Hacker News Reader

Comment by anextomp | Hacker News Reader

Buying hedges against the market when you intend to live in the house. When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

View on HN

The price to stay in the house you own is almost never close to zero, you still have to pay the bills, the repairs and the property taxes. If the house you live in becomes bigger than your salary can afford (let’s say you built a McMansion when you used to earn $200-300,000 per year) then you’ll have a really, really hard time staying afloat when you suddenly become unemployed and you can’t even find a job for the next 12 months, if not more. The bills will keep piling up, you’d sell the house and move away to greener pastures where they still have decent jobs but you find out that that would entail a 50-to-80% cut on the value of the house (the most probably reason for you losing your job is because the economy sucks, during which time no-one sane will pay close-to-parity money for a house), your marriage will most probably be in the doldrums, too (imho financial-caused stress is one of the biggest reasons for divorce) and you wished that younger you hadn’t put all his eggs in this one big house which right now drives you into the ground.

It hedges against housing market forces, but when your employment market changes and you need to move to Houston, the hedge is gone.

> but when your employment market changes and you need to move to Houston, the hedge is gone

That's the other end of the coin that's really easy to miss. I moved to Las Vegas in 2011, when my wife graduated (and where she landed in a nation-wide job search), thinking it'd be easy to find a job in any city with > 500k people (given that I had no trouble finding jobs as a recent CS grad in the relatively small metro of Champaign-Urbana, IL). It wasn't.

It's also easy to miss that "leverage" simply isn't available as an "investment tool" to most people, except with a mortage.

> When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

doesn't ur property tax go up with the market value?

> > When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.

> doesn't ur property tax go up with the market value?

The market value of a property is typically not assessed yearly, at least where I live.

Then you aren't paying higher property taxes when the prices go down?

I think the point is that it does the complete opposite if the market goes the other way, assuming you're taking out a loan to buy. If you have a net worth of $100k and take out a loan for a $500k property, as little as a 20% drop can wipe out your life's work, assuming the property market doesn't go back up.

I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?

> I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?

The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left.

30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.

> this is very good for retirement.

i can buy a house in detroit for $400 and pay no rent . is it a good retirement?

It's a house and you can live in it. You're isolated from the job market because you receive a pension. It's definitively a good investment assuming you bought it in a good condition back when its price was $200000.

Depends, do you like the neighborhood in Detroit? This is a personal question, don't let anyone else's hate of Detroit tell you different.

exactly. It depends on whether you like it or not. having a house is not a good investment by default.

I still don't get it. If your house is worth less than your mortgage, then you're gambling on an increase in it's value. It's like taking out a loan and gambling with it to try and pay off a debt.

You aren't gambling on anything. You continue to pay the price you agreed to when you bought the house. It's unfortunate if it ends up being worth less than you agreed to pay for it, but it's not gambling -- that's what happens when you buy a car, and buying a car is not gambling either.

Yes you're paying the same amount, for an asset that's worth a variable amount. The only time the amount that asset doesn't matter is if you plan to never ever sell it, which isn't realistic for most people (see elsewhere in the thread where someone pointed out that the median ownership time was 15 years or so).

What if you simply can afford to pay off the mortgage? If you can't, then buying the house was a bad idea no matter how the market moves.

The difference is that you can ride out housing market downturns until home values recover but if you bet it all and lose at the casino, the game is over. Even though the housing market drops 20% in your example, you still have a place to live and your monthly cash flow is unchanged. Just be patient, and you can recover it all.

...assuming you also keep your income. If you lose your job (and job losses and housing downturns are highly correlated), you're looking at foreclosure and losing everything, along with a 7-year blight on your credit report.

Even if you don't own a home you need to continue paying rent, so in either case you can't be jobless longer than your savings allow.

Right, but if you're evicted from a rental your loss is limited to your security deposit. All past rent paid is already a sunk cost, analogous to interest on a mortgage. If you're foreclosed upon you lose any accumulated equity in the house, and have to start again from zero.

It's very similar to margin trading on a stock brokerage, except that margin accounts are generally higher interest and not tax-deductible, while getting margin-called does not affect your credit. In both cases, you forfeit accumulated wealth built up if the market moves against you.

Your security deposit is not a limit on your liability. If you cause more damage, or owe more money than your deposit covers, your landlord can sue you for the remainder and has a good chance of winning.

>you can ride out housing market downturns until home values recover

not if you owned a house in detroit or any number of downturn cities.

Not so fast! Even Detroit is recovering.

https://www.trulia.com/real_estate/Detroit-Michigan/market-t...

Perhaps patience will be rewarded in Detroit too.

https://en.wikipedia.org/wiki/Sunk_cost

why do they have to hold on to some hope of price incrase just because they bought a house. Instead of having the freedom to choose the best investment like everyone else.

Sure hold on to it if you really think its the best investment for your money( i really doubt detroit house is best you can do with your money), not because of some sentimental value.

Reply on news.ycombinator.com