5 ms·

This isn't as outrageous as it sounds. In the time that your dad's house went up 12X, the S&P went up 20-30X. (In the 1970s it was in the 65-100 range, and no

This isn't as outrageous as it sounds. In the time that your dad's house went up 12X, the S&P went up 20-30X. (In the 1970s it was in the 65-100 range, and now it's over 1900) While the calculation isn't quite this simple (dividends on stock versus not paying rent, and interest deductions) it highlights that real estate appreciation isn't quite as crazy as it's made to sound.

nostrademons 11y ago
It shows the effect of inflation, though. Someone who put $1900 under a mattress 40 years ago would find it's worth about $65 today.
- jacobolus 11y ago
  According to the BLS’s CPI inflation calculator, $1900 in 1976 is the same buying power as $456 in 2016. Where are you getting $65 from? (Edit: that’s a rhetorical question.) There’s a huge difference between 300% inflation the BLS claims vs. 2800% inflation you are suggesting.
  - nostrademons 11y ago
    Inverting the S&P 500 numbers the grandparent posted. On a practical level, inflation is always relative to what you're actually buying. If you're buying S&P 500 index funds, the inflation rate is the price appreciation of the S&P 500. If you're buying real-estate, the inflation rate is the rate of increase in housing prices. (Perhaps this is a bad example because you typically wouldn't be buying stock index funds after 40 years of earning, but the point is to illustrate opportunity cost. If someone's goal is to pass wealth on to their children, for example, then the price of income-producing assets is a lot more relevant than the price of milk.)
    - jacobolus 11y ago
      That doesn’t make sense. If your goal is to leave your children an inheritance, presumably they are supposed to either directly buy goods with it, or hire people to do useful work for them. The price of goods, services, salaries, etc. have all gone up by roughly 3–4x in the US (with some notable exceptions like housing in certain areas and college tuition). Someone who invested in the S&P 500 and has 29x as many nominal dollars as they did in 1976 can buy about 8 times as much of other people’s labor as they could before. Some fixed percentage of the total size of the S&P 500 is a practically useless measuring stick. If we use that as a standard, 90%+ of the population in the USA is 8x poorer than they were in 1976.
- imh 11y ago
  I don't understand what you're saying. If you put money under a mattress, doesn't it stay the same in worth? If I put a $20 bill under the mattress 40 years ago, it's still a $20 bill, worth exactly $20 today. What did you mean?
  - presto8 11y ago
    Instead of "worth", perhaps "purchasing power" would be more accurate. The purchasing power of cash is generally reduced over time due to inflation.
joelhaus 11y ago
This is an interesting "investment" example. In addition to the listed trade-offs, the mortgage would've likely allowed 25% cash down in 1976, approximately $18,000. Furthermore, savings in rent would've largely gone toward mortgage interest, repairs and capital expenditures. Given these assumptions, the result over a 40 year period would be an annual return of 10.12%[0]. Even so, the approximate return from the S&P 500 (reinvesting dividends) over the same period would be 11.468%[1]. [0] http://www.moneychimp.com/features/portfolio_performance_calculator.htm http://www.moneychimp.com/features/portfolio_performance_cal... [1] http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/
- mathattack 11y ago
  One thing to add... It's only in rare parts of the US that real estate appreciated so much, but you would have gotten those equity returns anywhere in the country.

nostrademons 11y ago

It shows the effect of inflation, though. Someone who put $1900 under a mattress 40 years ago would find it's worth about $65 today.

jacobolus 11y ago
According to the BLS’s CPI inflation calculator, $1900 in 1976 is the same buying power as $456 in 2016. Where are you getting $65 from? (Edit: that’s a rhetorical question.) There’s a huge difference between 300% inflation the BLS claims vs. 2800% inflation you are suggesting.
- nostrademons 11y ago
  Inverting the S&P 500 numbers the grandparent posted. On a practical level, inflation is always relative to what you're actually buying. If you're buying S&P 500 index funds, the inflation rate is the price appreciation of the S&P 500. If you're buying real-estate, the inflation rate is the rate of increase in housing prices. (Perhaps this is a bad example because you typically wouldn't be buying stock index funds after 40 years of earning, but the point is to illustrate opportunity cost. If someone's goal is to pass wealth on to their children, for example, then the price of income-producing assets is a lot more relevant than the price of milk.)
  - jacobolus 11y ago
    That doesn’t make sense. If your goal is to leave your children an inheritance, presumably they are supposed to either directly buy goods with it, or hire people to do useful work for them. The price of goods, services, salaries, etc. have all gone up by roughly 3–4x in the US (with some notable exceptions like housing in certain areas and college tuition). Someone who invested in the S&P 500 and has 29x as many nominal dollars as they did in 1976 can buy about 8 times as much of other people’s labor as they could before. Some fixed percentage of the total size of the S&P 500 is a practically useless measuring stick. If we use that as a standard, 90%+ of the population in the USA is 8x poorer than they were in 1976.
imh 11y ago
I don't understand what you're saying. If you put money under a mattress, doesn't it stay the same in worth? If I put a $20 bill under the mattress 40 years ago, it's still a $20 bill, worth exactly $20 today. What did you mean?
- presto8 11y ago
  Instead of "worth", perhaps "purchasing power" would be more accurate. The purchasing power of cash is generally reduced over time due to inflation.

joelhaus 11y ago

This is an interesting "investment" example. In addition to the listed trade-offs, the mortgage would've likely allowed 25% cash down in 1976, approximately $18,000. Furthermore, savings in rent would've largely gone toward mortgage interest, repairs and capital expenditures. Given these assumptions, the result over a 40 year period would be an annual return of 10.12%[0]. Even so, the approximate return from the S&P 500 (reinvesting dividends) over the same period would be 11.468%[1]. [0] http://www.moneychimp.com/features/portfolio_performance_calculator.htm http://www.moneychimp.com/features/portfolio_performance_cal... [1] http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/

mathattack 11y ago
One thing to add... It's only in rare parts of the US that real estate appreciated so much, but you would have gotten those equity returns anywhere in the country.