Real Estate in a “Normal” Market

[POZ]

Dont forget about the opportunity cost of owning a home, THIS is the real value in home ownership. Its easy to get caught up in the investment, appreciation, and return on investing for everything. Isnt that how we got into this mess in the first place?

[cr]

I don’t recall anyone calling long term RE a horrible investment. Most here are against speculative bubble RE investment, and would encourage long term property ownership. Two completely different things.

But to answer your question anyway-

– You would also have to factor in what the renting couple earned on interest on the $80,000 they didn’t spend on a down payment, at whatever rate they can get. Easily mid 5%, higher with more risk. Even at 15% the dollar amount is lower, but…

– The 15% return on the purchase is equity, and only liquid if the house is sold. Selling the house will eat up a lot of that $12,000.

– As it applies to homes in today’s markets, most are depreciating so you lose on your “investment”. 4% may be a historical average, but the bubble saw double digit gains, and I expect the correction to see double digit losses.

That’s what started this bubble: people think of real estate as a short term investment. As a result the market is anything but normal. Assuming 4% is typical over 30 years, you could do better with a money market account.

[cr]

I don’t recall anyone calling long term RE a horrible investment. Most here are against speculative bubble RE investment, and would encourage long term property ownership. Two completely different things.

But to answer your question anyway-

– You would also have to factor in what the renting couple earned on interest on the $80,000 they didn’t spend on a down payment, at whatever rate they can get. Easily mid 5%, higher with more risk. Even at 15% the dollar amount is lower, but…

– The 15% return on the purchase is equity, and only liquid if the house is sold. Selling the house will eat up a lot of that $12,000.

– As it applies to homes in today’s markets, most are depreciating so you lose on your “investment”. 4% may be a historical average, but the bubble saw double digit gains, and I expect the correction to see double digit losses.

That’s what started this bubble: people think of real estate as a short term investment. As a result the market is anything but normal. Assuming 4% is typical over 30 years, you could do better with a money market account.

[cr]

I don’t recall anyone calling long term RE a horrible investment. Most here are against speculative bubble RE investment, and would encourage long term property ownership. Two completely different things.

But to answer your question anyway-

– You would also have to factor in what the renting couple earned on interest on the $80,000 they didn’t spend on a down payment, at whatever rate they can get. Easily mid 5%, higher with more risk. Even at 15% the dollar amount is lower, but…

– The 15% return on the purchase is equity, and only liquid if the house is sold. Selling the house will eat up a lot of that $12,000.

– As it applies to homes in today’s markets, most are depreciating so you lose on your “investment”. 4% may be a historical average, but the bubble saw double digit gains, and I expect the correction to see double digit losses.

That’s what started this bubble: people think of real estate as a short term investment. As a result the market is anything but normal. Assuming 4% is typical over 30 years, you could do better with a money market account.

[drunkle]

once you own the home, you reap great rewards. anything prior to that is speculative.

since american society has become far more mobile, the “legacy value” of homes is diminished. that is, the odds of your kids inheriting your home and using it to save money (accumulate wealth) are much less now than before.

[drunkle]

once you own the home, you reap great rewards. anything prior to that is speculative.

since american society has become far more mobile, the “legacy value” of homes is diminished. that is, the odds of your kids inheriting your home and using it to save money (accumulate wealth) are much less now than before.

[drunkle]

once you own the home, you reap great rewards. anything prior to that is speculative.

since american society has become far more mobile, the “legacy value” of homes is diminished. that is, the odds of your kids inheriting your home and using it to save money (accumulate wealth) are much less now than before.

[Fearful]

New Guy, partly right.

It is all quite confusing, because there are three separate dynamics. One is the performance of the underlying asset. Second is the after-tax cost of ownership versus renting the same asset. Third is the leverage.

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns. Your example was of the underlying asset increasing in value 4% year over year, but what about in the situations in which prices decrease? You easily lose your entire down payment, your credit is screwed, you maybe have to declare bankruptcy … plus, to add insult to injury, the IRS comes after you for the implied income of the debt forgiveness. Leverage is wonderful when it works in your favor, and downright awful when not.

Plus, the huge negative to housing is the transaction cost. You don’t pay 5-7% to sell a stock, no matter how leveraged you are.

[Fearful]

New Guy, partly right.

It is all quite confusing, because there are three separate dynamics. One is the performance of the underlying asset. Second is the after-tax cost of ownership versus renting the same asset. Third is the leverage.

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns. Your example was of the underlying asset increasing in value 4% year over year, but what about in the situations in which prices decrease? You easily lose your entire down payment, your credit is screwed, you maybe have to declare bankruptcy … plus, to add insult to injury, the IRS comes after you for the implied income of the debt forgiveness. Leverage is wonderful when it works in your favor, and downright awful when not.

Plus, the huge negative to housing is the transaction cost. You don’t pay 5-7% to sell a stock, no matter how leveraged you are.

[Fearful]

New Guy, partly right.

It is all quite confusing, because there are three separate dynamics. One is the performance of the underlying asset. Second is the after-tax cost of ownership versus renting the same asset. Third is the leverage.

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns. Your example was of the underlying asset increasing in value 4% year over year, but what about in the situations in which prices decrease? You easily lose your entire down payment, your credit is screwed, you maybe have to declare bankruptcy … plus, to add insult to injury, the IRS comes after you for the implied income of the debt forgiveness. Leverage is wonderful when it works in your favor, and downright awful when not.

Plus, the huge negative to housing is the transaction cost. You don’t pay 5-7% to sell a stock, no matter how leveraged you are.

[sdrealtor]

But Real Estate always goes up.

If it doesnt you can always send your lender a little Jingle Mail love letter.

[sdrealtor]

But Real Estate always goes up.

If it doesnt you can always send your lender a little Jingle Mail love letter.

[sdrealtor]

But Real Estate always goes up.

If it doesnt you can always send your lender a little Jingle Mail love letter.

[barnaby33]

If it doesnt you can always send your lender a little Jingle Mail love letter.

Now thats not very Gary Watts of you. You should have stuck with the first sentence by itself, it only goes up! That way all of new guys calculations pan out. Adjusted for inflation the stock market, in the form of index funds, beats housing every single time. Maybe there are a couple of periods in the last 10 years when that isn’t so, but generally housing is a lousy investment. It is however a great way to keep the sun and wind off of you.

Josh

[barnaby33]

If it doesnt you can always send your lender a little Jingle Mail love letter.

Now thats not very Gary Watts of you. You should have stuck with the first sentence by itself, it only goes up! That way all of new guys calculations pan out. Adjusted for inflation the stock market, in the form of index funds, beats housing every single time. Maybe there are a couple of periods in the last 10 years when that isn’t so, but generally housing is a lousy investment. It is however a great way to keep the sun and wind off of you.

Josh

[Author]

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