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> NIMBYism exists because home ownership is basically the most accessible mechanism to grow personal wealth in the US. That has to be due a lack of financial e

> NIMBYism exists because home ownership is basically the most accessible mechanism to grow personal wealth in the US. That has to be due a lack of financial education and knowledge of what options exist to grow personal wealth. You need at least $50k to put 20% down on a median US home. You need only $2.5k to start an index fund account with Vanguard. Guess which one will give you a better return on average and is more liquid?

bzbarsky 9y ago
> Guess which one will give you a better return on average Hard to say. Depends on inflation levels. In particular, a home is one of the few leveraged investments most people can make. And if inflation is somewhat high (which it hasn't been recently), a leveraged investment that just grows at the rate of inflation can beat out an index fund that grows several percent above the rate of inflation but is not leveraged. Just to put numbers to this, if you are levered 5 to 1 (20% down), inflation is 3%, home price grows at inflation, you are getting a 15% nominal return on your investment in the home, and a 12% real return. For a more realistic estimate, say leverage is 4 to 1 (you've paid off part of the mortgage), inflation at 2% as it has been recently. Still 6% real return. I will grant that the index fund is more liquid, obviously.
- jogjayr 9y ago
  > Just to put numbers to this, if you are levered 5 to 1 (20% down), inflation is 3%, home price grows at inflation, you are getting a 15% nominal return on your investment in the home, and a 12% real return. I'm sorry I didn't follow that calculation perfectly. I (sort of) understand the part where you get a 15% nominal ROI for 20% down. But if you're paying your mortgage every month you're leveraged less and less each successive month right (as you pay off principal and accumulate equity)? Would that change the calculation? Valuation and ROI (beyond simple stuff) is not one of my strengths unfortunately. > Hard to say. Depends on inflation levels. And if inflation is somewhat high (which it hasn't been recently), That's what I was getting at with "on average". Inflation hasn't been high for quite a while. I will grant you that it's not cut-and-dry in favor of index funds under all circumstances.
  - lmm 9y ago
    > if you're paying your mortgage every month you're leveraged less and less each successive month right (as you pay off principal and accumulate equity)? Would that change the calculation? Yes. But you can keep your leverage ratio the same by upsizing every few years and remortgaging when you do. As you get towards retirement you generally delever but that's what you would want to be doing anyway (sacrificing some return for lower risk).
  - bzbarsky 9y ago
    > Would that change the calculation? Yes, it would. As Imm says, this is actually conceptually similar to shifting out of stocks into bonds as you get older: lower returns, less risk. And of course some people do interest-only mortgages and whatnot, just like some people invest all their money in risky stocks... I agree that if one were actually approaching this as a personal financial decision one would need to do some careful calculation, as well as modeling of different inflation expectations and so forth. And that no one does this in practice.
meddlepal 9y ago
Sure, but you can't live in your Index Fund. Housing is already a sunk cost for everybody. You're either paying rent and getting nothing out of it or getting a mortgage and at the end of it you have an actual owned asset.
- jogjayr 9y ago
  I was referring to the relative accessibility. You need $50k (or $25k if we're going for 10% down) to even start living in the median house. Even a $100k house would require you to save up $10-20k. $2.5k is a far lower bar to start building wealth.
  - rosser 9y ago
    As true as all that is, you still have to have somewhere to live. You can put some of that money back in your own pocket, or you can put all of it in someone else's.
    - jpetso 9y ago
      Alternatively, you can calculate how much you'd pay and save/invest in particular scenarios after taking into account ROI, rent, maintenance, mortgage interest, property taxes, closing costs incl. risk of wanting to move earlier than expected, and personal discipline to save when not compelled by a mortgage. Phrases such as "put it into your own pocket or someone else's" are a vast oversimplification that has more to do with faith and indoctrination than actual fiscal outcomes. It's true some of the time, but you should never make a decision based on a blanket statement like this one. It's not that hard to make an individual analysis for your very own situation, so make yourself some data points rather than listen to biased generalizations.
- fennecfoxen 9y ago
  You can't live in your index fund like your house. But if you invest the value of your down payment in an index fund, and rent a property, the fund may grow to be large enough to purchase a house, in about the same amount of time. (It depends on your local housing market, of course. The index fund may not keep up with a boom-town like Silicon Valley of the past few decades, but it is unlikely to turn into Detroit, either. Choose your risks wisely.) And if you put a down payment into a fancier house instead of in a simpler house, most of the gains you'll get from doing so are delivered in the form of immediate consumption of "nice house" over time, not in the form of something you can reinvest (indeed, maintenance costs will be higher as well.) And you've committed to this much house for a long time. That said, the huge thing that houses have going for them in the US today is special tax treatment - if you're in a higher tax bracket, even more so. You get both mortgage interest deductions and some special capital gains treatment, I do believe. You're the darling of the US tax code. Consequentially, this special treatment in our tax policy distorts the incentives to invest, encouraging people obsess about the housing market instead of other forms of more-diversified investments, and thus contributes to damaging asset bubbles. It also generally impairs social mobility by incentivizing homeowners to support land use policies that drive up housing prices (directly harming the poor, lower middle class, and any other non-homeowners like the youth), and while the policy overall is pitched to the middle class, many of the biggest winners are the rich, as their tax brackets are higher and their houses more expensive. Huh. Who could have seen any of that coming? cougheveryeconomistevercough
maxsilver 9y ago
> Guess which one will give you a better return on average and is more liquid? Honestly? The house still wins. An index fund account with Vanguard can lose value, but large banks and the federal government artificially inflate property so that it's effectively banned from dropping in value. An index fund can easily be lost or stolen without your knowledge, but your house usually can't be (assuming you live in it everyday). And rental costs in every mid-size to major city go up 10-50% year-over-year forever. Mortgages in the US are generally fixed. Houses are also practically liquid. When 90% of homes sell in less than 3 days, and for more than asking prices (as is the case in the US today), liquidity is basically a non-issue. Index funds rarely sell for more than they are worth, but houses almost always sell for far more than they are worth, daily. So whether your working off of irrational fears (lost value, stolen) or rational thoughts (total cash calculations), the house is usually a better investment in either case. Which is terrible for the general economy at large. But is a totally rational move for any one person who has to deal with the current state of affairs
- refurb 9y ago
  What you're describing is a hot real estate market. It's not always hot. Take a look at Toronto now. Everything you said was true, now it's taking a long time to sell and prices are dropping.
- jogjayr 9y ago
  > large banks and the federal government artificially inflate property so that it's effectively banned from dropping in value. Tell that to Detroit homeowners. An extreme case but no more than the the bit about rents you mentioned. > And rental costs in every mid-size to major city go up 10-50% year-over-year forever. Umm...did you mean 5-10%? If rents were really going up 50% year-over-year in every major city I would think we'd see way more investment in apartment housing; every investor would be licking their lips. SF !== every mid-size to major city in America after all.
kasey_junk 9y ago
Access to leverage is much more available (and is highly subsidized) when it comes to US homes. Personally, I think that is a major problem and the US would be much better off if the government stopped amping home ownership so much, but from a rationale actor point of view its fairly easy to turn government subsidized mortgages into outsized returns in housing.

bzbarsky 9y ago

> Guess which one will give you a better return on average Hard to say. Depends on inflation levels. In particular, a home is one of the few leveraged investments most people can make. And if inflation is somewhat high (which it hasn't been recently), a leveraged investment that just grows at the rate of inflation can beat out an index fund that grows several percent above the rate of inflation but is not leveraged. Just to put numbers to this, if you are levered 5 to 1 (20% down), inflation is 3%, home price grows at inflation, you are getting a 15% nominal return on your investment in the home, and a 12% real return. For a more realistic estimate, say leverage is 4 to 1 (you've paid off part of the mortgage), inflation at 2% as it has been recently. Still 6% real return. I will grant that the index fund is more liquid, obviously.

jogjayr 9y ago
> Just to put numbers to this, if you are levered 5 to 1 (20% down), inflation is 3%, home price grows at inflation, you are getting a 15% nominal return on your investment in the home, and a 12% real return. I'm sorry I didn't follow that calculation perfectly. I (sort of) understand the part where you get a 15% nominal ROI for 20% down. But if you're paying your mortgage every month you're leveraged less and less each successive month right (as you pay off principal and accumulate equity)? Would that change the calculation? Valuation and ROI (beyond simple stuff) is not one of my strengths unfortunately. > Hard to say. Depends on inflation levels. And if inflation is somewhat high (which it hasn't been recently), That's what I was getting at with "on average". Inflation hasn't been high for quite a while. I will grant you that it's not cut-and-dry in favor of index funds under all circumstances.
- lmm 9y ago
  > if you're paying your mortgage every month you're leveraged less and less each successive month right (as you pay off principal and accumulate equity)? Would that change the calculation? Yes. But you can keep your leverage ratio the same by upsizing every few years and remortgaging when you do. As you get towards retirement you generally delever but that's what you would want to be doing anyway (sacrificing some return for lower risk).
- bzbarsky 9y ago
  > Would that change the calculation? Yes, it would. As Imm says, this is actually conceptually similar to shifting out of stocks into bonds as you get older: lower returns, less risk. And of course some people do interest-only mortgages and whatnot, just like some people invest all their money in risky stocks... I agree that if one were actually approaching this as a personal financial decision one would need to do some careful calculation, as well as modeling of different inflation expectations and so forth. And that no one does this in practice.

meddlepal 9y ago

Sure, but you can't live in your Index Fund. Housing is already a sunk cost for everybody. You're either paying rent and getting nothing out of it or getting a mortgage and at the end of it you have an actual owned asset.

jogjayr 9y ago
I was referring to the relative accessibility. You need $50k (or $25k if we're going for 10% down) to even start living in the median house. Even a $100k house would require you to save up $10-20k. $2.5k is a far lower bar to start building wealth.
- rosser 9y ago
  As true as all that is, you still have to have somewhere to live. You can put some of that money back in your own pocket, or you can put all of it in someone else's.
  - jpetso 9y ago
    Alternatively, you can calculate how much you'd pay and save/invest in particular scenarios after taking into account ROI, rent, maintenance, mortgage interest, property taxes, closing costs incl. risk of wanting to move earlier than expected, and personal discipline to save when not compelled by a mortgage. Phrases such as "put it into your own pocket or someone else's" are a vast oversimplification that has more to do with faith and indoctrination than actual fiscal outcomes. It's true some of the time, but you should never make a decision based on a blanket statement like this one. It's not that hard to make an individual analysis for your very own situation, so make yourself some data points rather than listen to biased generalizations.
fennecfoxen 9y ago
You can't live in your index fund like your house. But if you invest the value of your down payment in an index fund, and rent a property, the fund may grow to be large enough to purchase a house, in about the same amount of time. (It depends on your local housing market, of course. The index fund may not keep up with a boom-town like Silicon Valley of the past few decades, but it is unlikely to turn into Detroit, either. Choose your risks wisely.) And if you put a down payment into a fancier house instead of in a simpler house, most of the gains you'll get from doing so are delivered in the form of immediate consumption of "nice house" over time, not in the form of something you can reinvest (indeed, maintenance costs will be higher as well.) And you've committed to this much house for a long time. That said, the huge thing that houses have going for them in the US today is special tax treatment - if you're in a higher tax bracket, even more so. You get both mortgage interest deductions and some special capital gains treatment, I do believe. You're the darling of the US tax code. Consequentially, this special treatment in our tax policy distorts the incentives to invest, encouraging people obsess about the housing market instead of other forms of more-diversified investments, and thus contributes to damaging asset bubbles. It also generally impairs social mobility by incentivizing homeowners to support land use policies that drive up housing prices (directly harming the poor, lower middle class, and any other non-homeowners like the youth), and while the policy overall is pitched to the middle class, many of the biggest winners are the rich, as their tax brackets are higher and their houses more expensive. Huh. Who could have seen any of that coming? cougheveryeconomistevercough

maxsilver 9y ago

> Guess which one will give you a better return on average and is more liquid? Honestly? The house still wins. An index fund account with Vanguard can lose value, but large banks and the federal government artificially inflate property so that it's effectively banned from dropping in value. An index fund can easily be lost or stolen without your knowledge, but your house usually can't be (assuming you live in it everyday). And rental costs in every mid-size to major city go up 10-50% year-over-year forever. Mortgages in the US are generally fixed. Houses are also practically liquid. When 90% of homes sell in less than 3 days, and for more than asking prices (as is the case in the US today), liquidity is basically a non-issue. Index funds rarely sell for more than they are worth, but houses almost always sell for far more than they are worth, daily. So whether your working off of irrational fears (lost value, stolen) or rational thoughts (total cash calculations), the house is usually a better investment in either case. Which is terrible for the general economy at large. But is a totally rational move for any one person who has to deal with the current state of affairs

refurb 9y ago
What you're describing is a hot real estate market. It's not always hot. Take a look at Toronto now. Everything you said was true, now it's taking a long time to sell and prices are dropping.
jogjayr 9y ago
> large banks and the federal government artificially inflate property so that it's effectively banned from dropping in value. Tell that to Detroit homeowners. An extreme case but no more than the the bit about rents you mentioned. > And rental costs in every mid-size to major city go up 10-50% year-over-year forever. Umm...did you mean 5-10%? If rents were really going up 50% year-over-year in every major city I would think we'd see way more investment in apartment housing; every investor would be licking their lips. SF !== every mid-size to major city in America after all.

kasey_junk 9y ago

Access to leverage is much more available (and is highly subsidized) when it comes to US homes. Personally, I think that is a major problem and the US would be much better off if the government stopped amping home ownership so much, but from a rationale actor point of view its fairly easy to turn government subsidized mortgages into outsized returns in housing.