WSJ: "How Houses Eat Money"

[Nords]

My local newspaper links the Sunday WSJ for free, so I think this Jonathan Clements article can be read without a subscription.

Essentially he says that his 200% home appreciation has been "eaten" by improvements, repairs, & maintenance.  The only time you profit from ownership is when you pay off the mortgage and live in the house "rent free".

Landlord-free peace of mind?  Priceless...

 

[rapoole]

Nords-

I read that story by Clements. He reaches the conclusion that he's lost money on his house by assuming that having a place to live has no value, so it's a phony calculation. He's not the sharpest tack in the box.

rapoole

 

[BUM]

No doubt that improvments cost money. From a financial (WSJ) perspective, those improvments if well planned don't "eat up" gains. Improvements keep your investment viable and at best, can increase your selling price.

I have a neighbor who ignored his house for 20 years. Oh, he had the grass cut and the pool maintained but the basement was moldy and the bathrooms and kitchen were worn out. His blind eye opinion was, "Why should I spend $50,000 on the chance that I might make as much or more on the selling price?". Apparantly commom sense prevailed as the contractor's truck has become a fixture in their driveway.

 

[cute fuzzy bunny]

I guess that depends a lot on the property.

I could have put $50k-75k into my old mcmansion. I didnt do much major stuff, just regular maintenance and fixed anything that fell off. But it could have used a new roof, some siding replacement, a kitchen update and some minor bath updates, new carpet, etc. But it appreciated $200k+ while I lived in it and its worth more than that now.

New place is up ~$150k. Other than some new carpet I doubt I could put more than a few hundred into anything or will need to put more than a few thousand into it over the next 5-10 years.

 

[LEX]

Even though its hard to admit it, I consider my house as a form of utility. The other factor why I picked this property was personal lifestyle/personal choice.  I bought my house for its location and space from the neighbors while still being in a city.  Its not the most expensive house I could have bought, but its well built. Its masonary/adobe like exterior is low maintenance.  

A House bought for family living is not an investment. I consider them at best depreciating assets despite the current irrational mania going on in virtually any real estate market.  The mass confusion will eventually end when money becomes fully valued and real estate markets have to deliver value based on function rather than the next wild realtor driven, "look at what your neighbor sold for" appraisal.

I do not go out and buy new shoes with the expectaion I will derive any residual value of ownership other than the use for which they were bought, shoes are for walking.  The concept that one should expect any other value from their primary home besides its utility for shelter and lifestyle is at best a mixed priority and at worst a flawed investment decision.  If you really want to invest in real estate, then buy property to rent, develop or otherwise leverage, be emotionally distant, and know its just as easy to loose in this investment as it is in the stock market.  I consider the house where my family lives to be off my investment ledger and in the category of basic requirements that have their value in their utility, as in food clothing and shelter.  

 

[unclemick]

Hmmm

Playing some games  off the article and counting bulldozer cleanup after hurricanes - in 26 yrs - for our fish camp we're only 70- 80k in the hole having spent 142k over 26 yrs and using $45/sq foot as replacement cost - about what it might sell for on a good day.

On the other hand - a swag brings 125k equivalent rent over the same period - sort of a wash - plus all the fun of cussing and swearing doing your own repairs - and no - I didn't count the cost of adult toys(tools??) or a rate for my own labor.

After all - fun is fun.

My sister made her weekly call from Yankee land to Mom last night and mentioned the pier(15-20k job for 120 ft) - how nice the sunset would be, etc, etc.

My neighbor broke down last year and replaced his - one month before Ivan took it again.

Home is a mental thing - but the numbers are good fun.

If I went by numbers - I'd rent and never own.

 

[LEX]

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

 

[LEX]

(Please do not make any off color references to Kilted Scottsmen)

 

[unclemick]

Well

I got two out of three - after three years, she wanted a fish camp - at least she had furniture and her own 401k.

 

[azanon]

The only time you profit from ownership is when you pay off the mortgage and live in the house "rent free".

This is incorrect.   A home loan is just another loan, where if you pay it off, you effectively earn the rate of your mortgage (minus any interests deductions you might lose).   An alternative option to paying off any loan is investing the money and earning whatever rate of return your investment can bring you which may be well above your home loan rate.

Loans are give and take and they offset;  I might get a bank to effectively hand me 120K to purchase a house.  But in the same instance i have a 120K dollar appreciating investment that offsets any month to month payment, SO the point at which you pay off your house isnt a profit point at all.   On the contrary, if one consistently makes more in their investments than they have to pay in interest on their home loan, they actually profit less as they have less money borrowed over time (because they're no longer using pseudo leverage to enhance their return potential).

Azanon

 

[greg]

Had an interesting conversation w/ my cousin a few weeks ago. He was going down to Texas to look at a winter 'retirement' home in a development down there. I got the distinct impression that the real reason was to make some money on a RE venture. He was going to borrow money from his home to finance the down payment, then rent the place out until he retired. I tried to tear him a new one--housing bubble, too leveraged, what if?, what if?, what if?

All I wanted him to see is that one needs to clearly distinguish between home and making money. Martha made the comment a year or so ago that way too many people are buying homes not for themselves and their families but for the next buyer ("Gosh honey, if we buy this $500,000 McMansion we don't really need, we'll make 10%/year; but if we buy the cute $300.000 house that fits us well, we only make $30,000/year. Duh! Let's buy the big, expensive one, it has better resale value.")

My comment to my cousin: this works well--until it doesn't

 

[Whakamole]

I just read an article discussing how many home sales in various "hot" regions - parts of Florida, Arizona - were second homes.

Yup, lots of 'investors.' The funny thing is, there is no way they can rent their homes out for even a decent fraction of their mortgage payment. That's one of the classic real estate bubble signals.

And remember kids, leverage works both ways...

 

[Caroline]

Martha made the comment a year or so ago that way too many people are buying homes not for themselves and their families but for the next buyer ("Gosh honey, if we buy this $500,000 McMansion we don't really need, we'll make 10%/year; but if we buy the cute $300.000 house that fits us well, we only make $30,000/year.  Duh!  Let's buy the big, expensive one, it has better resale value.")

My comment to my cousin:  this works well--until it doesn't

A friend of mine made this exact decision a few years back out here in Sunny California.  Traded in his modest rancher for a McMansion.  Six months later his company moved him from contractor status (where he made a lot of money per hour but was responsible for his own healthcare, etc.) to full-time employee, where his hourly salary dropped by 40%.

Had to sell the big house less than a year after he'd bought it and move back to a modest home.  Even with the housing bubble out here I can't see how he made back the transactions costs on all of this.

Caroline

 

[tryan]

Agree with all that the primary residence is a place to live ... not an investment.

To that end our hero should have added 14 years of comparable rents to the value side of ledger. This would have tilted the scale pretty heavily in favor of home ownership.

 

[tryan]

... and another thing (note the JG posting style) .... most home owner improvements do little to add value to the house. Simply style preferences. Can remember the colors the DW picked for our first house's bedrooms. Little sence in adding those costs to the value of the house.

 

[Jarhead*]

Nords: If old Jonathan spent his 200% gain on repairs, etc., its a pretty fair assumption that property management should not be a fall-back career for him.

 

[azanon]

Agree with all that the primary residence is a place to live ... not an investment.

You can call it whatever you like.  It won't change the fact that real estate, provided you bought in a good location, is one of the best "investments" you can make since the historical appreciate of real estate is quite good, and just down-right fantastic over the past 5-6 years.   It also won't change the fact that you can (most likely) sell your house today for a heck of a lot more than you could have 5-6 years ago.

Investment = An appreciating asset that can reasonbly be bought and sold. My house can be 1. sold, and 2. it has appreciating potential (which outweights its depreciating potential judged historically).

 

[Martha]

We used to own a home on the beach and sold it after a couple of years because we were tired of the summer crowds, high property taxes, and the big mortgage payment. We got a decent return and were able to pay off all remaining student loan debt when we sold the house. It was after we got rid of that home we were able to start really saving money.

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. But we would have spent more money along the way as well and I think we would not have been better off in the end.

 

[azanon]

But we would have spent more money along the way as well and I think we would not have been better off in the end.

... but because that might have been the case, wouldn't have made the house not an "investment". Any investment that can triple in value (and is liquidable) in 8 years is a damn good one.

I'd go so far as to say that anyone that doesnt recognize their personal home as an investment is making a major mistake because they're sinking a LOT of equity into it just the same. If you knew for instance, the housing market was going to crash, it'd be crazy to buy at the peak and take the investment loss "on paper" simply because you declare you're going to live there forever so it doesn't matter. It DOES matter cause if you knew that, then far better to rent while housing values are in the process of dropping, then later pay far less down the line for the same house. So, ignoring the fact that its an investment can end up really costing someone a lot of money.

 

[Martha]

But if you look at the house you live in as an investment, you have to factor in the costs of that investment. For us the costs were high mortgage payment, having to continue to make interest payments on student loans, high property taxes, and the inconveniences in living there in the summer. When I look at those costs, I believe we were in fact better off sellling when we did. You can't just look at the appreciation.

We have always looked at every place we have lived beyond our very first house as an investment.

 

[Patrick]

We used to own a home on  the beach and sold it after a couple of years because we were tired of the summer crowds, high property taxes, and the big mortgage payment.  We got a decent return and were able to pay off all remaining student loan debt  when we sold the house.  It was after we got rid of that home we were able to start really saving money. 

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. But we would have spent more money along the way as well and I think we would not have been better off in the end. 

I just purchased a 35 year-old  house near the beach.  At the closing I saw a form that showed what the house has previously sold for.  In 1974, $41K; in 1977, $71K; in 2000, $379K; then I paid $600K.  I'm not sure what that is compounded annually, but dollar-wise it's pretty significant (14.6 times in 31 years).  My nextdoor neighbor bought his house then tore it down and is in the process of building a new house - guess he just wanted the lot (a very large improvement cost there!).  My taxes will be $13.2K/year, so the house has to appreciate at 2%/year to cover that.  For me, it was a lifestyle choice to purchase this place because I want to live there, but I still consider it an investment. 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.

 

[Patrick]

... and another thing (note the JG posting style) .... most home owner improvements do little to add value to the house.  Simply style preferences.  Can remember the colors the DW picked for our first house's bedrooms.  Little sence in adding those costs to the value of the house.

So true. The best are kitchens and baths, which return about 70% of their cost (YMMV).

 

[saluki9]

Nords: If old Jonathan spent his 200% gain on repairs, etc., its a pretty fair assumption that property management should not be a fall-back career for him.

HE was talking about his carry as part of the expenses

 

[azanon]

For us the costs were high mortgage payment, having to continue to make interest payments on student loans, high property taxes

What was weird for me was, for my financed amound (120K of 150K), my mortgage payment (on 30 year loan) + all the other escrow (property tax, interest, other misc stuff) was about the same as my apt rent for a 2 bedroom.

So, the only real difference I see is who's mortgage i'm going to pay; mine or someone else's. I'd prefer to pay mine.

 

[TromboneAl]

Great article. I'm saving it for when someone tells me how much they've made on their house.

Often you'll hear someone say something like "I bought this house/land 15 years ago and I sold it for twice what I paid!" They don't realize that even without property taxes and other expenses, that's only a 5% rate of appreciation.