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I'm a big fan of the folk wisdom that the power of housing as an investment is essentially a self-discipline mind trick. Paying your mortgage feels more urgent

I'm a big fan of the folk wisdom that the power of housing as an investment is essentially a self-discipline mind trick. Paying your mortgage feels more urgent than contributing to a brokerage account, withdrawing home equity feels dirtier than withdrawing stock portfolio value, and holding onto your house during a downturn is easier than holding onto your crashing stock portfolio. Once you know those things, you can rig yourself similar safeguards around other asset classes (automatic payroll contributions, tax sheltered accounts with early withdrawal penalties, etc).

GhostVII 7y ago
Another benefit is that you are essentially trading on margin when buying a house, which you couldn't do to the same degree with other assets.
- wocram 7y ago
  You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.
  - asdfasgasdgasdg 7y ago
    > You could if you wanted to Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
    - User23 7y ago
      You can get margin rates as low as a mortgage or even substantially lower[1]. If you don't want to switch brokers you can also ask your current broker for a discounted margin rate. I've heard anywhere from $250k to $1m total assets is enough for them to consider discounts. However, margin calls are a lot more terrifying than foreclosure proceedings, that's for sure. As such, it's virtually imperative to appropriately hedge and that should be factored into the cost of borrowing. [1] https://www.interactivebrokers.com/en/index.php?f=18069 https://www.interactivebrokers.com/en/index.php?f=18069
      - asdfasgasdgasdg 7y ago
        I was unaware that IB's rates are so low. From reading about it, it looks like they make the money back on other fees, including inactivity fees and commissions. So the real rate is not really as low as what it says, although I suppose on large accounts those fixed fees would make up only a small fraction of the total value. Either way, I was wrong about there being "no" options with interest terms as favorable as mortgages. There is plainly at least one. Your point about hedging is well-taken, also.
    - jdashg 7y ago
      Margin calls are the primary difference. (InteractiveBrokers and Robinhood have pretty good margin rates: <=3.05% and ~5% respectively) Being forced to sell at during a temporary low is the major threat, whereas most people who kept their house during 2008-2009 are doing fine today.
      - refurb 7y ago
        That's true for the US market, but what I learned is a "margin call" is a potential scenario in Canada. Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years. If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal. As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
        astura 7y ago
        During the housing crisis in the US a lot of mortgages were ARMs, which are basically the same thing as your describing. https://www.cbsnews.com/news/adjustable-rate-mortgages-make-a-comeback/ https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
  - usaar333 7y ago
    A housing loan is far less risky than a 5x margin position as they are structurally different types of loans: * The housing loan is non-recourse (you can't lose more than your home), while brokerage is not. * A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines. All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
  - Slartie 7y ago
    Nah, it is indeed much easier to invest in real estate on 5-10x leverage than doing the same with stocks or ETFs, because the banks are usually much more comfortable lending you the money in the first case. I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares. Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
    - phatfish 7y ago
      This seems to be the benefit to me as well. The average person won't get a £100,000+ loan from a bank so easily for anything else. Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund. For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way. I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move. Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
      - scarby2 7y ago
        The thing is housing almost comes with a rock solid business plan and as a basic need is somewhat resistant to radical decreases in price (it is almost impossible that your house would depreciate by 100% - company stock/your own business investments could). With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
  - fredophile 7y ago
    Real estate isn't a very volatile asset class. Using leverage in more volatile asset classes, like FOREX, is where people run into big problems very quickly. Your bank will also make you buy insurance if you're getting a mortgage with more than 5x leverage. Good luck finding anyone that would insure your stock picking at 10x leverage.
    - Slartie 7y ago
      > Real estate isn't a very volatile asset class. This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
      - magicalhippo 7y ago
        My home will not depreciate much relative to other homes I could have bought. Yes I'm forced to sell during a downturn it's not good, but once the market picks up it's almost certain my home will increase in value as well. Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
        jdsully 7y ago
        All your arguments of safety are even more applicable to index funds since you actually own a slice of the entire market rather than just being merely correlated as you are with your house.
  - slumdev 7y ago
    5x? Amateur. I put 3% down when I bought my house. That's 30x leverage. The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
  - throwaway100773 7y ago
    You don’t get margin calls with a house. You just have to make the mortgage payments.
    - chii 7y ago
      a margin call is the same as a foreclosure. You prevent margin calls if you put in your own money (to boost the margin). A broker margin calls you because they no longer accept the raised risk, but it's the same concept.
      - throwaway100773 7y ago
        A margin call is not the same as a foreclosure. It’s quite different. You have a fixed payment with a mortgage. If the value of your house declined precipitously, that fixed payment stays the same. You enter foreclosure proceedings only if you cannot make that payment, and depending on the state, this takes some time. You might be living in your house for a year or more without making a payment while in foreclosure. On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out. Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
        chii 7y ago
        > if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.
- tenpies 7y ago
  This cannot be understated. You can conceivably get a house with 5% down. There is no other instrument that allows a retail investor to get 20X leverage - especially at that price. Even leveraged ETFs are basically capped at 3X because anything else is too volatile and was deemed a market hazard. Now imagine a 20X ETF that invests in a single property, with high maintenance costs, extremely low liquidity, zero diversification, and high transaction costs. That is basically what some of these mortgages are. It is absolutely intoxicating when the asset price goes up and I am not surprised in the least that people love it as an investment. Even if it explodes, you walk away and your losses are minimal. You only risked 5% of the price and sure you made some payments along the way, but the risk asymmetry completely rewards being as reckless as possible.
  - rainyMammoth 7y ago
    Completely agree with this. Homeowner usually understand very little about investing. As you said it is intoxicating when it goes up a 5 or 10% a year but pretty much invisible if it goes down or stays flat (since the mortgage is seen as an alternative to rent).
- rainyMammoth 7y ago
  Because housing is typically such a bad investment, it actually only makes sense in some cases because you get your mortgage on margin. I see this argument all the time but once you do the math, it comes down close to the same with the house being leveraged and index funds without leverage (also known as the 5% rule)
  - xchaotic 7y ago
    If it’s close why complicate things?
valdiorn 7y ago
ehm, are you not forgetting the small detail that if you forget to contribute to your "investment" (i.e. your house, i.e. pay your mortgage) this month, you become homeless? > Paying your mortgage feels more urgent than contributing to a brokerage account Of course it does, because if you spend your monthly brokerage allowance on a fancy dinner and booze, nothing too bad will happen. If you spend your mortgage payment on booze and steaks, you lose your house. That's not a "mind trick", that's a real problem with serious repercussions. Housing is not just an investment for most people, it's THE investment, with life-changing, family destroying consequences if you don't keep it afloat.
- majos 7y ago
  I think they're arguing that the real contribution of home ownership is the incentive to regularly invest in an appreciating asset, not the fact that the asset is a house. I don't think they're arguing that the incentive is irrational.
  - marcosdumay 7y ago
    Except that housing is not an asset, it's a fundamental good without with people can barely survive. Making it appreciate is very problematic.
    - wingspar 7y ago
      Is a vacation home an asset?
      - marcosdumay 7y ago
        Well, ok, I have taken it a bit too far. Anything you can use or sell is technically an asset, even if it's more expensive to maintain than you would get on a sale (so even boats qualify). But policy should never treat it as an asset. For policy, it should be a consumable good that only happens to take a very long time to consume.
chiefalchemist 7y ago
Housing as investment is a mindtrick, and a dangerous one at that. With it often comes property taxes. There's the time and cost of maintenance. There's the friction of being able to easily relocate for a better paying job. Worst of all, past performance is no indication of future returns. That is, it's possible your property won't appreciate, at least not sufficiently. For example, think Detroit. Or beachfront property in say 25 yrs. Or McMansions. Will smaller less consumption-minded families in the future want them? Housing works as an investment because everyone is in on the scheme. The gov. The banks. Everyone. And it's still a roll of the dice.
- UncleOxidant 7y ago
  I don't look at my house as an investment as much as it is an inflation hedge. We bought our current house in 2010 when prices were low due to the great recession. Our mortgage is $835/mo (15yr mortgage). If we were renting now our rent would be ~$1500/mo for a comparable house in the same area. And our mortgage will be paid off in about 3.5 years as we've paid some extra on the principal over the years. Yes, there's still property tax and repairs but those are built into rental prices anyway. I also don't have to worry about having to move if the landlord sells the place I'm renting. I like the area and don't plan to move for a different job anyway.
  - _bxg1 7y ago
    Sounds like that panned out, but it's pretty circumstantial. Not all of us have the opportunity to buy a house at the bottom of the largest real-estate recession in generations.
    - sunnytimes 7y ago
      i got extremely lucky buying my first house right in the middle of that recession. paid 101k , got it appraised last year at 190k and the area has gone up since. my second house where i'm at now was right when the prices started going up so a bit more but less wife. i owe alot to that recession.
  - 7y ago
hkmurakami 7y ago
There’s been some research lately about whether Private Equity outperformance is partly driven by the illiquidity making it harder for investors to dump their positions in a moment of panic. Your thoughts about housing illiquidity seem related to this concept. (If you’re interested, Matt Levine has covered it in Money stuff with links to the research papers). In addition, we have affordable margin loans, mortgage interest tax deduction, property tax deduction to juice the system, not to mention additional legsilation like 1031 exchanges, prop13, etc. Many of these were put in place as public policy promoting homeownership driven by the idea that homeownership would be less costly / beneficial to society compared to long term tenancy. That thought doesn’t seem to necessarily be wrong per se. but if you help out demand side legislatively while restricting supply legislatively, sometimes you’ll get cases of imbalance like we see in the coastal cities. Given what we’ve observed in the last couple of decades around the world, a managed system like Singapore where property appreciates at a ~2% rate a year (and if demand suddenly shoots up, they’ll add transfer taxes or stamp duties or inject supply into the market) seems much more stable for society.
- vinniejames 7y ago
  | making it harder for investors to dump their positions in a moment of panic On the flip side, it also makes it harder to sell when it is booming. The potential return is intrinsically higher from 0 to 1 for PE, than it is from 1 to N in public markets
- gowld 7y ago
  My Matt Levine says that Private Equity is actually financial engineering scams to steal money from creditors of bankrupt companies: https://www.bloomberg.com/opinion/articles/2019-04-18/private-equity-looks-out-for-itself https://www.bloomberg.com/opinion/articles/2019-04-18/privat...
- throw0101a 7y ago
  > There’s been some research lately about whether Private Equity outperformance is partly driven by the illiquidity making it harder for investors to dump their positions in a moment of panic. There are apocryphal stories of studies purporting to find that the best performing investment accounts are those that belong to people who are either dead or had forgotten about their account: * https://www.marketwatch.com/story/why-the-buy-and-play-dead-investment-strategy-doesnt-work-2015-10-12 https://www.marketwatch.com/story/why-the-buy-and-play-dead-... * https://twocents.lifehacker.com/the-best-investors-literally-forget-about-their-portfol-1782581085 https://twocents.lifehacker.com/the-best-investors-literally... Generally, even if one invested lump sums right at market peaks, just before crashes, you'd still get a decent returns as long money was not withdrawn: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... Though the best strategy for most people seems to be to just put away a little every money in a total market passive index fund: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
3fe9a03ccd14ca5 7y ago
Discussion of housing as an investment without also taking into account that you live in your house is pretty silly. There’s really nothing like owning your own home. What other investment options allow me to grow food to eat in it?
- _bxg1 7y ago
  > There’s really nothing like owning your own home. For some people. Others really don't care one way or another about a sense of home-ownership, they just buy because "it's what you're supposed to do, financially".
slumdev 7y ago
> housing as an investment It's just a meme that needs to die. A primary home is an asset, not an investment. Home prices were stable (in real dollars) until Greenspan kicked off this train of asset bubbles in the 1990s.
- rolltiide 7y ago
  > a primary home is an asset, not an investment. so weird that this venn diagram only has one circle on it
  - slumdev 7y ago
    I think you are asserting that "asset" and "investment" are synonymous. I'll reply to that. A house is something you own. It can appreciate or depreciate, but it does not generate value. You might get lucky and realize a capital gain by selling it after it appreciates (if it appreciates and you can time the sale correctly), but it does not create value. An investment is ownership of something that generates value. All investments are assets, but not all assets are investments.
    - rolltiide 7y ago
      Your definition of generating value is narrowly linked to interest-bearing or dividend issuing investments. Even with that fictionally higher standard and procedurally generated definition of "investment", renting out a part of the house is generating value.
      - slumdev 7y ago
        If we go with the fictional notion that all homeowners become landlords, then we can start calling a home an "investment", and I will retract everything I've said.
    - snowwrestler 7y ago
      By your definition, a stock that does not pay dividends would not count as an "investment" either because you can only realize capital gains on it (if you get "lucky").
umvi 7y ago
Well the thing is, even if the value of your house tanks, you still have something. You have a house you can live in. If the value of your stocks tank, you have nothing to show for it...
- the_gastropod 7y ago
  Well, you have dividends, which presumably can help pay for some of your (likely now lowered) rent?
- rainyMammoth 7y ago
  This is a fallacy. The chances that an index fund goes to 5 or 10% of today's value is way lower than the probability your home going to zero. There are plenty of catastrophic events all over the country that happen periodically (fire, tornadoes, flooding,... you also seem to forget that in order to Have your home you still need to pay for HOA, maintenance and... property taxes.
  - mrep 7y ago
    That's why you get home owners insurance.
    - rainyMammoth 7y ago
      And the exact same type of assurance exists for Stocks. It is called hedging your bets.
- closeparen 7y ago
  That benefit is just like any other investment income. Lots of financial products have a payout irrespective of their market value. Some countries even treat "you can live in your house" the same as e.g. dividend income by taxing imputed rent.
hinkley 7y ago
You can get some of these benefits by setting up an automatic transfer each month to another account. Money in your house ends up abusing the inability of people to reason about compound interest and inflation. Making 2x inflation per year on your house is not a terrible rate of return, but it leaves you at the backend believing you've doubled your money when you haven't, and you lose much of that to property taxes. At the beginning when you own 20%, your property taxes are 1% of the assessed value of your house, which is going to be between 3-5% of the purchase price. And that's at the beginning before inflation and compound interest. Then 6% for the purchase and sale... and now taxes if you don't roll it into a new house... And then there's home improvement. I figured out at one point that renting an apartment for a few hundred bucks more a month for a nicer kitchen/bathroom was cheaper and potentially less disruptive to my life than having someone tear apart my kitchen for weeks at a time and the dust and noises and people around all day.
- webninja 7y ago
  You could just get a home with a kitchen you are content with and don’t want to rip out.
kmonsen 7y ago
There is one more difference, at the end you are left with a house you can live in. That is good and bad I guess, but it is a tangible asset that if all goes bad can still be used as your home.
alexmingoia 7y ago
Housing isn’t an investment if you don’t plan to sell. One doesn’t receive a yearly liquid return on a house like they do in an index fund. Most people aren’t buying and selling a house every year. Lowering debt (refinancing) isn’t “earning” income.
- cjbillington 7y ago
  The interpretation I've heard is that the dividend is the rent. You can rent it to someone else for a few percent of its value per annum (which definitely looks like an investment), but even if you don't, it's still paying the dividend in the form of you not having to pay rent each month, which would be the case if you didn't own the place.
  - alexmingoia 7y ago
    The rent is profit only after the loan is paid, minus property taxes, repairs, insurance, and management costs. If one isn’t living in the house then it’s not a home and they aren’t a homeowner, they’re in the property management business. My point is that obtaining a mortgage on a house is not necessarily an investment, particularly if one plans on living in it. Yet I often hear from homeowners that their home was a “good investment” despite never having realized a gain on it, and never planning on selling it.
- barry-cotter 7y ago
  If you live in it it’s an asset. You’re receiving a return in the form of imputes rent, the money that you would have to pay to rent equivalent housing. That your return is in kind not cash doesn’t make it not an investment.
saberdancer 7y ago
I completely agree with that idea. Especially when buying a first home, I often hear that rent is throwing money away. In reality, your rent is or should be lower than equivalent home mortgage and as a renter you do not need to invest in long term maintenance of the property. Problem most people find is that they do not invest the difference and instead just live a slighty more expensive lifestyle. If they buy a house, they can no longer "cheat" themselves out of the savings and instead their home becomes a type of forced long term investment.
robomc 7y ago
The big difference is that no bank will let you borrow 500k @ 3% to invest in stocks or whatever.

GhostVII 7y ago

Another benefit is that you are essentially trading on margin when buying a house, which you couldn't do to the same degree with other assets.

wocram 7y ago
You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.
- asdfasgasdgasdg 7y ago
  > You could if you wanted to Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
  - User23 7y ago
    You can get margin rates as low as a mortgage or even substantially lower[1]. If you don't want to switch brokers you can also ask your current broker for a discounted margin rate. I've heard anywhere from $250k to $1m total assets is enough for them to consider discounts. However, margin calls are a lot more terrifying than foreclosure proceedings, that's for sure. As such, it's virtually imperative to appropriately hedge and that should be factored into the cost of borrowing. [1] https://www.interactivebrokers.com/en/index.php?f=18069 https://www.interactivebrokers.com/en/index.php?f=18069
    - asdfasgasdgasdg 7y ago
      I was unaware that IB's rates are so low. From reading about it, it looks like they make the money back on other fees, including inactivity fees and commissions. So the real rate is not really as low as what it says, although I suppose on large accounts those fixed fees would make up only a small fraction of the total value. Either way, I was wrong about there being "no" options with interest terms as favorable as mortgages. There is plainly at least one. Your point about hedging is well-taken, also.
  - jdashg 7y ago
    Margin calls are the primary difference. (InteractiveBrokers and Robinhood have pretty good margin rates: <=3.05% and ~5% respectively) Being forced to sell at during a temporary low is the major threat, whereas most people who kept their house during 2008-2009 are doing fine today.
    - refurb 7y ago
      That's true for the US market, but what I learned is a "margin call" is a potential scenario in Canada. Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years. If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal. As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
      - astura 7y ago
        During the housing crisis in the US a lot of mortgages were ARMs, which are basically the same thing as your describing. https://www.cbsnews.com/news/adjustable-rate-mortgages-make-a-comeback/ https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
- usaar333 7y ago
  A housing loan is far less risky than a 5x margin position as they are structurally different types of loans: * The housing loan is non-recourse (you can't lose more than your home), while brokerage is not. * A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines. All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
- Slartie 7y ago
  Nah, it is indeed much easier to invest in real estate on 5-10x leverage than doing the same with stocks or ETFs, because the banks are usually much more comfortable lending you the money in the first case. I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares. Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
  - phatfish 7y ago
    This seems to be the benefit to me as well. The average person won't get a £100,000+ loan from a bank so easily for anything else. Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund. For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way. I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move. Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
    - scarby2 7y ago
      The thing is housing almost comes with a rock solid business plan and as a basic need is somewhat resistant to radical decreases in price (it is almost impossible that your house would depreciate by 100% - company stock/your own business investments could). With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
- fredophile 7y ago
  Real estate isn't a very volatile asset class. Using leverage in more volatile asset classes, like FOREX, is where people run into big problems very quickly. Your bank will also make you buy insurance if you're getting a mortgage with more than 5x leverage. Good luck finding anyone that would insure your stock picking at 10x leverage.
  - Slartie 7y ago
    > Real estate isn't a very volatile asset class. This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
    - magicalhippo 7y ago
      My home will not depreciate much relative to other homes I could have bought. Yes I'm forced to sell during a downturn it's not good, but once the market picks up it's almost certain my home will increase in value as well. Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
      - jdsully 7y ago
        All your arguments of safety are even more applicable to index funds since you actually own a slice of the entire market rather than just being merely correlated as you are with your house.
- slumdev 7y ago
  5x? Amateur. I put 3% down when I bought my house. That's 30x leverage. The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
- throwaway100773 7y ago
  You don’t get margin calls with a house. You just have to make the mortgage payments.
  - chii 7y ago
    a margin call is the same as a foreclosure. You prevent margin calls if you put in your own money (to boost the margin). A broker margin calls you because they no longer accept the raised risk, but it's the same concept.
    - throwaway100773 7y ago
      A margin call is not the same as a foreclosure. It’s quite different. You have a fixed payment with a mortgage. If the value of your house declined precipitously, that fixed payment stays the same. You enter foreclosure proceedings only if you cannot make that payment, and depending on the state, this takes some time. You might be living in your house for a year or more without making a payment while in foreclosure. On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out. Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
      - chii 7y ago
        > if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.
tenpies 7y ago
This cannot be understated. You can conceivably get a house with 5% down. There is no other instrument that allows a retail investor to get 20X leverage - especially at that price. Even leveraged ETFs are basically capped at 3X because anything else is too volatile and was deemed a market hazard. Now imagine a 20X ETF that invests in a single property, with high maintenance costs, extremely low liquidity, zero diversification, and high transaction costs. That is basically what some of these mortgages are. It is absolutely intoxicating when the asset price goes up and I am not surprised in the least that people love it as an investment. Even if it explodes, you walk away and your losses are minimal. You only risked 5% of the price and sure you made some payments along the way, but the risk asymmetry completely rewards being as reckless as possible.
- rainyMammoth 7y ago
  Completely agree with this. Homeowner usually understand very little about investing. As you said it is intoxicating when it goes up a 5 or 10% a year but pretty much invisible if it goes down or stays flat (since the mortgage is seen as an alternative to rent).
rainyMammoth 7y ago
Because housing is typically such a bad investment, it actually only makes sense in some cases because you get your mortgage on margin. I see this argument all the time but once you do the math, it comes down close to the same with the house being leveraged and index funds without leverage (also known as the 5% rule)
- xchaotic 7y ago
  If it’s close why complicate things?

valdiorn 7y ago

ehm, are you not forgetting the small detail that if you forget to contribute to your "investment" (i.e. your house, i.e. pay your mortgage) this month, you become homeless? > Paying your mortgage feels more urgent than contributing to a brokerage account Of course it does, because if you spend your monthly brokerage allowance on a fancy dinner and booze, nothing too bad will happen. If you spend your mortgage payment on booze and steaks, you lose your house. That's not a "mind trick", that's a real problem with serious repercussions. Housing is not just an investment for most people, it's THE investment, with life-changing, family destroying consequences if you don't keep it afloat.

majos 7y ago
I think they're arguing that the real contribution of home ownership is the incentive to regularly invest in an appreciating asset, not the fact that the asset is a house. I don't think they're arguing that the incentive is irrational.
- marcosdumay 7y ago
  Except that housing is not an asset, it's a fundamental good without with people can barely survive. Making it appreciate is very problematic.
  - wingspar 7y ago
    Is a vacation home an asset?
    - marcosdumay 7y ago
      Well, ok, I have taken it a bit too far. Anything you can use or sell is technically an asset, even if it's more expensive to maintain than you would get on a sale (so even boats qualify). But policy should never treat it as an asset. For policy, it should be a consumable good that only happens to take a very long time to consume.

chiefalchemist 7y ago

Housing as investment is a mindtrick, and a dangerous one at that. With it often comes property taxes. There's the time and cost of maintenance. There's the friction of being able to easily relocate for a better paying job. Worst of all, past performance is no indication of future returns. That is, it's possible your property won't appreciate, at least not sufficiently. For example, think Detroit. Or beachfront property in say 25 yrs. Or McMansions. Will smaller less consumption-minded families in the future want them? Housing works as an investment because everyone is in on the scheme. The gov. The banks. Everyone. And it's still a roll of the dice.

UncleOxidant 7y ago
I don't look at my house as an investment as much as it is an inflation hedge. We bought our current house in 2010 when prices were low due to the great recession. Our mortgage is $835/mo (15yr mortgage). If we were renting now our rent would be ~$1500/mo for a comparable house in the same area. And our mortgage will be paid off in about 3.5 years as we've paid some extra on the principal over the years. Yes, there's still property tax and repairs but those are built into rental prices anyway. I also don't have to worry about having to move if the landlord sells the place I'm renting. I like the area and don't plan to move for a different job anyway.
- _bxg1 7y ago
  Sounds like that panned out, but it's pretty circumstantial. Not all of us have the opportunity to buy a house at the bottom of the largest real-estate recession in generations.
  - sunnytimes 7y ago
    i got extremely lucky buying my first house right in the middle of that recession. paid 101k , got it appraised last year at 190k and the area has gone up since. my second house where i'm at now was right when the prices started going up so a bit more but less wife. i owe alot to that recession.
- 7y ago

hkmurakami 7y ago

There’s been some research lately about whether Private Equity outperformance is partly driven by the illiquidity making it harder for investors to dump their positions in a moment of panic. Your thoughts about housing illiquidity seem related to this concept. (If you’re interested, Matt Levine has covered it in Money stuff with links to the research papers). In addition, we have affordable margin loans, mortgage interest tax deduction, property tax deduction to juice the system, not to mention additional legsilation like 1031 exchanges, prop13, etc. Many of these were put in place as public policy promoting homeownership driven by the idea that homeownership would be less costly / beneficial to society compared to long term tenancy. That thought doesn’t seem to necessarily be wrong per se. but if you help out demand side legislatively while restricting supply legislatively, sometimes you’ll get cases of imbalance like we see in the coastal cities. Given what we’ve observed in the last couple of decades around the world, a managed system like Singapore where property appreciates at a ~2% rate a year (and if demand suddenly shoots up, they’ll add transfer taxes or stamp duties or inject supply into the market) seems much more stable for society.

vinniejames 7y ago
| making it harder for investors to dump their positions in a moment of panic On the flip side, it also makes it harder to sell when it is booming. The potential return is intrinsically higher from 0 to 1 for PE, than it is from 1 to N in public markets
gowld 7y ago
My Matt Levine says that Private Equity is actually financial engineering scams to steal money from creditors of bankrupt companies: https://www.bloomberg.com/opinion/articles/2019-04-18/private-equity-looks-out-for-itself https://www.bloomberg.com/opinion/articles/2019-04-18/privat...
throw0101a 7y ago
> There’s been some research lately about whether Private Equity outperformance is partly driven by the illiquidity making it harder for investors to dump their positions in a moment of panic. There are apocryphal stories of studies purporting to find that the best performing investment accounts are those that belong to people who are either dead or had forgotten about their account: * https://www.marketwatch.com/story/why-the-buy-and-play-dead-investment-strategy-doesnt-work-2015-10-12 https://www.marketwatch.com/story/why-the-buy-and-play-dead-... * https://twocents.lifehacker.com/the-best-investors-literally-forget-about-their-portfol-1782581085 https://twocents.lifehacker.com/the-best-investors-literally... Generally, even if one invested lump sums right at market peaks, just before crashes, you'd still get a decent returns as long money was not withdrawn: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... Though the best strategy for most people seems to be to just put away a little every money in a total market passive index fund: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

3fe9a03ccd14ca5 7y ago

Discussion of housing as an investment without also taking into account that you live in your house is pretty silly. There’s really nothing like owning your own home. What other investment options allow me to grow food to eat in it?

_bxg1 7y ago
> There’s really nothing like owning your own home. For some people. Others really don't care one way or another about a sense of home-ownership, they just buy because "it's what you're supposed to do, financially".

slumdev 7y ago

> housing as an investment It's just a meme that needs to die. A primary home is an asset, not an investment. Home prices were stable (in real dollars) until Greenspan kicked off this train of asset bubbles in the 1990s.

rolltiide 7y ago
> a primary home is an asset, not an investment. so weird that this venn diagram only has one circle on it
- slumdev 7y ago
  I think you are asserting that "asset" and "investment" are synonymous. I'll reply to that. A house is something you own. It can appreciate or depreciate, but it does not generate value. You might get lucky and realize a capital gain by selling it after it appreciates (if it appreciates and you can time the sale correctly), but it does not create value. An investment is ownership of something that generates value. All investments are assets, but not all assets are investments.
  - rolltiide 7y ago
    Your definition of generating value is narrowly linked to interest-bearing or dividend issuing investments. Even with that fictionally higher standard and procedurally generated definition of "investment", renting out a part of the house is generating value.
    - slumdev 7y ago
      If we go with the fictional notion that all homeowners become landlords, then we can start calling a home an "investment", and I will retract everything I've said.
  - snowwrestler 7y ago
    By your definition, a stock that does not pay dividends would not count as an "investment" either because you can only realize capital gains on it (if you get "lucky").

umvi 7y ago

Well the thing is, even if the value of your house tanks, you still have something. You have a house you can live in. If the value of your stocks tank, you have nothing to show for it...

the_gastropod 7y ago
Well, you have dividends, which presumably can help pay for some of your (likely now lowered) rent?
rainyMammoth 7y ago
This is a fallacy. The chances that an index fund goes to 5 or 10% of today's value is way lower than the probability your home going to zero. There are plenty of catastrophic events all over the country that happen periodically (fire, tornadoes, flooding,... you also seem to forget that in order to Have your home you still need to pay for HOA, maintenance and... property taxes.
- mrep 7y ago
  That's why you get home owners insurance.
  - rainyMammoth 7y ago
    And the exact same type of assurance exists for Stocks. It is called hedging your bets.
closeparen 7y ago
That benefit is just like any other investment income. Lots of financial products have a payout irrespective of their market value. Some countries even treat "you can live in your house" the same as e.g. dividend income by taxing imputed rent.

hinkley 7y ago

You can get some of these benefits by setting up an automatic transfer each month to another account. Money in your house ends up abusing the inability of people to reason about compound interest and inflation. Making 2x inflation per year on your house is not a terrible rate of return, but it leaves you at the backend believing you've doubled your money when you haven't, and you lose much of that to property taxes. At the beginning when you own 20%, your property taxes are 1% of the assessed value of your house, which is going to be between 3-5% of the purchase price. And that's at the beginning before inflation and compound interest. Then 6% for the purchase and sale... and now taxes if you don't roll it into a new house... And then there's home improvement. I figured out at one point that renting an apartment for a few hundred bucks more a month for a nicer kitchen/bathroom was cheaper and potentially less disruptive to my life than having someone tear apart my kitchen for weeks at a time and the dust and noises and people around all day.

webninja 7y ago
You could just get a home with a kitchen you are content with and don’t want to rip out.

kmonsen 7y ago

There is one more difference, at the end you are left with a house you can live in. That is good and bad I guess, but it is a tangible asset that if all goes bad can still be used as your home.

alexmingoia 7y ago

Housing isn’t an investment if you don’t plan to sell. One doesn’t receive a yearly liquid return on a house like they do in an index fund. Most people aren’t buying and selling a house every year. Lowering debt (refinancing) isn’t “earning” income.

cjbillington 7y ago
The interpretation I've heard is that the dividend is the rent. You can rent it to someone else for a few percent of its value per annum (which definitely looks like an investment), but even if you don't, it's still paying the dividend in the form of you not having to pay rent each month, which would be the case if you didn't own the place.
- alexmingoia 7y ago
  The rent is profit only after the loan is paid, minus property taxes, repairs, insurance, and management costs. If one isn’t living in the house then it’s not a home and they aren’t a homeowner, they’re in the property management business. My point is that obtaining a mortgage on a house is not necessarily an investment, particularly if one plans on living in it. Yet I often hear from homeowners that their home was a “good investment” despite never having realized a gain on it, and never planning on selling it.
barry-cotter 7y ago
If you live in it it’s an asset. You’re receiving a return in the form of imputes rent, the money that you would have to pay to rent equivalent housing. That your return is in kind not cash doesn’t make it not an investment.

saberdancer 7y ago

I completely agree with that idea. Especially when buying a first home, I often hear that rent is throwing money away. In reality, your rent is or should be lower than equivalent home mortgage and as a renter you do not need to invest in long term maintenance of the property. Problem most people find is that they do not invest the difference and instead just live a slighty more expensive lifestyle. If they buy a house, they can no longer "cheat" themselves out of the savings and instead their home becomes a type of forced long term investment.

robomc 7y ago

The big difference is that no bank will let you borrow 500k @ 3% to invest in stocks or whatever.