Report finds residential real estate underperforms other assets

[Spacebär]

http://www.marketwatch.com/news/story/report-finds-residential-real-estate/story.aspx?guid=%7B6C85CE03%2DEABE%2D46E6%2DAC8C%2D04BCFBB670D0%7D

 

[Peaceful_Warrior]

What the article does not account for is the leveraging that we take advantage of with the bank loans.

 

[wabmester]

The actual report is here:

pdf link

It's basically a sales job from Fidelity, but it has some good data that shows the cyclical nature of real estate.

 

[2B]

In my 30 years of home ownership, I haven't seen any significant return on my capital "invested" despite the leverage. The only way it works out is when I factor in the tax "benefits" and the fact that I had to live somewhere anyway.

Gains came randomly. Since I've been living in mid-America and the Gulf Coast, I haven't won the real estate lottery by having owned a property in one of the "hot" areas.

We're in the process of selling my FIL's property in Houston. He bought the original lot in 1953. His lot happened to turn out to be in an area that became one of the most upscale Houston neighborhoods. If he had bought a mile in any direction his gains would have been far less. His annualized return on the lot based on my financial calculator was just over 11%. This neglects any taxes or cost/value of his home which is to be torn down. I'm willing to bet that this is the best return anyone has gotten in Houston real estate over the same period.

 

[audreyh1]

The two pieces of real property we owned for over 20 years way lagged any other asset class. I'm not sure they even kept up with inflation! One was a home in Central Texas, the other was some rural land in the same area. Both were bought in the early 80s.

When you buy real property and the location have everything to do with appreciation.

Audrey

 

[Gone4Good]

I think other research has shown long-run real estate returns at about 1% above inflation, which significantly lags bonds at ~2.5% and stocks at ~7%.

When most people think of real estate gains they tend to ignore not only inflation (particularly for people who have owned their home for 30 odd years) but also the constant maintenance expense. Most estimates I've seen for annual home maintenance costs run about 1-2% of the original purchase price, which means that residential real estate is at best a break even proposition. Add in the carrying cost of leverage and it is almost certainly a money losing proposition over the long-term, on average.

A home is a good place to live but it's not likely a good investment in the traditional sense of the word.

 

[tryan]

... and - once again - market rents are no factored into the equation. Point being, what's it gonna REALLY cost you if you do not own your home and put the whole wad in some other market.

My free n' clear rentals average 4.5-5% return from ONLY rents. Appreciation is just icing on the cake.

The author is ONLY looking at appreciation ... appreciation is nice; but is ONLY a side benefit to RE. Everyone needs a roof over thier head!

 

[Delawaredave]

I view RE as just another diversifying asset class with returns and risks inbetween stocks and bonds.

I think Bernstein had historical returns around 8% (in between stocks and bonds) with volatility also inbetween stocks and bonds. This makes sense to me - with the appreciation portion about 1-2% above inflation.

Was digging through my fathers records - found 1960's sales literature for waterfront lot at a lake in Maryland. Think the price was around $15,000. I looked up current comparables a couple years ago - the compounded return was about 7% per year. And that's for desireable waterfront.

I don't think it's a question of RE being "good" or "bad" - it has balanced and attractive risk / return / volatility characteristics and deserves a place in diversified portfolio - either through direct ownership or REITs.

 

[Gone4Good]

... and - once again - market rents are no factored into the equation. Point being, what's it gonna REALLY cost you if you do not own your home and put the whole wad in some other market.

My free n' clear rentals average 4.5-5% return from ONLY rents. Appreciation is just icing on the cake.

The author is ONLY looking at appreciation ... appreciation is nice; but is ONLY a side benefit to RE. Everyone needs a roof over thier head!

This is precisely why real-returns for owner occupied residential real estate are somewhere around zero . . . because the owner is consuming the returns through the avoidance of rent payments.

But you can't consume the returns twice, which is the point of the article. In other words, you can't expect your house to provide you with rent free living AND significant capital appreciation on which to retire.

 

[JustCurious]

Was digging through my fathers records - found 1960's sales literature for waterfront lot at a lake in Maryland. Think the price was around $15,000. I looked up current comparables a couple years ago - the compounded return was about 7% per year. And that's for desireable waterfront.

You are looking at the appreciation while ignoring the costs of ownership. If you had owned that property for the last 40 years, you would have had to pay property taxes, insurance, maintenance, utilities for each and every year. And that doesn't include the transaction costs associated with buying and selling.

 

[tryan]

Comparing returns on a primary residence to any other market is always gonna be an apples to oranges comparison. People over improve and/or decorate to thier taste.

I've got nearly 20 years of MS money data on the units I keep. So I can run these numbers to the penny. For years my return was in the 6-7% based on only rental income (compared to CURRENT market value). With the cazy run-up in prices returns have DROPPED to 4.5-5%. Every penny of expences has been accounted for in these returns. And these properties are not over improved (just ask the tenants ).

Of course, add in the last decade of apprciation, and weeelll ... But admittedly much of the appreciation was just great timing. :

But the point, historical return comparisons are of little value since you'll only hold the asset for a little while.

 

[Kwirk]

How do people make real profit (above general inflation) by investing long-term in a home (not rental property)? The ways that I come up with are:

1. Increasing demand for the land under the home that causes the total price to rise faster than general inflation. SF, Boston, San Diego come to mind. Waterfront in many areas.

2. Boutique value of the house, such as an architectural feature that has increasing demand or a home previously occupied by a famous person.

3. Commodity or labor costs that are rising faster than general inflation which would cause the replacement cost of the building to rise faster than inflation. Has this happened significantly over the long-term?

4. Having a mortgage with an after-tax interest rate that is less than general inflation. (if you chose an especially expensive home specifically for this purpose you would also want to include additional maintenance, insurance and after-tax taxes as expenses.)

What am I missing?

 

[Gearhead Jim]

We've owned our home in the far suburbs of Chicago for 25 years, the value has not quite kept up with inflation. When you add in the costs of upkeep, insurance, etc then it's been a losing investment. But as posted above, you've got to live somewhere. And it's fun watching the deer play in the back yard every evening, the neighbor's pond, etc.

 

[tryan]

What am I missing?

Improvements can be made with returns that exceed inflation. In most markets, for example, adding a fireplace will give back 125% of cost. Outdoor landscaping can have the same results (if you know what you're doing).

Of course, if you don't know what you're doing the "improvement" will have the opposite impact ... how many houses have walked into and said "what were they thinking" or "wow, it looks like I did the work."

 

[Kwirk]

Good points!

 

[calmloki]

Improvements can be made with returns that exceed inflation. In most markets, for example, adding a fireplace will give back 125% of cost. Outdoor landscaping can have the same results (if you know what you're doing).

Of course, if you don't know what you're doing the "improvement" will have the opposite impact ... how many houses have walked into and said "what were they thinking" or "wow, it looks like I did the work."

Sounds like a favorite old cartoon: "The trouble with most do it yourself projects is they end up looking like you did them yourself"!

 

[spideyrdpd]

A good reason to pull out your equity and invest it elsewhere ?

Primary real estate doesnt compare to rentals. My tenants cover most of the expenses.

Did the article address the fact that your payment for most mortgages are fixed. Where rents increase over time..

 

[audreyh1]

A good reason to pull out your equity and invest it elsewhere ?

Primary real estate doesnt compare to rentals. My tenants cover most of the expenses.

Did the article address the fact that your payment for most mortgages are fixed. Where rents increase over time..

To me this would be the main reason to buy a house rather than rent long term - protection from inflation.

Audrey

 

[ERD50]

To me this would be the main reason to buy a house rather than rent long term - protection from inflation.

Audrey

Well, the mortgage payment is fixed, but the tax deduction keeps decreasing. Property taxes, insurance, maintenance and utilities may go up faster than inflation.

My present property taxes alone are about equal to what all of the above combined were 25 years ago (in a similarly sized house).

-ERD50

 

[retire@40]

...I've got nearly 20 years of MS money data on the units I keep. So I can run these numbers to the penny. For years my return was in the 6-7% based on only rental income (compared to CURRENT market value). With the cazy run-up in prices returns have DROPPED to 4.5-5%. Every penny of expences has been accounted for in these returns...

If you are basing your ROI only on rental income, why would you calculate your return using the current market value as the denominator? I would think you would calculate returns based on your cost basis.

If you buy a house for $100K and collect $10K in rent, your return is 10%. Why would the fair market value factor into this?

 

[ERD50]

If you are basing your ROI only on rental income, why would you calculate your return using the current market value as the denominator? I would think you would calculate returns based on your cost basis.

If you buy a house for $100K and collect $10K in rent, your return is 10%. Why would the fair market value factor into this?

Because you could sell it, and invest the proceeds in a CD @ 6% (for example).

-ERD50

 

[Craig]

We've owned residential real estate in AZ, OR, CA, TX and TN. All but TX showed us very clearly that residential appreciation can far outstrip inflation. AZ showed us returns far in excess of the S&P 500. At least for the periods we owned.

TX was pitiful ... a function of high real estate taxes, and huge amounts of private land available.

I agree it is a crap shoot ... but it has been and will continue to be an important part of our portfolio. A shrinking part, as we get more liquid, but still an important class for us.

 

[audreyh1]

Well, the mortgage payment is fixed, but the tax deduction keeps decreasing. Property taxes, insurance, maintenance and utilities may go up faster than inflation.

Even though there are taxes, the mortgage payment is fixed and eventually disappears! It's still got to be cheaper than renting in the long run.

Audrey

 

[califdreamer]

My ROE (compounded annually) since '98 in San Diego: 40%

 

[tryan]

Because you could sell it, and invest the proceeds in a CD @ 6% (for example).

Exactly ... the "sell decision" is in that calculation. Especially if you believe the run-up of the last decade will not continue.

Calmloki,

Hows your return on investment ((profits from rents)/(current market value)). Trying to see if the west coast results mirror the east coast.

Thanx in advance!