Record low numbers of millennials think buying a home is a good investment
cnbc.com
cnbc.com
So glad I ignored them because it is the best financial decision I've ever made. Literally changed life for me and my family.
Today is a sellers market and everyone knows it.
Really not too different from what you hear in the news right now ;)
In the markets that are most affected by this phenomenon like London, SF, and so on, for the vast majority of individuals, it's the only thing that costs money anyway.
Anything else can either be binned as 'trivially cheap' (e.g. groceries+bills+transport combined) or 'luxury fun' (e.g. nice clothes, expensive holidays, etc).
To the point that money in the abstract is basically irrelevant (vanishingly small numbers of people have liquid wealth, but tons of families with modest jobs own 500K, 1M, 2M homes in London).
If you don't want a house or apartment to call your own, a place to make good and have suit your needs (with nice fittings, a layout that suits you, neighbours you know well and so on) then you don't want it.
Young people barely ever want this stuff (I sure didn't) and the Internet has only exacerbated that. Money has less to do with it than people think, I reckon.
But, a home is generally the most expensive thing people own. For a lot of people (most?), it probably makes up the majority of their net worth. So in general the incentives are for policy to be passed to pump up home values because people want to make money without having to work. Basically, we have perverse incentives regarding housing prices due to the fact that they are expensive things.
The net result is you're relying on increasing demand to make money, which only works for location, location, location.
I own my home because I like owning it and being able to use it the way I want to rather than asking permission from the owner. But I don't think I have illusions about it being an investment. It kinda sucks as an investment.
I bought it considering the ownership to be primarily an act of consumption; it's just happened to turn out to be a greater windfall than my actual/intentional investments. I accounted for it like consumption, but had pretty strong suspicions that it would have a strongly positive financial return. (Nice large, already old, single-family with a yard in Cambridge, MA.)
"A single family home is not an investment," CFP Eric Roberge tells CNBC Make It. "It may gain money over time, but if you're looking to invest, buying a single family home and then living in that home is not the place to do it."
A few things to keep in mind:
Obviously location is important. Parents have done really well on their Bay Area homes ,averaging a compounded return of 7% since 1996 on home equity (or about 3.5% real), but other locations may be worse. That far exceeds the 1.3% figure quoted by the article and includes the 2008-2011 hosing bust.
The 1.3% figure may be abnormally low due to the exceptionally high inflation of the 70's and early 80's distorting the stats. It is exceedingly unlikely imho that we will see 10% inflation again.
The article downplays the erosion of potential wealth due to rent. Since 2009, rent, especially in booming areas like Seattle and Bay Area, has far exceeded inflation. http://greyenlightenment.com/bay-area-rent-prices-are-surgin... Also, many landlords require a huge deposit and a good credit score , which negates many of the advantages of renting such as not needing as much money and nimbleness. Otherwise, for short-term rents you're stuck with services like AirBnB, which is even more expensive on a per-night and inflation-adjusted basis.
Rent + stock market may beat home ownership, but when the market falls, rent does not fall. Also one must account for the fact a mortgage allows a lot of leverage, which magnifies those returns.
Home ownership allows cheap leverage and has generous payment and tax plans, which stocks do not have. With stocks, you have no negotiating power with the broker if you find yourself in a bind.
Why do you say that? Rents certainly dropped during the financial crisis even in hot cities like SF.
1. Capital/equity appreciation - the value of the home + land is worth more in the future. This is not a guarantee in most parts of the country. There are a few areas that are fairly resilient (usually within the metro area of the largest cities in the country) but the barrier to entry can be impossibly high for most people.
2. Hedge against inflation - the value of your mortgage stays the same, but rents (and, in turn, the value of the dollar) increase. This is the classic "rent vs buy" scenario. If rents / sq ft are more in your area than owning the home it's worthwhile. This may not always be the case but even if rents dip they may (will) rise again and the predictability of a mortgage payment over 30 years can offer stability. Again, though, it can require considerable upfront capital to secure that steady payment.
A few other reasons to add to your list:
- Preferential tax treatment. In the US and Canada, capital gains/appreciation on your home is completely TAX FREE. For comparison, any gains you make on the stock market 15-40% will go to taxes.
- Leverage. Try going to a bank and ask for a $500K loan to invest in stocks. Not going to happen. You can do this with a mortgage at incredibly low interest rate.
It's quite easy for a coastal city home to appreciate by more than the $500K exclusion.
If I had to guess, I'd take the "over" on 5%.
They’ll be paying taxes on half of that appreciation.
The mortgage is fixed
Many of my colleagues saw all their equity wiped out and were saddled with a multi-year process to unload their house.
Possible? There definitely is one coming. It's just a question of when.
If you look at how many years' income it costs to buy a home, it's gone up by a lot in many places. Back when it used to cost 2-3 annual salaries it might have made a lot of sense to buy a place. Now there's parts of the world where it's 10x.
It's not exactly an apples to apples comparison
But, if you are in area where jobs are plentiful in your area of ecpertise, it’s not about the stability of your job but the ability to find another one quickly.
Do I think the next 10 years will be as good as the last 10? I don't think so, because I don't think that housing can grow sustainably faster than wages [because wages are spent on housing] and as interest rates inevitably rise from the current low levels, that will put pressure on price appreciation as well. Nevertheless, we have a house that suits our needs and fully expect to be here in 10 years.
It was a struggle to afford the downpayment and payments when we first bought it. It forced a certain amount of financial discipline. It'd be a similar sized struggle now for us to buy the place for the Zillow WAG.
By all means, though, if you don't think your career/field is stable or think you're going to move in the next half-decade, don't buy a house to live in.
The first one is also a valid (actually quite good) house-hacking strategy. My brother and my brother-in-law both afforded their first houses in large part by renting rooms in it to friends.
What's the difference between buying a house, and buying an annuity that pays the rent on that house? You don't even need appreciation to 'profit'. If the cost of buying and owning the house is less than the rent, that's profit (or outperformance at least).
For some reason they got 'balanced' responses rather than actually answering the question, is it worth buying a house, which is a bit unsatisfying.
Security of tenure. In the UK, the advantage is also the ability to repaint your walls, put up shelves, or install e.g. a functional, non-bottom-of-the-barrel shower without asking your landlord.
In London, with rare exception, you don't get to live in a nice place unless you buy it.
There are some luxury developments with porters and whatnot for trust funders which are fitted well. (They're not necessarily unaffordable, but they're a waste; a labourer will save and buy instead).
But generally, a privately rented flat is going to have multi-decade old everything, walls in the wrong place, crap carpets, bad or no storage, and just generally be suboptimal.
Every flat I'd lived in as a renter I could have trivially made far better if I owned it. It's not a matter of permission; it's about ownership; no-one is spending five grand on doing up their landlord's kitchen; no-one's installing high end shelving or fitted wardrobes and taking them to the next place that's a different physical size in 8 months.
Renting (as a majority thing rather than an option) is pernicious because it reduces investment in one's surroundings. It's not only internal stuff; you won't know your neighbours in six months, you don't care about the outside of the house or the lawn or whatever, etc.
A couple of homes later, I'm now in a place where I can see myself living until retirement.
When I bought the first few homes I definitely had investment very much in mind, though not the overriding factor. Otherwise I might not have been able to upgrade.
Many people don’t. There’s an idea of a “starter home” that you buy and sell for a profit and trade up to the dream house later on in life.
Buying a good future rental as an owner-occupant with the intention of moving out and renting it out later is fine. Buying a starter home gambling that it will appreciate fast enough to cover the transaction costs and aggravation is, well, gambling IMO.
Real estate produces rents but also costs (taxes, maintenance) and over long periods the investment only just keeps up with inflation. Putting your money in productive businesses (the stock market) has historically been a much better investment, beating inflation by something like 3-5%.