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>Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation (Robert Shiller quote)

>Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation (Robert Shiller quote) >By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style. Wow, I never really thought of it that way. I guess I implicitly understood that buying a home was, at best, a hedge against inflation. But it also seems like a good investment. But it's not, really, in the long run, unless you are "timing the market" and buying into an area with long-term population growth.

RangerScience 9y ago
The building's worth goes down, but the land's worth goes up...?
- Xcelerate 9y ago
  Yep, this is what happened with my grandmother in West Meade (next to Belle Meade). The land has appreciated drastically, but most new buyers in the area just tear down the existing houses to build something new. It's kind of sad, really.
  - alacombe 9y ago
    which doesn't mean that the building was worthless, at best, it mean that the new building is expected to be worth more than the old one. With the current easy access to credit, why not ?
  - ng12 9y ago
    I used to live close to this house in Palo Alto: http://valleywag.gawker.com/hoarders-house-in-palo-alto-is-on-the-market-for-1-8-m-1648912478 http://valleywag.gawker.com/hoarders-house-in-palo-alto-is-o... $2m plus the cost of a full teardown for maybe two thousand square feet of flooded land.
- IshKebab 9y ago
  Yeah I don't know what homes he is talking about but in most of the UK the land is virtually all of the cost. People all want to live on the same land. That's why house prices go up, not because the physical homes are somehow getting more valuable. It's so obvious... how was this article written?
burke 9y ago
Yeah, this is a really simple insight that's not obvious at first. I like the way it's stated in The Wealthy Renter: > The Golden Rule of Real Estate:... Buildings never go up in value. Ever. Period. ... Only land can go up in value. I take some minor exception with the absoluteness of the statement (I could imagine a building designed by some architect who later became extremely famous increasing in value), but overall it's obviously true.
- paulsutter 9y ago
  This is false. Vacant lots don't appreciate nearly as much as constructed and occupied buildings. A vacant lot in a downtown district has a lot of development risk associated with it. Look at how many years it takes to get plans approved and construction completed in a city like San Francisco or Manhattan. It's difficult to finance a project across that many years and you never really know what plans will get approved or how long it will take until you're well into the process. Look into the history of the LinkedIn building at 2nd and Howard for example (which was for many years a parking lot).
  - burke 9y ago
    The quote doesn't claim that you can't do things with a lot to cause it to appreciate less, just that a building won't appreciate more than the lot it stands on. I don't think what you said disagrees with that thesis.
PeanutNore 9y ago
Depending on where you live and your level of income, the most realistic way to think of buying a home may be as simply a more cost effective way of putting a roof over your head than renting would be. It's certainly the case for me.
- sparrish 9y ago
  This is exactly why I recently purchased a home. Rent in the same area is $2.2k/month and purchasing the same home is $1.8k/month. Didn't make sense for me to keep renting.
  - nikanj 9y ago
    Our home in Vancouver rents for just under two grand, and would sell for something around one million. The math doesn't make sense anymore, but everyone wants to get on that sweet rocket ship. Own a place for a year, watch it go from a million to 1.3 million, cash out via HELOC or selling to the next sorry sod. Actually I'm just bitter I didn't buy in 2013.
  - xienze 9y ago
    Only a $400 difference? That will get quickly eaten up once you replace the AC, roof, siding, have to fix the foundation, and other things you have to do to maintain a house.
    - cpncrunch 9y ago
      To get an accurate comparison you should probably just include the mortgage interest at 4 or 5% (closer to long-term mortgage rates, and similar to the income you would get from equities), and also include property tax, maintenance, etc. The principal can be thought of as building up equity, similar to a renter putting their spare cash in the stock market. When you run the numbers for places like Vancouver and Toronto it's probably cheaper renting, small towns in the prairies the opposite might be true. We're paying $1250/month to rent a nice $200k townhouse on Vancouver Island, so the numbers are similar either way when you factor in property tax, water, etc., and we don't have to worry about maintenance.
deleted 9y ago
[deleted]
sologoub 9y ago
A primary residence shouldn't be compared to stock market investment on pure returns basis, as you get additional utility out of the home by living in it, using all that the neighborhood offers etc. However, you can absolutely compare rental income (a kind of perpetuity, or an annuity with an indefinite payment stream duration) with another annuity (such as a dividend producing stock or a bond). In general, these all can (and in my opinion should) factor into your investment diversification strategy. Real estate cash flows tend to be more volatile than say a bond from a AAA+ rated borrower (leases end, people stop paying, roof leaks, etc), but that should be measured against your required rate of return for the said risk. When compared with stocks, real estate cash flows tend to be less risky (if valued properly), because even in disastrous situations you have some salvage value, whereas if a company goes bankrupt that's kind of that. (Gross oversimplification but still.) One aspect of homeownership that I am a very big fan of is that even in a flat market, the mortgage acts as a type of forced savings account with negative interest (that is, you pay the bank). In a culture where the savings rates are dismally low, this is better than nothing. Unfortunately, refinancing and HELOCs really screwed this up for people. At the extreme of the last housing bubble, people were literally treating their home as an ATM...
- fbonetti 9y ago
  All good points. Another benefit of investing in real estate (compared to investing in the stock market) is that you have significantly more leverage. You can ask a bank to give you a loan for hundreds of thousands of dollars and use that to produce positive, monthly cash flow. It's a lot harder to convince a bank to give you a loan to buy dividend producing stocks.
- JBlue42 9y ago
  >using all that the neighborhood offers etc. Great general comment but this specific point is one I try to make to people I know that are in the insanely stressful, desperate search for buying a house. In LA, there are plenty of neighborhoods on the way up or already there with houses at minimum of $600-700k. I hear all the typical rhetoric from these folks of "why waste all my money on rent, when I can get equity, etc." and I try to point out that yes, you're "building equity" for 30 years but you should also be ready for the reality that in 10-15 years (or sooner) the shit could hit the fan. When looking at a house, instead of purely as investment vehicle, maybe approach it as "If the house doesn't grow in value, or even sinks a little bit, would I still be happy to call this place and my neighborhood my home?" Because I think that gets lost and none of the reality tv shows help. You're taking out a 30-year mortgage and hopefully you get 30 years good use out of the house and much more. Will it be enough to raise kids, relax, enjoy neighborhood stuff, what have you? So much is about the money/investment side of it that I think lots of folks lose sight of the idea of a "home".
xenadu02 9y ago
Housing is unique because it is a sunk cost. You need to live somewhere so you either pay rent or buy. You usually can't refuse to buy and put 100% of that money into the stock market.
nbanks 9y ago
This doesn't seem to account for rental income, either by renting out a building or by spending money on a mortgage which would otherwise be spent in rent. The real appreciation may be less, but are dividends from stocks greater than rental income from real estate?
mfringel 9y ago
A house is an asset that also provides shelter services. In addition, if you buy a house with a mortgage, you're only putting down a portion of the house's cost, while you will realize all of the capital gains. Contrast with owning stocks where you (in the typical buy-and-hold case) have to keep 100% of your money in the stock in order to keep owning the stock.

RangerScience 9y ago

The building's worth goes down, but the land's worth goes up...?

Xcelerate 9y ago
Yep, this is what happened with my grandmother in West Meade (next to Belle Meade). The land has appreciated drastically, but most new buyers in the area just tear down the existing houses to build something new. It's kind of sad, really.
- alacombe 9y ago
  which doesn't mean that the building was worthless, at best, it mean that the new building is expected to be worth more than the old one. With the current easy access to credit, why not ?
- ng12 9y ago
  I used to live close to this house in Palo Alto: http://valleywag.gawker.com/hoarders-house-in-palo-alto-is-on-the-market-for-1-8-m-1648912478 http://valleywag.gawker.com/hoarders-house-in-palo-alto-is-o... $2m plus the cost of a full teardown for maybe two thousand square feet of flooded land.
IshKebab 9y ago
Yeah I don't know what homes he is talking about but in most of the UK the land is virtually all of the cost. People all want to live on the same land. That's why house prices go up, not because the physical homes are somehow getting more valuable. It's so obvious... how was this article written?

burke 9y ago

Yeah, this is a really simple insight that's not obvious at first. I like the way it's stated in The Wealthy Renter: > The Golden Rule of Real Estate:... Buildings never go up in value. Ever. Period. ... Only land can go up in value. I take some minor exception with the absoluteness of the statement (I could imagine a building designed by some architect who later became extremely famous increasing in value), but overall it's obviously true.

paulsutter 9y ago
This is false. Vacant lots don't appreciate nearly as much as constructed and occupied buildings. A vacant lot in a downtown district has a lot of development risk associated with it. Look at how many years it takes to get plans approved and construction completed in a city like San Francisco or Manhattan. It's difficult to finance a project across that many years and you never really know what plans will get approved or how long it will take until you're well into the process. Look into the history of the LinkedIn building at 2nd and Howard for example (which was for many years a parking lot).
- burke 9y ago
  The quote doesn't claim that you can't do things with a lot to cause it to appreciate less, just that a building won't appreciate more than the lot it stands on. I don't think what you said disagrees with that thesis.

PeanutNore 9y ago

Depending on where you live and your level of income, the most realistic way to think of buying a home may be as simply a more cost effective way of putting a roof over your head than renting would be. It's certainly the case for me.

sparrish 9y ago
This is exactly why I recently purchased a home. Rent in the same area is $2.2k/month and purchasing the same home is $1.8k/month. Didn't make sense for me to keep renting.
- nikanj 9y ago
  Our home in Vancouver rents for just under two grand, and would sell for something around one million. The math doesn't make sense anymore, but everyone wants to get on that sweet rocket ship. Own a place for a year, watch it go from a million to 1.3 million, cash out via HELOC or selling to the next sorry sod. Actually I'm just bitter I didn't buy in 2013.
- xienze 9y ago
  Only a $400 difference? That will get quickly eaten up once you replace the AC, roof, siding, have to fix the foundation, and other things you have to do to maintain a house.
  - cpncrunch 9y ago
    To get an accurate comparison you should probably just include the mortgage interest at 4 or 5% (closer to long-term mortgage rates, and similar to the income you would get from equities), and also include property tax, maintenance, etc. The principal can be thought of as building up equity, similar to a renter putting their spare cash in the stock market. When you run the numbers for places like Vancouver and Toronto it's probably cheaper renting, small towns in the prairies the opposite might be true. We're paying $1250/month to rent a nice $200k townhouse on Vancouver Island, so the numbers are similar either way when you factor in property tax, water, etc., and we don't have to worry about maintenance.

deleted 9y ago

[deleted]

sologoub 9y ago

A primary residence shouldn't be compared to stock market investment on pure returns basis, as you get additional utility out of the home by living in it, using all that the neighborhood offers etc. However, you can absolutely compare rental income (a kind of perpetuity, or an annuity with an indefinite payment stream duration) with another annuity (such as a dividend producing stock or a bond). In general, these all can (and in my opinion should) factor into your investment diversification strategy. Real estate cash flows tend to be more volatile than say a bond from a AAA+ rated borrower (leases end, people stop paying, roof leaks, etc), but that should be measured against your required rate of return for the said risk. When compared with stocks, real estate cash flows tend to be less risky (if valued properly), because even in disastrous situations you have some salvage value, whereas if a company goes bankrupt that's kind of that. (Gross oversimplification but still.) One aspect of homeownership that I am a very big fan of is that even in a flat market, the mortgage acts as a type of forced savings account with negative interest (that is, you pay the bank). In a culture where the savings rates are dismally low, this is better than nothing. Unfortunately, refinancing and HELOCs really screwed this up for people. At the extreme of the last housing bubble, people were literally treating their home as an ATM...

fbonetti 9y ago
All good points. Another benefit of investing in real estate (compared to investing in the stock market) is that you have significantly more leverage. You can ask a bank to give you a loan for hundreds of thousands of dollars and use that to produce positive, monthly cash flow. It's a lot harder to convince a bank to give you a loan to buy dividend producing stocks.
JBlue42 9y ago
>using all that the neighborhood offers etc. Great general comment but this specific point is one I try to make to people I know that are in the insanely stressful, desperate search for buying a house. In LA, there are plenty of neighborhoods on the way up or already there with houses at minimum of $600-700k. I hear all the typical rhetoric from these folks of "why waste all my money on rent, when I can get equity, etc." and I try to point out that yes, you're "building equity" for 30 years but you should also be ready for the reality that in 10-15 years (or sooner) the shit could hit the fan. When looking at a house, instead of purely as investment vehicle, maybe approach it as "If the house doesn't grow in value, or even sinks a little bit, would I still be happy to call this place and my neighborhood my home?" Because I think that gets lost and none of the reality tv shows help. You're taking out a 30-year mortgage and hopefully you get 30 years good use out of the house and much more. Will it be enough to raise kids, relax, enjoy neighborhood stuff, what have you? So much is about the money/investment side of it that I think lots of folks lose sight of the idea of a "home".

xenadu02 9y ago

Housing is unique because it is a sunk cost. You need to live somewhere so you either pay rent or buy. You usually can't refuse to buy and put 100% of that money into the stock market.

nbanks 9y ago

This doesn't seem to account for rental income, either by renting out a building or by spending money on a mortgage which would otherwise be spent in rent. The real appreciation may be less, but are dividends from stocks greater than rental income from real estate?

mfringel 9y ago

A house is an asset that also provides shelter services. In addition, if you buy a house with a mortgage, you're only putting down a portion of the house's cost, while you will realize all of the capital gains. Contrast with owning stocks where you (in the typical buy-and-hold case) have to keep 100% of your money in the stock in order to keep owning the stock.