7 ms·

Why a house is a terrible investment (2013)

66 points by nreece 8y ago

wl78393 8y ago
"Don't worry millenials! You didn't really want a house anyway, it's a terrible idea! Keep paying those student loan payments and renting!" -- Retired boomer with $1MM+ equity in their suburban California home purchased in 1975 for $10k.
- david-gpu 8y ago
  HN guidelines discourage these sort of shallow dismissive comments. Reading a constructive rebuttal would be more interesting.
  - mancerayder 8y ago
    While snarky, he made a point about material interest differences between two generations.
- mixmastamyk 8y ago
  ^Nimby boomer.
- Terr_ 8y ago
  To be fair, it's hard to say that trying to follow the exact same trajectory today would lead you to the exact same place in 2061.
- 0x00000000 8y ago
  *with 1975 property tax locked in thanks to prop 13
  - Overtonwindow 8y ago
    Is that accurate? Property taxes can change
    - jurassic 8y ago
      Property taxes are locked to the purchase price of the home in California because of a law called Proposition 13. It's a been major contributor to the housing crisis but is extremely popular with everyone who currently owns property. It lets owners benefit from appreciation of their property without any increase in their tax liability while newer (and often younger) buyers must pay taxes based on the current absurd home prices.
    - wl78393 8y ago
      Yes, with rare exceptions Prop 13 means you get your property tax assessment locked in when you purchase. The major way to trigger re-assessment is to pull a permit for construction/improvements, which is why unpermitted remodels/additions are so rampant in California.
    - deleted 8y ago
      [deleted]
  - briandear 8y ago
    That is so true and one of the major reasons SV real estate is such a tight market. Those tax rate freezes essentially eliminate a good portion of liquidity normally present in a market.
- DrScump 8y ago
  suburban California home purchased in 1975 for $10k Where? About the cheapest you could do in San Jose then was $21K for a 1400sf condo from Singer Housing (the budget developer of the era). I grew up in one.
Simulacra 8y ago
I bought a house in 2015 (at 32) and it was the best thing I ever did. Even though I had to move away, I turned it into a rental property, and it’s earning $380 a month in profit. I’ve been using that profit to pay down the principal and add to my 401(k). My only regret is that I didn’t buy a lot sooner.
- curuinor 8y ago
  I mean, in the past 7 or so years, all the boats have been rising. What would your returns have been if you put them in stocks? How great was and is the risk you take by taking tenants versus the risk you take by buying stocks?
  - toomuchtodo 8y ago
    You do both to diversify (equity and real estate). Having the property as a rental is very tax efficient as well (you get to depreciate a property that appreciates in value). Also, no one is going to let you leverage equity purchases with debt like you can with real estate. Disclosure: I own several rental properties to round out my investment portfolio.
    - asfasgasg 8y ago
      You don't really need to do both to diversify. There is a lot of exposure to real estate in the stock market (rental companies + commercial real estate + construction), and REITs can be used to gain more exposure if desired.
      - toomuchtodo 8y ago
        I can manage my real estate risk better (IMHO) in a rising interest rate environment better than a REIT can (and I find most REITs to be overvalued, specifically O). My cash on cash returns are better as well.
        curuinor 8y ago
SirLJ 8y ago
The point is quality of life... Under the bridge is free...
- pdpi 8y ago
  The article doesn’t say that buying a house is a bad idea — just that it’s a bad investment. There’s many reasonable motives for buying a house, you’re just better off making sure that those motives are strong enough by themselves and you’re not doing it “because it’s a good investment”
awat 8y ago
As a younger millennial I find myself far more interested in a home from a Maslow’s hierarchy perspective than an investment at this point.
- Simulacra 8y ago
  Yes! Tbh I wasn’t really all that interested in buying. I finally gave in after spending a summer working with the homeless, and reading a Priceonomics article about David Raether. I got really afraid. https://priceonomics.com/what-its-like-to-fail/ https://priceonomics.com/what-its-like-to-fail/
  - awat 8y ago
    That’s where my interest came from as well. The success/failure line is much thinner than many people think imho.
  - ckdarby 8y ago
    This article didn't scare me just shined the light that people are truly not willing to sacrifice. They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life. The best future investment that could have been made here is living within the reality of the numbers.
    - Simulacra 8y ago
      Absolutely agree. He should’ve downsized and cut expenditures, but for whatever reason (maybe hubris? Pride?) he allowed things to get out of control. For me, I know that I can get a job at Home Depot and make the mortgage payments, and that’s why I stuck with something small and affordable.
matte_black 8y ago
Your house might be a terrible investment. Rental properties not so much.
hsnewman 8y ago
This is totally a biased article against home ownership. Not one positive toward home ownership...I can't believe the author would be so biased.
- Finnucane 8y ago
  One could write a similarly ridiculous article about how renting is flushing your money down the drain, you're paying someone else's mortgage, etc. Worrying about the rent going up, hoping your landlord isn't too much of a scumbag, and so on. Sure, a house is not a great investment. But there's more to housing than investment. You have to live somewhere, and you're probably going to be paying for it one way or another. There's no perfect solution--you have to figure out what works for you. We bought this house nine years ago, and hope that we never have to move again. Now the mortgage is about half of what it would cost to rent an apartment in this neighborhood. That's kind of a trap, too. There's no point to thinking about moving--there's no place we could go that would be cheaper than what we have unless we leave the area entirely.
ajross 8y ago
This is awful analysis. Almost every one of the bullet points is just wrong, or at least terribly spun. I mean, one of them argues that homes are "heavily taxed" when of course they are the source of the biggest single deduction category in the whole budget, another claims with a straight face that the ability to leverage the investment via a (again, government subsidized!) loan is a bad thing! Now, obviously not all investments are winners, even if they are "good" investments in principle. And there are all sorts of very good arguments about why homes should not be subsidized in the way they are, and that our government has made them "too good" in a way that harms the public as a whole. But nonetheless homes in almost all of the US are absolutely good investments. They have been for going on three quarters of a century now and certainly don't show signs of stopping.
- timr 8y ago
  This is excellent analysis. Every one of the bullet points is correct, and you've picked one to debate (and misinterpreted the argument): relative to virtually every other investment you can make, homes are heavily taxed. Arguing that you can (possibly) deduct some of those taxes misses the point. I don't have to pay my state and local governments annual taxes on the stocks and bonds that I own. On average, homes in the US appreciate at about the rate of inflation, and the choice to rent vs. buy is favorable in some markets, unfavorable in many others. It's nowhere near as clear-cut as the comments in this thread would lead you to believe.
  - sulam 8y ago
    I recently sold and bought a house, and as far as I know I paid no taxes on it, and I am still deducting mortgage payments. I could pay off my mortgage tomorrow (it's Sunday here, so I'd have to wait for my bank to open) but my accountant tells me that's a horrible idea.
    - dman 8y ago
      How long did you hold it? Where was the home located?
bigcostooge 8y ago
Houses do pay dividends. You have to live somewhere, and you get to live in your house for free (in the analogy where it’s discussed as an investment.) The alternative is much worse in many markets.
hacknat 8y ago
Anyone who responds to this article by saying their particular house was a good investment didn’t read the article.
SQL2219 8y ago
There was a flyer on my door yesterday. We pay cash for your home, close in 3 days. Avoid realtor fees. There is only one problem, I have to live somewhere. I'm not huge fan of being a homeowner, but if I decided to rent, my rent would be almost twice what my mortgage is.
013a 8y ago
I really fail to see how most of those points are relevant when you consider that a home is an investment you can, you know, live in. The alternative would be to rent indefinitely, which apparently we're ok with even though its not just a 0% return on investment, its an infinitely negative percent return on investment. Even if your house breaks even over 10 years, you still got to live in it for ten years for what is, functionally, the cost of interest + upkeep, which would often easily amount to less than rent. If I stayed where I rented last year for ten years, the total cost over ten years (assuming the rent is never increased) (rent is always increased) is $132,0000. Even if my house cost that much to maintain over ten years plus interest (it won't), I'll still break even on the principal and enjoy the benefits of home ownership. That's not to say that home ownership is always the right choice for everyone in every stage of life. But to sweep a broad generality like "houses are a terrible investment"...
- sjm-lbm 8y ago
  All of these analyses also ignore the fact that most people generally want to have some parts of their lives where they aren't working, and people still want a place to live even then. My parents may have made (by the article's standards) "bad investments" for 40 years, but after rolling steadily increasing amounts of equity into a few different houses, they own the place they live outright. Even if they could have done better with stocks, the peace of mind to only have to pay property taxes and upkeep on a house is something that has substantial value in retirement.
- mdorazio 8y ago
  > which would often easily amount to less than rent. Hang on a minute there. Big citation needed, or caveat for which locality you're talking about. In LA or SF, for example, the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment. And that's after the huge assumption that you can even afford the up-front cost needed to buy a house in the first place.
  - smallnamespace 8y ago
    > the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment Yes, but rental prices also change over time, whereas your mortgage payment doesn't (although the tax deduction falls over time, and your locality may up your property taxes, but these are fairly minor components). If you have reason to believe that rent will continue to increase (either around CPI, or in the case of the Bay Area, 10%+ per annum...), then by all means buying a house now (which produces an infinite stream of rents) allows you to profit off that view. Another way to view this is that you are acquiring an rental inflation-indexed asset and a nominal liability, so you will profit if inflation is high enough.
ThrustVectoring 8y ago
My financial roadmap has "buy and live in a duplex to quadplex in Texas" on it, just for creditor protection purposes.
dawhizkid 8y ago
For a lot of people the "investment" piece of owning their home is secondary to having a home to live in and raise their family in. Especially in the US, there are tax benefits to owning, and depending on the market owning could make more sense than renting.
- imron 8y ago
  Exactly. A house is more than an investment, it's a place to live. My sister and her family are living in their 3rd home in as many years because the owners of the places they are renting keep selling and don't renew their lease. Then it's a hectic couple of months of finding somewhere new (but close enough to the same location so kids don't have to change schools) packing up everything in to boxes, moving and unpacking everything. It's 2-3 months of hassle they would love to avoid. Not everyone is buying a house as an investment.
asfasgasg 8y ago
I am generally sympathetic to the idea that homes are a bad investment. The fundamentals are terrible, as discussed in the article, the most important one probably being the lack of diversification. But I wonder how it meshes with the results proposed by the article "The Rate of Return of Everything." That article found that housing has only slightly underperformed stocks as an investment. Now, obviously, if you're living in your house, you're not going to get nearly the same return -- this is the total return on housing, so a house you're living at could be expected to provide returns on average as listed, minus the annual value of rent. But that means its overall performance as an investment is actually better than observed appreciation. https://www.frbsf.org/economic-research/files/wp2017-25.pdf https://www.frbsf.org/economic-research/files/wp2017-25.pdf
jeremymcanally 8y ago
Every house I've ever owned has (a) cost way less per month than rent (I know it will cost less, but I mean on the order of nearly 50% less) and (b) appreciated enough after a short time that it made a sale worth it. The first house we owned appreciated by about $25k in 2 years, and the house we're in now (according to comps we just ran as we're preparing to sell) has appreciated about $80k+ in 3 years. You can make smart property choices, even for the home you occupy (i.e., not just rental properties). But "smart" includes evaluating all the criteria. If you live in an area with a ridiculous property market (e.g., the Bay Area) or a very, very slow one, then the investment isn't as enticing. I'm blessed to live in a market with a lot of movement for a variety of reasons, not just being a "hot" area to live in, but others are not so much. I'm also blessed to work remotely, so I can choose to live in an area like this. :) tl;dr: this is probably true in a lot of America, but it's not universal by any means.
bartart 8y ago
Homes are a bad investment except that we all need somewhere to live. Even if you're renting many of the costs and risks the article mentions are borne by the landlord and then passed on to you.
Spooky23 8y ago
This logic is so specious. Renting and owning from a cash flow perspective are usually pretty close, and you need to live, so a suboptimal investment with any return is better than making a landlord money and investing the scraps into 401ks. I’m in my late 30s and missed the gogo crazy years. But everyone I know in my age cohort has had a positive, meaningful ROI in trading houses up at least once. The supposed flexibility of renting is overrated as well. No decent landlord will take less than a 1 year lease, and some premium properties will demand a premium if you refuse a 2 year lease. Getting jammed up with buying out a lease early, or getting stuck with a high rent when the market cools is another way that renting is almost always a bad deal for the tenant. This sounds like a corporate accounting analysis, not advice for people. People don’t benefit from deducting opex.
- smallnamespace 8y ago
  > The supposed flexibility of renting is overrated as well. Plus there's nothing keeping you from renting out your property and then living somewhere else. You lose some of the nicer deductions and time spent being a landlord, and that certainly hurts ROI, but it's definitely not the case that you must live in what you own.
tomasien 8y ago
This makes great points that shouldn't be ignored. But here's the reality: most people don't invest in anything but do pay rent. If you just shift that rent into a mortgage + repairs, at least you're investing in something that will slightly under-perform inflation (maybe). It's lower risk / higher return when you think of it that way. (I do not own a house nor do I plan to own one, however)
Ancalagon 8y ago
I actually agree with a lot of the points made here. Still terrible advice. Youre always gonna need somewhere to live. Guess whats a better bet to invest in than an apartment? A house. If you buy though, check all your bases. Whats appreciation looked like for the last 10 years in this neighborhood? How are the schools? Hows the job market for professionals? etc.
jpmattia 8y ago
No one has touched on 1. Interest rates are at historic lows. Real interest rates have recently been negative. When this changes in the next decades, interesting things will occur. 2. It is time for the baby boomers to leave their houses and move into smaller digs. There is a demographic shift on the horizon. 3. The Republican tax legislation just hammered home deductions in many areas. There are interesting times ahead.
pzone 8y ago
Reasons why your house is a good investment: - Massive tax subsidies provided by the government. Seriously apalling if you think about it hard enough, but since they're available, you should try to take advantage of them. That list is sufficient.
paxys 8y ago
The author makes a few good points, but IMO most others are negated by the two he conveniently skips: 1. Your house is usually generating income (for a rental property) or offsetting the rent you would otherwise have to pay. Saying "you have to pay a lot of taxes" doesn't mean much unless you compare the numbers. 2. He mentions that property value is tied to a specific geographical area (and that's a bad thing), but then contradicts himself by calculating appreciation based on the national average. If you live in a fast-growing city then it's pretty certain that you're going to make more than inflation.
- shanghaiaway 8y ago
  You're assuming that housing prices always increase. If they decrease, the property is not generating income but losses even if you rent it out.
  - AstralStorm 8y ago
    That is equivalent to any investment. The difference is that the property still generates income if not capital total gain. A depreciated stock generates no dividend. Moreover there is a floor on a value of a home unless you let it completely unmaintained or it gets bombed in a war. There is no floor on stocks. There is such a floor on some material futures. (Though probably lower.)
SCAQTony 8y ago
I own my own home and this idea being pimped to millennials that they should lease everything from car rides, music, movies, bicyles, and shelter is a fast curtain to a bad "third act." (read that as old age) John Goodman said it best while playing a loan shark in the the film "The Gambler..." Frank: You get up two and a half million dollars, any a-hole in the world knows what to do: you get a house with a 25-year roof, an indestructible [Japanese]-economy shit box, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of Fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level... Did your grandfather take risks? Jim Bennett: Yes. Frank: I guarantee he did it from a position of fk you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves. https://www.youtube.com/watch?v=xdfeXqHFmPI https://www.youtube.com/watch?v=xdfeXqHFmPI
haberman 8y ago
When I was house-hunting, I found it really frustrating how difficult it is to truly price out the total cost of owning a house. Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs: - interest on your mortgage - mortgage insurance (if you have >80% LTV) - closing costs on your loan (2-5% when you buy) - property taxes - homeowners insurance - yard care / landscaping - HOA fees - home maintenance (estimated: 1%/year) - realtor fees (6% when you sell!) - excise tax (~1% when you sell, in my locale) All of these costs come before you have contributed a single dollar of equity to pay down your loan. If you rent, your rent check covers all of the above expenses. I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy. Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.
deleted 8y ago
[deleted]
raspasov 8y ago
The article is basically correct. Let's explore the options. BUYING REAL ESTATE ------------------ Take the average price of a home in the USA, according to a google's top result, approximately 200,000. Take the average APR at the moment, 4.5%. That results in a $800 payment per month for 30 years if you put 20% downpayment of 40,000. (source https://www.dollartimes.com/loans/mortgage-rate.php?length=30&amount=160000 https://www.dollartimes.com/loans/mortgage-rate.php?length=3...) Depending on the area, you'll most likely be able to rent a similar home for the same or lower amount. BUYING STOCKS ------------- Take the same 40,000 downpayment and invest them in a low cost broad market index fund such as Vanguard, SPDR, etc. Assuming an average long term return of around 9% for the stocks, after 30 years this will result in around $600,000. (source https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator https://www.investor.gov/additional-resources/free-financial...) WHERE IT GETS INTERESTING ------------------------- Let's look at what happens after only 5 more years. Your investment has now grown to over %933,000! If you wait 5 more years (40 years total), the sum is now $1,400,000+ ! Why? Because investments in stocks are compounded! I believe one of the reasons why people think a house is an OK investment is because they don't realize the biggest flaw of one house - it does not really compound the way liquid stocks or ETFs do. In the short run it's hard to see the difference but given a long horizon the differences become enormous. There's reasons to own a home such a sentimental value, ability to modify it just you like it, etc. But people who believe it has been or is a great investment in the long term are deluding themselves. Look at it as something that's nice to have, or luxury if you will. PARTING THOUGHTS ------------------------- You can always come with an example where real estate was a great investment. You can make that argument both ways. If you bought real estate in 2009, you made great returns but if you do the above calculation for the average broad market ETF chances are the returns are even better! In the long term, history is on the side of dynamic stocks/companies and not real estate. I don't have a crystal ball and can't promise you that choosing one or the other will be better next month/year/decade etc(aka past results do not guarantee future returns). After all, this is all facts of the past :).
- AstralStorm 8y ago
  I'd like to see a stock that reliably compounds in the way described. It'd be a killer. What I see is at best stable few percent smoothed compounding. Not 100%. Please consider historical variance at the very least which vastly outstrips APR. Losses get compounded to and there are major opportunity costs when you actually need cash for any of various reasons. I have seen people get totally wiped out in a market crash. Some of them managed to keep property they owned. History is not on anybody's side. Companies can fall too. Houses can be incorporated or stolen or get dilapidated.
abootstrapper 8y ago
This is such a line of bullshit they’re feeding the millennials. They want you to work without benefits in the “gig economy” and rent forever. Don’t fall for it.

66 points by nreece 8y ago

"Don't worry millenials! You didn't really want a house anyway, it's a terrible idea! Keep paying those student loan payments and renting!" -- Retired boomer with $1MM+ equity in their suburban California home purchased in 1975 for $10k.

david-gpu 8y ago
HN guidelines discourage these sort of shallow dismissive comments. Reading a constructive rebuttal would be more interesting.
- mancerayder 8y ago
  While snarky, he made a point about material interest differences between two generations.
mixmastamyk 8y ago
^Nimby boomer.
Terr_ 8y ago
To be fair, it's hard to say that trying to follow the exact same trajectory today would lead you to the exact same place in 2061.
0x00000000 8y ago
*with 1975 property tax locked in thanks to prop 13
- Overtonwindow 8y ago
  Is that accurate? Property taxes can change
  - jurassic 8y ago
    Property taxes are locked to the purchase price of the home in California because of a law called Proposition 13. It's a been major contributor to the housing crisis but is extremely popular with everyone who currently owns property. It lets owners benefit from appreciation of their property without any increase in their tax liability while newer (and often younger) buyers must pay taxes based on the current absurd home prices.
  - wl78393 8y ago
    Yes, with rare exceptions Prop 13 means you get your property tax assessment locked in when you purchase. The major way to trigger re-assessment is to pull a permit for construction/improvements, which is why unpermitted remodels/additions are so rampant in California.
  - deleted 8y ago
    [deleted]
- briandear 8y ago
  That is so true and one of the major reasons SV real estate is such a tight market. Those tax rate freezes essentially eliminate a good portion of liquidity normally present in a market.
DrScump 8y ago
suburban California home purchased in 1975 for $10k Where? About the cheapest you could do in San Jose then was $21K for a 1400sf condo from Singer Housing (the budget developer of the era). I grew up in one.

Simulacra 8y ago

I bought a house in 2015 (at 32) and it was the best thing I ever did. Even though I had to move away, I turned it into a rental property, and it’s earning $380 a month in profit. I’ve been using that profit to pay down the principal and add to my 401(k). My only regret is that I didn’t buy a lot sooner.

curuinor 8y ago
I mean, in the past 7 or so years, all the boats have been rising. What would your returns have been if you put them in stocks? How great was and is the risk you take by taking tenants versus the risk you take by buying stocks?
- toomuchtodo 8y ago
  You do both to diversify (equity and real estate). Having the property as a rental is very tax efficient as well (you get to depreciate a property that appreciates in value). Also, no one is going to let you leverage equity purchases with debt like you can with real estate. Disclosure: I own several rental properties to round out my investment portfolio.
  - asfasgasg 8y ago
    You don't really need to do both to diversify. There is a lot of exposure to real estate in the stock market (rental companies + commercial real estate + construction), and REITs can be used to gain more exposure if desired.
    - toomuchtodo 8y ago
      I can manage my real estate risk better (IMHO) in a rising interest rate environment better than a REIT can (and I find most REITs to be overvalued, specifically O). My cash on cash returns are better as well.
      - curuinor 8y ago

SirLJ 8y ago

The point is quality of life... Under the bridge is free...

pdpi 8y ago
The article doesn’t say that buying a house is a bad idea — just that it’s a bad investment. There’s many reasonable motives for buying a house, you’re just better off making sure that those motives are strong enough by themselves and you’re not doing it “because it’s a good investment”

awat 8y ago

As a younger millennial I find myself far more interested in a home from a Maslow’s hierarchy perspective than an investment at this point.

Simulacra 8y ago
Yes! Tbh I wasn’t really all that interested in buying. I finally gave in after spending a summer working with the homeless, and reading a Priceonomics article about David Raether. I got really afraid. https://priceonomics.com/what-its-like-to-fail/ https://priceonomics.com/what-its-like-to-fail/
- awat 8y ago
  That’s where my interest came from as well. The success/failure line is much thinner than many people think imho.
- ckdarby 8y ago
  This article didn't scare me just shined the light that people are truly not willing to sacrifice. They had a $500k nest egg and living in a 4000 sqf home. The decision could have been to sell the home, downgrade to a home half the size, cut all 'future children investments' and lived a frugal life. The best future investment that could have been made here is living within the reality of the numbers.
  - Simulacra 8y ago
    Absolutely agree. He should’ve downsized and cut expenditures, but for whatever reason (maybe hubris? Pride?) he allowed things to get out of control. For me, I know that I can get a job at Home Depot and make the mortgage payments, and that’s why I stuck with something small and affordable.

matte_black 8y ago

Your house might be a terrible investment. Rental properties not so much.

hsnewman 8y ago

This is totally a biased article against home ownership. Not one positive toward home ownership...I can't believe the author would be so biased.

Finnucane 8y ago
One could write a similarly ridiculous article about how renting is flushing your money down the drain, you're paying someone else's mortgage, etc. Worrying about the rent going up, hoping your landlord isn't too much of a scumbag, and so on. Sure, a house is not a great investment. But there's more to housing than investment. You have to live somewhere, and you're probably going to be paying for it one way or another. There's no perfect solution--you have to figure out what works for you. We bought this house nine years ago, and hope that we never have to move again. Now the mortgage is about half of what it would cost to rent an apartment in this neighborhood. That's kind of a trap, too. There's no point to thinking about moving--there's no place we could go that would be cheaper than what we have unless we leave the area entirely.

ajross 8y ago

This is awful analysis. Almost every one of the bullet points is just wrong, or at least terribly spun. I mean, one of them argues that homes are "heavily taxed" when of course they are the source of the biggest single deduction category in the whole budget, another claims with a straight face that the ability to leverage the investment via a (again, government subsidized!) loan is a bad thing! Now, obviously not all investments are winners, even if they are "good" investments in principle. And there are all sorts of very good arguments about why homes should not be subsidized in the way they are, and that our government has made them "too good" in a way that harms the public as a whole. But nonetheless homes in almost all of the US are absolutely good investments. They have been for going on three quarters of a century now and certainly don't show signs of stopping.

timr 8y ago
This is excellent analysis. Every one of the bullet points is correct, and you've picked one to debate (and misinterpreted the argument): relative to virtually every other investment you can make, homes are heavily taxed. Arguing that you can (possibly) deduct some of those taxes misses the point. I don't have to pay my state and local governments annual taxes on the stocks and bonds that I own. On average, homes in the US appreciate at about the rate of inflation, and the choice to rent vs. buy is favorable in some markets, unfavorable in many others. It's nowhere near as clear-cut as the comments in this thread would lead you to believe.
- sulam 8y ago
  I recently sold and bought a house, and as far as I know I paid no taxes on it, and I am still deducting mortgage payments. I could pay off my mortgage tomorrow (it's Sunday here, so I'd have to wait for my bank to open) but my accountant tells me that's a horrible idea.
  - dman 8y ago
    How long did you hold it? Where was the home located?

bigcostooge 8y ago

Houses do pay dividends. You have to live somewhere, and you get to live in your house for free (in the analogy where it’s discussed as an investment.) The alternative is much worse in many markets.

hacknat 8y ago

Anyone who responds to this article by saying their particular house was a good investment didn’t read the article.

SQL2219 8y ago

There was a flyer on my door yesterday. We pay cash for your home, close in 3 days. Avoid realtor fees. There is only one problem, I have to live somewhere. I'm not huge fan of being a homeowner, but if I decided to rent, my rent would be almost twice what my mortgage is.

013a 8y ago

I really fail to see how most of those points are relevant when you consider that a home is an investment you can, you know, live in. The alternative would be to rent indefinitely, which apparently we're ok with even though its not just a 0% return on investment, its an infinitely negative percent return on investment. Even if your house breaks even over 10 years, you still got to live in it for ten years for what is, functionally, the cost of interest + upkeep, which would often easily amount to less than rent. If I stayed where I rented last year for ten years, the total cost over ten years (assuming the rent is never increased) (rent is always increased) is $132,0000. Even if my house cost that much to maintain over ten years plus interest (it won't), I'll still break even on the principal and enjoy the benefits of home ownership. That's not to say that home ownership is always the right choice for everyone in every stage of life. But to sweep a broad generality like "houses are a terrible investment"...

sjm-lbm 8y ago
All of these analyses also ignore the fact that most people generally want to have some parts of their lives where they aren't working, and people still want a place to live even then. My parents may have made (by the article's standards) "bad investments" for 40 years, but after rolling steadily increasing amounts of equity into a few different houses, they own the place they live outright. Even if they could have done better with stocks, the peace of mind to only have to pay property taxes and upkeep on a house is something that has substantial value in retirement.
mdorazio 8y ago
> which would often easily amount to less than rent. Hang on a minute there. Big citation needed, or caveat for which locality you're talking about. In LA or SF, for example, the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment. And that's after the huge assumption that you can even afford the up-front cost needed to buy a house in the first place.
- smallnamespace 8y ago
  > the interest + property tax + upkeep + HOA fees + closing costs + etc. very often run significantly more than rent on an apartment Yes, but rental prices also change over time, whereas your mortgage payment doesn't (although the tax deduction falls over time, and your locality may up your property taxes, but these are fairly minor components). If you have reason to believe that rent will continue to increase (either around CPI, or in the case of the Bay Area, 10%+ per annum...), then by all means buying a house now (which produces an infinite stream of rents) allows you to profit off that view. Another way to view this is that you are acquiring an rental inflation-indexed asset and a nominal liability, so you will profit if inflation is high enough.

ThrustVectoring 8y ago

My financial roadmap has "buy and live in a duplex to quadplex in Texas" on it, just for creditor protection purposes.

dawhizkid 8y ago

For a lot of people the "investment" piece of owning their home is secondary to having a home to live in and raise their family in. Especially in the US, there are tax benefits to owning, and depending on the market owning could make more sense than renting.

imron 8y ago
Exactly. A house is more than an investment, it's a place to live. My sister and her family are living in their 3rd home in as many years because the owners of the places they are renting keep selling and don't renew their lease. Then it's a hectic couple of months of finding somewhere new (but close enough to the same location so kids don't have to change schools) packing up everything in to boxes, moving and unpacking everything. It's 2-3 months of hassle they would love to avoid. Not everyone is buying a house as an investment.

asfasgasg 8y ago

I am generally sympathetic to the idea that homes are a bad investment. The fundamentals are terrible, as discussed in the article, the most important one probably being the lack of diversification. But I wonder how it meshes with the results proposed by the article "The Rate of Return of Everything." That article found that housing has only slightly underperformed stocks as an investment. Now, obviously, if you're living in your house, you're not going to get nearly the same return -- this is the total return on housing, so a house you're living at could be expected to provide returns on average as listed, minus the annual value of rent. But that means its overall performance as an investment is actually better than observed appreciation. https://www.frbsf.org/economic-research/files/wp2017-25.pdf https://www.frbsf.org/economic-research/files/wp2017-25.pdf

jeremymcanally 8y ago

Every house I've ever owned has (a) cost way less per month than rent (I know it will cost less, but I mean on the order of nearly 50% less) and (b) appreciated enough after a short time that it made a sale worth it. The first house we owned appreciated by about $25k in 2 years, and the house we're in now (according to comps we just ran as we're preparing to sell) has appreciated about $80k+ in 3 years. You can make smart property choices, even for the home you occupy (i.e., not just rental properties). But "smart" includes evaluating all the criteria. If you live in an area with a ridiculous property market (e.g., the Bay Area) or a very, very slow one, then the investment isn't as enticing. I'm blessed to live in a market with a lot of movement for a variety of reasons, not just being a "hot" area to live in, but others are not so much. I'm also blessed to work remotely, so I can choose to live in an area like this. :) tl;dr: this is probably true in a lot of America, but it's not universal by any means.

bartart 8y ago

Homes are a bad investment except that we all need somewhere to live. Even if you're renting many of the costs and risks the article mentions are borne by the landlord and then passed on to you.

Spooky23 8y ago

This logic is so specious. Renting and owning from a cash flow perspective are usually pretty close, and you need to live, so a suboptimal investment with any return is better than making a landlord money and investing the scraps into 401ks. I’m in my late 30s and missed the gogo crazy years. But everyone I know in my age cohort has had a positive, meaningful ROI in trading houses up at least once. The supposed flexibility of renting is overrated as well. No decent landlord will take less than a 1 year lease, and some premium properties will demand a premium if you refuse a 2 year lease. Getting jammed up with buying out a lease early, or getting stuck with a high rent when the market cools is another way that renting is almost always a bad deal for the tenant. This sounds like a corporate accounting analysis, not advice for people. People don’t benefit from deducting opex.

smallnamespace 8y ago
> The supposed flexibility of renting is overrated as well. Plus there's nothing keeping you from renting out your property and then living somewhere else. You lose some of the nicer deductions and time spent being a landlord, and that certainly hurts ROI, but it's definitely not the case that you must live in what you own.

tomasien 8y ago

This makes great points that shouldn't be ignored. But here's the reality: most people don't invest in anything but do pay rent. If you just shift that rent into a mortgage + repairs, at least you're investing in something that will slightly under-perform inflation (maybe). It's lower risk / higher return when you think of it that way. (I do not own a house nor do I plan to own one, however)

Ancalagon 8y ago

I actually agree with a lot of the points made here. Still terrible advice. Youre always gonna need somewhere to live. Guess whats a better bet to invest in than an apartment? A house. If you buy though, check all your bases. Whats appreciation looked like for the last 10 years in this neighborhood? How are the schools? Hows the job market for professionals? etc.

jpmattia 8y ago

No one has touched on 1. Interest rates are at historic lows. Real interest rates have recently been negative. When this changes in the next decades, interesting things will occur. 2. It is time for the baby boomers to leave their houses and move into smaller digs. There is a demographic shift on the horizon. 3. The Republican tax legislation just hammered home deductions in many areas. There are interesting times ahead.

pzone 8y ago

Reasons why your house is a good investment: - Massive tax subsidies provided by the government. Seriously apalling if you think about it hard enough, but since they're available, you should try to take advantage of them. That list is sufficient.

paxys 8y ago

The author makes a few good points, but IMO most others are negated by the two he conveniently skips: 1. Your house is usually generating income (for a rental property) or offsetting the rent you would otherwise have to pay. Saying "you have to pay a lot of taxes" doesn't mean much unless you compare the numbers. 2. He mentions that property value is tied to a specific geographical area (and that's a bad thing), but then contradicts himself by calculating appreciation based on the national average. If you live in a fast-growing city then it's pretty certain that you're going to make more than inflation.

shanghaiaway 8y ago
You're assuming that housing prices always increase. If they decrease, the property is not generating income but losses even if you rent it out.
- AstralStorm 8y ago
  That is equivalent to any investment. The difference is that the property still generates income if not capital total gain. A depreciated stock generates no dividend. Moreover there is a floor on a value of a home unless you let it completely unmaintained or it gets bombed in a war. There is no floor on stocks. There is such a floor on some material futures. (Though probably lower.)

SCAQTony 8y ago

I own my own home and this idea being pimped to millennials that they should lease everything from car rides, music, movies, bicyles, and shelter is a fast curtain to a bad "third act." (read that as old age) John Goodman said it best while playing a loan shark in the the film "The Gambler..." Frank: You get up two and a half million dollars, any a-hole in the world knows what to do: you get a house with a 25-year roof, an indestructible [Japanese]-economy shit box, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of Fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level... Did your grandfather take risks? Jim Bennett: Yes. Frank: I guarantee he did it from a position of fk you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves. https://www.youtube.com/watch?v=xdfeXqHFmPI https://www.youtube.com/watch?v=xdfeXqHFmPI

haberman 8y ago

When I was house-hunting, I found it really frustrating how difficult it is to truly price out the total cost of owning a house. Many people think that renting is throwing your money away, and buying is acquiring equity. This is true as a first-order approximation, but far from the whole story. Home ownership also has ton of non-recoverable costs: - interest on your mortgage - mortgage insurance (if you have >80% LTV) - closing costs on your loan (2-5% when you buy) - property taxes - homeowners insurance - yard care / landscaping - HOA fees - home maintenance (estimated: 1%/year) - realtor fees (6% when you sell!) - excise tax (~1% when you sell, in my locale) All of these costs come before you have contributed a single dollar of equity to pay down your loan. If you rent, your rent check covers all of the above expenses. I'm still really happy to be a homeowner. I love my house and I love being able to do what I want to it. I just wish it was easier to price out the total cost of ownership prior to buying, so that rent vs. buy comparisons could be more enlightened. I certainly felt like I didn't have enough information to make a totally informed decision when I was choosing to rent vs. buy. Part of what complicates this analysis is: a lot of the financial benefit arises from the house's appreciation, not your accumulated equity. But betting on home appreciation is a bit of a gamble. Home values are subject to a lot of economic and political factors that you can't control. If the mortgage interest deduction went away, or mortgage interest rates rose significantly, it could devalue houses a lot.

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raspasov 8y ago

The article is basically correct. Let's explore the options. BUYING REAL ESTATE ------------------ Take the average price of a home in the USA, according to a google's top result, approximately 200,000. Take the average APR at the moment, 4.5%. That results in a $800 payment per month for 30 years if you put 20% downpayment of 40,000. (source https://www.dollartimes.com/loans/mortgage-rate.php?length=30&amount=160000 https://www.dollartimes.com/loans/mortgage-rate.php?length=3...) Depending on the area, you'll most likely be able to rent a similar home for the same or lower amount. BUYING STOCKS ------------- Take the same 40,000 downpayment and invest them in a low cost broad market index fund such as Vanguard, SPDR, etc. Assuming an average long term return of around 9% for the stocks, after 30 years this will result in around $600,000. (source https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator https://www.investor.gov/additional-resources/free-financial...) WHERE IT GETS INTERESTING ------------------------- Let's look at what happens after only 5 more years. Your investment has now grown to over %933,000! If you wait 5 more years (40 years total), the sum is now $1,400,000+ ! Why? Because investments in stocks are compounded! I believe one of the reasons why people think a house is an OK investment is because they don't realize the biggest flaw of one house - it does not really compound the way liquid stocks or ETFs do. In the short run it's hard to see the difference but given a long horizon the differences become enormous. There's reasons to own a home such a sentimental value, ability to modify it just you like it, etc. But people who believe it has been or is a great investment in the long term are deluding themselves. Look at it as something that's nice to have, or luxury if you will. PARTING THOUGHTS ------------------------- You can always come with an example where real estate was a great investment. You can make that argument both ways. If you bought real estate in 2009, you made great returns but if you do the above calculation for the average broad market ETF chances are the returns are even better! In the long term, history is on the side of dynamic stocks/companies and not real estate. I don't have a crystal ball and can't promise you that choosing one or the other will be better next month/year/decade etc(aka past results do not guarantee future returns). After all, this is all facts of the past :).

AstralStorm 8y ago
I'd like to see a stock that reliably compounds in the way described. It'd be a killer. What I see is at best stable few percent smoothed compounding. Not 100%. Please consider historical variance at the very least which vastly outstrips APR. Losses get compounded to and there are major opportunity costs when you actually need cash for any of various reasons. I have seen people get totally wiped out in a market crash. Some of them managed to keep property they owned. History is not on anybody's side. Companies can fall too. Houses can be incorporated or stolen or get dilapidated.

abootstrapper 8y ago

This is such a line of bullshit they’re feeding the millennials. They want you to work without benefits in the “gig economy” and rent forever. Don’t fall for it.