patrick.net

I disagree. With the re-introduction of zero down loans, it's a great way to save money! Put nothing in, bail as soon as your loan goes underwater, and live rent free for 1-3 years until the Sheriff comes knocking.

Patrick says

$32,000 in principal

Not sure why you'd remove the principal, that's more a form of saving rather than an expense?
I think its a great form of forced saving too.

You'd subtract principal because it's your own money already. Doesn't add or take away from the investment.

I do agree that forced saving is good for a lot of people, especially those with family that would ramp up spending to absorb all excess savings.

But there are other ways to force savings, like maxing out one's 401k contributions, and doing automated transfers on payday to move money into a brokerage account.

Maybe there is a market for forced savings. Could be an interesting business model: "Set up automated transfers into this brokerage account and we will guarantee you don't have access to it for n number of years."

BTW, I was just in Hawaii with my old boss from Schwab, and he pointed to a condo he owned for three years and then sold back in 1983 for $200K, giving him and a partner $100K profit. The amazing thing is that the condo is still worth under $400K today. So that's about a 2% annual return for the last 35 years after he sold. He was lucky to have hit a bubble and cashed out quickly.

Patrick says

I do agree that forced saving is good for a lot of people, especially those with family that would ramp up spending to absorb all excess savings.

They refi anyway. Lose the equity and spend the cash in the moment and don't invest. Keeping up with the Jones' is the hardest thing to resist for most people. I'd say it's not even a forced investment for 90% of people. 9 out of 10 people will piss away money when given the chance. It's all anecdotal, but how many people know someone that has a paid off house? I'd venture to guess 60% of retirees don't even have their house paid off (if they're actually retired).

If anyone ever suggests to you that your primary residence is an investment, shoot them on the spot. It's not even bad advice, it's wrong. And I actually like real estate for investment purposes and a tool to gain wealth.

Gotta take the rental market around you into account. My home I bought in 2011... has a PITI of $2200 a month. No way could I be renting a 4 bed 2 bath home with a nice yard and pool for anything close to that price in a nice Los Angeles neigborhood.

Had we got scared in 2011 and kept renting our 2 bedroom at the time for $1800 a month... we would be way worse off. Unless I magically knew to throw the entire $40k down payment into Bitcoin.

WildMind says

Gotta take the rental market around you into account. My home I bought in 2011... has a PITI of $2200 a month. No way could I be renting a 4 bed 2 bath home with a nice yard and pool for anything close to that price in a nice Los Angeles neigborhood.

Completely valid point. But most people like to keep their mortgage on par with rent by refinancing though, and increasing their mortgage payment. If you can resist that, you'll almost certainly end up better. Unfortunately most people can't resist the urge and end up taking $40k out of their homes every 3-4 years and tacking on $200-$300/mo on their payment.

If the $40k is getting thrown into something kicking back money at a higher interest then the mortgage, cool. Most buy a boat or go on some vacation they should have had the cash for before even thinking about going on the vacation, let alone using refi money for it.

Monster Truck! It may be your home some day!

WookieMan says

Patrick says

I do agree that forced saving is good for a lot of people, especially those with family that would ramp up spending to absorb all excess savings.

They refi anyway. Lose the equity and spend the cash in the moment and don't invest.

You're right. That's a good answer to the "forced savings" argument. People do indeed refi themselves into a black hole all the time. I know people who have done it.

Patrick says

You're right. That's a good answer to the "forced savings" argument. People do indeed refi themselves into a black hole all the time. I know people who have done it.

They gotta have that Range Rover. Must....compete....with....Joneses. Resistance....is....futile.

One thing I will say though is that the SF bay has had a long run of high home price appreciation - much more than the national average. I think it was like 4% or so when I looked, but I recall it was difficult to find data, and I'm not sure how accurate it was.

If (and, it's a big if) this high appreciation rate continues, then buying a home is pretty lucrative compared to renting.

It seems one could maybe explain the appreciation as being driven by the growth in high paying jobs. If so, the future appreciation rate might be estimated by the future bay job market.

People really have short memories of the real estate cycles, including the downturns of 2008/9. I don't know how many times I have heard people crowing about their home values, only to get kicked in the teeth at the next down cycle. There was also a very long "stagnant" cycle in the 80's and 90's, a slight bump in the early 90s, followed by further stagnation until the dotcom bubble. I remember houses in my neighbor hood remaining on the market for two years without selling.

WookieMan says

Patrick says

They refi anyway.

I've seen this too, although I think in general the forced savings is usually better than renting for the average family that will stay put for at least a decade or so.

I think someone in perpetual forced savings mode will accumulate more wealth, even if they occasionally cash much of it out and blow it on crap. Having to make that mortgage payment, or else lose it, is a big motivator that I think keeps people from making certain deleterious life/financial decisions. It keeps a fire lit under their ass.

NuttBoxer says

I disagree. With the re-introduction of zero down loans, it's a great way to save money! Put nothing in, bail as soon as your loan goes underwater, and live rent free for 1-3 years until the Sheriff comes knocking.

What a deal......Heads you win, tails you don't lose.

Strategist says

What a deal......Heads you win, tails you don't lose.

There is the issue of credit, but if you do it in during an economic downturn when everyone is going underwater, you're just another face in a sea of misery, and everyone just assumes you were unlucky.

it is 10% return + 10 years of not paying any rent?

Patrick says

https://www.usatoday.com/story/money/columnist/2018/02/18/why-your-home-lousy-investment-when-you-think-its-great/340516002/

On Jan. 1, 1995, San Mateo’s median home price was $305,083. Suppose you bought and put 20% down plus 1% closing costs. With 1995, 30-year fixed-rate mortgages going for 7.5%, your monthly payments were about $1,700.

Jump to 2005, when you sold for $763,100 (2005’s median price), a perfectly timed deal months before home prices peaked. After amortization payments, your remaining mortgage balance was $211, 837. After paying that off, you had a gain of $551,263. Then, subtracting your down payment, you had a whopping 803% return, or 23.4% annualized. Problem is you forgot a mega boatload of expenses, all of which must be subtracted.

Over those 10 years, you paid more than $32,000 in principal a...

you're right. That's a good answer to the "forced savings" argument. People do indeed refi themselves into a black hole all the time.

Just like the folks who over withhold on income tax. Another "forced savings," but think of all those who live for the spending spree on "tax refund day."

I'm sorry, but does renter live for free?

I see a calculation with a return that bears the cost of living like that is not avoidable. So it's 10% a year and free rent.

If you own a home in San Mateo since 1995, you are a multimillionaire and owns a shitload of stocks too.

So you would be better off paying rent that whole time? When I bought my first home, a small house in 1992 for $64,000, the monthly home ownership cost on a 15 year loan was less than rent for a comparable property. At that time, there was a depressed housing market where I lived. As rent went up, my payment stayed the same. By 2004 with some extra monthly payments, I had the property payed off, and in 2006 sold it for several times the original price. For full disclosure, I also put about $12,000 into the house over the years. I realize that is an extreme case and fortunate timing, but still I had to live somewhere and it was cheaper to own than rent at that particular time. You have to pick your spots. Sometimes owning property is a bad investment and sometimes it's excellent. Today I live in a nice home that's paid off, while rents are skyrocketing around me. I also bought several rental houses between 2011 and 2013. I'm holding on to them for now, but watching the market closely. Buy low, sell high. That equation works for all investments, whether you live in them or not. Also, that stock market that you mentioned is no picnic either. You had better know what you're doing when investing in it.

Don't forget until the recent Trump tax reform, you could deduct mortgage interest on your taxes for very high amounts and state tax.

SFace says

If you own a home in San Mateo since 1995, you are a multimillionaire and owns a shitload of stocks too.

I love when house-humpers say stuff like, "Well, if you bought your house in 1995, before the biggest bubble of all time, you'd be a multi-millionaire with tons of stocks."

Get me a time machine, and I'll happily go buy a whole block. But until one gets invented, why should any normal person buy a house right now when renting that same house is a fraction of the monthly cost? That's when speculation is in full swing.

Jeez, it's just math and easily proven. Try the NY Times rent-vs-buy calculator:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Patrick says

Jeez, it's just math and easily proven.

You assume no emotional investment in being right about a HUUUGGGE debt. Once they sign those papers they pretty much have to believe they made the right decision, screw the math.

SFace says

If you own a home in San Mateo since 1995, you are a multimillionaire and owns a shitload of stocks too.

Were the "multi" part is coming from? I can see a house in San Mateo costing about $1M more than in '95 (not adjusted for anything, just nominal), but "multi"?

Patrick says

Jeez, it's just math and easily proven. Try the NY Times rent-vs-buy calculator:

It is just math, but not easily proven. The house in the OP was a good investment. Much better than renting.

As others have posted, you have to add in the cost of renting to the net gain since you got to live rent free in your "investment". Not to mention the tax savings.

Do the calculation correctly and see what you end up with.

NuttBoxer says

You assume no emotional investment in being right about a HUUUGGGE debt. Once they sign those papers they pretty much have to believe they made the right decision, screw the math.

Yes @NuttBoxer in my experience you are correct. Everyone with a massive mortgage believes that they did the right thing with a religious devotion that would shock hardened ISIS fighters. Facts like basic mathematics make no dent in their belief.

Patrick says

Everyone with a massive mortgage believes that they did the right thing with a religious devotion that would shock hardened ISIS fighters.

Not everyone. I, for one, have no fucking devotion (religious or otherwise) to my massive mortgage.

Satoshi_Nakamoto says

Not everyone. I, for one, have no fucking devotion (religious or otherwise) to my massive mortgage.

I agree. I've rented when it's cheaper to rent (or if I need a bit more flexibility) and bought when it's cheaper to buy.

Usually, in my experience, it's cheaper to buy. Patrick is right that one should run the numbers and see what the math says. When I've done it, renting only made sense when I lived in CA. (although I guess if you don't include the cost of rent that you aren't paying when you own, renting will look much better)

Patrick, I have to remind you that one should NOT underestimate how much influence emotions have on human behavior. Cold blooded math may be secondary to people who wants to leave a good memory for their children. With a place that records things that happened through out their lives. The scratch on the wall, the clock, the table they spend years having dinner together. These are worth spending money on in the same way people pay hookers for sex, another form of emotion. If you want to put a price on this? Difficult, very subjective. On numbers, I definitely agree with you that a house may NOT be the best investment.

Satoshi_Nakamoto says

Patrick says

Everyone with a massive mortgage believes that they did the right thing with a religious devotion that would shock hardened ISIS fighters.

Not everyone. I, for one, have no fucking devotion (religious or otherwise) to my massive mortgage.

Lol, OK, not everyone. But the temptation to justify your own actions is a strong one, even when the math is against you.

JZ says

The scratch on the wall, the clock, the table they spend years having dinner together.

Sure, but it doesn't work out like that for most people. The median period of house ownership is only 6 years.

Hi Patrick,

I tend to agree with your premise, in general, but at some times it was unquestionably a great investment to buy a house in California. I saw some people questioning methodology like adjusting for down payment, etc. It is easier to make your point with a typical example. I know of a couple of examples of people who bought houses for $600,000 and then like 5 years later sold for $800,000. Was it a good deal? They made $200,000, but no, as an investment you are right. Forget down payments, that is part of the cost basis. Do remember also, that you have to consider opportunity costs/benefits of the investment. One of the benefits is that you avoid rent payments, that is part of the income stream of the cash-flow.

So assume $600K cost, normal selling and buying costs and they got a 6% interest only loan for ease of calculations. Annual interest is $36K.
We will assume 0 down because most people end up refinancing anyway or getting a HELOC.

So, $600K + purchase and loan costs (2,000) + improvements (Your figure $40,000) $642,000 cost basis.
Average ($7,000) of your property taxes for five years $35,000. after tax benefit $25,000.
Mortage interest $216,000 after tax benefit $142,560
Maint (your figure approx $2,000) total is $10,000
Utilities wash with renting
Sale price $800K less selling costs 10% average $720,000 gross proceeds less (total cost of ownership $819,500) equals a net loss of $99,500.

The benefit, no rent so that is a savings of $3,500 per month times 60 months. $210,000, which nets out to be $110,500 after subtracting the net loss of $99,500 from owning.This is a savings stream of $22,000 a year, based on the cost basis, this investment has an ROI of 3.44% if you owner occupy, but is a complete dud if it was a second home purchased as a speculative investment. In that case you would not factor rent savings. Like you have said in the past, part of a home's value is the actual housing it provides.

The real money is in lower priced homes that go from $150,000 to $350,000. That actually did happen.

The math is rough, but I wanted to share the methodology of how someone in real estate would evaluate this type of deal. Also, the effect of a 3.5% loan verses a historic 6% loan in itself can sway a deal from unattractive to attractive.

Note: ROI is used here in a casual way to approximate a return on the cost of the house. In strict financing theory, the interest would not be considered and the project would be considered attractive if you could borrow at a rate that is less than the ROI aka IRR.

Malcolm says

Do remember also, that you have to consider opportunity costs/benefits of the investment.

Sure, and the biggest opportunity cost is not being able to put your money into the stock market instead. Here's the key line:

That’s comparable to stock or bond returns over the same period in a tax-deferred 401(k).

Would be interesting to run the actual numbers with the real return from the stock market, using https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Here's some numbers if you're into it: the annual growth rate in the house price for those 10 years is 9.6% (305083 * 1.096^10 = 762998)

Here's the stock market returns for those 10 years:

1995 37.6%
1996 23.1%
1997 33.4%
1998 28.6%
1999 21.0%
2000 -9.1%
2001 -11.9%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%

In my example I calculated the return at 3.44%, with zero down, you would still have your money to put in stocks, unless you pay cash for the house or a portion.

Now, if it was the case that you were placing money in the house or the stock market, you would be correct in evaluating both deals and choosing the higher return. That situation would mean interest rates are prohibitive to the deal making sense, in other words the loan interest is higher than the IRR.

With rates so low, it makes sense to use leverage to control a house asset. I don’t see why someone wouldn’t.

Human emotions are fickle, and people change minds. The point is, houses being a bad investment does NOT prevent people from buying it due to the emotional factor.


href="/post/1314386&0#comment-1490942">JZ says

The scratch on the wall, the clock, the table they spend years having dinner together.

Sure, but it doesn't work out like that for most people. The median period of house ownership is only 6 years.

PrivilegedtobeWhite says

SFace says

If you own a home in San Mateo since 1995, you are a multimillionaire and owns a shitload of stocks too.

I love when house-humpers say stuff like, "Well, if you bought your house in 1995, before the biggest bubble of all time, you'd be a multi-millionaire with tons of stocks."

Get me a time machine, and I'll happily go buy a whole block. But until one gets invented, why should any normal person buy a house right now when renting that same house is a fraction of the monthly cost? That's when speculation is in full swing.

When speculation is in full swing, renting is cheaper than buying. However, factor in double digit appreciation rates that are common during boom times, and you will see buying rather than renting is a no brainer.
Even 4% appreciation rates would make buying a better option, simply because interest rates are 4%.

Strategist says

Even 4% appreciation rates would make buying a better option, simply because interest rates are 4%.

What about property taxes, maintenance, insurance, and the fact that the stock market went up 32% in 2017?

Patrick says

What about property taxes, maintenance, insurance, and the fact that the stock market went up 32% in 2017?

Believe it or not, my most impressive deal was a house purchased in 1998 and it tripled in value when I sold it in 2006. I would suggest that you consider overall historic averages for comparison. That same house ended up in foreclosure after I sold it, and the stock market is more likely than not to have negative years as well.

I am certainly not suggesting that now is an entry window, only because I am presently bearish on California housing.

A great financial suicide strategy right now would be to buy a house and use leverage to buy some expensive stocks. Max out the credit lines, hell, put a new deck in while you’re at it, a new kitchen is always nice.

I hate that Montelongo fuck face. There are people literally paying him 10s of thousands of dollars to learn how to get rich in real estate. I saw a woman interviewed who paid $38,000 saying if it didn’t pay off, she would be ruined. Ya think?

Patrick says

What about property taxes, maintenance, insurance,

You're paying that already as a renter, but don't get and benefit of the tax deduction.

Not always. What the landlord pays does not necessarily get passed through to the renter.

You really have to work out the numbers and it's fairly complex, dependent on predictions about appreciation and the stock market.

Patrick says

and the fact that the stock market went up 32% in 2017?

What about the fact that the market went sideways 2014, 2015 and 2016 with very little growth?

The house have 4 characteristics that makes buying decision complicated.
1. Shelter utility.
2. Jewelry utility to anchor your emotions and memories.
3. Investment. Long term cash flows.
4. Speculation. A gamble on what others will do.

I know this thread is about “Investmet”, but people keep dragging in the other 3 and confuse things.
For 1, shelter utility, you buy houses like you buy groceries. You buy it on sale when there is less demand and more supply. Current situation is ther is more demand, which is reflected in rent, it is NOT on sale. If you can avoid it, wait till on sale sign. If you have to buy it for its utitlity, then do it.

For 2, everybody is different, but it is a strong driver for decision making.

For 3, at Price/Rent =30, and history of rent suggest that current rent is actually high, the investment aspect is poor. You can argue with low rates, this is NOT bad, but still low return is low return.

For 4, this is gambling on other people’s move. Other people included local W2 shelter buyer, flipper, wall street, foreign money laundering. I usually give up this aspect for decision making because I am NOT good at gambling to transfer other people’s wealth.