Is Home Ownership Really Worth It?

[CourtneyC]

Good question. To expand on the previous poster's comments about home ownership being the better long-run option, I will explain why that is the case.

In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage.

Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible.

In the short-run, however, your gains would not be as substantial as they would appear because of the 5-6% real estate commission you would likely incur to sell the home. Six percent of $220,000 = $13,200. After your other expenses, you would be lucky to break even if you sold after the first year.

In the long-run, however, your leveraged gains should far exceed realtors' commissions and other expenses, so buying makes sense.

[teejayevans]

Quote:

Originally Posted by CourtneyC For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase,

Understand that since 1900 (2000-present excluded), real estate has
appreciated at the same rate as inflation. Hence the reason why we
have the current real estate bubble.
TJ

[CyclingInvestor]

Quote:

Originally Posted by haha You have owned in LA since 1981, and even with the great appreciation you have had you feel that renting would have left you with more money? This seems like a very strong argument for renting! Ha

My first house rose about 26% in 6 years, my current house has slightly more than
tripled in almost 20 years.- total appreciation of 5-6%/year. A few years ago I
analyzed my total estimated ownership costs vs renting - ownership had a decent
positive return, but I have kept my $$ in tax-free bonds (to 93) and stocks since.
The returns on these were considerably higher (I wish I had kept the ownership #s).

[al_bundy]

Quote:

Originally Posted by CourtneyC Good question. To expand on the previous poster's comments about home ownership being the better long-run option, I will explain why that is the case. In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage. Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible. In the short-run, however, your gains would not be as substantial as they would appear because of the 5-6% real estate commission you would likely incur to sell the home. Six percent of $220,000 = $13,200. After your other expenses, you would be lucky to break even if you sold after the first year. In the long-run, however, your leveraged gains should far exceed realtors' commissions and other expenses, so buying makes sense.

you have to run the numbers for 15 years. there are people living in the NYC burbs in good neighborhoods who bought 1987 - 1990 and it took 10 years for their home price to come back to the level of what they paid for their homes. add up the interest, taxes, maintenance and they probably lost money. of course once they pay off their home a big expense goes away unlike with renting

using the last 10 years of data for home price growth is not very scientific

[OAG]

My first home was $37K, sold it for $50K two years later; rolled profit into next $70K home; lived there 7 years sold it for $125K, next home purchased for $87K lived there 7 month (mistake) and sold it for $84K; next home purchased for $75K lived there for 9 years and sold it for $95K; next home $202K lived there for 9 years and sold it for $300K; next home purchased for $345K. Total "gain" $183K (assuming I sold current home for $345K today). The way I see it if you add the assumed "rent" I would have paid about $12K to $20K per year, so if we assume the midpoint of $16K per year over the past 30 years that would have been an additional $480K of "imputed" gain of a total of $663K ($183K + 480K = $663K). Of course the expense of ownership (RE Taxes, Insurance, Improvements, Maintenance, Repairs, etc.,) have to be subtracted. A reasonable guess, over the same 30 years, would be about $10K per year or $300K for the period. Could I have invested the excess and have had far more than the estimated net of $363K in this example; maybe, maybe not. BTW I never paid a commission to buy or sell these places and after the 3d one all were cash deals. I surmise that it all would have been very close to a net wash, especially when you consider the income loss of the cash sitting in the properties. So IMHO to answer the OP it probably is a wash. Just depends on what you feel is best for you.

[honobob]

Quote:

Originally Posted by teejayevans Understand that since 1900 (2000-present excluded), real estate has appreciated at the same rate as inflation. Hence the reason why we have the current real estate bubble. TJ

Understand that you are using a nationwide figure for home appreciation. Unless I'm trying to buy a home in every market my 9-11% (HI/CA/NV) per year appreciation is the figure I'm looking at.

And even if you count long term inflation as 3%, that's $9,000 per year on a $300K house. That's a 15% return on your 20% down. So you're saying anyone that buys a home is getting an automatic 15% return on their money? Make that the headline in tomorrows paper and we'll solve any current housing bubble you perceive.

[W2R]

2002: bought my house for $160K
2005: Very similar house across the street sold for $203K (same sq ft and age, fewer upgrades, little hurricane damage to either)
2006: paid off my house for $176K total P&I; tax + insurance ~= $2400/yr over that
2007: total put into my house so far, including P&I, tax, insurance, multiple A/C repairs, new circuit box, plumbing repairs, tree removal after Katrina, etc., up to now has been $192K. Don't know if I would want to sell in the current market, but I would take $195K if it was offered this afternoon.

Living in peace and quiet, knowing that I never have to pay rent or P&I again, and knowing in greater detail that I can ER when the time comes, are some of the intangible advantages to home ownership for me.

[perinova]

Quote:

Originally Posted by CourtneyC Good question. In the long run, real estate tends to appreciate in value. The amount of appreciation varies by area and timing, but over time, almost every home will appreciate in value. In good markets, appreciation can exceed 10% per year on an annualized basis over a long timespan. The return on your investment that you actually recognize as a homeowner is much greater because of a concept called leverage. Here's how leverage works: say you purchase a home for $200,000. To buy this home you decide to put down 20% of the purchase price ($40,000) and take out a mortgage on the rest ($180,000). For simplicity purposes, let's just say your property appreciates 10% during the year following your purchase, which would be $20,000 (10% of your purchase price x $200,000). Expenses and interest payments aside, you just made $20,000 on your $40,000 down payment, or 50%. Better yet, the interest payments on a mortgage are tax deductible.

Don't forget though that there is a lost opportunity cost of about 7% a year on a balanced portfolio. (That's about $3K the first year). Housing cost increases not at 10% average but only at the rate of inflation of 3% (It has in the past 150 years and fortunately for our descendants that will purchase homes with the same lending rules in the future). 3%=$6K. Another thing is that this "investment" only retain this value if maintained at about 1%(?) per year or you will sell it as a "fixer upper". 1%=$2K

You also need to factor in interest cost which is about half of the loan repayment over Thirty years ~$5K. (Worse: The first years are almost all interest payments).

The tax deduction needs to be compared with the standard deduction allowable to everyone ($5000*# of people: Family of two: $10K or more than all interest payments. Family of three: $15K would be more than interest payments and property tax too!!!).

On average per year this house costs you
$3K(Opportunity cost)+$5K(interest)-$6K(value increase)
+$5K(prop tax)+$2K(maintenance) = $9K/year. This is the rent equivalent on average.

- If you are lucky and can pull 10% consistently over your lifetime (??) your value increase might be $18K but again your Opportunity cost might also be much higher in the stock market and be $6K.
- The leverage works both ways and you might take a 0% gain (not that uncommon): Rent equivalent becomes now $15K.
Remove the leverage by buying all cash and you Opportunity cost is now $15K, no interest cost: That's a rent equivalent of $13K/year!!!!. BECAUSE THE FINANCIAL MARKET GENERATES WEALTH ON AVERAGE AT 4% HIGHER THAN INFLATION BUT NOT REAL ESTATE!!!!!!

It is good to know the average case in order to beat the average.

[twaddle]

Quote:

Originally Posted by honobob Understand that you are using a nationwide figure for home appreciation. Unless I'm trying to buy a home in every market my 9-11% (HI/CA/NV) per year appreciation is the figure I'm looking at.

Ah yes. The "past is prologue" argument. So, if the median house in CA sells for $600K today, and homes appreciate at 11%/year, in 10 years the *median* house in CA will sell for $1.7 million, right?

Riiiiiiight. Who will be buying those crappy 2000 sq ft homes for $1.7 million?

Trees don't grow to the sky. When an area has above-average appreciation, that's not a good sign for future appreciation. Beware regression to the mean.

[honobob]

Quote:

Originally Posted by twaddle Ah yes. The "past is prologue" argument. So, if the median house in CA sells for $600K today, and homes appreciate at 11%/year, in 10 years the *median* house in CA will sell for $1.7 million, right? Riiiiiiight. Who will be buying those crappy 2000 sq ft homes for $1.7 million? Trees don't grow to the sky. When an area has above-average appreciation, that's not a good sign for future appreciation. Beware regression to the mean.

Duh? Prolly the people who bought in 1985 for $80K's that now have houses worth 11% more each year, say slightly over $600K!!! Don't believe that and you prolly don't believe in the Holocost or the moon landing!

And, they're crappy 1,000 sq ft homes here in the bay area!
Crappy 2000 sq ft homes are in Stockton, foreclosure capital!

11% is the average appreciation rate in the Bay Area. Lately it's been 25-50%+!!! Won't argue that it won't regress/revert to the mean but strongly disagree that our mean is determined by home sales in Louisville KY.

[twaddle]

Quote:

Originally Posted by honobob Won't argue that it won't regress/revert to the mean but strongly disagree that our mean is determined by home sales in Louisville KY.

Agreed. So, what is the fundamental driver for appreciation in an area? Wage growth, population growth, job growth, and building constraints, right?

I agree that parts of the Bay Area should outperform KY over the long term. But it'll probably be limited to Silicon Valley, and only if prices don't get so high that companies will start looking at KY to maintain their margins.

Of course, if the current credit squeeze drives us into a recession, all bets are off until the economy recovers. Currently, even the mainstream economists (and the fed) are predicting that the housing bubble and resulting credit squeeze will at least impact consumer spending and economic growth for the next 5 years or so.

[kcowan]

One other thing about the past is prologue assumption is that wages have been driven up by productivity growth from the industrial revolution. Regression to the mean will be driven by affordablity.

What is going to drive up wages in the next 50 years?

[twaddle]

Quote:

Originally Posted by kcowan What is going to drive up wages in the next 50 years?

Demographics. Honobob is betting that Boomers will be retiring en masse to Las Vegas and HI, while the few remaining youngsters will get higher wages in Silicon Valley. Probably not a bad bet.

[aenlighten]

If your stocks do 10% and half is paid in marginal taxes while rents rise 5%, you will do better buying if you do so at a favorable time since expenses vary little but returns vary greatly. The average house performs like bonds. If you don't like bonds, you shouldn't buy the average house, but you really need to look not at averages but at what you intend to buy. The problem in expensive areas is not the return itself but the failure of local growth. Prices are high now, but where was everyone 10 years ago, and where will they be 10 years from now?

[honobob]

Quote:

Originally Posted by twaddle Probably not a bad bet.

Ding, ding, ding!

Actually I thought water would limit the growth in Vegas but they keep stealing acquiring it from other states. They are almost built up to the mountains so maybe they'll stop there until they figure a way to build straight up. I'm not in Vegas for long term and it will be the first property I sell off but I believe the future is good at least 10 years forward if not forever.


S.F. luxury homes cross $3 million threshold: survey - San Francisco Business Times: Sorry don't know how to tiny url

Twaddle, doesn't look like I'll get that 50% off beach house anytime soon. Maybe if you go down there with a sign "The Reversion is Near" things will speed up. Wear a white sheet, you'll be taken more seriously!

It's been pointed out by others that Hawaii and SF are not dependent on wage growth. People who buy $3M homes are not counting on next years cost of living increase. The desirability by people with money will fuel the demand in the Bay Area.

Twaddle, thanks for the investment spread sheet. I inputed info for a possible Hono purchase and it shows % return on initial equity starting at 47% and increasing to 106.7% by year 10!! I've also been playing with my historical data and it sure confirms my predictions in the 70s, 80's, 90's & 2000's. Actually proves I was smarter than I thought I was. Trouble to follow for sure!

[twaddle]

Quote:

Originally Posted by honobob It's been pointed out by others that Hawaii and SF are not dependent on wage growth. People who buy $3M homes are not counting on next years cost of living increase. The desirability by people with money will fuel the demand in the Bay Area.

Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home.

And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer.

Patience. The sale hasn't even started yet.

[lets-retire]

Quote:

Originally Posted by twaddle Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home. And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer. Patience. The sale hasn't even started yet.

Not if the person moving up who has lived in the house several years decides it might be a good time to rent. Then the upwardly mobile person doesn't need to sell they just rent out thier house and use the monthly rental income to offset the cost of buying the more expensive place. It is more common than I initially thought.

[perinova]

Quote:

Originally Posted by twaddle Well, they are dependent on windfalls and/or somebody buying their $2M homes so they can move up to a $3M home. And the $2M buyers need to sell their $1M home. And the $1M buyers need to sell their $500K homes. And the $500K sellers need wage earners to buy their homes. Whoops. That's where the game of musical chairs stops. Bummer. Patience. The sale hasn't even started yet.

Anybody considering a $3M home doesn't need to worry about appreciation of the home. This is a whole other market that doesn't follow the same set of rules since the median is where most homes and incomes are situated. If there is no buyer at $3M and the seller needs to sell wouldn't the house go down to $1M in a snap?

The house could stay on the market for years too. Just like this one not far from where I am (NJ) has been listed for $12M for about 3 years and the taxes are $75K per year!!!
Coldwell Banker Residential Brokerage - Real Estate Company


I understand that there has been boom and busts in Hawaii as well. Luxury is the first thing that gets cut in any budget.

Sometimes the market changes dramatically somewhere because people discover the place and flock there for jobs or enjoyment.
The key is to find the former before everyone does and to avoid places that may decay.
BUT people will be complaining that too many people are coming and that the place will not be "like it used to be". Highways, noise, property taxes and all. So what will it be?

[twaddle]

Quote:

Originally Posted by perinova If there is no buyer at $3M and the seller needs to sell wouldn't the house go down to $1M in a snap?

It depends. The high-end really isn't that much different except for a few factors: buyers have a ton of ego and generally the ability to weather financial blows, and greedy builders tend to create too much inventory.

In my area, high-end properties are sitting on the market for a long time, and there's on the order of a year's worth of inventory. Probably the worst segment from a supply and demand perspective.

Which is why I think that segment will get hit the hardest in the end, just as I witnessed during the SoCal crash of 1990-1996. Big discounts a comin'.

I figure the big sale starts this fall. I came up with a name for it last year.

The Great Fall of 2007

What do you think?

[kcowan]

Slowdowns start at the top and percolate downward, whereas hot markets start at the bottom. In the previous bubbles, the decline has taken several years. So be careful not to jump too soon.

Of course individual markets vary a lot. But this time most markets were affected.