Real Estate vs. Stocks

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Looks about the same to me. I notice a peak in both interest rates and builder's costs about 1980/81 at which time the home price escalates. It's easy to see that builder's costs decline in tandem with interest rates. The only aspect not in Joe's analysis is the population increase. (But I suspect a discussion of immigration policy my be disallowed by the moderators, even though it does appear to be having an impact on individual financial-planning.)

Elizabeth Richardson

What about start up cost, e.g. downpayment. You can't buy a house with a 10K downpayment anymore.

Well that's nice. I can cite stocks that I have owned that has appreciated over 1,000% (you read that right). But that's an extremely rare example (too bad for me). You are looking at a real estate bull market the last 5 or 6 years. Compare that with the 5 years before 2000 stocks beat real estate hands down.

In other words, can't selectively pick the time period that give you the max gains.

How come you are using an 8% average return for stocks, and not the

20% average for the period from 1996 to 2000?

You mean boarders? That's pretty high risk. They can sue you, they could be serial killers. But again it's apples and oranges. You have expenses associated with your real estate investment and taking in boarders. There is very little active management involved in stocks.

>I show that all appreciation from 1981 to 2005 can be accounted for in>>the drop in rates from 14%/yr to 6%/yr and inflation. > How does this reconcile with the link below?>

Well, for one I read a book in college called "how to lie with statistics". I am not calling Shiller a liar, but his graph of 10 year T-Bonds is on a scale that doesn't do justice to the facts. The chart on my page was pulled from the CME, with a link provided. By focusing on only the years in discussion, the drop from nearly 14% to 6% is drawn to a proper scale. He ignores how this impacts monthly mortgage payments. I've updated my hourly wage data along with a link to the source (thank-you, Elle, for continuing to 'keep me honest') and I show that housing became more affordable during the period in question. I continue to welcome any views on this, it's too easy to say "hey, here's my idea, I like it, I'm sticking to it". i know what Shiller ignored, what did I ignore? JOE

You missed the point ... again ... I was merely stating data (the past). As to intelligence (the future), fwiw, we're looking forward to

8% for the next 10 years here. But hey, we like our home here in Ottawa ... an excellent city ... an hours drive and we're boating in the 1000 Islands and on and on and on ... and we are also coming to appreciate what an excellent investment it turned out to be. In closing, I'm in need of nothing ... I am a very thankful and happy guy.

Maybe not ... paid cash for mine

There was no bull market here ... and about that last "bull market".

Hey, I'm just telling it as it was.

My understanding ... 8% was the norm ... but use 20% if you want. Again, I'm just relating my experience. So $200K at 20% over 10 years ... why that's $1.2M. Geez did I ever screw up ... oh well.

Serial killers ... yikes :-)

So do you guys live off planet? Or in cardboard boxes, or what?

Well it ignores that interest rates haven't explained prices very well at all unless you're willing to just look at endpoint data. I've had an Excel file going for several years tracking Bay Area median home prices vs. the corresponding monthly payment on a 30-yr fixed, based on mortgage rates reported by Freddie Mac for the month of closing. My original hypothesis was that people buy homes based on monthly payment, but there seems to be more to it than that when bubble-nomics take hold.

It took a full 9 years after the last housing bubble (89-90) for the monthly payment to get back to where it was at that time. So much for the "increasing incomes" theory for price increases...buyers through most of the 90s were paying less than the '89 buyer per month, even before adjusting for inflation. And if the theory is that prices went up because of simple inflation and the fact that mortgage rates dropped, there are a lot of years in the 1990s that question that hypothesis. By

1993, for example, fixed mortgage rates had fallen below 7% (from 12-13%+), but home prices had actually dropped 10%+ since those high-rate years. And it took about 7 years to surpass the old prices despite many years of 7-8% fixed rates. Prices started to surge during 1999-00, a period that mortgage rates were rising to the highest levels they'd been since 1996.

I agree that cheap financing explains part of price increases, at certain times, but it's nowhere near to being the dependent variable. There are too many other wildcards like "percentage of income devoted to housing costs." If that drifts from 25% to 35%, it swamps the cost differences attributable to mortgage rate changes. Another: changes between short-term/adjustable financing, and long-term/fixed financing

-- huge impact on affordable payment (temporarily anyway). Another, I believe, is "ability to use prior-home equity to buy the next, bigger house." We'll see how this last one pans out over the next few years.

-Tad

Actually, I own my home.

But I own it to live in it, not as an investment. It's a lovely home, but, frankly, as an investment, well, I'm awfully glad I've got other assets. And I keep adding to the other assets. I'd like real estate to be a smaller allocation than it is, but it's hard to do that given that it tends to come in, well, home-sized chunks.

All your points are well taken. I find that the National Association of Realtors put out a median price history which doesn't quite match the CME data I used. 1981 CME is $50K

+/-, but NAR shows $66K, not even close. If I can find reliable data for historic mortgage rates, I'll pursue an analysis, I just don't know that I'd ever find such data as 'loan to value', or 'debt ratio' and I agree with you that these data are important. I suspect I'd find a strong correlation between a move to whacky financing and bubbles, but I also believe that median data does a decent job ignoring those bubbles which are mostly regional and/or impact the higher end homes. I note the NAR data from 1968 to 2004 shows no down year, the worst year was 1989 at .2% growth. So median certainly masks something. JOE

Well you are on the right track. The home you live in is not investment property. Investment property, unless something goes wrong, is property that someone else pays for after your initial cost. Residential or commercial, someone else is paying the mortgage and maintenance. Thumper

Property owned primarily for its potential increased value. Examples include land, stock, works of art, and collectibles.

Couldn't resist ...

You're correct. What I meant by property was real estate. Thumper

This thread has been haunting me... For those who don't know, I recently sold my (one) house to pay off debts and am now renting. It was an agonizing decision that I constantly feel that I have to justify, because all my life I've thought "buying is better than renting".

I recently read this article: and now I see my neighbor cleaning out her house, presumably getting ready to sell. She bought her house in 1976 for $16,500, it now (according to the county) has a "just market value" of $120,000. That's about a

6.4-6.5% gross APY over 31 years. Of course cost of upkeep and interest on any mortgages she had must be taken out of that.

In the mean time, back in February when my house was about to be sold, I was looking for a place to buy and made an offer on a house. He was asking $195K and I offered $160K. He refused to counter-offer (He said, "$195K and not a penny less".) My wife just noticed that his house is still on the market, he is now asking $170K... My lease isn't up until December, but I'm thinking on making another offer on that house, maybe $140K (that way payments would be about the same as my rent)... I don't know though, I still have $11K in debt (@ 8.9% APR) and no money to put down...

Any advice/comments appreciated