7 ms·

My parents bought their house 25 years ago 250k and sold it for 1.5m. Now they are renting a 2 br apt for 1500/month. Their housing cost will be roughly 25k/yr

by kjackson2012 14y ago

My parents bought their house 25 years ago 250k and sold it for 1.5m. Now they are renting a 2 br apt for 1500/month. Their housing cost will be roughly 25k/yr and they are millionaires. The idea that the article talks about how you can't be long the housing market is just dumb. His analogy doesn't work and to say that you can't benefit from house prices going up is dumb.

kelnos 14y ago
If your parents took out a loan when they bought the original house, you're likely neglecting the cost of interest. If not, that's fine too. So they "made" $1.25MM at the sale of their house. That's a taxable capital gain. The rules for that can be complicated, but let's just say 15% to keep it simple. So that drops the gain about $188k down to $1.06MM. Let's say they live for the rest of their lives in the 2BR apartment (I have no idea how old your parents are, but lets just say that's another 30 years). So you say your parents' housing costs will be $25k per year. Let's say that goes up 2% per year. In a rent-controlled area it might be a little lower than that, and otherwise it might be a bit higher. Over those 30 years, your parents' housing costs will be $970k. So now your $1.06MM is down to about $90k. So, effectively, your parents have "made" $90k on their $250k home. That's 36%, or about 1.5% per year. Not great, but better than most savings accounts. Er, wait. Inflation. Wolfram Alpha says that 250k 1987 dollars is worth just over $500k today. So under this model, your parents just "lost" $410k. Not to mention that your parents are now living in a 2BR apartment instead of a presumably-larger house. And maybe that's fine: you can say that your parents' innate housing short got smaller because they've decided that they don't need such a large house anymore, and something smaller and not free-standing will be fine for them. But that's basically like saying you bought a case of beer, then decided you didn't need that much, sold it, and bought a half-case of beer to replace it. Sure, you now have a half case of beer worth of money that you didn't have before, but you can't say you "made money" selling the beer. Now, I'm sure I left out some costs (housing upkeep, property taxes, etc.), and didn't get the capital gains tax quite right, but I hope you see my point here. It may make financial sense to sell your house and downsize, but this in no way means that a home purchase was an "investment".
- blrgeek 14y ago
  Presumably, they'd 'invest' that $1M @ 2.5% to get 25K/yr, nicely paying off their rent, and keeping the capital in place. And if they invest it at 2.5% + inflation, they'd never run out their capital either. So your conclusion is incorrect. The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.
  - kelnos 14y ago
    Good point, I hadn't thought of that. Still, though, depending on a lot of factors, his parents may or may not make out net positive in the end. Thinking about it a bit more, though, I think I'm harping on the wrong thing here. Whether or not you come out ahead has nothing to do with whether home ownership is an asset or a hedge. You can certainly come out ahead with a hedge: that is, the instrument that you use as a hedge can turn out to be a source of income in the end. That's part of the reason that it's there, to provide a possible gain to offset a possible loss. But that doesn't make it an "investment" after the fact. It's still a hedge.
- anatari 14y ago
  Your analysis is incorrect because having to spend 25k + inflation 30 years from now is not the same as spending it today. To calculate properly, future expenditures need to be discounted according to return minus inflation compounded over the duration. So unless you're claiming that you can't safely get a return above inflation, his parents will come out ahead.
  - kelnos 14y ago
    I never said anything about inflation over the 30 years following the home sale. I was talking about inflation between the $250k purchase and $1.25MM sale of the house.
    - anatari 14y ago
benjaminwootton 14y ago
A lot of people think their house is their pension and they will downsize, but few people do. A lot of old people simply don't want to leave their home, and of those that do, most people will prefer to stay in the same area near lifelong friends and family. As area tends to be a bigger element of the price than the size of the house, it's difficult to be release that much capital after taxes, costs of moving. Also note that your parents lived through a massive and unprecedented credit bubble. Just because this happened over the last generation does not mean it will continue to happen. Quite the opposite, we'll be unwinding the excesss of that generation over the next 10-20 years.

kelnos 14y ago

If your parents took out a loan when they bought the original house, you're likely neglecting the cost of interest. If not, that's fine too. So they "made" $1.25MM at the sale of their house. That's a taxable capital gain. The rules for that can be complicated, but let's just say 15% to keep it simple. So that drops the gain about $188k down to $1.06MM. Let's say they live for the rest of their lives in the 2BR apartment (I have no idea how old your parents are, but lets just say that's another 30 years). So you say your parents' housing costs will be $25k per year. Let's say that goes up 2% per year. In a rent-controlled area it might be a little lower than that, and otherwise it might be a bit higher. Over those 30 years, your parents' housing costs will be $970k. So now your $1.06MM is down to about $90k. So, effectively, your parents have "made" $90k on their $250k home. That's 36%, or about 1.5% per year. Not great, but better than most savings accounts. Er, wait. Inflation. Wolfram Alpha says that 250k 1987 dollars is worth just over $500k today. So under this model, your parents just "lost" $410k. Not to mention that your parents are now living in a 2BR apartment instead of a presumably-larger house. And maybe that's fine: you can say that your parents' innate housing short got smaller because they've decided that they don't need such a large house anymore, and something smaller and not free-standing will be fine for them. But that's basically like saying you bought a case of beer, then decided you didn't need that much, sold it, and bought a half-case of beer to replace it. Sure, you now have a half case of beer worth of money that you didn't have before, but you can't say you "made money" selling the beer. Now, I'm sure I left out some costs (housing upkeep, property taxes, etc.), and didn't get the capital gains tax quite right, but I hope you see my point here. It may make financial sense to sell your house and downsize, but this in no way means that a home purchase was an "investment".

blrgeek 14y ago
Presumably, they'd 'invest' that $1M @ 2.5% to get 25K/yr, nicely paying off their rent, and keeping the capital in place. And if they invest it at 2.5% + inflation, they'd never run out their capital either. So your conclusion is incorrect. The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.
- kelnos 14y ago
  Good point, I hadn't thought of that. Still, though, depending on a lot of factors, his parents may or may not make out net positive in the end. Thinking about it a bit more, though, I think I'm harping on the wrong thing here. Whether or not you come out ahead has nothing to do with whether home ownership is an asset or a hedge. You can certainly come out ahead with a hedge: that is, the instrument that you use as a hedge can turn out to be a source of income in the end. That's part of the reason that it's there, to provide a possible gain to offset a possible loss. But that doesn't make it an "investment" after the fact. It's still a hedge.
anatari 14y ago
Your analysis is incorrect because having to spend 25k + inflation 30 years from now is not the same as spending it today. To calculate properly, future expenditures need to be discounted according to return minus inflation compounded over the duration. So unless you're claiming that you can't safely get a return above inflation, his parents will come out ahead.
- kelnos 14y ago
  I never said anything about inflation over the 30 years following the home sale. I was talking about inflation between the $250k purchase and $1.25MM sale of the house.
  - anatari 14y ago

benjaminwootton 14y ago

A lot of people think their house is their pension and they will downsize, but few people do. A lot of old people simply don't want to leave their home, and of those that do, most people will prefer to stay in the same area near lifelong friends and family. As area tends to be a bigger element of the price than the size of the house, it's difficult to be release that much capital after taxes, costs of moving. Also note that your parents lived through a massive and unprecedented credit bubble. Just because this happened over the last generation does not mean it will continue to happen. Quite the opposite, we'll be unwinding the excesss of that generation over the next 10-20 years.