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> If you take the money you'd use for a down payment and mortgage and invest it instead (after paying rent) you end up in about the same place. That is not the

by Galanwe 4mo ago

> If you take the money you'd use for a down payment and mortgage and invest it instead (after paying rent) you end up in about the same place. That is not the right way to see it. If you have the cash to buy upfront, then yes, real estate is not that good an investment, unless you have a loaded portfolio already and want to diversify a bit, get some high inflation hedge, etc. The real value of buying a home is leverage. That is, most people cannot go to a bank and borrow $500k. The bank will just not make a blank loan like that without any idea of what you're going to do with it. Buying a home though is well understood and borrowing is made relatively easy. For most people, buying a home is the only way they have to actually get significant leverage from borrowing.

funksta 4mo ago
Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. The recent 40-year trend of decreasing interest rates lulled a lot of people into the belief that real estate leverage is an unalloyed good.
- brabel 4mo ago
  > I bought my current home in 2011 for $420k, and the Zillow currently estimates its value at $757k. Well yeah, in the last 20 to 30 years in most countries the story has been the same. My parents bought a house in Brazil in the early 90's for 30k and we're now selling it for 400k. My relatives in Australia bought a house in Adelaide for 400k around 5 years ago. Prices exploded there and it's now around 700k. They got 300k dollars in a few years while actually earning less than that in salaries over the same period. On the other hand, me, in Europe, managed to lose money on a house I bought 10 years ago because I overpaid (at the time it was really hard to buy as competition was huge) and after COVID, prices in my region fell 20% and never recovered... Also, I invested too much on a new building in the property which people in this country don't actually value a lot, so the investment did not pay off. But before that I had made 60k on an apartment in just 2 years. So, while I know too well that the housing market can be unpredictable, I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.
  - bombcar 4mo ago
    You also have to factor out inflation over those periods of time, as often it turns out the return is relatively anemic, but the time periods are long.
  - tmnvix 4mo ago
    > I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed. I think they have. As mentioned above, the past 40 year trend of declining interest rates appears to be at an end. It was the most significant factor in rising prices in my opinion.
- at-fates-hands 4mo ago
  >> Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. This. I worked for a medium sized company in the early aughts. It was a family owned business. The eldest brother was the owner and we often had lunch and he would tell me that once I make x amount, then I should buy this kind of real estate. When you get to this xx amount, then buy this kind of real estate. Fuck the stock market, only real estate goes up in value every year like clockwork. At the time he had several rental properties and three or four houses located all over the country. That was until 2008. Its funny, I ran into him at an architecture conference a few years back and one of the first things he said to me was, "Remember that real estate advice I was giving you? You can completely ignore that now!" and we both had a good laugh about how drastically the market had changed since 08'.
  - schumpeter 4mo ago
    Sounds like your friend did something wrong with his investments. I had rentals before 2008, and bought more during the crash in South Florida for pennies on the dollar. It was a great time to buy.
- hardtke 4mo ago
  In some states (California being one) the original mortgage on a house purchase is non-recourse. This means that the bank cannot come after your personal assets in the event of default. Yes your credit gets dinged but the leverage of a home loan is fundamentally different than a margin loan in the stock market.
wwweston 4mo ago
Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface in an HN discussion. It's probably worth making a closer comparison though: * Buying a House on Loan: commit to paying off a $450k loan over 30 years at 5% interest, with an immediate $50k down payment and the home itself as collateral. So ~$2500/mo payments, another 400k in interest by the time you're done. Your home probably appreciates by that much in most markets, which gives you a million dollar asset at the end. In some good markets, it may appreciate by 3-4 times, which would mean you have a 1.5-2 million dollar asset. * Pure Financial Investment: put $50k into a fund, add sustained regular $2500/mo contributions. Let's imagine that the fund averages a conservative 5% annual return and we do this for 30 years. The outcome should be... a bit above 2 million dollars. All investment involves risk and variable outcomes, but the BHL plan probably has a more varied outcome. Parity may be as common as substantial profit. The PFI plan, on the other hand, performs really well even considering conservative 5% returns: over 2 million dollars (minus 400k you would have probably paid in rent). Bump it to 8% returns and we're looking at 3 million, a performance even many good real estate markets couldn't match. Its major problem is that you need to be disciplined about putting the chunky contributions in, which means you need to consistently have rent-payment-level disposable income to make this work. Many working people don't. Leverage lets housing costs go to equity and interest payments, which is key leverage for people who don't have disposable investment income. But less key for people who do.
- vardalab 4mo ago
  You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.
  - skeptic_ai 4mo ago
    Exactly lol
  - hbarka 4mo ago
    They forgot to mention that they will move back to mom’s house.
Eridrus 4mo ago
This is only relevant when rates are low. Rates are currently higher than the growth you can expect in housing prices. I have done repeated financial models of this over the last 15 years and it has never made sense to buy a house for me. When rates were low, if I had bought a house and then stayed in it a long enough time to counteract transaction costs, it could have been ok, but in expectation, basically everyone buying a house would have been better off investing the money from their downpayment & repayments into the stock market.
- bombcar 4mo ago
  Transaction costs are killer and never factored in correctly, I’ve found.
musicale 4mo ago
> most people cannot go to a bank and borrow $500k Unless they can get admitted to a private university and a professional school.

by Galanwe 4mo ago

funksta 4mo ago

Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. The recent 40-year trend of decreasing interest rates lulled a lot of people into the belief that real estate leverage is an unalloyed good.

brabel 4mo ago
> I bought my current home in 2011 for $420k, and the Zillow currently estimates its value at $757k. Well yeah, in the last 20 to 30 years in most countries the story has been the same. My parents bought a house in Brazil in the early 90's for 30k and we're now selling it for 400k. My relatives in Australia bought a house in Adelaide for 400k around 5 years ago. Prices exploded there and it's now around 700k. They got 300k dollars in a few years while actually earning less than that in salaries over the same period. On the other hand, me, in Europe, managed to lose money on a house I bought 10 years ago because I overpaid (at the time it was really hard to buy as competition was huge) and after COVID, prices in my region fell 20% and never recovered... Also, I invested too much on a new building in the property which people in this country don't actually value a lot, so the investment did not pay off. But before that I had made 60k on an apartment in just 2 years. So, while I know too well that the housing market can be unpredictable, I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed.
- bombcar 4mo ago
  You also have to factor out inflation over those periods of time, as often it turns out the return is relatively anemic, but the time periods are long.
- tmnvix 4mo ago
  > I would continue to bet on it going up in most markets since the conditions which made prices increase have not changed. I think they have. As mentioned above, the past 40 year trend of declining interest rates appears to be at an end. It was the most significant factor in rising prices in my opinion.
at-fates-hands 4mo ago
>> Leverage is great when prices are increasing, but not when prices are moving in the opposite direction. This. I worked for a medium sized company in the early aughts. It was a family owned business. The eldest brother was the owner and we often had lunch and he would tell me that once I make x amount, then I should buy this kind of real estate. When you get to this xx amount, then buy this kind of real estate. Fuck the stock market, only real estate goes up in value every year like clockwork. At the time he had several rental properties and three or four houses located all over the country. That was until 2008. Its funny, I ran into him at an architecture conference a few years back and one of the first things he said to me was, "Remember that real estate advice I was giving you? You can completely ignore that now!" and we both had a good laugh about how drastically the market had changed since 08'.
- schumpeter 4mo ago
  Sounds like your friend did something wrong with his investments. I had rentals before 2008, and bought more during the crash in South Florida for pennies on the dollar. It was a great time to buy.
hardtke 4mo ago
In some states (California being one) the original mortgage on a house purchase is non-recourse. This means that the bank cannot come after your personal assets in the event of default. Yes your credit gets dinged but the leverage of a home loan is fundamentally different than a margin loan in the stock market.

wwweston 4mo ago

Love that the two most solid pro-homebuying points I've ever encountered (jedberg's about the psychological benefits, yours about leverage) immediately surface in an HN discussion. It's probably worth making a closer comparison though: * Buying a House on Loan: commit to paying off a $450k loan over 30 years at 5% interest, with an immediate $50k down payment and the home itself as collateral. So ~$2500/mo payments, another 400k in interest by the time you're done. Your home probably appreciates by that much in most markets, which gives you a million dollar asset at the end. In some good markets, it may appreciate by 3-4 times, which would mean you have a 1.5-2 million dollar asset. * Pure Financial Investment: put $50k into a fund, add sustained regular $2500/mo contributions. Let's imagine that the fund averages a conservative 5% annual return and we do this for 30 years. The outcome should be... a bit above 2 million dollars. All investment involves risk and variable outcomes, but the BHL plan probably has a more varied outcome. Parity may be as common as substantial profit. The PFI plan, on the other hand, performs really well even considering conservative 5% returns: over 2 million dollars (minus 400k you would have probably paid in rent). Bump it to 8% returns and we're looking at 3 million, a performance even many good real estate markets couldn't match. Its major problem is that you need to be disciplined about putting the chunky contributions in, which means you need to consistently have rent-payment-level disposable income to make this work. Many working people don't. Leverage lets housing costs go to equity and interest payments, which is key leverage for people who don't have disposable investment income. But less key for people who do.

vardalab 4mo ago
You forgot to include the actual living costs if you invest. You're not gonna be able to contribute $2,500 a month. You would be able to contribute not that much , around here rents are $2,500 a month.
- skeptic_ai 4mo ago
  Exactly lol
- hbarka 4mo ago
  They forgot to mention that they will move back to mom’s house.

Eridrus 4mo ago

This is only relevant when rates are low. Rates are currently higher than the growth you can expect in housing prices. I have done repeated financial models of this over the last 15 years and it has never made sense to buy a house for me. When rates were low, if I had bought a house and then stayed in it a long enough time to counteract transaction costs, it could have been ok, but in expectation, basically everyone buying a house would have been better off investing the money from their downpayment & repayments into the stock market.

bombcar 4mo ago
Transaction costs are killer and never factored in correctly, I’ve found.

musicale 4mo ago

> most people cannot go to a bank and borrow $500k Unless they can get admitted to a private university and a professional school.