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In most cases you have a mortgage so it isn't as simple as that. For example, you didn't pay $1 million (even if that is the cost) - maybe you put down $200,00

In most cases you have a mortgage so it isn't as simple as that. For example, you didn't pay $1 million (even if that is the cost) - maybe you put down $200,000. If it goes to $1.2 million you sell it and get $400,000 (paying off the $800,000 you borrowed). That is 100% of your $200,000 even though the price only went up 20%. This is oversimplified for illustrative purposes. You have to pay interest, taxes, get a place to live... but the example shows why you don't need the sales price to go up by inflation to break even or make a profit even in 2007 dollars.

mgce 9y ago
Good point. What you're describing, at core, is leverage. The general principle of leverage is that it exaggerates the market's natural results. When things go up you stand to make a lot of money. But when things go down you stand to lose a lot of money. One mistake (IMO) many people make about housing is not adequately thinking through the second possibility.
ProfessorLayton 9y ago
I agree that I don't have all the info to make a true apples to apples comparison, but even your illustrative example is way off: 1.2M - 6% realtor fees is 1.128M. Thats 72K just for realtor fees right off the bat. not including including costs like city transfer tax, capital gains for short term sales, and countless other seller fees that vary by market temperature. All this comes off your 200k "profits", which is still great, but homeowners typically take years just to stop being underwater when buying a home.
- curiouscats 9y ago
  True. All I was trying to point out is that the return isn't just the sales price having to beat inflation. You are completely right that I forgot to mention buying and selling costs (which, as you note, are very high in real estate).
losvedir 9y ago
You can achieve the same in the stock market by buying on margin. In both cases, financing the majority of an investment with debt cranks up the risk. If you put $200k in an investment (say, the stock market, or bonds, or whatever) and it goes down by 10% then you've lost $20k. But if you're leveraged 5x (as in your example: putting in $200k on a $1M investment), then that's a multiplier in the positive and negative direction. A fall in housing prices in your city, area, neighborhood, of 10% will now wipe out 50% of what you put in. Leverage is considered very risky. Housing is considered fairly safe to begin with, so when you use leverage on it it only becomes moderately risky. But basically there's no such thing as a free lunch. The reason your $200k can double if housing prices move just a little bit up, is because it can also be wiped out if they move just a little bit down.

mgce 9y ago

Good point. What you're describing, at core, is leverage. The general principle of leverage is that it exaggerates the market's natural results. When things go up you stand to make a lot of money. But when things go down you stand to lose a lot of money. One mistake (IMO) many people make about housing is not adequately thinking through the second possibility.

ProfessorLayton 9y ago

I agree that I don't have all the info to make a true apples to apples comparison, but even your illustrative example is way off: 1.2M - 6% realtor fees is 1.128M. Thats 72K just for realtor fees right off the bat. not including including costs like city transfer tax, capital gains for short term sales, and countless other seller fees that vary by market temperature. All this comes off your 200k "profits", which is still great, but homeowners typically take years just to stop being underwater when buying a home.

curiouscats 9y ago
True. All I was trying to point out is that the return isn't just the sales price having to beat inflation. You are completely right that I forgot to mention buying and selling costs (which, as you note, are very high in real estate).

losvedir 9y ago

You can achieve the same in the stock market by buying on margin. In both cases, financing the majority of an investment with debt cranks up the risk. If you put $200k in an investment (say, the stock market, or bonds, or whatever) and it goes down by 10% then you've lost $20k. But if you're leveraged 5x (as in your example: putting in $200k on a $1M investment), then that's a multiplier in the positive and negative direction. A fall in housing prices in your city, area, neighborhood, of 10% will now wipe out 50% of what you put in. Leverage is considered very risky. Housing is considered fairly safe to begin with, so when you use leverage on it it only becomes moderately risky. But basically there's no such thing as a free lunch. The reason your $200k can double if housing prices move just a little bit up, is because it can also be wiped out if they move just a little bit down.