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

[Sam]

http://finance.yahoo.com/real-estat...ur-home-is-not-the-investment-you-think-it-is

Concluding paragraph:
If you don't already own your own home, do the math. Don't buy if you think you'll be moving in just a few years. Don't buy a house that's too big for your needs or so expensive that you will strain to pay for it simply because "it's a good investment." It's not.


What do you think?

 

[Cut-Throat]

Home = Not Investment

 

[Sparky]

This time it's different... NOT

 

[jazz4cash]

Home = Not Investment

 

[CCdaCE]

Pfft. Silly article.

I'd say their "Major Repairs & Improvements" line throws everything out of whack in the first two tables.

Table 1 estimates someone as spending $300k in repairs & improvements on a $300k house over 30 years, or $10,000 per year. What are they estimating... new windows, shingles, and siding in a continuous three year rotation?

Table 2, they take a $50k house and sink $150k in repairs & improvements into it over 30 years? $5k/year? Not so bad, but on a $50k house, absolutely nuts.

Whatta garbage article.

-CC

 

[CyclingInvestor]

Agreed. Their costs are way too high. My house cost $154k in 1987 (about $500k
now). I have paid $5500 for a roof, $1500 for painting, $2000 for a new heater,
$500 for a hot water heater, $900 for a driveway patch, and a few minor repairs
in 19 years. Maybe $1000/year total.

 

[dex]

Interesting article - I would have done the analysis differently. To me the the question is not as presented in the article but a comparison between buying and renting in a particular market. Below are some quick numbers.

In the example the question is: Is it better to rent or buy in a particular market. (Someone else can compute if there is a mortgage.)
If renting is more than $2,250 it would be better to buy if less than rent.

300,000 Purchase Price - assuming no mortgage
7.0% Interest Rate opportunity Cost
21,000 Opportunity Cost
3,000 Real Estate Taxes
2,500 HOA or Maintance
500 Insurance
27,000 Total Purchase Cost

12
2,250 Rental Eqilevant

 

[bbuzzard]

Note that Houston curve? That is where I live .

 

[bbbamI]

Living in our home is enough for us.

 

[Mwsinron]

It had some good points. But I agree with others about the costs. I don't pay nearly that much. Plus we were lucky to buy into an area that sky rocketed and probably will continue too.

 

[al_bundy]

Pfft. Silly article.

I'd say their "Major Repairs & Improvements" line throws everything out of whack in the first two tables.

Table 1 estimates someone as spending $300k in repairs & improvements on a $300k house over 30 years, or $10,000 per year. What are they estimating... new windows, shingles, and siding in a continuous three year rotation?

Table 2, they take a $50k house and sink $150k in repairs & improvements into it over 30 years? $5k/year? Not so bad, but on a $50k house, absolutely nuts.

Whatta garbage article.

-CC

new kitchen with granite, nice cabinets with junk like lazy susan, new black or stainless steel appliances, etc can easily cost over $50,000. Add another $20,000 for a bathroom.

my wife is dragging me to open houses just to see what's out there and we always talk about whether we would buy this place afterwards. Right now someone had to make some really nice renovations for us to consider buying it. if you made nothing or some very minor cosmetic ones like adding a new coat of paint on top of 20 years of old paint we aren't interested.

I'm pretty sure this trend will continue for a few years.

 

[BarbaraAnne]

I agree with al bundy. In my neighborhood/area if you haven't upgraded to granite, stainless appliances, scraped wood floors, etc. and upgraded bathrooms (esp. master) it is hard to sell and there is a significant price difference per square foot.

Where we are there is so much new construction with all of the upgrades that it is hard to get people to look at a 10+ year old home. In addition, we haven't had the appreciation in Texas that other parts of the country have enjoyed. Supply and demand is out of balance. It's hard to make money under these circumstances...

 

[kcowan]

I think the bubble appreciation in the last 10 years makes any financial analysis difficult. Just like FIRE in 2000 was tough because of the dotcom, tech and telecom bubbles, any home ownership analysis needs to make some assumption about the correction.

If I buy a $300k home today, and it declines in value by 30% between now and 2013, then even $1000/mo in maintenance and repairs is going to be less than the depreciation ($72k versus $90k). Of course the $72k is real whereas the $90k is on paper. And if I live in the house until I die, its value is moot.

 

[CCdaCE]

new kitchen with granite, nice cabinets with junk like lazy susan, new black or stainless steel appliances, etc can easily cost over $50,000. Add another $20,000 for a bathroom.

my wife is dragging me to open houses just to see what's out there and we always talk about whether we would buy this place afterwards. Right now someone had to make some really nice renovations for us to consider buying it. if you made nothing or some very minor cosmetic ones like adding a new coat of paint on top of 20 years of old paint we aren't interested.

I'm pretty sure this trend will continue for a few years.

I agree with al bundy. In my neighborhood/area if you haven't upgraded to granite, stainless appliances, scraped wood floors, etc. and upgraded bathrooms (esp. master) it is hard to sell and there is a significant price difference per square foot.

Where we are there is so much new construction with all of the upgrades that it is hard to get people to look at a 10+ year old home. In addition, we haven't had the appreciation in Texas that other parts of the country have enjoyed. Supply and demand is out of balance. It's hard to make money under these circumstances...

Must be the midwesterner in me. I still say if you're droppin' $50-70k into a $50-300k house, you're nuts. But, it's your life, your money, etc. If renovation is something you're doing to sell the place, and that is seen as necessary, then it's a different story. If I have to dump $50k+ into a house to get you to consider buying, now THAT is just a crazy MARKET.

Right now, I'm putting $2k into a bathroom.

Ahhh, real estate.

-CC

 

[tryan]

Once again the message from Fidelity is "forget your house ... give your money to US".

The whole story is summarized by the only useful sentence:

Q: Yes, but the house will be worth much, much more.

A: Maybe, maybe not. Whether you come out ahead depends on where and when you buy.

It the risk of repeating myself ... I made more money in real estate over the last decade than any index fund returns I've seen. NW went from 160k to just over 2m. Yes I am giving some of it back this year ... but the same MIGHT be said of stocks. We'll see.

 

[teejayevans]

It the risk of repeating myself ... I made more money in real estate over the last decade than any index fund returns I've seen.

For me it was the opposite...there are no absolutes

 

[FinanceDude]

It the risk of repeating myself ... I made more money in real estate over the last decade than any index fund returns I've seen. NW went from 160k to just over 2m. Yes I am giving some of it back this year ... but the same MIGHT be said of stocks. We'll see.

As I recall, you took some HUGE risks to make that happen......certainly most of us wouldn't do that............

But in your case, BIG RISK = BIG REWARD. Congratulations, you took the type of risk 95% of all folks wouldn't, so you get the reward............

 

[tryan]

For me it was the opposite...there are no absolutes

I absolutely believe that .... that's why the only useful piece in that article is "where and when" you buy. And the same is said of equities (as the NASDAQ is STILL 50% off it's peak).

you took some HUGE risks to make that happen

Weelll, not as much risk as the dotcom investors . Not as much reward either.

 

[ERD50]

Interesting article - I would have done the analysis differently. To me the the question is not as presented in the article but a comparison between buying and renting in a particular market.

I totally agree. You can't just look at your primary residence the same as another 'investment'. It must be compared to 'what else could I do'. And, that alternative is renting. So compare homeownership to renting.

It's probably not an easy comparison, I'm not sure what all the intangible trade-offs are, or what I would spend on improvements in a rental that I considered my 'home'. But, in general, I think most people way overestimate the gains they got in their home because they use the wrong benchmark.

The S&P is 4x what it was when I bought my house. Imagine if I bought the S&P in 1993 with 50% leverage.

If you want to compare to an *investment* property, then fine, compare to alternate investments. Your primary residence, compare to renting.

-ERD50

 

[brewer12345]

Must be the midwesterner in me. I still say if you're droppin' $50-70k into a $50-300k house, you're nuts. But, it's your life, your money, etc. If renovation is something you're doing to sell the place, and that is seen as necessary, then it's a different story. If I have to dump $50k+ into a house to get you to consider buying, now THAT is just a crazy MARKET.

Right now, I'm putting $2k into a bathroom.

Ahhh, real estate.

-CC

Hmmm, we bought our house 4.5 years ago for $300k. I'd guess I would clear around $400k if I sold, although we have no plans to do so. The house was built ca. 1950 and was in OK shape, but it needed a few upgrades and badly needed redecorating (you wouldn' believe me if I told you). In the time we have owned it, we have put in roughly:

- $10k redecorating, carpets, etc.
- $2k worth of plumbing
- $3k of insulation and roof venting
- $5k of misc. repairs and upgrades

Now in the midst of a mid-grade kitchen renovation (gutted, except for appliances) that I expect will run us slightly over $20k by the time the dust settles. The upstairs bathroom needs a complete reno as well (next year), and I imagine that will probably run another $10k.

So we are talking about $50k of work in 5 years for a ~2000 sq. ft. house in a middle class neighborhood, with nothing done over the top or terribly high end. I don't expect to continue at a pace of $10k a year, since the kitchen and bath jobs are good for a decade or better, but its not hard to run up a serious tab on rennovations and maintenance.

 

[CCdaCE]

<snip>

... but its not hard to run up a serious tab on rennovations and maintenance.

My gripe is they're putting $300k into a $300k house, ON TOP of maintenance. ...in table 1.

In table 2, putting $150k into a $50k house. ON TOP of maintenance. And THEN, showing a $103.5k loss.

NUTS.

How can there be any other explanation?

I've put less than $5k into my house in almost 4 years. It was purchased at $117k, now it's appraised at $140-ish, for tax purposes. Maybe it's worth slightly more.

To me, the article is saying something similar to "buy a $10k car, put $10-30K into it, and watch it depreciate to $5k."

Am I the one who's interpreting this incorrectly? ... Am I Nuts?

-CC


Edit: maybe I need to back off on the caffeinated beverages.

 

[al_bundy]

Must be the midwesterner in me. I still say if you're droppin' $50-70k into a $50-300k house, you're nuts. But, it's your life, your money, etc. If renovation is something you're doing to sell the place, and that is seen as necessary, then it's a different story. If I have to dump $50k+ into a house to get you to consider buying, now THAT is just a crazy MARKET.

Right now, I'm putting $2k into a bathroom.

Ahhh, real estate.

-CC

http://www.expo.com/stores/storelocator.aspx

this place was extremely busy the last few years. At least the NYC stores. They are a division of Home Depot. The NYC Home Depot stores are a mix of regular HD and Expo in the product selection.

bought my apartment in NYC in 2003 for $135,000. Put in $30k into it. $5000 walls, $12000 kitchen, $8000 bathroom and the rest here and there. With the renovations i can probably sell it for $250,000. $700,000 houses were $250,000 in 1997 around here. My guess is a lot of people took out HELOC's to put a lot of money into their homes because i've seen some pretty average people there.

it was one thing when anything sold around here, but now at current prices a lot of people want to move in and not do anything. and they want something that is modern looking. that means if your house/apartment has a kitchen/bathroom or whatever from the 1960's or 1970's you are going to take longer to sell, will need to cut your price or whatever.

there is so much choice here from 100 year old homes to newly built ones and everything in between that it's also a little like keeping up with the joneses.

another reason is to do it for feng shui or just for yourself since it's nice coming home to something that is nicer looking than what my place looked like when i first bought it. 50 years of paint. personally i hate carpet so if i ever look at a place with carpet i'm calculating how much it's going to cost to rip it out and replace it with wood.

my inlaws bought a home for $235,000 in 1994 and have put around $100,000 into. almost everything is redone including knocking down walls and european almost everything because they like the european look. Recently they bought a $350 kitchen faucet just because they like the look oof Grohe better than Delta.

 

[Sam]

I noticed the high amount of repairs & improvement too. It's either a mistake or an exaggeration.

Aside from that, I think the article is good.

 

[al_bundy]

My gripe is they're putting $300k into a $300k house, ON TOP of maintenance. ...in table 1.

In table 2, putting $150k into a $50k house. ON TOP of maintenance. And THEN, showing a $103.5k loss.

NUTS.

How can there be any other explanation?

I've put less than $5k into my house in almost 4 years. It was purchased at $117k, now it's appraised at $140-ish, for tax purposes. Maybe it's worth slightly more.

To me, the article is saying something similar to "buy a $10k car, put $10-30K into it, and watch it depreciate to $5k."

Am I the one who's interpreting this incorrectly? ... Am I Nuts?

-CC


Edit: maybe I need to back off on the caffeinated beverages.

last year i was running numbers in my head of buying the cheapest home in the NYC area i can find with a good sized lot and in a good neighborhood. Find something with 30 year old kitchen and bathroom. then over 15 years or so gut it out and remodel with top of the line stuff. $400,000 house will probably cost $150,000 to remodel. i would do this mostly for myself

they had this on cnbc a while ago. bathroom remodels are a huge growth industry over the last 20 years or so and people are spending this kind of money mostly to have something nice.

when i lived down south almost everyone had a truck. i would stick with a cheaper car and spend the money home improvement in a heartbeat since a car or truck depreciates and i think it's a waste of money buying a truck that commands a price premium just because people are willing to pay it.

 

[teejayevans]

My gripe is they're putting $300k into a $300k house, ON TOP of maintenance. ...in table 1.

In table 2, putting $150k into a $50k house. ON TOP of maintenance. And THEN, showing a $103.5k loss.

Ignoring the particulars, I believe the it does make a valid point that houses may not be
a sure fire investment of years past, especially if you take into account the taxes, interest,
ongoing maintenance, insurance, upgrades, etc, especially short term.
And anybody dealing with Katrina aftermath probably would agree with me.

I would think land might make a better investment, don't have the above extra fees, and
probably less downside.

Of course I'm 2-1-1 in the real estate world, with no BIG wins, so what do I know
Tom