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People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your hou

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfortable place for our partner, etc. So we have to take this risk.

dehrmann 2y ago
If you ask a financial advisor for advice on investing half your net worth on 5x leverage in an liquid asset with one customer and one location, they'd think you're crazy.
- edmundsauto 2y ago
  But most of them would not think you’re crazy once it’s specified to real estate. This means either financial professionals are blind to the similarities or there is something critical missing from your description.
  - dehrmann 2y ago
    It's that people have an irrational emotional attachment to homes and financial advisors know they wouldn't be in business if they told prospective homeowner to put the money in an index fund. Where owning a home wins is it forces people to set aside income and put it in an asset rather than spend it, but there are other ways to do this.
    - edmundsauto 2y ago
      I think it’s a lot more nuanced than that. Leverage is great, being able to do what you want to your living space has value. It also locks in your housing costs. There are tax advantages. It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance. (Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)
- sokoloff 2y ago
  When that one customer is "your family", it's a little bit different, though. PS: From context, I suspect you meant to say "illiquid asset".
  - dehrmann 2y ago
    > When that one customer is "your family", it's a little bit different, though. I think it makes it worse.
    - sokoloff 2y ago
      How so? You control the customer’s buying decision and the product on offer is “living indoors”, something that you’re not going to easily decide to cut from your budget.
Tade0 2y ago
> If your house loses half its value, that represents hundreds of thousands in losses. I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house. Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?
- fwip 2y ago
  Well, you don't always know if you're going to want to sell later. Maybe you lost your job, maybe you need to move to another city, maybe you just hate the neighborhood.
  - francisofascii 2y ago
    Right, all it takes is for the large local employer to suddenly downsize, causing both the loss of job, and the crash of the local housing market simultaneously.
    - roland35 2y ago
      Not just one employer, sometimes the entire industry goes down! Just look at the housing market in Detroit or Youngstown
    - llukas 2y ago
      Shouldn't this be priced into the house value in this local market?
      - bobthepanda 2y ago
        it usually isn't because banks are not all-seeing and cannot tell which local employer or industry is likelier to go bust. in that sense all metro areas are often equally risky.
- WalterBright 2y ago
  > it's still the same house What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
glitchc 2y ago
No, it's far less risky to invest in housing. These two graphs over long term illustrate the difference in risk: Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS https://fred.stlouisfed.org/series/ASPUS Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart https://www.macrotrends.net/1319/dow-jones-100-year-historic...
- crooked-v 2y ago
  Though it helps to keep in mind that returns there are because the US housing market has been distorted beyond all recognition by under-building that goes back to the civil rights era.
  - jopsen 2y ago
    You could also argue that there was population growth, and we might not see that in future. So under-building in the future will be harder, as houses exist. Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D
    - bobthepanda 2y ago
      even without population growth, household size decline means that there will be more demand for housing, since the same amount of people divided by smaller household size = more households.
- aidenn0 2y ago
  Isn't the latter CPI adjusted, but not the former?
  - glitchc 2y ago
    Thank you for that, I forgot to mention it: Both inflation adjusted and log plotting need to be turned off (as checkboxes) for an apples to apples comparison.
pdonis 2y ago
But your primary home isn't an investment, it's a necessity. You're going to live somewhere. The only choice you have is whether to buy or rent the place you live in. So that's the comparison that should be made. Comparing your primary home to your stock portfolio is pointless because you can't live in your stock portfolio. The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.
WalterBright 2y ago
Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all. Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
- giaour 2y ago
  The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.
- Kirby64 2y ago
  Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.
  - WalterBright 2y ago
    Remember, leverage works both ways.
    - Kirby64 2y ago
      Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.
      - throwaway2037 2y ago
        This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.
jjav 2y ago
> People don't realize how risky housing is compared to other investments. Do not compare your house to other investments, that's as apple to oranges as it gets. Compare it to renting, since you have to live somewhere.

dehrmann 2y ago

If you ask a financial advisor for advice on investing half your net worth on 5x leverage in an liquid asset with one customer and one location, they'd think you're crazy.

edmundsauto 2y ago
But most of them would not think you’re crazy once it’s specified to real estate. This means either financial professionals are blind to the similarities or there is something critical missing from your description.
- dehrmann 2y ago
  It's that people have an irrational emotional attachment to homes and financial advisors know they wouldn't be in business if they told prospective homeowner to put the money in an index fund. Where owning a home wins is it forces people to set aside income and put it in an asset rather than spend it, but there are other ways to do this.
  - edmundsauto 2y ago
    I think it’s a lot more nuanced than that. Leverage is great, being able to do what you want to your living space has value. It also locks in your housing costs. There are tax advantages. It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance. (Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)
sokoloff 2y ago
When that one customer is "your family", it's a little bit different, though. PS: From context, I suspect you meant to say "illiquid asset".
- dehrmann 2y ago
  > When that one customer is "your family", it's a little bit different, though. I think it makes it worse.
  - sokoloff 2y ago
    How so? You control the customer’s buying decision and the product on offer is “living indoors”, something that you’re not going to easily decide to cut from your budget.

Tade0 2y ago

> If your house loses half its value, that represents hundreds of thousands in losses. I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house. Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

fwip 2y ago
Well, you don't always know if you're going to want to sell later. Maybe you lost your job, maybe you need to move to another city, maybe you just hate the neighborhood.
- francisofascii 2y ago
  Right, all it takes is for the large local employer to suddenly downsize, causing both the loss of job, and the crash of the local housing market simultaneously.
  - roland35 2y ago
    Not just one employer, sometimes the entire industry goes down! Just look at the housing market in Detroit or Youngstown
  - llukas 2y ago
    Shouldn't this be priced into the house value in this local market?
    - bobthepanda 2y ago
      it usually isn't because banks are not all-seeing and cannot tell which local employer or industry is likelier to go bust. in that sense all metro areas are often equally risky.
WalterBright 2y ago
> it's still the same house What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

glitchc 2y ago

No, it's far less risky to invest in housing. These two graphs over long term illustrate the difference in risk: Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS https://fred.stlouisfed.org/series/ASPUS Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart https://www.macrotrends.net/1319/dow-jones-100-year-historic...

crooked-v 2y ago
Though it helps to keep in mind that returns there are because the US housing market has been distorted beyond all recognition by under-building that goes back to the civil rights era.
- jopsen 2y ago
  You could also argue that there was population growth, and we might not see that in future. So under-building in the future will be harder, as houses exist. Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D
  - bobthepanda 2y ago
    even without population growth, household size decline means that there will be more demand for housing, since the same amount of people divided by smaller household size = more households.
aidenn0 2y ago
Isn't the latter CPI adjusted, but not the former?
- glitchc 2y ago
  Thank you for that, I forgot to mention it: Both inflation adjusted and log plotting need to be turned off (as checkboxes) for an apples to apples comparison.

pdonis 2y ago

But your primary home isn't an investment, it's a necessity. You're going to live somewhere. The only choice you have is whether to buy or rent the place you live in. So that's the comparison that should be made. Comparing your primary home to your stock portfolio is pointless because you can't live in your stock portfolio. The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.

WalterBright 2y ago

Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all. Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

giaour 2y ago
The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.
Kirby64 2y ago
Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.
- WalterBright 2y ago
  Remember, leverage works both ways.
  - Kirby64 2y ago
    Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.
    - throwaway2037 2y ago
      This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.

jjav 2y ago

> People don't realize how risky housing is compared to other investments. Do not compare your house to other investments, that's as apple to oranges as it gets. Compare it to renting, since you have to live somewhere.