Comment by kelnos | Hacker News Reader

Comment by kelnos | Hacker News Reader

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If your parents took out a loan when they bought the original house, you're likely neglecting the cost of interest. If not, that's fine too.

So they "made" $1.25MM at the sale of their house. That's a taxable capital gain. The rules for that can be complicated, but let's just say 15% to keep it simple. So that drops the gain about $188k down to $1.06MM.

Let's say they live for the rest of their lives in the 2BR apartment (I have no idea how old your parents are, but lets just say that's another 30 years). So you say your parents' housing costs will be $25k per year. Let's say that goes up 2% per year. In a rent-controlled area it might be a little lower than that, and otherwise it might be a bit higher. Over those 30 years, your parents' housing costs will be $970k. So now your $1.06MM is down to about $90k.

So, effectively, your parents have "made" $90k on their $250k home. That's 36%, or about 1.5% per year. Not great, but better than most savings accounts. Er, wait. Inflation. Wolfram Alpha says that 250k 1987 dollars is worth just over $500k today. So under this model, your parents just "lost" $410k.

Not to mention that your parents are now living in a 2BR apartment instead of a presumably-larger house. And maybe that's fine: you can say that your parents' innate housing short got smaller because they've decided that they don't need such a large house anymore, and something smaller and not free-standing will be fine for them. But that's basically like saying you bought a case of beer, then decided you didn't need that much, sold it, and bought a half-case of beer to replace it. Sure, you now have a half case of beer worth of money that you didn't have before, but you can't say you "made money" selling the beer.

Now, I'm sure I left out some costs (housing upkeep, property taxes, etc.), and didn't get the capital gains tax quite right, but I hope you see my point here. It may make financial sense to sell your house and downsize, but this in no way means that a home purchase was an "investment".

Presumably, they'd 'invest' that $1M @ 2.5% to get 25K/yr, nicely paying off their rent, and keeping the capital in place.

And if they invest it at 2.5% + inflation, they'd never run out their capital either.

So your conclusion is incorrect.

The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.

Good point, I hadn't thought of that.

Still, though, depending on a lot of factors, his parents may or may not make out net positive in the end.

Thinking about it a bit more, though, I think I'm harping on the wrong thing here.

Whether or not you come out ahead has nothing to do with whether home ownership is an asset or a hedge. You can certainly come out ahead with a hedge: that is, the instrument that you use as a hedge can turn out to be a source of income in the end. That's part of the reason that it's there, to provide a possible gain to offset a possible loss. But that doesn't make it an "investment" after the fact. It's still a hedge.

In all of your complexity, you seem to fail to account for the "control case" of GP's parents renting the whole time. You can't reasonably "charge" the $970K for the next 30 years of rent against their "profit" from their ownership experience.

What you've essentially proven is that, "In order to live in their original house for 25 years plus an additional 30 years of renting, they will have out-of-pocket housing expenses." That finding is air-tight, but also unenlightening.

What would it have cost them to rent for all those 55 years?

You can use whatever math to rationalize your theoretical position on the subject. However, my parents who were a single income middle class family earning no more than 60,000 at their peak now has 1.5m in the bank.

The idea they "lost" 410,000 when they have $ 1.5m cold hard cash is mind boggling in your own self delusion.

  (%i1) float(solve(sum(y*1.08^x,x,0,25)=1500000,y));
  (%o1)                       [y = 18760.69004076126]

Rasing 1.5M in non-inflation adjusted dollars in 25 years requires saving only about $1563/mo.

It's quite possible that they did better with their leveraged housing purchase than they could have otherwise since they needed housing anyways... but they were fortunate to be in a location that went up in demand, many places barely kept up with inflation.

But raising 1.5M in 25 years is no astounding feat on its own.

I never said it was astounding those are your words not mine. Now tell me how many of your parents middle class friends have been able to save $1500/month consistently for 25 years and have 1.5m in the bank. Unless you are in the upper class, I'll bet none of them.

The point is the above poster gave ludicrous manipulative figures saying they "lost" 400k. It's a great example of how people can sit back and be great armchair quarterbacks and pooh-pooh things using flawed mathematical assumptions but when you look at things in the real world, it all falls apart. He says based on his numbers they "lost" 400k meanwhile they have 1.5m in the bank. You say all it takes is to save 1500/month over 25 years every year and ill be willing to bet no one you know has been able to save 1/3 of their pretax income consistently every month for 25 years.

Housing is generally a great passive way for people to save for retirement. Nothing is guaranteed of course. Many people lost their savings because of the Housing bust. But that is a 5 year period of people relative to decades of people who actually prospered from it.

I've personally saved more than 1/3rd of my _pretax_ income over the past 14 years. Does that count?

People don't talk in public about their finances very much, so I don't know about other people. Especially because when people realize you have healthy savings they start asking for 'loans'. Perhaps that is another benefit of owning an expensive house: it's a way to stash away value that less thrifty friends and family won't mistake for free money that you can give them.

The long term housing values are net positive, yes, but not relative e.g. to the broad stock market.

The fact that housing can be a "great passive way for people to save for retirement." is largely because they already need housing, which was part of the article.

I wasn't stating that the prior poster's figures were correct... just pointing out that the 1.5m figure isn't that impressive and that achieving that depended on historically atypical appreciation, and that it could have gone the other way.

You're missing his point (which wasn't hard since the point wasn't very clear...)

In inflation adjusted dollars, your parents paid roughly $500,000 for their house. You said they sold it for $1.5MM. Even if we ignore interest payments, property taxes, repairs, maintenance, upgrades, and the myriad of other costs associated with ownership, and all transaction costs associated with buying/refinancing/selling, your parents netted $1MM in 25 years. Let's also assume they only put down 20% in 1987, or $100,000 in today's dollars. Under these circumstances, they doubled their money 3.25 times, or earned roughly a 10%/year rate of return. That's pretty good, if you ignore all associated costs.

Now consider just one easy alternative: The S&P 500 was at 250 in Dec 1987. Today its at 1400, meaning it has doubled 2.4 times, or earned roughly a 7%/year rate of return. The DOW was at 1750 and today its at 13000, meaning it doubled almost 3 times, or earned roughly 9%/year rate of return.

Mind you, the costs associated with investing in and holding an index fund are unbelievably lower than the costs associated with owning real property. Once you account for even a portion of those costs, your parents' real rate of return on their real property is likely to be around half of what their return would have been on just a simple index fund.

(The above analysis excludes what your parents would have paid in rent during those 25 years. This is obviously a significant factor that changes the numbers [just as all the other costs associated with real property would], but as you can see, even when returns on real property look significant [we turned $250k into $1.5MM in 25 years!], the actual return is often much, much different.)

Edit: Note that I've just purchased a rather expensive home in California within the last year, so I am "long" housing relative to what I could be paying in rent. I'm not bashing real estate by any means, only pointing out that all returns are not what they appear.

He says based on his numbers they "lost" 400k meanwhile they have 1.5m in the bank.

I think the person who said they lost $400K was telling you that they really could have had almost $2M in the bank today, not that they should be $400K in debt.

You're right that his mathematical assumptions are wrong, but I wouldn't hand wave away sound financial math reasoning if you want to make informed investment decisions.

Your analysis is incorrect because having to spend 25k + inflation 30 years from now is not the same as spending it today. To calculate properly, future expenditures need to be discounted according to return minus inflation compounded over the duration. So unless you're claiming that you can't safely get a return above inflation, his parents will come out ahead.

I never said anything about inflation over the 30 years following the home sale. I was talking about inflation between the $250k purchase and $1.25MM sale of the house.

Agreed, but you subtracted 30 years of rent from the home sale. Future rent needs to be discounted.

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