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Can you elaborate on the homeowners considering their home an investment - and why they shouldn't? I've moved from Europe to Canada 20 years ago, and I'm still

Can you elaborate on the homeowners considering their home an investment - and why they shouldn't? I've moved from Europe to Canada 20 years ago, and I'm still coming up against it all the time - I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down. EVERYbody around me thinks I'm crazy and that houses are #1 best investment ever.

Spellman 10y ago
Because, at least in the US, except for the '08 crash housing has ALWAYS gone up. Historical Graph: http://www.calculatedriskblog.com/2017/01/corelogic-house-prices-up-71-year-over.html http://www.calculatedriskblog.com/2017/01/corelogic-house-pr... Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perhaps influenced by HGTV) started viewing it as not only a safe investment but one that, with a little DIY work, could be a rather fast growing investment! EDIT: added graph/article
- nommm-nommm 10y ago
  Why Your House Is Not An “Investment”... a true investment requires more than the prospect of an increase in value. https://www.moneyunder30.com/why-your-house-is-not-an-investment https://www.moneyunder30.com/why-your-house-is-not-an-invest... * A house has a more important primary purpose * A house can’t be an investment if you never plan to sell it * Thinking of your house as an investment can lead to equity stripping * The carrying costs of a house are too high for it to be an investment * Your house won’t generate cash flow * Price appreciation is the magic ingredient, but it’s not guaranteed I'm not actually arguing against home ownership, I am a home owner myself. A primary home (for most people) should be thought of more as a commodity item.
  - thedufer 10y ago
    > A house has a more important primary purpose Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much. Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments. > A house can’t be an investment if you never plan to sell it I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house). > Thinking of your house as an investment can lead to equity stripping This says that thinking of your house as an investment leads to poor decisions, not that it is wrong. Sure, maybe it does, but that's a completely different argument. > The carrying costs of a house are too high for it to be an investment The carrying costs of a house are typically negative, unless you conveniently forget that a house covers a short position and is thus paying you back (in the form of covering your rent). Which the article does. > Your house won’t generate cash flow Again, it is covering a short position. It saves you from paying rent, which is mathematically identical to forcing you to continue paying rent but paying you the same amount. > Price appreciation is the magic ingredient, but it’s not guaranteed This is true of all investments.
    - nommm-nommm 10y ago
      >Aren't houses purchased for the intent of renting them out investments? Those are investment properties which is a different thing than we are talking about. We are talking about a primary residence bought to live in. Yes, some investments are illiquid, I have some personally, but its stupid to have your entire portfolio in illiquid assets. >I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house). A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here. >The carrying costs of a house are typically negative Doubtful. Very, very, few people are going to spend as much on rent as they would a house. Houses have a way of eating away at your money in a way renting does not. The carrying cost of my house is certainly not negative. Of course, "you have to live somewhere" muddles the water a little bit. But its designed to get you to think about your house as more "somewhere to live" rather than "something to build wealth." >This is true of all investments. Which is why we diversify, to minimize risk. The American mindset is "buy a house because your house will make you rich." So people overspend on houses neglecting any other investments or savings in the process. That's the real problem.
- jcranmer 10y ago
  One of the principle causes of the '08 crash was that financiers thought they found a free lunch: there's no way a geographically-diverse portfolio of real estate could crash in value, right?
- FireBeyond 10y ago
  "(perhaps influenced by HGTV)" Oh, yes. "So before we reno'ed your house, it was worth $300K. We put $50K into renovations and it's now worth $400K!" Just like ... "magic". Now I know this is simplistic, as the value of an actual improvement which has had the planning, effort and time in does have a premium over the pure investment. But some of this was farcical, and lead many to believe they could do the same.
nommm-nommm 10y ago
Most Americans (and apparently Canadians) think their home is a very good place to park their entire net worth. Meaning they think its guaranteed to appreciate and appreciate faster than all other assets and investments a person has. They also tend to only look at raw numbers that look impressive unless you don't think about it too much rather than the whole picture. Grandma bought her house in 1970 for $10,000 and sold in 2005 for $100,000 (made up example). Looks impressive at a glance, however, What's the carrying cost of the house, transaction costs, inflation, and the performance of other investment vehicles during that time period? This thinking is part of what drove the 2000s housing bubble. Its also part of what causes people to become "house poor," meaning a very large part of their income and assets go towards their primary residence leaving them unable to save any money and have no retirement fund. http://www.usatoday.com/story/money/personalfinance/2014/05/10/why-your-home-is-not-a-good-investment/8900911/ http://www.usatoday.com/story/money/personalfinance/2014/05/... >a recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold. The reality is house prices stay about lock step with inflation on average over the long haul. There's other reasons why I house is a bad investment even if they did outpace inflation. Not that they are a bad thing to buy or own, I am a homeowner myself, its just not a great financial investment. The American government also subsidizes home ownership in various ways which can play into the fantasy. >I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down. This is a great attitude. A home can be a fantastic thing to own. It is great at providing housing! It can provide a sense of pride. Its just not a great financial investment and every portfolio should be diversified even if it were.
- dcherman 10y ago
  Depends on your definition of investment and what you're looking to get out of it. If they maintain value by appreciating at least at the rate of inflation, then they're a great store of value. At that point, you need to take all expenses into consideration (including any applicable tax deductions and rental incomes from rooms) in order to determine whether you're net positive or net negative versus renting. This can't be generalized since it depends on your local housing/rental market, however I can speak for my own situation where I pay about the same for my home as I would for a rental where I'd live by myself. If I was to rent out my extra room, I'd be paying significantly less. That's a bit long winded, just don't want people automatically rule out home ownership since not only can it be a point of pride, it actually can be financially beneficial if you're willing to do the math for your own situation.

Spellman 10y ago

Because, at least in the US, except for the '08 crash housing has ALWAYS gone up. Historical Graph: http://www.calculatedriskblog.com/2017/01/corelogic-house-prices-up-71-year-over.html http://www.calculatedriskblog.com/2017/01/corelogic-house-pr... Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perhaps influenced by HGTV) started viewing it as not only a safe investment but one that, with a little DIY work, could be a rather fast growing investment! EDIT: added graph/article

nommm-nommm 10y ago
Why Your House Is Not An “Investment”... a true investment requires more than the prospect of an increase in value. https://www.moneyunder30.com/why-your-house-is-not-an-investment https://www.moneyunder30.com/why-your-house-is-not-an-invest... * A house has a more important primary purpose * A house can’t be an investment if you never plan to sell it * Thinking of your house as an investment can lead to equity stripping * The carrying costs of a house are too high for it to be an investment * Your house won’t generate cash flow * Price appreciation is the magic ingredient, but it’s not guaranteed I'm not actually arguing against home ownership, I am a home owner myself. A primary home (for most people) should be thought of more as a commodity item.
- thedufer 10y ago
  > A house has a more important primary purpose Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much. Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments. > A house can’t be an investment if you never plan to sell it I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house). > Thinking of your house as an investment can lead to equity stripping This says that thinking of your house as an investment leads to poor decisions, not that it is wrong. Sure, maybe it does, but that's a completely different argument. > The carrying costs of a house are too high for it to be an investment The carrying costs of a house are typically negative, unless you conveniently forget that a house covers a short position and is thus paying you back (in the form of covering your rent). Which the article does. > Your house won’t generate cash flow Again, it is covering a short position. It saves you from paying rent, which is mathematically identical to forcing you to continue paying rent but paying you the same amount. > Price appreciation is the magic ingredient, but it’s not guaranteed This is true of all investments.
  - nommm-nommm 10y ago
    >Aren't houses purchased for the intent of renting them out investments? Those are investment properties which is a different thing than we are talking about. We are talking about a primary residence bought to live in. Yes, some investments are illiquid, I have some personally, but its stupid to have your entire portfolio in illiquid assets. >I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house). A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here. >The carrying costs of a house are typically negative Doubtful. Very, very, few people are going to spend as much on rent as they would a house. Houses have a way of eating away at your money in a way renting does not. The carrying cost of my house is certainly not negative. Of course, "you have to live somewhere" muddles the water a little bit. But its designed to get you to think about your house as more "somewhere to live" rather than "something to build wealth." >This is true of all investments. Which is why we diversify, to minimize risk. The American mindset is "buy a house because your house will make you rich." So people overspend on houses neglecting any other investments or savings in the process. That's the real problem.
jcranmer 10y ago
One of the principle causes of the '08 crash was that financiers thought they found a free lunch: there's no way a geographically-diverse portfolio of real estate could crash in value, right?
FireBeyond 10y ago
"(perhaps influenced by HGTV)" Oh, yes. "So before we reno'ed your house, it was worth $300K. We put $50K into renovations and it's now worth $400K!" Just like ... "magic". Now I know this is simplistic, as the value of an actual improvement which has had the planning, effort and time in does have a premium over the pure investment. But some of this was farcical, and lead many to believe they could do the same.

nommm-nommm 10y ago

Most Americans (and apparently Canadians) think their home is a very good place to park their entire net worth. Meaning they think its guaranteed to appreciate and appreciate faster than all other assets and investments a person has. They also tend to only look at raw numbers that look impressive unless you don't think about it too much rather than the whole picture. Grandma bought her house in 1970 for $10,000 and sold in 2005 for $100,000 (made up example). Looks impressive at a glance, however, What's the carrying cost of the house, transaction costs, inflation, and the performance of other investment vehicles during that time period? This thinking is part of what drove the 2000s housing bubble. Its also part of what causes people to become "house poor," meaning a very large part of their income and assets go towards their primary residence leaving them unable to save any money and have no retirement fund. http://www.usatoday.com/story/money/personalfinance/2014/05/10/why-your-home-is-not-a-good-investment/8900911/ http://www.usatoday.com/story/money/personalfinance/2014/05/... >a recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold. The reality is house prices stay about lock step with inflation on average over the long haul. There's other reasons why I house is a bad investment even if they did outpace inflation. Not that they are a bad thing to buy or own, I am a homeowner myself, its just not a great financial investment. The American government also subsidizes home ownership in various ways which can play into the fantasy. >I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down. This is a great attitude. A home can be a fantastic thing to own. It is great at providing housing! It can provide a sense of pride. Its just not a great financial investment and every portfolio should be diversified even if it were.

dcherman 10y ago
Depends on your definition of investment and what you're looking to get out of it. If they maintain value by appreciating at least at the rate of inflation, then they're a great store of value. At that point, you need to take all expenses into consideration (including any applicable tax deductions and rental incomes from rooms) in order to determine whether you're net positive or net negative versus renting. This can't be generalized since it depends on your local housing/rental market, however I can speak for my own situation where I pay about the same for my home as I would for a rental where I'd live by myself. If I was to rent out my extra room, I'd be paying significantly less. That's a bit long winded, just don't want people automatically rule out home ownership since not only can it be a point of pride, it actually can be financially beneficial if you're willing to do the math for your own situation.