4 ms·

Most people don't understand opportunity cost or time-value of money. How good an investment is it after you remove the realtor fees, closing fees, HOA, taxes,

Most people don't understand opportunity cost or time-value of money. How good an investment is it after you remove the realtor fees, closing fees, HOA, taxes, repair and compare it to a steady 7% on average on the SP500? At a minimum your house MUST go up 10% over a couple years to get even.

ethbr1 3y ago
The key point here is leveraging, given that an average US mortgage is 6.5x to 20x. And that leverage is broadly available to most people, supported (and funded) by government policies.
- lotsofpulp 3y ago
  And it is a non-callable loan, unlike borrowing $300k from your brokerage to invest in VOO. And many states require it to be a non recourse loan. And due to the backing of the federal government, it offers a 30 year fixed rate. The public subsidies are insane.
  - ethbr1 3y ago
    Non-callable, can be refinanced at buyer's discretion, broadly standardized so there's a competitive mortgage originator/refinancing market, and can be borrowed against by using that same market (HELOC or home equity loan) There's a lot of mortgage features that make it attractive to "I'm not an Accredited Investor" types.
  - reaperman 3y ago
    The interest is also deducted from the borrower's AGI. USA being nearly the only country that subsidizes loan interest. https://www.stlouisfed.org/open-vault/2018/may/why-economists-dont-like-mortgage-interest-deduction https://www.stlouisfed.org/open-vault/2018/may/why-economist... https://www.economist.com/finance-and-economics/2017/02/02/what-if-interest-expenses-were-no-longer-tax-deductible https://www.economist.com/finance-and-economics/2017/02/02/w... https://www.economist.com/free-exchange/2010/09/13/dont-defend-this-deduction https://www.economist.com/free-exchange/2010/09/13/dont-defe... https://www.economist.com/briefing/2015/05/16/a-senseless-subsidy https://www.economist.com/briefing/2015/05/16/a-senseless-su... https://fivethirtyeight.com/features/the-tax-deductions-economists-hate/ https://fivethirtyeight.com/features/the-tax-deductions-econ...
    - 01100011 3y ago
      I don't know about you, but I would have to significantly upsize before the mortgage payments exceeded the standard deduction my wife and I receive as a couple. In my market, the mortgage deduction is effectively dead.
      - lotsofpulp 3y ago
        It is dead for 90% of American tax filers since 2017 TCJA. But those juicy standard deductions end at the end of 2025 too, so could be only a few more years before the mortgage interest tax deduction is in play again for many.
        01100011 3y ago
        Interesting. On the one hand I think it would be political suicide for pols to fail to extend the standard deduction, but on the other hand I think we're going to require substantially higher taxes in the near future to avoid financial repression, currency devaluation(no, not Weimar Republic levels...) and inflation. Should be interesting...
        ethbr1 3y ago
        The petrodollar and the dollar's globalization seem like the tipping points. If either of those substantially changes, the US budget to inflation link becomes very different, because there won't be external sinks to soak up extra dollars. Globalization will change on glacial timescales. And the alternatives don't look great: Euro (economic concerns), yen (economic concerns), yuan (economic and political concerns), ruble (economic and political and sanctions concerns), rupee (maybe if SE Asia gets its economic integration in order), naira (would need scale from other major African economies) Oil being sunset is going to be fascinating macroeconomically, as a huge part of the US' world economic power flows through Saudi Arabia.
- goalonetwo 3y ago
  You bring a good point, but leveraging is absolutely required to make housing an even close to acceptable investment. All the recurring and one time fees take away from the leverage. Playing with the buy or rent calculator from the NYT shows you how leverage is an absolute necessity: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
  - runako 3y ago
    > leverage is an absolute necessity Yes, in more ways than one. To juice returns, sure. But the main reason people lever into real estate is because they don't have the cash to buy. So most homebuyers enter into a favorable high-leverage asset whose gains are given preferred tax treatment. Discussing residential RE as if leverage is optional is not useful.
    - goalonetwo 3y ago
      Sure, but discussing it as a "juicy" investment that returns 5x the upside because you are leveraged 5x is also a false narrative that doesn't include all the fees and costs.
      - kevinventullo 3y ago
        Not to mention risks!
  - epistasis 3y ago
    Real estate, at least the land aspect of real estate, should never be an investment. It leads to misallocatiom of resources and rentierism. The only aspect of "investment" should come from proper maintenance of structures, and replacing structures with greater density as soon as the land values justify it. Home ownership as investment has been a generational disaster
asdfaoeu 3y ago
Typically there's much less tax involved when investing in real estate. Here (Australia) there's both no tax on the imputed rent or price appreciation if it's your own home.
kelnos 3y ago
On the other hand, if you need housing (and who doesn't!), it's not a bad deal to pay for a house and "only" end up realizing (at a later sale) a couple percent of gains. Frankly I consider that a great deal! I wish I could buy a car and sell it 10 years later for higher than the purchase price. Or furniture. Or computers. Anything non-consumable, really. Also probably important to consider that most people who buy homes cannot do so without a mortgage. So you're not even really comparing it to whatever else you might do with that money (well, aside from the down payment); it's just a pure expense. Sure, unless you have an interest-only loan, you're also putting principal into it every month (which you could put in the S&P instead), but that's sometimes better than giving a similar amount to a landlord, depending on housing economics in your area.
- 01100011 3y ago
  I don't know of any other consumable where I have to effectively repurchase it every few decades or I lose it. For instance, looking at buying a typical home in my market, one would have to pay around $2k in taxes and insurance per month. That's 2/3 of my current rent, and doesn't include maintenance. That's after the mortgage is paid off. That's on a $1.5M house. That $1.5M would earn you $82,500/year in risk free interest right now, or $6,875/mo. That's nearly enough to rent an equivalent house even after you've paid the income taxes.
UtopiaPunk 3y ago
We shouldn't even have to think in terms of "breaking even" because housing should't be an investing tool. It's a shelter and a home. Unfortunately, making "good investments" is necessary to stay above water in this precarious society, and our society is so fucking heartless that houses are one of the best investments a person can make. It's both bleak and absurd.

ethbr1 3y ago

The key point here is leveraging, given that an average US mortgage is 6.5x to 20x. And that leverage is broadly available to most people, supported (and funded) by government policies.

lotsofpulp 3y ago
And it is a non-callable loan, unlike borrowing $300k from your brokerage to invest in VOO. And many states require it to be a non recourse loan. And due to the backing of the federal government, it offers a 30 year fixed rate. The public subsidies are insane.
- ethbr1 3y ago
  Non-callable, can be refinanced at buyer's discretion, broadly standardized so there's a competitive mortgage originator/refinancing market, and can be borrowed against by using that same market (HELOC or home equity loan) There's a lot of mortgage features that make it attractive to "I'm not an Accredited Investor" types.
- reaperman 3y ago
  The interest is also deducted from the borrower's AGI. USA being nearly the only country that subsidizes loan interest. https://www.stlouisfed.org/open-vault/2018/may/why-economists-dont-like-mortgage-interest-deduction https://www.stlouisfed.org/open-vault/2018/may/why-economist... https://www.economist.com/finance-and-economics/2017/02/02/what-if-interest-expenses-were-no-longer-tax-deductible https://www.economist.com/finance-and-economics/2017/02/02/w... https://www.economist.com/free-exchange/2010/09/13/dont-defend-this-deduction https://www.economist.com/free-exchange/2010/09/13/dont-defe... https://www.economist.com/briefing/2015/05/16/a-senseless-subsidy https://www.economist.com/briefing/2015/05/16/a-senseless-su... https://fivethirtyeight.com/features/the-tax-deductions-economists-hate/ https://fivethirtyeight.com/features/the-tax-deductions-econ...
  - 01100011 3y ago
    I don't know about you, but I would have to significantly upsize before the mortgage payments exceeded the standard deduction my wife and I receive as a couple. In my market, the mortgage deduction is effectively dead.
    - lotsofpulp 3y ago
      It is dead for 90% of American tax filers since 2017 TCJA. But those juicy standard deductions end at the end of 2025 too, so could be only a few more years before the mortgage interest tax deduction is in play again for many.
      - 01100011 3y ago
        Interesting. On the one hand I think it would be political suicide for pols to fail to extend the standard deduction, but on the other hand I think we're going to require substantially higher taxes in the near future to avoid financial repression, currency devaluation(no, not Weimar Republic levels...) and inflation. Should be interesting...
        ethbr1 3y ago
        The petrodollar and the dollar's globalization seem like the tipping points. If either of those substantially changes, the US budget to inflation link becomes very different, because there won't be external sinks to soak up extra dollars. Globalization will change on glacial timescales. And the alternatives don't look great: Euro (economic concerns), yen (economic concerns), yuan (economic and political concerns), ruble (economic and political and sanctions concerns), rupee (maybe if SE Asia gets its economic integration in order), naira (would need scale from other major African economies) Oil being sunset is going to be fascinating macroeconomically, as a huge part of the US' world economic power flows through Saudi Arabia.
goalonetwo 3y ago
You bring a good point, but leveraging is absolutely required to make housing an even close to acceptable investment. All the recurring and one time fees take away from the leverage. Playing with the buy or rent calculator from the NYT shows you how leverage is an absolute necessity: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
- runako 3y ago
  > leverage is an absolute necessity Yes, in more ways than one. To juice returns, sure. But the main reason people lever into real estate is because they don't have the cash to buy. So most homebuyers enter into a favorable high-leverage asset whose gains are given preferred tax treatment. Discussing residential RE as if leverage is optional is not useful.
  - goalonetwo 3y ago
    Sure, but discussing it as a "juicy" investment that returns 5x the upside because you are leveraged 5x is also a false narrative that doesn't include all the fees and costs.
    - kevinventullo 3y ago
      Not to mention risks!
- epistasis 3y ago
  Real estate, at least the land aspect of real estate, should never be an investment. It leads to misallocatiom of resources and rentierism. The only aspect of "investment" should come from proper maintenance of structures, and replacing structures with greater density as soon as the land values justify it. Home ownership as investment has been a generational disaster

asdfaoeu 3y ago

Typically there's much less tax involved when investing in real estate. Here (Australia) there's both no tax on the imputed rent or price appreciation if it's your own home.

kelnos 3y ago

On the other hand, if you need housing (and who doesn't!), it's not a bad deal to pay for a house and "only" end up realizing (at a later sale) a couple percent of gains. Frankly I consider that a great deal! I wish I could buy a car and sell it 10 years later for higher than the purchase price. Or furniture. Or computers. Anything non-consumable, really. Also probably important to consider that most people who buy homes cannot do so without a mortgage. So you're not even really comparing it to whatever else you might do with that money (well, aside from the down payment); it's just a pure expense. Sure, unless you have an interest-only loan, you're also putting principal into it every month (which you could put in the S&P instead), but that's sometimes better than giving a similar amount to a landlord, depending on housing economics in your area.

01100011 3y ago
I don't know of any other consumable where I have to effectively repurchase it every few decades or I lose it. For instance, looking at buying a typical home in my market, one would have to pay around $2k in taxes and insurance per month. That's 2/3 of my current rent, and doesn't include maintenance. That's after the mortgage is paid off. That's on a $1.5M house. That $1.5M would earn you $82,500/year in risk free interest right now, or $6,875/mo. That's nearly enough to rent an equivalent house even after you've paid the income taxes.

UtopiaPunk 3y ago

We shouldn't even have to think in terms of "breaking even" because housing should't be an investing tool. It's a shelter and a home. Unfortunately, making "good investments" is necessary to stay above water in this precarious society, and our society is so fucking heartless that houses are one of the best investments a person can make. It's both bleak and absurd.