Is Your Home A Good Investment? – WSJ.com
Is Your Home A Good Investment? – WSJ.com
Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it’s risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time.Critics may point out that the analysis is unfair — after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.
Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That’s still only a real return of 2.2% a year above inflation.
You can often do better on long-term inflation protected government bonds.
And real estate often costs 2% or more a year in property taxes, condo fees, maintenance, insurance and the like.
Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent — in other words, the right to live in your home — was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.
Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.
So. What do you think? Is your personal home a good investment?
Is anyone in TIPS?
Where are all the financial geniuses? Let’s see some NPV and IRR calculations please!
And more importantly, let’s make sure those calculations are Real Bay Area specific!
June 7th, 2009 at 8:26 am
UAD. RE is always local. In a large part of this country, even in large parts of CA, RE is not such a great investment. This is more the reason why those of us living in the BA are in a special position to take advantage of this opportunity that is not commonly available elsewhere.
June 7th, 2009 at 9:40 am
Let’s quote burbed’s article:
“Where are all the financial geniuses? Let’s see some NPV and IRR calculations please!”
Now, excreter – where do you see the call for incorrect, unfounded, and unsubstantiated bullshit?
What’s that? You don’t either?
Then why did you write post 1?
June 7th, 2009 at 10:27 am
I’m a renter so the only question that is applicable to me is the TIPS query and my answer is “No.”
I sold out of nearly all my Treasury bonds a few months ago – just before the Chinese did. The tax benefits are very good and I had great interest rates (6.35%), however, I am concerned as to whether we will have the same sort of government around in 20 years to repay.
The only thing I would suggest right now is ultra-short term Treasuries such as in a US Treasury MMF, maybe a 3-month Note, but that’s it.
Sorry to be so bearish, but participants put our government and its solvency on the line for ethereal home “equity” and mortgage/RE sales/appraisal commissions.
June 7th, 2009 at 10:58 am
Yes — at least it is for us. We bought in 1987 and have not used out house like an ATM. We have refied and taken cash out for remodels, but we’ve managed to keep our mortgage payment around the same amount — 650 to 750. We might do another refi to a fixed mortgage and that might get our payment down to 500.
Now — we do not have an “HGTV wonderful tricked out house and garden”. It’s basic and normal, for the neighborhood, which is solid blue collar lower middle class.
But we can afford our house easily, and now that we make real money, we can sock away tons of cash and invest it. I save three thousand a month. I could save more, but I’d just have to pull it out to pay quarterlies and it’s earning nothing in savings so why bother?
Other than our house, we have no debt. No car payments (and we drive lower end Toyotas — truck for hubby for the business, I drive a Matrix also handy to haul stuff to and fro) no credit card debt.
What is scary? Since we are self employed we hold our own health insurance. We are turning 50 this year. Our health insurance by the end of the year will be 1086. A month.
June 7th, 2009 at 1:52 pm
The article is nonsense. The massive leverage you can get on housing increases returns. A 1% real return becomes 4% with 20% down.
June 7th, 2009 at 2:55 pm
>>Where are all the financial geniuses? Let’s see some NPV and IRR calculations please!
We don’t use NPVs here. In the Silicon Valley, we use P/E Growth ratios. LOL
June 7th, 2009 at 3:28 pm
Hey anon – could you please cut back on your swearing? I’d like to see a more G-rated Burbed.com
Thanks!
June 7th, 2009 at 3:36 pm
I find it odd that they did not bring up the effect of leverage on the annual returns. Assuming 20% down payment, you are looking at annual return of 23.5% on your investment instead of 4.7%. Taking out mortgage interest (5% after tax deductions) and 2.5% for property tax/maintenance, we get a return of 16%, much better than most asset classes with the exception of timber.
June 7th, 2009 at 6:17 pm
I agree, the article is nonsense as far one’s return on investment. The article does however serve as a reminder that contrary to the garbage spewed by many in the real estate industry, real estate typically appreciates at a rate slightly above inflation, it doesn’t double every 10 years (which would still only be 7.2% growth, not the double digit increases that were occurring during boom years).
June 7th, 2009 at 9:11 pm
OK, it’ll take me a little while but ill be coming back with numbers on this one. And charts, darn it. And you know very well it depends HUGELY on what year you bought and what year you sold. No one mentions the 6% for the broker in this thread either.
I’ll show a distribution of IRRs depending on what year you sell, assuming it was held for 7 years, based on C-S with 20% down and the prevailing interest rate.
June 7th, 2009 at 10:50 pm
#8: you have got bad math.
remember you are also leveraging ur interest/taxes, so instead of 7.5%, u r paying 7.5*5% on ur capital.
do the detailed math, and u will see the flaw.
in ur example, unless house appreciates more than 7.5%, u will lose money
June 9th, 2009 at 12:11 am
sv_newbie, thanks for setting me straight. You are right that both the taxes/maintenance have to be on the fully leveraged amount and not the invested capital. However since you won’t be paying interest on your down payment portion, it would work out to (5*4)+(2.5*5) with the first part of the equation dropping over the period of the loan.
June 10th, 2009 at 7:22 pm
Such elementary economics.
First of all, a house is a liability until its paid off and should be viewed as such. Its much less an investment and maybe a hedge against inflation. But I’d even say that’s a weak claim.
Secondly, stocks and investments over time will be the snot out of housing. If you were smart and saved a mere $10,000 by the time you were 25, you’d be worth over a million by the time your were 60. That’s all folks and this uses stats over the last 100 years of performance. Market rate tends to return around 7% median returns over the long term. As the article mentioned, housing- even in places like the BA- tends to return around 4%.
The bottom line is that there are a LOT of people in the BA who have zero retirement because they spent it all on a house. In order to extract that money they have to sell the house and move to North Dakota. Even so, a person who over time had invested the same amount in stocks would be worth a multi-millionaire and still get to keep their non-BA, non hyper inflated house.
Its simple really. You will never outperform the market simply buying a house.
June 10th, 2009 at 7:48 pm
“That’s all folks and this uses stats over the last 100 years of performance.”
Oh, then you must be right.
June 10th, 2009 at 7:57 pm
Bob: You are dead wrong. If you put zero down, you can easily outperform stocks through housing, even with traditional appreciation. If you get a period like 1996-2008, then you make out like a bandit.
Leverage matters.
June 10th, 2009 at 8:22 pm
Zanon, that doesn’t make any sense, did you even bother to read sv_newbie’s post?, if you put down 0%, and the house goes up in value 4.7% a year, then you will still have to pay in the interest on the loan.
If you borrow at 6% you are losing at least 1.3% of the value of the house every year. Interest, maintenance, and insurance are all costs.
Leveraged gains are ALWAYS measured against the interest paid. If I buy on margin at 8% interest and I had only 50% down, if the stock goes up 4% I didn’t get a 8% gain. I had to pay 8% on the 50% I borrowed, so I made NO gain. Sorry, but you have to do your accounting better. This is a big problem I see people do online, they say they bought a house for $500k with $50k down, sold it 8 years later for $700k, and so they made a 400% return. Sorry, but the interest they paid was a cost, you can’t make an argument about leveraged gains without talking about the interest rate!