadians were forced to live somewhere else, down in US presumably.
The return on investment on a house is not just the cost of the house but also the rent money you have saved by staying in your own home. In fact without that you cant get +ve return even in upscale real estate investment.
Would you buy farmland, let it sit barren, then sell it years down the road? Of course not -- you would rent it to farmers. This income would need to be included in the returns to buying the land.
Also, many readers seem to miss the fact that Shiller almost certainly did not write that clickbait headline.
Add to that the tax incentive structure and buying a house that's sitting on a huge chunk of land that can be subdivided years down the road if desired makes good sense for many people.
https://experimental-geography.blogspot.com/2016/05/employme...
If he's taking the national average, which will include plenty of low-demand areas around America, then his comments are not very enlightening for most of the readers of the NY Times who tend to live in high-demand.
Add to that, you still have to pay to live somewhere.
this is a 5 min back of an envelope calculation, correct me if i am missing something.
For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.
1% penalty every year (property tax)
Exit load of 6% (commissions again)
That is why real estate tends to be a worse investment long-term compared with the financial sector.
Also, your analysis excludes the utility value of having a roof over your head or tenants paying rent. It basically assumes you buy a house and let it stand vacant to cash in on appreciation. Nobody in their right mind does that.
Whoa whoa whoa, you can't call the commission a cost on both the purchase and sale.
Either call it a cost on the sale (seller picks up the tab since seller pays the agent), or call it on the purchase (sellers aren't dumb, and price in the commission). Don't call it a cost on both sides of the transaction, that doesn't make any sense.