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Thread: is a house a bad investment?

  1. #1
    Vulture of The Western World Eric's Avatar
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    is a house a bad investment?

    “Housing Fades as a Means to Build Wealth, Analysts Say.” That’s the title of a New York Times article by David Streitfeld. Here’s most of the lead:

    “Many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

    “The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

    “More than likely, that era is gone for good.”

    Housing is generally a worse investment than either stocks or simple U.S. Treasury bonds. Then why do so many people think it’s such a great investment?

    Leverage. Let’s say inflation is 2% and housing returns 3% (1% real return). If you put 10% down, now your house is returning 30%, or a 28% real return; subtract a 6% fixed-rate mortgage, and you’re making about 22%–or twenty-two times the real return of the underlying asset. Of course, we all know the dangers of leverage.

    Price illusion. People remember the nominal price they paid for their houses. When they sell them thirty years later, they look at the difference between the nominal purchase and sale prices and think they made a ton of money. This is especially true of the generation that bought houses in the 1960s and early 1970s before inflation hit; they saw their home prices go up by a factor of ten and thought it was due to high real returns.

    Bubbles and optimism bias. Every now and then we have a huge bubble. For a while, people think that’s the new normal. For a while after that, they continue to think it’s the new normal, because they are biased toward optimistic expectations about the world. (Note that during the first half of the decade housing was actually a great investment, assuming you could get out in time.)

    OK, so now we all now the real story. Or do we? “In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.” There’s that optimism bias.

    But I don’t think it’s correct to say that an era is over – an era when housing appreciation was the key to the economy. That era never existed; housing was flat for a long time, and then there was a bubble. Instead, we had the illusion of an era of housing appreciation, produced mainly by leverage and price illusion. For every homeowner who made a killing because he got a fixed-rate mortgage in 1970, there was a new family that couldn’t afford a house in 1980 because interest rates were too high, or a savings and loan that failed because it was weighed down by those fixed-rate mortgages.

    That whole phenomenon was just a transfer of wealth within society.

    One last caveat, however. When “analysts say” one thing, they are usually wrong. Remember back in 1999-2000, when most analysts were saying that stocks were the best investment for everyone, all the time? Generally the best time to buy an asset class is when conventional wisdom has shifted against it. So while I still think housing is overpriced – and we should slowly remove the props on that price, like the mortgage interest tax deduction–maybe in the long term it’s not such a bad idea after all.

  2. #2
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    Quote Originally Posted by Eric View Post
    “Many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
    It's all part of our declining standard of living.

    In 1950 you had one wage earner, a stay at home mom, and a modest home.

    With rising incomes and the advent of 'womens lib' housing prices shot up like a rocket beginning in the mid 70's.

    Soon two people were needed to support a family and 'day care' (warehousing of children) was invented.

    The true value of a home is based on how much a dual income family can earn, and the percentage of their income that they are willing to pay for housing.

    What I observe is that there are a lot of crappy jobs out there, paying $25k - $30k per year. Housing prices are not going to appreciate in our current economy.


    Fox News:
    Now a new study, conducted by MIT and Harvard researchers, reveals the drop in value to a foreclosed property is even more staggering than many would believe.

    "Foreclosed homes sell for less, not just a little bit less, but much less than comparable homes sold in the same area at the same time but voluntarily outside the foreclosure process," explains Harvard Professor of Economics John Campbell. "In fact, the discount on average is about 27% which is really a very large number."

    And a foreclosure is bad news for the neighborhood...
    The study-which examined 1.8 million home sales in Massachusetts from 1987 to 2009 reveals nearby homes within 250 feet of a foreclosure lose 1% of value.

    One reason- the condition of a foreclosed house often deteriorates and falls into disrepair.
    And This:
    Sales of previously occupied homes plunged last month to the lowest level in 15 years, despite the lowest mortgage rates in decades and bargain prices in many areas.

    July's sales fell by more than 27 percent to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday. It was the largest monthly drop on records dating back to 1968, and sharp declines were recorded in all regions of the country.

    The plunge in home sales also magnified fears about the broader economy.

    "The housing market is undermining the already faltering wider economic recovery," said Paul Dales, U.S. economist with Capital Economics. "With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse."

    Sales were particularly weak among homes in the lower- to mid-priced ranges. For example, in the Midwest, homes priced between $100,000 and $250,000 tumbled nearly 47 percent.
    As sales have slowed, the inventory of unsold homes on the market grew to nearly 4 million in July. That's a 12.5 month supply at the current sales pace, the highest level in more than a decade. It compares with a healthy level of about six months.
    One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out.

    "It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers — and home prices will come down."

    The housing market is also being hampered by the weakening economic recovery. Unemployment remains stuck at 9.5 percent and many potential buyers worry they might not have a job to pay the mortgage
    Last edited by dBrong; 08-24-2010 at 12:54 PM.

  3. #3
    Vulture of The Western World Eric's Avatar
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    Yes.

    Personal anecdote:

    We were very fortunate in that I bought a house (when I was single) in the mid-1990s, when prices were low - in an outlying suburb of Northern Va. that (at the time) was considered not-so-great. By 2004, I was married and the price of this house had more than doubled what I had paid for it; we hated the area (which by then had become maggoty with people and traffic and shit architecture everywhere) and had been wanting to move to the country for some time, so we decided to sell - and bail. We got out at about 80 percent of the peak of the bubble. We were able to pay off everything we owed on the old house and buy our current house outright.

    I am acutely aware of just how lucky were are. The only thing that saved us from the fate that has befallen so many people is that we hate suburbia and wanted to live in a rural area. If we had stayed, we would have lost at least $200k in home equity - and still have a big mortgage. Meanwhile, my income is half what it was in 2004. We'd be in trouble, in other words.

    But because we don't have a mortgage, we can manage on a much-diminished income.

    Still, kids are pretty much out of the question. I admit that I am just too scared about the future, about the prospect of having to go into debt or having to take on some McJob in order to provide adequately for a family, that we've decided to stick with just us.

    I think having a kid would be fun in some respects, but the way things are going - and given that I can't deal with the idea of ever having to go back into the system again - it looks like I'm the last of my line!

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