Home ownership is a lousy investment compared with stocks or bonds | Hacker News Reader

Home ownership is a lousy investment compared with stocks or bonds

usatoday.com

31 pointsdevy62 comments

This is a horribly incomplete analysis. It doesn’t account for the cost of rent, and it assumes that everyone would be crazy enough to keep a 7.5% interest mortgage for 20 years! You’d have to try really hard to not find this intentionally disingenuous.

And they wonder why we call it fake news. I realize it's not a news story but wow, they must really think their readership is stupid.

They probably want us to get into the stock market casino. Just lost half of your money? Remember you are in it long term. It'll go back up and you just need to diversify more (give the broker more money) so you won't lose as much during the next down-turn.

I'm sorry if this sounds cynical, but that's my honest assessment of the stock market. Some very wealthy salesman is always trying to get me to put more money into it and continually tells me to just be patient. It feels like a big scam.

Is it a worse scam than savings accounts where you lose money to inflation? You don't have to invest 100% in stocks. If you want to see less volatility you could hold mostly bonds, less risk but less reward.

You don't even have to pay that much in commissions if you don't want to. Use index funds to build a simple 3 or 4-fund portofolio. Contribute once per year, so even if you pay $10 per trade you're paying $40/years in fees, plus ~0.1% of assets in fund expenses.

I've been investing 20+ years, through the dot-bomb bubble, great recession, etc. Losing half of your money over a long term period (10+ years) is basically impossible if you are diversified. It's pretty simple: mostly buy index funds, invest regularly, avoid putting too much in a single stock, and , most importantly, don't panic. Sure, if you invested everything in Pets.com back in 2000, you'd be screwed, but that is easy to avoid if you never put more than x% in a single stock.

I just took a new job and one of the benefits they offer is this health care savings account, where you get a high deductible plan and then also contribute to this other account tax free for medical spending. One of the "features" of this account (actually touted by the custodian's literature) is that you can stick that money--you guessed it--right into the stock market casino! So, now you want me to take money I'm already setting aside for something as important as my health and put it on the Wall Street roulette wheel? The mind boggles.

That's why there is a minimum contribution to the HSA before you're allowed to invest it. It's for healthy people who have saved up a big chunk and don't expect to need the money for 10 or more years, so they can park it somewhere to earn a decent return. The stock market is only a casino if you're in it for the short term.

It does address rent: "If you didn’t own, you’d pay rent (which is tiny compared with the above, as I showed in last month's column). " Here's the link: https://www.usatoday.com/story/money/columnist/2018/01/28/40...

This is a terrible analysis from someone who offers professional investment advice (the author).

Nobody would have held a 7.5% mortgage w/o refinancing. You can always ratchet down if rates go down.

Mortgage interest is (was?) largely deductible, greatly reducing the after-tax interest rate, especially in the market example cited (San Mateo).

Property taxes are deductible as well (less so before the recent tax changes).

You have to live somewhere and that's a quantifiable benefit (in rental equivalent terms). If you put all of your money in stocks, and none in a house, you're going to have to pay rent somewhere.

A portion of the capital gains on the sale of your primary residence is tax-free, further increasing your after-tax returns.

Housing market examples, like stocks, can always be cherry-picked for one argument or the other.

Home ownership is not always a great investment, but it's usually not lousy.

I didn't buy my place for the investment although I'm confident it's going to work out just fine from a financial stand point. I did it for the personal utility that comes with improved quality of life and satisfaction from having a place that I can customize and not have a landlord that I have to stress about kicking me out and / or raising rent. The after-tax all-in cost is about the same as what it would cost to rent out the place that I bought so I don't see how it is such a "lousy investment".

To me, this is like pointing out that car ownership is a lousy investment: it may be true, but it seems beside the point. If I want to have a car that I'm planning to hang onto for a long time, and which I can do whatever I want with, I want to buy a car instead of leasing it. Sure, I won't make money that way, and I might even come out ahead financially if I were to lease, but then it isn't my car, it belongs to someone else, and there are going to be a bunch of rules associated with that. To me, owning a house is the same thing, but with the added bonus that there is actually a chance of making some money. But that's purely a bonus; comparing it with buying stocks or bonds seems ...odd to me.

It's still important for home buyers. If you go in knowing you probably won't make money on the car or house, you won't buy more than you need (unless you really want to). And maybe invest the rest?

Perhaps a car’s main benefit is the utility to make money in that it can transport you to work, sales, meetings.

Not the greatest analogy, as there are very very few circumstances where leasing would put you financially ahead of buying a car and driving it for a long time. Even better if you buy a car that’s 2-3 years old and drive it into the ground!

This article doesn’t consider at all the cost of rental. I have no idea in US but in London renting an house is quite more expensive than mortgaging one. And you have to consider the non-insignificant problem of rental going up 5-10%/year while mortgage interest are going quite quickly to zero if you pay the mortgage at the same rate of the rent. If I listened to this “genius” instead of being almost the sole owner of an house doubled in price in 7 years I would have spent much more than 100k on rental in the same period without having nothing at all at the end. I can’t really understand what this “journalists” gain in deceiving people in this way..

And so you respond with purely anecdotal evidence, based on your special case of buying a home at precisely the right time, in the most overheated real estate market on earth (London). Look for instance at a random home in Phoenix, AZ [0]. If you had bought at the very bottom of the housing crash in '09, and sold today, that's about 50% returns before any of the associated costs with home ownership and mortgages. Compare that to ~300% return over the same period from just dumping your money in the S&P 500 [1]

[0] https://www.zillow.com/homes/for_sale/Phoenix-AZ/pmf,pf_pt/7...

[1] https://www.morningstar.com/etfs/arcx/vti/quote.html

Your 300% return sadly doesn’t include the cost of renting. If buying SPX would give me free housing I would be the first buyer, believe me. But unless you are born very, very, privileged you need to buy an house or to pay a rental, unless you want to live with your parents, and your wife is happy to do so. For me, as I repeat, it was a no-brainer. If you want to live for the foreseeable future with your parents then obviously better to put money on some index rather than buying an house. If you have a family I’m really not sure that it would be better even in Phoenix or in Castrovillari or wherever in the world you want.

The article does make the unstated assumption that you're able to 1) rent for cheaper than the cost of a mortgage + extras, and more importantly 2) invest the difference. If your individual circumstances don't allow that and you're able to afford the necessary downpayment, the calculation is pretty easy to make, yes.

Apples and oranges comparison because you still need a place to live.

The true investment value of a home is the residual you receive every month after the home is paid off in the form of no rent. Sure you still need to pay for property tax and up keep but the difference between that and the rent you'd need to pay to live in a similar dwelling is the residual you collect.

A better comparison would be how you choose to invest the disposable income you have available after your housing needs are met.

> I can’t really understand what this “journalists” gain in deceiving people in this way..

The author is Ken Fisher of Fisher Investments. He stands to benefit from fees on assets under management if you put your money under his management instead of tying it up in real estate. Even if you don’t put it under his management, if it’s in equities propping up that market, it helps his clients (and therefore his firm).

Ah ok, I didn’t know. Thanks, this explains a lot of things. I don’t think he ever had to pay for his house if these are his ideas..

The attraction of buying a house has always been (to me) the leveraging of the money. I can buy a $500K house for $100K down and the X% appreciation applies to the full $500K.

Better yet, I can put 5% down and buy the same property. Then the X% appreciation of a property turns into X% times 20 return.

You can do the same by buying stocks on margin.

It does not mean this is a good idea, however.

In practice,it’s hard to get much beyond 3x leverage in the equities market. It’s typical to find 5x, fairly common to get 20x, and possible to get to 33x in the real estate market.

Use options and you can get very leveraged.

The option premium limits your leverage for holding a leveraged position for long using options.

You can get massive leverage on CFDs (Contracts for Difference), you can run on as little as 5% margin (i.e. 20x).

Maybe it's different in the USA, but in New Zealand the lowest I've seen is 5%, which is uncommon, 10% for lower value houses, and only 20% margin is common.

GGP was “stocks on margin” and my response of (unqualified) equities I meant stocks as well.

Can you really get 20x leverage on margin?

in most states, mortgages are no recourse. If I borrow a million bucks and default on it, I lose the house and take a credit hit, even if I have millions in the bank. If I borrow a million dollars (margin) to invest in equities and I need to cover the loan, they can sue me/force me into bankruptcy.

This is incorrect. You pay interest/maintenance/insurance/tax costs for this home. Then one must calculate cost to sell the house. The appreciation of the home value simply does not all go toward the increase in your investment. One must also subtract the opportunity cost of the downpayment.

I did this math at one point for my particular scenario. Housing was not a good investment for me unless I assumed that there would be some sort of outlandish growth in value without course corrections.

That said, there are compelling reasons to own your personal dwelling beyond money.

The other argument is that it forces people to save money (to pay back mortgage). All buy vs. rent comparison assume you save and invest some money, which requires financial discipline.

(It's an argument I discovered recently, does not apply to everyone but I think it makes some sense)

The lever works both ways, as people found out in 2008 when their debts far exceeded the value of the house.

I bought a place several years ago in Seattle, where the market has been going up like crazy. So has the stock market. Between fees, interest, and opportunity cost of my down payment in the stock market, I'm not sure I've financially come out ahead if I were to sell today. However, non-financially it's been great. I've had stability, a place I can make my own, and haven't had to deal with a landlord. Buying a primary residence as an investment is far from a sure thing. But it might be the right call for other reasons.

Seattle might be due for a correction in the near future, but if you bought several years ago, it would be hard to not make money in real estate right now in Seattle. Did you see where average prices on Capitol Hill are now > $1MM? Ballard / Phinney Ridge everything is > $800K. Unless there are extenuating circumstances, you should be more than fine should you choose to sell.

To me the interesting question is, does one believe this growth will continue for several more years? IE: should one buy a (overpriced?) property today in one of these popular residential neighborhoods? Or, is one better off looking farther afield assuming that less desirable neighborhoods are going to eventually become desirable as most of us are priced out of places like Fremont or Ballard? In other words, are we at the top of market already?

I wasn't suggesting that I won't be ok, just that it might not beat out the gains I would have had if I had the rent difference and downpayment invested. And that is in a very hot market.

I'm not sure if the growth will continue. If I was buying today with an eye for appreciation, I'd aim for one of the less desirable neighborhoods towards the south end.

I'd agree with that; there are some good values to the south.

Real estate is just another type of investment, and one that can bring diversification to a portfolio. Of course if your net worth is all invested in your home, your risk/reward profile is probably suboptimal (YMMV!)

You could invest in a real estate investment trust (REIT) to diversify over several houses rather than just one.

Absolutely. But I guess that when you look a the diversification together with the opportunity to be the owner of your own house, it's a sensible investment. Basically I was just disputing that buying a house is never a reasonable investment choice. But hey, I'm not number 200 in the list of richest Americans ;)

This is lousy calculation by armchair pundit. The main thing missing is all the rents you would have paid if you didn't owned the house. So if you have two scenarios, one where you just rented an apartment with ever increasing rents and other where you had a fixed mortgage for 30-year - you would most likely win by wide margin in 2nd scenario.

This article is an example of the bad math common in rent vs but discussions. Sadly it contributes to the difficulty of developing wealth or the perception that the rich get richer and the poor get poorer.

It’s not always best to buy instead of rent, it takes many factors like stability, career, family, etc. So any blanket advice like “always buy” is not very useful.

That being said, buying a house over renting is likely the top means for the middle class to develop wealth (maybe under save for retirement and exercise). This article is really about investing in real estate vs. stocks. And stupid real estate investing where there’s no income from the house.

A proper analysis needs to account for cost of purchase and ownership vs. cost of rent. This author is either really stupid or expects his readers to be stupid. If the former then you don’t want to buy his investment advice, if the latter then readers shouldn’t buy anyone investment advice.

I bought my house as a place to live. (My only "mistake" was that it's a bit larger than I need.) It was a cheaper option than renting, as apartments 50%-60% smaller were significantly more than my mortgage payment. Buying a house to live in, with the idea it's an investment just doesn't seem to be guaranteed to me. That's especially true if it comes to making any modifications -- I want to do them to suit me, not trying to consider if a future buyer wants them.

If it appreciates? Great. If the value stays the same? Fine. If I move and can only make what's outstanding on the mortgage? That's good, too. If it's worth less? Then I will look into renting it out.

There are a few inconsistencies here for sure, as in if you don't buy the house you still have to pay for rent. But I think the largest takeaway is that really financing the house eats away the most amount of profit. The benefit to financing is of course if you can't buy the house outright you can still own it, hopefully pay around what you would for renting, and then still end up with a profit, which is more than can be said for renting.

I think the biggest factors to consider are is this your primary residence, what are the carrying costs for the property if you bought it outright, and how much of your net worth is tied up in this asset, or said another way, how much of your burn rate.

... says the article written by a guy who sells stocks and bonds for a living.

I wonder if he lives in a rental.

Such articles make me nervous- is there a stock or bond bubble?

I have a 3% mortgage for 30 years (though I am paying toward the principle so I should pay it off in 20 years). My mortgage + insurance/taxes for a 4 bedroom house on a quarter acre is far less (about $500-1000 less a month) than what people in my area are paying for tiny 1-2 bedroom apartments.

Plus if I were to sell my house right now I could sell it for more than double what I bought it for. The market might tank, but I'm planning on living here for another 20 years at least so it could go through the boom-bust cycle a few times before I get around to selling.

I don't care much for real estate investing. You pay taxes, insurance, and maintenance on it. You only have a vague notion of what it is worth, and that all depends on just happening on the right buyer at the right time. It can take a month to a year to sell. You pay 6% commission on selling it.

With stocks, you know second by second what it is worth. There are no taxes, maintenance, insurance, or liabilities that come with it. You can buy/sell it at any moment. With a discount broker, the sales commissions are minimal.

If you’re talking about the US, you’re wrong in that there are capital gains taxes at 20% long term, and up to 38% short term on the sale of stock. For a real estate investment that you live in, couples do not have to pay capital gains tax on up to $500k worth of gains.

Just to play devil’s advocate - when you buy a stock, you are buying nothing more than a piece of paper, and you don’t even get a piece of paper nowadays. It’s really easy to manipulate the price of a piece of paper.

It's more complicated than that. The $500k is for married couples - it's $250k for singles. You also have to stay in the house for at least 2 years. There are a bunch of other rules, too.

> It’s really easy to manipulate the price of a piece of paper.

The real estate crash of 2007 shows there is no such thing as sure thing in real estate, either.

I've done better with my home investment than I have with my managed investment funds. I bought my flat in 1994 for $107,000 and it's now worth $715,000 after Melbourne had the same rise in house prices as San Francisco.

Two problems, though. (1) The money is locked up. I can't take a couple of bricks down to the travel agent and exchange them for tickets. (2) I am locked up. Google wants me to work for them but are quite insistent that I move to California. I guess remote work can only go so far.

Some people do better in the lottery than their managed investments too.

And that's less than the return of the s&p in the same period (~880k).

Well, I assume you are calculating as if you paid all cash for the house. With a mortgage, you leverage quite a bit. Most would never be able to leverage that much to invest in the stock market.

You could get a HELOC?

Home equity line of credit.

Like, sure, but it's beside the point when one considers that you have to live somewhere.

The Globe and Mail also has a great comparison of rent vs buy using numbers from Toronto (includes closing costs, taxes, maintenance, inflation, etc): https://www.youtube.com/watch?v=NZR_vMTLfIk

(buying comes out slightly ahead assuming you don't move for 25 years, and the renter averages 7.5%/year returns on their investments, and, and, and etc.)

TL;DR buying is probably better if you don't move very often, but there are so many variables that you can't know beforehand -- that you need to be able calculate whether renting vs buying is more profitable -- that it's probably not worth worrying about.

EDIT: The NYT also has a nice visual calculator for this: https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal... You need to know about 21 variables (that can change over time during the lifetime of your mortgage).

That NYT calculator is awesome, and helped convince me to buy my place. Particularly helpful for seeing how changing interest rate vs down payment affects the overall cost of a mortgage and moves the break even point vs renting.

Hopefully at some point they update their site to take the new tax laws into account (which will make buying less competitive for people in areas with higher cost of living)

I agree its a great calculator. The funny thing is that I used it and it convinced me its far better to rent in my market.

My home is not an investment but since I'm now renting it out it is turning a very tidy profit.

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