Why a house is a terrible investment (2013)
jlcollinsnh.com
jlcollinsnh.com
Now, obviously not all investments are winners, even if they are "good" investments in principle. And there are all sorts of very good arguments about why homes should not be subsidized in the way they are, and that our government has made them "too good" in a way that harms the public as a whole. But nonetheless homes in almost all of the US are absolutely good investments. They have been for going on three quarters of a century now and certainly don't show signs of stopping.
On average, homes in the US appreciate at about the rate of inflation, and the choice to rent vs. buy is favorable in some markets, unfavorable in many others. It's nowhere near as clear-cut as the comments in this thread would lead you to believe.
Homes are heavily taxes if you don't live in them, to the above poster's point.
Property taxes also apply to home ownership.
Until this year, you could deduct those taxes up to your total federal tax liability (which may be what the parent is saying), but now you're limited to $10,000. Either way, it's a lot more burdensome than most investments.
Regarding property tax, yes, but dividends are taxed as well and you generally are going to pay capital gains in the specific situation I’m describing if you replace “primary residence” with “stock”. Primary residences with mortgages have better tax treatment, really. If it didn’t I wouldn’t have a mortgage.
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
up to $250,000 of profit is tax-free
If your profit isn't 6 figures, choose this option carefully.
Are you referring to the over-55-once-in-a-lifetime exemption that was replaced in 1997 with the introduction of the Taxpayer Relief Act? https://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997
Also, the point about diversification is a valid concern. Would you put (50% of your net worth + loaned money) into only FB/AMZN/XYZ stocks, today (tomorrow)? Probably not.
Like I said, I actually am on your side that the US obsession with homeownership has led to all kinds of bad externalities with poor urban development and income inequality. I'd support all manner of regulation intended to decrease the subsidy we pay out to the middle class in favor of higher density rental environments.
But houses in all but a few markets are and remain "good investments" by any reasonable interpretation. To argue otherwise is to argue in bad faith. Stop it.
What about the interpretation that I don't want to be subject to price fluctuations of a single object that represents a large fraction of my net worth? The argument that I might not wish to manage a property? The argument that I don't want to avail myself of the opportunity to be foreclosed on because I would like to maintain my credit? All those seem reasonable enough to me as factors to consider in defining a good investment (obviously subject to any individual investor's utility function).
Personally I think what should stop is you accusing anyone who disagrees with you of arguing in bad faith.
That only makes sense if you bought the house in cash or if someone is willing to loan you money at 4-5% to buy stocks. Investments aren't zero sum when the government is effectively underwriting your mortgage.
This article is total woo. Sorry.
[1] https://wallethub.com/edu/states-with-the-highest-and-lowest...
If I stayed where I rented last year for ten years, the total cost over ten years (assuming the rent is never increased) (rent is always increased) is $132,0000. Even if my house cost that much to maintain over ten years plus interest (it won't), I'll still break even on the principal and enjoy the benefits of home ownership.
That's not to say that home ownership is always the right choice for everyone in every stage of life. But to sweep a broad generality like "houses are a terrible investment"...
Even if they could have done better with stocks, the peace of mind to only have to pay property taxes and upkeep on a house is something that has substantial value in retirement.
Hang on a minute there. Big citation needed, or caveat for which locality you're talking about. In LA or SF, for example, the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment. And that's after the huge assumption that you can even afford the up-front cost needed to buy a house in the first place.
Yes, but rental prices also change over time, whereas your mortgage payment doesn't (although the tax deduction falls over time, and your locality may up your property taxes, but these are fairly minor components).
If you have reason to believe that rent will continue to increase (either around CPI, or in the case of the Bay Area, 10%+ per annum...), then by all means buying a house now (which produces an infinite stream of rents) allows you to profit off that view.
Another way to view this is that you are acquiring an rental inflation-indexed asset and a nominal liability, so you will profit if inflation is high enough.
As someone who doesn't plan to indefinitely stay in the Bay Area, I'm very happy renting a rent-controlled unit.
https://www.quora.com/What-percentage-of-San-Francisco-apart...
Rental is a way to hedge the short into long position for investors in homes and apartments. The renter instead is probably in long position on house prices add they likely want their own house - if they don't, they are subject to many market risks, including some existential ones.
- Not an ongoing drain on cash.
- Liquid.
- Cheap to buy and sell.
- Simple to buy and sell.
- Have historically generated high returns. (Although see my earlier comment for questions about whether this truly distinguishes stocks from housing.)
- Normally not leveraged.
- Normally not mortgaged.
- Often productive (dividends).
- Mobile. You can sell it to anyone in the world.
- Many large corporations are multi-national, and certainly immune to any event that would occur at a neighborhood level.
- Do not discourage you from moving to seek better opportunities.
- Stocks can be pretty cheap. Shares of good ETFs are in reach of anyone.
- Require no ongoing maintenance.
- Relatively immune to local or even global weather.
- Generally tax efficient, especially if held in a retirement account.
- Not subject to eminent domain.
What about this analysis makes you think that stocks fare poorly in it?
Large bigcorps ate also vulnerable to market downturns and can fail. This has been shown in the recent lending crisis and car manufacturer problems.
Stock require maintenance as in you have to watch the prices and the general condition of the market at the very least or you stand to lose a lot of money.
Stocks are not even immune to power outages. (E.g. one at certain flash manufacturing plant of Samsung) Media are less predictable than weather and affect stock prices a lot. Main factor in prices of mortgages is supply of houses and interest rates which are relatively predictable.
Stocks are taxed at capital gains tax level when you sell them like everything else.
Whole you can technically sell stocks to anyone, not anyone will want to buy your stocks anyway or will buy it for a massive discount.
The remaining point about not moving is moot when you have a family. Want to move yearly with a kid or two in tow? Good luck! And then you also presume there are always better opportunities to move to. This might be true in a score of professions but not most of them.
This would only make sense if you want to live in a place indefinitely. When the economy here (Alberta, Canada) tanked due to falling oil prices, people who were renting and were laid off simply gave their 1-2 month notice to their landlord and moved to Montreal or Southern Ontario for better employment opportunities. Those who owned could not do that without taking a huge loss, selling their house for less than the price they bought it for, potentially less than the remaining mortgage obligation, potentially leading to their bankruptcy. As for renting it out? Forget about finding a tenant in that economy. And even if they did, how could they manage a property from the other side of the country?
Mobility is worth more than zero. If you think the economy in the place you are living is going to be good for the rest of your life (or at least the rest of your mortgage term) and you are certain you would not want to move during this time, go ahead and buy a place. Otherwise, it makes sense to rent.
I think the majority opinion on HN is that unlike other industries like energy, auto manufacturing, agriculture, etc., tech is uniquely immune to downturns. My impression is that most people on HN believe that the tech scene in California is only ever going to get bigger and more lucrative, and with it property prices are always going to go up. Even suggesting that tech and SF bay area might end up like, say Detroit and auto manufacturing industry, would make many to dismiss your point entirely. But as an outsider who does not have a horse in this race, I don't share the same mindset. Only time will tell the truth. But I won't be surprised if the sustained tech boom goes bust at some point during the next half century.
Whoa, you have to go bankrupt to stop paying a mortgage in Canada? In the US, these are (in my experience) secured, non-recourse loans. That means that the bank's final option is to take the house, but if they do that, you owe them nothing else.
It depends on which province your property is located at. In Alberta and Saskatchewan, mortgages are non-recourse. In the rest of the country they are not. So for the majority of Canadians bankruptcy is the only way to get rid of their mortgage.
Admittedly in the specific example I gave this would not be the case. However to the best of my knowledge, defaulting on a non-recourse mortgage ruins your creditworthiness the same as declaring bankruptcy. Considering how many landlords and employers check your credit report, defaulting on a mortgage could have serious consequences for your livelihood, even if it is non-recourse.
the bank's final option is to take the house
Stay away!
Just don't do it as an investment.
Personally, I live in an apartment. I don't want the upkeep costs and time associated with a house. Even if I were to find a place to buy with a mortgage similar to my rent, I would then have upkeep costs on top of that. No thanks. I'll let someone else do all my maintenance, mowing, and snow removal, thank you very much.
I don't agree with all the points of the author as there are many factors to have into account when making the best financial decision. But rent can't be just seen as a negative investment, it's a cost that makes a person free to move their money into investments that provide a better return.
Now, obviously, if you're living in your house, you're not going to get nearly the same return -- this is the total return on housing, so a house you're living at could be expected to provide returns on average as listed, minus the annual value of rent. But that means its overall performance as an investment is actually better than observed appreciation.
suburban California home purchased in 1975 for $10k
1. Interest rates are at historic lows. Real interest rates have recently been negative. When this changes in the next decades, interesting things will occur.
2. It is time for the baby boomers to leave their houses and move into smaller digs. There is a demographic shift on the horizon.
3. The Republican tax legislation just hammered home deductions in many areas.
There are interesting times ahead.
They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life.
The best future investment that could have been made here is living within the reality of the numbers.
Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs:
- interest on your mortgage
- mortgage insurance (if you have >80% LTV)
- closing costs on your loan (2-5% when you buy)
- property taxes
- homeowners insurance
- yard care / landscaping
- HOA fees
- home maintenance (estimated: 1%/year)
- realtor fees (6% when you sell!)
- excise tax (~1% when you sell, in my locale)
I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy.
Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.
Disclosure: I own several rental properties to round out my investment portfolio.
Returns vs utility is an acceptable trade off for me.
However, that does not mean I made a wise financial decision. I made a lucky financial decision, which is very different. This article is about making wise decisions, and it's very hard to reason about this from results in a single investment.
I just want to add that a lot of people account very poorly for their real estate profits. Whether that number is good depends on how leveraged you are and the value of the property, and many other variables, like your costs and (unknowable) future vacancy rates. (If you have a lot of leverage and the property is only worth a little, that's great! It would not be very good in a scenario where the the property is paid off and worth $2M.)
Also known as speculation
Then it's a hectic couple of months of finding somewhere new (but close enough to the same location so kids don't have to change schools) packing up everything in to boxes, moving and unpacking everything. It's 2-3 months of hassle they would love to avoid. Not everyone is buying a house as an investment.
John Goodman said it best while playing a loan shark in the the film "The Gambler..."
Frank: You get up two and a half million dollars, any a-hole in the world knows what to do: you get a house with a 25-year roof, an indestructible [Japanese]-economy shit box, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of Fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level... Did your grandfather take risks?
Jim Bennett: Yes.
Frank: I guarantee he did it from a position of fk you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves.
Renting and owning from a cash flow perspective are usually pretty close, and you need to live, so a suboptimal investment with any return is better than making a landlord money and investing the scraps into 401ks.
I’m in my late 30s and missed the gogo crazy years. But everyone I know in my age cohort has had a positive, meaningful ROI in trading houses up at least once.
The supposed flexibility of renting is overrated as well. No decent landlord will take less than a 1 year lease, and some premium properties will demand a premium if you refuse a 2 year lease. Getting jammed up with buying out a lease early, or getting stuck with a high rent when the market cools is another way that renting is almost always a bad deal for the tenant.
This sounds like a corporate accounting analysis, not advice for people. People don’t benefit from deducting opex.
Plus there's nothing keeping you from renting out your property and then living somewhere else.
You lose some of the nicer deductions and time spent being a landlord, and that certainly hurts ROI, but it's definitely not the case that you must live in what you own.
I'm not huge fan of being a homeowner, but if I decided to rent, my rent would be almost twice what my mortgage is.
1. Your house is usually generating income (for a rental property) or offsetting the rent you would otherwise have to pay. Saying "you have to pay a lot of taxes" doesn't mean much unless you compare the numbers.
2. He mentions that property value is tied to a specific geographical area (and that's a bad thing), but then contradicts himself by calculating appreciation based on the national average. If you live in a fast-growing city then it's pretty certain that you're going to make more than inflation.
Moreover there is a floor on a value of a home unless you let it completely unmaintained or it gets bombed in a war. There is no floor on stocks. There is such a floor on some material futures. (Though probably lower.)
The alternative is much worse in many markets.
It's lower risk / higher return when you think of it that way.
(I do not own a house nor do I plan to own one, however)
- Massive tax subsidies provided by the government. Seriously apalling if you think about it hard enough, but since they're available, you should try to take advantage of them.
That list is sufficient.
Sure, a house is not a great investment. But there's more to housing than investment. You have to live somewhere, and you're probably going to be paying for it one way or another. There's no perfect solution--you have to figure out what works for you.
We bought this house nine years ago, and hope that we never have to move again. Now the mortgage is about half of what it would cost to rent an apartment in this neighborhood. That's kind of a trap, too. There's no point to thinking about moving--there's no place we could go that would be cheaper than what we have unless we leave the area entirely.
You can make smart property choices, even for the home you occupy (i.e., not just rental properties). But "smart" includes evaluating all the criteria. If you live in an area with a ridiculous property market (e.g., the Bay Area) or a very, very slow one, then the investment isn't as enticing. I'm blessed to live in a market with a lot of movement for a variety of reasons, not just being a "hot" area to live in, but others are not so much. I'm also blessed to work remotely, so I can choose to live in an area like this. :)
tl;dr: this is probably true in a lot of America, but it's not universal by any means.
BUYING REAL ESTATE
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Take the average price of a home in the USA, according to a google's top result, approximately 200,000.
Take the average APR at the moment, 4.5%.
That results in a $800 payment per month for 30 years if you put 20% downpayment of 40,000. (source https://www.dollartimes.com/loans/mortgage-rate.php?length=3...)
Depending on the area, you'll most likely be able to rent a similar home for the same or lower amount.
BUYING STOCKS
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Take the same 40,000 downpayment and invest them in a low cost broad market index fund such as Vanguard, SPDR, etc.
Assuming an average long term return of around 9% for the stocks, after 30 years this will result in around $600,000.
(source https://www.investor.gov/additional-resources/free-financial...)
WHERE IT GETS INTERESTING
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Let's look at what happens after only 5 more years. Your investment has now grown to over %933,000! If you wait 5 more years (40 years total), the sum is now $1,400,000+ !
Why? Because investments in stocks are compounded! I believe one of the reasons why people think a house is an OK investment is because they don't realize the biggest flaw of one house - it does not really compound the way liquid stocks or ETFs do. In the short run it's hard to see the difference but given a long horizon the differences become enormous.
There's reasons to own a home such a sentimental value, ability to modify it just you like it, etc. But people who believe it has been or is a great investment in the long term are deluding themselves. Look at it as something that's nice to have, or luxury if you will.
PARTING THOUGHTS
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You can always come with an example where real estate was a great investment. You can make that argument both ways. If you bought real estate in 2009, you made great returns but if you do the above calculation for the average broad market ETF chances are the returns are even better!
In the long term, history is on the side of dynamic stocks/companies and not real estate. I don't have a crystal ball and can't promise you that choosing one or the other will be better next month/year/decade etc(aka past results do not guarantee future returns). After all, this is all facts of the past :).
I have seen people get totally wiped out in a market crash. Some of them managed to keep property they owned.
History is not on anybody's side. Companies can fall too. Houses can be incorporated or stolen or get dilapidated.
It's easy to find one stock with way better returns than what I described over the long run, say 20+ years (example AAPL). It's also easy to find a stock that's way worse over 20 years (example HPQ). You have to keep up with that, sell the companies which are not good anymore, buy new ones, etc.
That's why an ETF is an "easy way out" for a small fee (usually 0.1% of the money invested or lower).
You can check the historical returns here and do the numbers for this ETF https://personal.vanguard.com/us/funds/snapshot?FundId=0970&... . You'll find it's very close to what I am describing.