WSJ: "How Houses Eat Money"

[JB]

Thanks Nords, that was a great article.

"I bought my house in late 1992 for $165,000. Today, it might fetch $500,000, giving me roughly a 200% gain."

How 500/165 = 300% gain. What am I missing?

One way to look at home ownership is as a forced savings plan - you have to make the payment every month, then when you sell you get the money back in a big lump sum. How many people would take the money they saved from renting and invest it? Not many I know.

This is exactly the case for many middle class homeowners that I know.

 

[Patrick]

Thanks Nords, that was a great article.

"I bought my house in late 1992 for $165,000. Today, it might fetch $500,000, giving me roughly a 200% gain."

How 500/165 = 300% gain.  What am I missing?

500-165=335.  335/165=2.03, or a 200% gain.  The house is worth 300% of its original value, but the GAIN is 200%.

Patrick

 

[JB]

Duh..
I think I need another cup of jo

 

[spammy_davis]

I noticed the same thing several others in this thread have... unless he's comparing renting versus owning a home but living in a cardboard box in the park, he's forgotten the value of the rent he's not paying, which over 13 years on a house with a closing value of half a mill (and with plenty of nice improvements ) is substantial and easily pushes this in favor of owning that house.

 

[moghopper]

...he's forgotten the value of the rent he's not paying, which over 13 years on a house with a closing value of half a mill (and with plenty of nice improvements ) is substantial and easily pushes this in favor of owning that house.

From the article

...while you are struggling to pay the property taxes and keep water out of the basement, something wonderful happens: You get to live in the place without paying rent.

 

[cute fuzzy bunny]

I think I need another cup of jo

I used to have a girlfriend named jo.

Was well worth a second cup.

Yes, we're past the 2nd beer... :

 

[Lancelot]

The Flies, floats and, you know, is a pretty good strategy

Real estate was good to me as long as I bought at a discount and didn't over improve.

 

[davidmull]

One way to look at home ownership is as a forced savings plan - you have to make the payment every month, then when you sell you get the money back in a big lump sum.  How many people would take the money they saved from renting and invest it?  Not many I know.

This is an excellent point. 

Here's an additional reason to own:  A lot of people (like me) want the security of being in charge of their own housing.  I can have pets, paint the walls lime green, or knock down walls if I want to.

And when you're a renter, there's not much incentive for either you or your landlord to fix a place up to make it nice.  Now that I'm my own landlord, I get great pleasure from puttering around my house and gardening.  My house has my style (which means, of course, lots of lime green paint and demolished walls!).   :

 

[cute fuzzy bunny]

Heck you could have lime green pets.

Cant do that in a rental.

Patrick...you HOPE you get the money back in a big lump sum

 

[honobob]

Heck you could have lime green pets.

Cant do that in a rental.

Minty fresh.

 

[honobob]

We used to own a home on the beach and sold it after a couple of years

About 8 years later the same house sold again for nearly triple what we paid. (And the new owner tore down the house and built a new one ) So if we would have retained the house, we would have made a bunch more money.

Timing and location is the key.

 

[FANOFJESUS]

I think the Jonathan Clements article is on track. Alot of people think they are making money when they are not. How many people are going to sit down and add up all of these costs.

 

[skyline]

This is all interesting - but I think everyone should remember that we're coming off the best US residential real estate boom in recorded history - and one that has either only moderately or yet to correct.

Which is to say that we're all in a real estate 'high' of sorts...pretty much anyone that owned a home since the early to mid 2000's can do the math and determine that they made a killing (this would include me)

What I wonder about, thought, is how things might look going forward beyond this boom? Anyone out there have numbers on appreciation vs. maintenance/cost for their home for say, 1990-1998? This might be closer to what we're in for in the next 5-10 years vs. the last 5-10 years...

 

[TargaDave]

What I wonder about, thought, is how things might look going forward beyond this boom?

Well, there have been plenty of reversion to mean graphs by one of the typical measures (rent to price or income to price, etc) bandied about recently. Throw on top of that some sea changes like an aging demographic and permanently higher utility costs, and you end up with things looking not-so-great for awhile. Oh well, the forced savings and the nesting factor will always make ownership desirable. My feeble prediction is that cookie cutter McMansions will become the true dinosours of the future. Maybe they already are.

What amazes me is the number of people I meet who have no clue on actually doing maintenence or upgrades considering the $ impact. For me it's always been sort of a "second job" (at least in cost savings) and source of entertainment. Just got done releveling an entire beach house on pilings. About 4 inches worth. Fun with a couple of 20 ton hydraulic jacks and a laser level. Sure beats becoming an internet forum junky

 

[OAG]

I think the Jonathan Clements article is on track. Alot of people think they are making money when they are not. How many people are going to sit down and add up all of these costs.

Wonder what his article would say if he was writing it today (in 2008) versus the original 2005 article?

 

[tryan]

Heck you could have lime green pets.

Cant do that in a rental.

Tenants get the pets too ... try evicting for a no pet lease clause; Good luck with that.

 

[FIREd]

I keep reading threads like "your home is a money pit" / "your home is the best investment you'll ever make" and I have to say that, intuitively, I was leaning towards the money pit camp (perhaps because lately we've had to make a lot of costly repairs). But I had to be sure, so this morning I decided to sit down and using my Quicken data I crunched the numbers. And oh surprise! it's really not as bad as I thought!

We bought our house 3.5 years ago for $194,000 with 10% down. Realtors in the area have reported an average annual appreciation rate of 7% since early 2005. I conservatively estimate that my home would sell today for $240,000 (or about a 6.5% average annual appreciation rate. Also a bit low based on local comps).

So in the past 3.5 years the costs have been:
Closing costs: $2,604
Mortgage Interests paid: $30,842
Repairs: $20,344
Property taxes and homeowner insurance: $7,433
Total costs: $61,223

On the benefits side of the equation, we have (again over the past 3.5 years):
Cost of renting an identical house in the same location: $45,600
Tax savings (mortgage interest deduction): $7,710
Home Value Appreciation: $46,000
Total benefits: $99,310

So when taking all costs (I can think of) into consideration, still a gain a $38,087 (or about 20% of the home's purchase price), net of capital gain taxes. For an initial investment of $19,400 it's not bad!

Off course if I were to sell right now realtor commissions (about 6% of selling price or $14,400) would eat a sizeable portion of that gain. But still a good surprise!

Note: I assumed that utility costs would be identical whether I own or rent the house, so I did not include them.

 

[mathjak107]

3.5 years is basically a flip in time frame . you pretty much are only talking about the greatest housing run up we had. you need a much longer time frame to draw any conclusion. lots more in taxes, interest, repairs, insurance to be paid ahead... in most areas rent is way lower than cost of ownership. by the time you would have paid that house off you would have paid 2 to 3x the price in mortgage interest alone. that mortgage deduction has to start after the standard deduction amount too...

3.5 years is kind of like buying in after the stock market debacle of 2000 and commenting how great the markets were where if you were in long term your returns were okay but your averages long term were way lower then someone just buying in catching a way above normal run up and not paying years worth of margin interest to get there.. make sense?

 

[LOL!]

FIREDreamer, our numbers are similar to yours: we paid about $194K for the house and it's worth about $240K. The one difference is that we've owned the house for 14 years. Our home value has not kept up with inflation.

 

[FIREd]

Mathjak,

It makes sense and I did not claim my case was typical. Off course individual results depend upon your local RE market, how much you pay in property taxes and insurance, how much work your home needs, whether you bought at the top of market or not, how long you stay in your house etc...

I was merely interested to see whether MY home had been a good "investment" so far or if it had been a money pit. I have a few things going for me where I live: very low property taxes and insurance, low cost of living (meaning repairs tends to cost less than elsewhere and people are not so interested in high-end finishes), historically a decent RE appreciation rate but certainly it's no CA, rents are high enough to be on par with cost of ownership (the cost of renting I mentioned is based on the going rental rate in my neighborhood, I didn't make it up).

The amount I quote under "repairs" include a new roof, new A/C unit, a brand new sewer line plus a number of other minor repairs (all done in the past year). Those are probably the costliest repairs you can have in a house and I don't expect to have to do those repairs again in quite a while. So I would expect that my repair costs will remain lower for the next few years at least. Mortgage interest payments are going to be lower as well with each passing year (and so will the tax savings), but in all likelihood the cost of renting will go up during that time. Of course property taxes and insurance will also go up. I also don't intend to stay in this house indefinitely (probably another 3-5 years max) so long term returns (stock market style) are irrelevant in my case. I sold my last house after only 3 years so 3.5 year is quite a record for me!

Finally yes, if I stayed in this house for 30 years, by the time I pay off the house I would have paid 2x or 3x the price in mortgage interests alone, but that should be offset by the cost of renting during that period. Right now I pay less than $10,000 a year in mortgage interests ($13,000 a year including principal repayment) but the cost of renting would actually be close to $13,000 a year. In 2018, I may pay only $7500 in mortgage interests but I bet that the cost of renting will be higher then than it is now. So barring a huge hike in taxes/insurance or major unforeseen repairs, the balance sheet should become more favorable with the years, not less.

Am I missing something?

 

[tryan]

Hey, results will vary house to house. My neighbor is upside down having bought at the peak in 2005 and he foolishly dumped 100k into it AFTER over paying. We're still sitting on some equity having bought 10+ years earlier (even with a rehab effort).

Much like the QQQ's .... still down over 50% from the peak 8+ years later.

 

[kcowan]

On old friend once advised: "If it flies, floats or wears a skirt, rent it."

Maybe your friend was just paraphrasing Felix Dennis who was written up in Business Week (although his quotation was a little clearer in not eliminating Scotsmen).

How to Get Rich—and Notorious

 

[kcowan]

So when taking all costs (I can think of) into consideration, still a gain a $38,087 (or about 20% of the home's purchase price), net of capital gain taxes. For an initial investment of $19,400 it's not bad!

Off course if I were to sell right now realtor commissions (about 6% of selling price or $14,400) would eat a sizeable portion of that gain. But still a good surprise!

So based on your "all in" analysis and including disposition costs to compare apples and apples, you are saying that you invested $19,400 and after three years can see a gross out of $38,087-$14400=$23,687 for a net of $23,687-$19,400=$4,287 producing a total return of 22% and an annual return of 7.4%.

Do you think the $19k might have done better in another risky equity investment?