WSJ: Why Your Home Is Not the Investment You Think It Is

[wabmester]

Actually, it can be monetized through borrowing against the appreciated value (e.g. a home equity loan) in the same way you can monetize an unrealized gain in a margined security. In fact, one could argue that a home equity loan is superior to a margin loan since your house is not subject to any maintenance margin requirements.

Oh, no. This thread has morphed into the pay-off-your-mortgage debate!

 

[brewer12345]

Oh, no. This thread has morphed into the pay-off-your-mortgage debate!

Don't they all? Its sort of like the forum's version of gravity.

 

[samclem]

Don't they all? Its sort of like the forum's version of gravity.

Or increasing entropy. It's the forum's version of the Second Law of Thermodynamics. We've reached absolute zero when the thread turns to discussions of Bill Clinton or the war in Iraq.

 

[cute fuzzy bunny]

Yeah, the "home is not a financial instrument" thing certainly is a very mighty hairball.

Considering its plausibly our largest investment/sinkhole/place to put some of your money, I'd think one would want to consider it as part of their financial picture.

It supposedly cant be monetized, yet a minority very ardently arb theirs, issuing a bond to some bank and paying them interest while trying to invest the proceeds. Some rent them in part or in whole, others use them to sway their tax implications in one way or another. Et cetera...

Bobs points are well taken, but the approach is voluntary. I'm always fully aware of my homes values and quite regularly consider my options, both for reasonable and unreasonable times. I maintain and upgrade fairly continuously, so i'm avoiding some elements of depreciation, and I only buy properties in appreciating areas.

That whole pain in the butt of moving is a bit of a limiter, but then again, $3-4k lets someone else do it for you. Barely a 1% tariff.

 

[kcowan]

That whole pain in the butt of moving is a bit of a limiter, but then again, $3-4k lets someone else do it for you. Barely a 1% tariff.

Also there is the 6% tariff on both ends for a couple of realtors. Unless, of course, the home owners are into DIY but then that would be not a straight apples comparison, would it?

 

[cute fuzzy bunny]

I guess thats why I dont pay 6%.

 

[Billy]

Cute Fuzzy Bunny

But in renting/traveling/ you're paying for it one way or the other (your landlord/hotelier doesnt do the work for free, it comes out in your rent) or you're getting what you pay for.

We all have to live somewhere and as humans we take up space. I think it goes back to priorities and how much one wants to give to the housing factor in one's monthly alotment of expenses or in retirement planning (See 'Worry-Free' Housing http://retireearlylifestyle.com/a_a_communities.htm )

While yes, when traveling the landlord/hotelier doesn't do the work for free, saying "getting what you pay" for doesn't exactly paint the total picture. Our guest house room here in Chiang Mai rents for $11 per night. We have swimming pool, maid service, restaurant downstairs, cable TV, great location, air con, etc. In Australia we paid approx $25 nightly in renting someone's apartment while they were gone. From Bedroom, Kitchen, Living Room/Dining room was all picture window and we had a million dollar view of Sydney Harbor from the Manly side. Completely furnished, 1 - 1/2 blocks from the beach and a 15 minute walk to downtown for groceries and entertainment.

Yes, yes, we have stayed in The Four Seasons Hotels. (In fact we help open the one on Nevis back in 1991.) They have become almost a 'theme park' for us now. "Hey Honey. Look at those cute natives in their local costume. I wonder where they got that water buffalo? Do you think that rice paddy is real? I just love paying $10 for a beer that I can get for a buck outside these walls... it tastes so much better here when I can watch these employees work."

ESR Bob

If it were an investment I'd sell it, but as it is our home, we're staying.

WAB

Yep, it sucks to own a fast-appreciating home that you plan to stay in forever. The only impacts you feel from the appreciation are higher property taxes and more expensive contractors. I expect that the property tax burden for our place may someday drive us out. Something's wrong with this picture.

Yeah, that's a bit of a rub isn't it? We get attached to our home for all the emotional reasons - our kids grow up there, our friends are there, holiday celebrations. We have decades of life memories associated with it and it's tough to get up and move 20+ years down the road. In some ways it sort of feels like a betrayal or somehow 'not fair.' Nothing stays the same forever. .. It takes Courage to Change. http://www.retireearlylifestyle.com/courage.htm

Akaisha
Author, The Adventurer's Guide to Early Retiremet

 

[bpp]

Why Your Home Is Not the Investment You Think It Is

I don't think of my home as an investment, so I guess this means that it really is.

It is a part of my net worth, but so are a lot of other things that I don't consider investments, like cars and cash in the bank. Not all assets are investments, and a house is a depreciating asset at that. The land it sits on is another matter, being basically an inflation-tracking store of value, so that could be considered an investment if tracking inflation counts. I prefer a positive, non-zero expected real return to really consider something an investment, though.

 

[teejayevans]

I guess thats why I dont pay 6%.

I couldn't sell 10 dollar bills for $5....
I'm just not a salesman...so some of us do have to pay 6%, which is why I
don't buy and sell houses.
Tom

 

[kcowan]

I couldn't sell 10 dollar bills for $5....
I'm just not a salesman...so some of us do have to pay 6%, which is why I
don't buy and sell houses.
Tom

And my point to CFB is exactly that. People that trade houses and do their own selling are actually working a second job for that 6%. I have no problem with that. Just don't tell me that the 6% is an equity gain. And CFB has little control over the 6% that the seller is paying unless he only considers FSBO inventory. (Or possibly buying new because the developer often sells for less than 6%.)

We would scream very loudly is every equity trade cost 12% in commissions (plus the moving costs). We just need to keep clear-headed on the true economics of real estate ownership.

 

[haha]

We just need to keep clear-headed on the true economics of real estate ownership.

We'll achieve that only a couple of yers into a true real estate downturn, not this spotty softness that we are seing now.

I guess with a enough political will house prices might be kept up forever. If the market should get too weak, we could give every immigrant who manages to show up $1 million to buy a starter home in Chula Vista, El Paso or Brownsville.

Problem solved!

Ha

 

[kcowan]

We'll achieve that only a couple of yers into a true real estate downturn, not this spotty softness that we are seing now.

Last time the US national house prices took 7 years to reach bottom so you need to be patient. In most places, we are at the top of the roller coaster when the cars just slow down and start to edge over the top. :

 

[tryan]

... exactly , I like to say the trip DOWN is half of the trip up. Soo if this ride up took 12 years ... the bottom will be seen around 6 years out.

Put your seat belts on!

 

[cute fuzzy bunny]

Wow, a whole lot of assumptions.

I guess the realtor commissions just dont seem that important to me when i'm doubling my money (or better) on a property, which has usually been my primary residence.

Doesnt take much of a salesman approach to call "help u sell" to get their 1.5% sellers fee and then ask them to set the buyers agent rate at 2.5%. Or if thats too much, call costco and go through their program and get a portion of the fees rebated to you.

Even my century 21 and coldwell banker agents will do a 4.5% total commision deal with no more negotiating than my asking "will you do it for 2%+2.5%?".

In selling my old house, it'll be darn near zero. I asked all my neighbors who among them knew someone who'd like to live next door to them and get the house at a good price. One seems to have materialized. The price we've tentatively negotiated is what I hoped to gross from the deal using a 4% commission, plus a couple of percent, plus they're going to paint and carpet it, which saves me another couple of percent. Hopefully the deal will go through as planned.

I realize this is an emotional issue and that a lot of people want to put their personal residence in a 'lock box'. As long as your recognize that you're boxing off what is probably your largest single 'holding' from working to your advantage, thats swell.

 

[kcowan]

Cibc World Markets published a piece saying they anticipate house prices will double in the next 20 years. That is 3.7% CAGR! Then deduct relators fees. taxes paid, maintenance and forecast inflation to determine the real gains. They think inflation will be 2% a year.

 

[BarbaraAnne]

Wow, a whole lot of assumptions.

I guess the realtor commissions just dont seem that important to me when i'm doubling my money (or better) on a property, which has usually been my primary residence.

Doesnt take much of a salesman approach to call "help u sell" to get their 1.5% sellers fee and then ask them to set the buyers agent rate at 2.5%. Or if thats too much, call costco and go through their program and get a portion of the fees rebated to you.

Even my century 21 and coldwell banker agents will do a 4.5% total commision deal with no more negotiating than my asking "will you do it for 2%+2.5%?".

In selling my old house, it'll be darn near zero. I asked all my neighbors who among them knew someone who'd like to live next door to them and get the house at a good price. One seems to have materialized. The price we've tentatively negotiated is what I hoped to gross from the deal using a 4% commission, plus a couple of percent, plus they're going to paint and carpet it, which saves me another couple of percent. Hopefully the deal will go through as planned.

I realize this is an emotional issue and that a lot of people want to put their personal residence in a 'lock box'. As long as your recognize that you're boxing off what is probably your largest single 'holding' from working to your advantage, thats swell.

Very impressive strategy! I'm going to remember that when we sell in a few years...

 

[chinaco]

In selling my old house, it'll be darn near zero. I asked all my neighbors who among them knew someone who'd like to live next door to them and get the house at a good price. One seems to have materialized.

We sold our last house using an agent, but purchased the new house directly from the exising owner. Of course, you wind up with everyone's contingent deals needing to close. What I found was that two owners dealing with each other can result in friction that could tank the deal. Owner/Buyer have too much at stake and it is difficult to keep it contained. While real estate agent fees are high (too high), they do work as a go between. Many of the hangups were on seemingly small, but important items.

What I did was negotiate half of a 6% commission (the savings) on my side. I factored this in from the beginning. It turned out ok... but was a frustrating experience.

We both hired attorneys. I would recommend that you engage a realestate attorney. If possible, let the attorney's work out the details. It may cost a little more, but you will have a negotiation buffer. Most of it should be able to be done over the phone.

 

[mathjak107]

it can be a wise move in this market to offer even an extra 1/2 to 1% commission to a broker on top of their usual. you want them concentrating more on selling your house than others they have

 

[cute fuzzy bunny]

Here in CA everything is done by the title company, no lawyers involved.

I had always thought that the extra .5 to 1% would help stimulate 'visits', as i've noted that cutting a half to 1% off the buyers agent fee seems to stunt them. But the house I bought had a 4% buyers agent commission on it and still didnt sell for 8 months.

 

[mathjak107]

it helps when trying to sell a house to price it so the buyer feels like hes getting a great deal too. if you really want to sell it fast leave some money on the table for the next guy and you may be surprised how fast it may go.

 

[tryan]

What's the rush ?? I always said if it sold in a day or even a week you priced it WAY TOO LOW.

In MA I've paid as little as 4% and as high as 5% and always felt very well supported. These are multi's and starter SF (~150k/unit) ... in CA or NYC I'ld expect alot more wiggle room when 1/2 million is peanuts.

 

[SecondCor521]

We sold our last house using an agent, but purchased the new house directly from the exising owner. Of course, you wind up with everyone's contingent deals needing to close. What I found was that two owners dealing with each other can result in friction that could tank the deal. Owner/Buyer have too much at stake and it is difficult to keep it contained. While real estate agent fees are high (too high), they do work as a go between. Many of the hangups were on seemingly small, but important items.

What I did was negotiate half of a 6% commission (the savings) on my side. I factored this in from the beginning. It turned out ok... but was a frustrating experience.

We both hired attorneys. I would recommend that you engage a realestate attorney. If possible, let the attorney's work out the details. It may cost a little more, but you will have a negotiation buffer. Most of it should be able to be done over the phone.

I've found just the opposite in my experience. The more people involved in a RE deal with different goals and reward structures would and has seemed to me to increase the potential for friction and conflict.

When we sold our last house we met the buyers at a coffee shop, talked over the offer over coffee, and had the whole deal written up in about 30 minutes on two single sided pieces of paper (the FSBO contract template). Previous buys and sells with realtors took weeks of back and forth: buyer -> buyers agent -> seller's agent -> seller -> seller's agent -> buyer's agent -> buyer, and that's just one round trip; there are usually a few of those.

2Cor521

 

[kcowan]

I did a 25 year look back on standard condos in our neighborhood:
1982 163k
2007 451k
CAGR 3.81%
CPI 2.97%
so a real gross return of 0.84% per year before deducting costs. If I pay a realtor 5% to sell it, the return drops to 0.63% before deducting monthly fees and maintenance. The DJIA index has a CAGR of 11.5% over the same period, less any MERs...

 

[cute fuzzy bunny]

I think we just identified why i'd never buy a condo.

 

[Nords]

I think we just identified why i'd never buy a condo.

Hey, our little Pacific Grove starter condo provided the down payment for our first Hawaii house, the rent from which pays the mortgage on our second Hawaii house...

It's all a giant hot potato with an inflation appreciation.

Good thing we enjoy home improvement.