sub-prime mortgages

Yes, but if you have zero net worth and can somehow qualify for a mortgage, buying a home is like buying a call option. If the home appreciates, you benefit, but if it depreciates and you turn in your keys, the lender eats the loss. That's the law in non-recourse states such as California, and it seems to be the reality in other states as well. There is also the possibility the government will bail you out, as Congress is now considering. I won't defend the morality of this approach to buying a home.

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"Don" wrote

Things have changed, from the standard deduction having risen somewhat disproportionately higher to home prices going higher. Unless one does much of one's own home maintenance, then the cost of upkeep, taxes, and insurance often mean renting is the better option. Columnist Paul Krugman of the NY Times recently added another twist: Job insecurities mean that one may have to move a few times during the course of one's work life. The transaction costs of buying and selling a home and having a house mortgage can eat into any financial advantage a home offers, too.

The only thing I expect when I purchase a home is a nicer quality of life than an apartment. I do not bet on its value going up or even holding.

People talk about rent being money thrown away. What one puts into one's home year after year to maintain the lawn, shrubbery, concrete, roof etc. is also money thrown away until the house finally is sold again.

We disagree about a home being the best investment a person can make. The best investment a person can make is to live within their means and save regularly. If this means no house, then they are still doing quite well.

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That may be possible, but I would guess it is a very risky plan. If a person has zero net worth and pays the mortgage every month on time and house prices kept on appreciating, then that person will indeed build up equity and profit over the years. But a person with zero net worth could have some bad habits as to saving vs spending and may end up in trouble if the same habits continue. And then if he turns in the keys he is not likely to get another chance to invest in much of anything for years to come.

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I can say the same thing about my stock and mutual fund investments (without the nicer quality of life). They have done OK and not actually declined in value over the years, but the house I live in has increased in value far, far more.

I certainly agree with that. But I wouldn't call that plan an investment. It is a matter of acquiring habits and discipline early on that make successful investment possible at a later time.

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Agreed, Elle, didn't we have a discussion here, not too long ago, where we concluded housing values kept up with inflation and no more? That the average size new home has increased in size and that actually added nearly a percent each year to the pricing numbers quoted. (i.e. average price may have more than doubled, inflation adjusted, but the 'more' was due to larger sized homes, the data wasn't normalized for price per square foot.)

Joe

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Don't think that is a universal comparison. Here is the rate of return over the years on three houses I have owned

Year Price Current ROR S&P500Ret AvgInfl

Year = year I bought house Price = what I paid Current = Zestimate from Zillow.com ROR = rate of return from purchase year until now S&P500Ret = geometric average ROR of S&P 500 from purchase year until now AvgInfl = geometric average rate of inflation from purchase year until now

I'm not sure I have the information I would need to calculate the rate of return on my actual investments over the given time periods, so I have included the S&P500 as a proxy for that. I've also listed the average rate of inflation over the time periods.

You can see that the S&P500 was superior to all three of my houses over the time periods shown. Only one of my houses has a ROR exceeding the rate of inflation, whereas the S&P500 did surpass inflation over those time periods.

Dave

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OK, that's reasonable. I generally equate inflation protection with something that is expected to return more than inflation. That's why many claim that equities or securities like TIPS provide inflation protection. But you have a point, until you factor in transaction costs.

-Will

william dot trice at ngc dot com

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You don't expect your stock and mutual fund investments to increase in value? Then why invest in stocks and mutual funds?

-Will

william dot trice at ngc dot com

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Has there ever been rental income, or are all three of these houses simply personal residences that you occupy at different times of the year? Over those multiple decades, have you never invested in any improvements, or had any casualty/theft losses?

That third house, the one that didn't even come close to doubling in value over the last twenty-two years, that was a stinker, wasn't it?

-Mark Bole

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"joetaxpayer" wrote

I agree we have had these discussions recently. I suppose the regulars are now well versed on Shiller's fairly bandied about housing data. This is the data where Shiller concluded that, historically, the post-inflation return on housing has been around 1%. So one can estimate an absolute return on housing of 3-4%.

You also have argued here and at your web site that if wages and mortgage interest rates are considered, houses by 2005 were quite affordable. I was not quite convinced a while back but at this point, I think the media have improperly focused on Shiller's Home Price Index and its significance. Your web site's graph could be said to be more meaningful, or at least be an important supplement to Shiller's work. Shiller himself gives a lot more credit for the bubble (and its bursting) to the capriciousness in the mortgage market. You also note this at your web site on the housing bubble. Some interesting 2008 comments by Shiller:

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"Mark Bole" wrote Re a 1986 house whose appreciation lagged (oh the horror!) inflation

Surely you are not sporting the recently fashionable attitude of those who expect much appreciation from their houses, are you? Stinker, come on. A house is more than an investment. In such real estate one dines, puts a bed, raises one's family, and grows trees. The stuff of a healthy life, hopefully.

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Diversification among asset classes is a good idea. But I do expect stock and mutual investments to increase in value, just not as much as some people might believe and not without risk.

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I don't own any of the houses now. I sold the first for $80,000 in

I bought the third house in Dallas at the beginning of the oil bust. As most housing did in Texas, it declined in value perhaps 20% in the next four years, and might have recovered in another four or five years.

I owned these houses to live in them, not as investments. The same is true of the house I have now. If anyone benefits from any investment gains in it, it is likely to be my heirs.

Dave

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You are right; the comparison is not universal. Just plain luck has a lot to do with it.

One problem here as I see it is that everyone who buys stocks or mutual funds does not hold on through all the ups and downs. Also people tend to buy stock when the market is high and sell when it is low. This makes it impossible to surpass inflation over a long period of time. I guess you could say that IF people keep their stock over the same periods of time they normally keep their houses, the chances of beting inflation are good.

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Elle -

At least one book on the Great Depression of the 1930's holds that the trigger was the branch of a German bank getting on the wrong side of cotton futures. The German parent covered the margin (a no-no), the trade continued to go against them, causing a New York Bank to lose money due them, and the domino effect took over with bank failures (and runs on banks). Then the Fed at that time blew it (raised interest rates).

However, the underlying causes of the 1930's financial disater were a combination of many of the same factors we see today. Among them: greed, failure to anaylze investments, false financial disclosures, and leverage.

"We" did NOT learn. The players in the LTCM debacle went on to signing bonuses in investment banks, and continued to create "risk management models." The same thing is happening again, today. Of the major banks I know of, only Wells Fargo elected to keep their heads and not play the CDO game. Other major banks are writing off bad mortgages, yes, but those are lower losses by far than the losses on highly leveraged CDO's.

The bottom line on this and many other stories is a weakness of responsibility. Integrity is worth much more than riches. Responsibility is key to integrity. The erosion of individual integrity and responsibility is the erosion of our freedom.

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"dapperdobbs" wrote

snip

I think all this is based in ignorance of consequences; of history; of mathematics; and of markets.

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The way the data was presented, it looked to me like some or all of the properties were actually rentals, in which case I was going to point out that rental income (including tax breaks) was also part of the ROI calculation, much like dividends with stocks.

(Another subsequent reply indicates that they were actually owned serially, as primary residences, and none are owned now.)

Look, many understand that home ownership equals investment+shelter, and when unbundled, the investment component can be fairly compared to other investments.

Some also also find it mentally helpful to ignore the real estate investment that they live in when looking at net worth. In a way, this becomes a forced savings plan for them, providing discipline they would not otherwise be able to muster, because after all emptying a savings account is one thing, but "losing a house" carries quite a bit more stigma.

Which brings us back to the original topic: if there wasn't so much propaganda in favor of being a homeowner, probably many of those hapless no-documentation borrowers would have stepped back and wondered whether buying a home at *any* price was necessarily a wise move for their financial situation.

-Mark Bole

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Absolutely agree with you, but extreme wealth can be veerrrryyy seductive. A friend of my son makes his money in suspicious ways. Anyway, a couple of seasons back he had a Skybox for the Phoenix Suns games and playoffs. We got invited many times and enjoyed the heck out of it. This included my 85 year old mother-in-law. The next season he didn't get the Skybox and we had to pay for cheap seats among the common folk. Haven't gone back because I was spoiled.

Integrity is HARD to hold on to when enjoying the pleasures of wealth. Not excusing the greedheads, just giving a possible reason.

Chip

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If you own a valuable painting and hang it in your living room so you can enjoy it every day, that does not mean that it is no longer an investment. You would not ignore its value in calculating your net worth.

Whether or not investment in art is wise or foolish is a question that cannot be answered in general terms that apply to everybody. Some people do well in that type of investment and some do not. It would be a mistake to say: "Buy paintings only for the purpose of enjoying them; never consider them as investments." In the same way, some investors in real estate do well, and some do not. The fact that your home you live in every day is also a potentially valuable investment should be looked upon as an opportunity, not something to be dismissed and forgotten.

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