negativefcf Wrote: ------------------------------------------------------- > joemontana Wrote: > -------------------------------------------------- > ----- > > negativefcf Wrote: > > > -------------------------------------------------- > > > ----- > > > Historically, real estate appreciation was > your > > > best bet for long term financial gain > > > > Historically, RE has performed better than > equity > > markets? You’re historically wrong. > > > Care to shed some light? > > Historical Real estate appreciation is 3%-4% > without leverage. Since 99.9% of people seek some > form of leverage on their mortgage, their returns > are 4x (very rough math) that amount. > > What’s equity long term return? 8%?- 9%? Look dude, you’re thinking in terms of “return on down payment.” Let’s say you got $20K. You can invest in higher return equities or use leverage and buy a $100K house. In 30 years, the home will be worth more – but not way more – than the equity portfolio. That’s the basis of your argument, right? Here’s what you forget: The equity investor gets to invest the monthly mortgage payment amount (adjusted for taxes) in his equity portfolio. When you factor in this return with the return to the initial $20K, the equity portfolio blows away the home value. Run a spreadsheet, dude. It’s not close. Even using Seigel’s LT exponential equity return of 6%-7%. Also, you only get 2.5x the RE return using 80% leverage. And the LT (arithmetic) overall equity return is around 10%
> > Let’s say you got $20K. You can invest in higher > return equities or use leverage and buy a $100K > house. In 30 years, the home will be worth more – > but not way more – than the equity portfolio. > That’s the basis of your argument, right? > > Here’s what you forget: The equity investor gets > to invest the monthly mortgage payment amount > (adjusted for taxes) in his equity portfolio. > When you factor in this return with the return to > the initial $20K, the equity portfolio blows away > the home value. The equity investor does not get to invest in the monthly mortgage payment. He gets to invest in the IMPLIED DIFFERENCE between (mortgage + other cost) - (Rent). With rent inflation expectation, I find it hard to believe that the summation of (mortgage + other cost) will be greater than the summation of (Rent) over 30 years unless you expect frightening low rent inflation. In my neck of the woods, my friends are paying 5% higher rent this year and with lease renewal in April, they’re facing an additional 4%. Higher rent is here to stay. To keep it simple, lets assume that PV (mortage + other cost) = PV (rent). Then, in your example, $20K becomes ($100K + real estate appreciation over 30 years). Assuming 3%. The total value is $242,700. If we tax this at 35% = $157,700 If you invest $20K in equity for 30 years and assume 9% pre tax or 5.85% after tax, that comes out to $110,100. So the question becomes, what do you prefer $157,700 with basically very little associated risk or $110,100 assuming you hit 9% ROI over 30 years in the stock market?
Yes, I do think its a good investment; BTW: I am > short just about any housing (and housing-related) > stocks out there. Housing market will absolutely > stink in the near term. Forget about the short > term picture, In the long run, you can’t get a > better deal/steal than in the housing market. > Just don’t buy anything that is outrageously > overpriced. I buy things that are 17x-20x rent > (Boston). I would agree, that if you are smart, you can make money. However, the majority of people in this area are not going to beat long-term average returns for equity. Donald Trump is akin to the best fund managers and the average joe is not. > > I am one of the most bearest guy out there but I > am not dumb enough to ignore the long term > fundamentals and benefit of an investment in > house. And I am not dumb either. I have run the numbers many times and it always comes out, at least for me, that housing is a bad investment. > > Leverage cost per year? Absolutely Tiny. Unless > you’re been in a cave for the last four years, > mortgage rates are stunning low. Factoring > maintenance cost, taxes… it’s very rare to have > all-in cost that is less than rent cost. It’s no > secret that all-in cost will be great than rent, > as of right now. But that is terribly > short-sighted since rent cost are surely to rise > in the coming years and your fixed mortgage will > NOT (assuming conventional 30 yr). If you need any > further proof, ask your parents or anyone who had > a mortgage for 10+ years, ask them how much they > pay in mortgage + other cost, and how much it cost > to rent out the place right now. The cost of rent will not go up that much in many places, maybe 2-3%, which is an average rate of appreciation from anywhere that I have ever lived. I have never bought into this aspect of “fixed costs” since there’s a lot of variable costs with housing. > > It’s a no brainer. > > > EDIT: > > It’s not like renting doesn’t have its own hidden > cost. Again, one of the most ignored risk is the > risk of rental increase. The average renter is > likely to move multiple time over 10+ year, you > have to factor in moving cost, brokerage fee / > finder fee, etc. Yes, both have their own “hidden costs”, but housing has more incremental hidden costs. Lets not fool ourselves here, a brokerage fee is a lot more on a house. My NYC apartment didn’t even charge brokerage fees. Leverage costs are minimal? Since when is 4% cost minimal, especially when that eats away at most of your appreciation. Even if you got a 5.5% rate, your after-tax cost, assuming 35% tax bracket and a blended rate of 30%, you still come out to 3.85%. According to Shiller, housing only appreciated at .2% over inflation from 1890 to about 1995, inflation was around 3.1%. Add in taxes and maintenance at 1% each, or so, and you’re already under the annual rate of appreciation. Then add in that you’re forgoing other investments with your DP, which adds opportunity costs. Finally, make sure you include the inevitable fact that your asset is in a depreciating environment, where, if you paid 20% down, you could have waited this environment out and paid less down, less mortgage, and less taxes. Then add to that the fact you’re going to have to pay comissions at closing. Sorry, but when it comes down to it, unless you have a 10+ year investment horizon and you are buying at the trough, housing sucks.
> Sorry, but when it comes down to it, unless you > have a 10+ year investment horizon and you are > buying at the trough, housing sucks. Exactly, its a long-term investment, I doubt it will be 10 years though. The original poster question was whether it was better to buy or rent, not whether you feel that a house a good investment in the short run. Unless you expect very low mortgage rate to continue AND you anticipate minimal rent increase in the coming years, then buying makes more logical sense if you do the math. Clearly buying in place like NYC and Southern Cal might be tough since the math doesn’t work out, but there are other markets out there where prices are more reasonable. People make it sound like everyone in this world either lives in NYC or Southern California, where Prices have gone up dramatically. There are other places and cities. Boston for example. Heck, even northern California.
this is an interesting thread. good points made by everyone. but, what about the non-quantifiable benefits of owning a house. original thread was about the pros and cons of renting or owning. there are plenty of both whether renting or owning. below is just my personal opinion though: rent v. own does not stop at finances. i know we’re all finance people or analysts of some sort, but there are so many benefits to home ownership that are intangible: like the sense of pride knowing you walk into your own place every night, sense of controlling your living environment you just don’t get when renting, the ability to plan, set goals, and accomplish those goals regarding remodeling a room or kitchen. then there’s the stability of not having to move when your lease is up or a landlord trying to raise your rent. it also killed me to write out a rent check each month knowing i’m paying someone else’s mortgage. i rented for a few years and owned a place for the past 5 yrs. i’ve done pretty well financially with my investment, but that’s not always going to happen. it feels good knowing you’re sitting on $100k in equity, but it feels better walking into my own joint at night. the beautiful thing is that just b/c property values start to decrease, you don’t have to sell. you need a place to live anyway, right. prices always turn around and there’s always a buyer around the corner. bottom line is you have to figure out what is right for you. sacrifies and concessions have to be made in both scenarios. i’d love to live in the downtown district of my city (did it when i rented), but i bought a place in the burbs b/c i wanted a place where i could grill up some steaks or burgers in a backyard and park my car with no hassles.
> The equity investor does not get to invest in the > monthly mortgage payment. He gets to invest in the IMPLIED DIFFERENCE between (mortgage + other cost) - (Rent). I’m not arguing rent-vs-buy. I’m arguing equity return vs real estate return.
negativefcf, Boston is not such a great place either. I waited and waited because I thought the market was overheated. Finally, in summer 2006, we felt like we couldn’t wait any longer for personal reasons (were going to have a kid) and bought a place. We’ve lost $47K already, according to Zillow (which I know isn’t 100% accurate). But I see where Zillow gets the estimate, based on comps, and I belive their number. Will we recoup that value in 2 years? Nah. I think our area will continue to slump through '08 and probably '09. I’m thinking it’ll take a good 5 years before we see it again. xavier makes some good points. I like having a place that’s ours. A place we can decorate as we see fit. And if I’d had a kid in an apartment, I think I would have lost my mind. And we were prepared to stay in our home for 5 years, so we’ll be okay. But it sucks being down so much. If we had to move unexpectedly, we’d get out without paying, but we’d have no downpayment remaining for a new place. That blows.