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Comment by kindle-dev | Hacker News Reader

This totally misses the point that there is no where else you can get 20x leverage at < 3% interest. Even with modest appreciation, you're going to make a lot of money putting 5% down on a house.

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Do you mean 5X? I believe 20% down is more common. If you do only put down 5% you'll also have PMI on top of interest.

That said, your point stands that it's easy to get low interest leverage.

Another related point that I think is implicit in your comment is that you win even if home values only keep up with inflation (what you'd expect with a healthy home supply).

I believe the average down payment on a house for first time buyers is around 5% these days (in the US): https://www.bankrate.com/mortgages/how-much-is-a-down-paymen...

Looks like the answer is in the middle of our guesses: your link says the median down payment is 12% for all buyers.

Using leverage to buy something not expected to increase in value more than inflation is not necessarily a savvy move.

Maybe you'd take issue with my "not expected to increase in value more than inflation" statement, but ultimately you are certainly in no way guaranteed to "make a lot of money putting 5% down on a house".

Everyone thinks they are a financial genius after a 10 year bull market.

If it moves exactly with inflation, then levering up actually is savvy. Ex: if inflation is 1% and you put down 5%, your return in real dollars is nearly 20%.

I don't follow, you need to account for things like property tax, home repair costs, insurance and the realtor fee to know what the return would be.

If you are considering renting vs buying the best calculator I know for these things is here: https://michaelbluejay.com/house/rentvsbuy.html

But the results are all dependent on your assumptions. If you assume houses will increase in value you get much better results than if you assume they will lose value, or not keep up with inflation.

If you assume stocks will go up a lot, it makes housing a comparatively "worse" investment.

Yes, my calculation ignored property tax, repairs, etc. I thought you were making a claim that being at the inflation level meant leverage wouldn't help you. I agree you'd have to take the total cost into account before deciding whether to buy or rent, but then in that larger analysis I don't see how comparing to the inflation rate is so crucial: it's possible that the home value increases faster than inflation but it still makes better sense to rent (if taxes or repairs are prohibitively expensive). I think I misunderstood your point.

This completely depends on the "modest appreciation". Even though it seems like it, growth in housing is not a given in the way you can reasonably assume stock market appreciation over the long term. Plus there is a lot more uncertainty since you cannot hedge your investment in a home. The entire market could be doing great but your particular house may be affected by local zoning laws or a homeless shelter in the neighborhood or a new highway or anything else.

20x leverage = 20x return, but also 20x risk.

Don't forget that the only reason housing works is because the margin calls take years, in contrast to instant (forex, crypto) or days (equities).

Except it is 1x risk for example in the US - see jingle mail. The debt is against the property not the person thus 20x return 1x risk (plus your destroyed credit).

For other countries in the world there is bankrupcy.

This only applies to non-recourse state, of which there are only 12.

Doesn't this only matter if the property is worth less than the mortgage? If the lender can foreclose and sell the property for enough to clear the outstanding mortgage, there's no additional loss beyond the down payment (and any equity paid in since then).

But you're still out the downpayment? Your loss is still 20x.

If the down payment was x, how are you out 20x? Let's use real numbers:

House cost: $200,000

Down Payment: $10,000 (5%)

(Time passes...)

Value at foreclosure: $200,000 (no price change)

EDIT: I changed the math on this a few times, updating to reflect that you indeed get your downpayment back (minus fees).

The bank sells the house for $200,000. You get your $10,000 back after paying the $190,000 mortgage balance. But you're not on the hook for anything. You walk away with only a hit to your credit. You went from owing the bank $190,000 to owing $0 and having $10,000 in your pocket.

Also (for non-recourse state):

House cost: $200,000

Down Payment: $10,000 (5%)

(Time passes...)

Value at foreclosure: $100,000 (massive change)

The bank sells the house for $100,000. You don't get your $10,000 back. But you're not on the hook for anything. You walk away minus $10,000 (i.e. 1x) and a hit to your credit. You went from owing the bank $190,000 to owing $0.

Exactly this. If the property goes up $100k, you earn a 10x return on your $10k. If it goes down $100k, you only lose your $10k (in non-recourse states). It's asymmetric leverage.

In your example, you get your deposit back, as 190k covers the debt, extra 10k goes back to owner. (e.g. if 195k was sale price would recieve back 5k etc)

>If the down payment was x, how are you out 20x?

right but in this case the house value never changed, so there was never any loss. Suppose the house value went down 5%, then you'd be totally wiped out (ie. you lose your entire deposit).

Correct. You are on the hook for 1x, not 20x, your down payment. This is asymmetric leverage in favor of the buyer.

It is a fair point that for small negative changes you are getting a leverage effect (i.e. for a 1% down move in asset value you do have a 20% loss on your capital).

There is however a floor so the payout profile is a lot more like an option.

This! Putting down 20k on a house in my late twenties was one of the best investments I’ve ever made.

I was especially surprised so many of my peers who had no clue that’s how little it takes to get into a mortgage. Of course, assuming you have a steady job/income.

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