A Home Is a Lousy Investment (WSJ)

[Nye Bevan]

At the risk of heaping more misery on the struggling residential property market, an analysis of home-price and ownership data for the last 30 years in California—the Golden State with notoriously golden property prices—indicates that the average single family house has never been a particularly stellar investment.

In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We've diverted capital from more productive investments and misallocated scarce public resources.

....

Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.

....


There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets.


http://online.wsj.com/article/SB10001424052702304259304576375323652341888.html?mod=googlenews_wsj

[Demeter]

1. Only if you expect to make money out of it

A house is bought to make a home, to nurture a family, or at least one person.

Anything else is going to cost more, and be far less likely.

[taught_me_patience]

2. These are exactly the type of articles that I've been waiting for

signaling a time to buy.

[Lex]

3. Two things. "in California" and "if a disciplined investor"

Usually paying for a home (a place to live) is a way for most people to have a valuable asset later in life. It is a way to invest AND get an immediate return (a place to live).

[QC]

4. It's time to drop this silly idea that a house is an investment.

It's not. It's a place to live.

But treating houses as magical investments is what brought us to this point. I am glad to see that line of thinking come to an end.

[ProfessorGAC]

13. +1

It's a place to live and place to call your own. If you bought a house to make a profit, then you weren't buying a home. My wife and i bought a home, not just a house.
GAC

[QC]

17. Exactly. I bought a little over a year ago,

and I did it because I wanted to have something of my own, after paying rent for so many years, and because I enjoy having a yard.

I did not buy this place thinking I would thereby become a real estate tycoon.

[ProfessorGAC]

18. If You did Think That. . .

. . .i'd question your sanity! LOL! Same with us. And we got the corner lot we wanted. And we paid our house off before i was 50 because we didn't buy more than we needed.
GAC

[dionysus]

30. it's an investment insofar as you're building equity that you own, not like an investment in stocks.

[murielm99]

5. My house is a place to live.

Is it an investment?

Because we have lived here thirty-three years, we have no mortgage. We pay taxes and insurance, that is all. Of course, there can be upkeep.

But it is nice to live without a monthly rent or mortgage payment. In that sense, we invested wisely.

[taught_me_patience]

6. This bullshit article completely ignores the HUGE tax advantage of homes

the mortgage interest deduction and 250k/500k tax free capital gains.

[Fire1]

7. Absolutely!!! n/t

[former9thward]

8. It is not huge. That is ridiculous.

For the average homeowner the interest deduction amounts to an effective tax credit of between 10% and 15%. So if you are giving $10,000 a year in interest to the bank you are getting a credit of between $1000-1500. Which means you are losing, in the example, $8500-9000 a year. A house is a terrible investment. You may want a house for other reasons but you will lose money on it unless you have special circumstances such as if you inherited it or something.

[taught_me_patience]

12. The mortgage interest deduction reduces the cost of capital

and makes a difference. The major difference is the tax free capital gain of 500k. At 30% marginal federal tax rate and 10% state tax rate, that could be a difference of 200k in taxes alone.

PLUS, when you invest in stocks, so still need to pay to live somewhere.

[former9thward]

25. Renting is cheaper if that is your only consideration.

Very few people are paying a 30% tax rate. With houses losing value the "tax free" capital gain does not mean much.

[Fire1]

14. $1000-1500 is huge to me and I am fortunate to have

a second home with no mortgage.

[former9thward]

26. If you are getting a credit of $1000 and that is huge

then you must be paying about $9000 to the bank in interest. Why is the money you are giving the bank not huge to you?

[Fire1]

28. ANY money I get back is huge to me! n/t

[former9thward]

31. Stop giving the bank ridiculous amounts of interest and you will have plenty.

[Fire1]

32. Can they beat 1.5%? n/t

[KurtNYC]

23. bc it is pushing stock ownership at all costs

Mostly backward looking, number fudging apple orange comparisons.

another fine News Corp publication: WSJ.

[Doctor_J]

9. Ah, the Murdoch Journal

by reading and posting this, you are aiding and abetting terrorists. Unrec and Ignore

[Rockholm]

10. Another Crappy Real Estate Article.

California, Arizona, Nevada, Florida, etc. do not make up the national real estate market. Actually, the market in my coastal town in Massachusetts is doing quite well. In fact, Eastern Massachusetts is doing much better than the rest of the country.

[REP]

11. Assets put money in your pocket; liabilities take money out of your pocket

Guess which one a house is.

[Fire1]

15. Good one!! LOL!!

[ProfessorGAC]

16. Incredibly Succinct!

Nicely put. I think.
GAC

[Volaris]

19. ahahahahah lol

What the WSJ MEANS to say is that anything that begins the process of transferring generational wealth LATERALLY among the middle classes, (like buying a house, paying it off and the leaving it for your kids when your gone, possibly giving them a bit easier of a life economically) rather than transferring that wealth up to THEM, is going to be a bad investment FOR THEM. We, the middle class, (at least in terms of the houses we live in) have been suckered into selling off (or been forced legally into giving up) THE primary mechanism of wealth transfer/wealth building AMONG the middle classes in this Nation, I.E., our homes. The ability to transfer that worked-for wealth LATERALLY to our kids when we pass is finally something they think they have figured out how to stop. I say, FUCK THEM.

What the idiot rich want NOW in this economy is for you to NOT buy a house, so the prices keep dropping, so THEY can buy it all, and then NEVER sell it off, that way, you have to pay rent to THEM for the very rest of your silly, little wage-slave life.

The WORKING poor people don't have TIME to engage in the political Public debate, and therefore can NEVER affect the status quo that keeps the upper crust, well, UPPER.

[taught_me_patience]

27. Right on.

Do the opposite of this idiotic article.

[Marr]

20. Nice information for the poolside investor class, I suppose, but

we plebes actually need a place to live, and paying down a house is better than renting an apartment.

[pitohui]

21. how do you know they're lying, it's in the wall street journal!!!

what bullshit, do they think we're complete idiots?

it costs MORE money to rent than to buy, dumbasses, because, and this is pretty basic adam smith 18th century beginner's capitalism stuff here, YOU HAVE TO ALLOW FOR THE LANDLORD'S PROFIT!!!!

with renting, you have to pay more for two reasons -- you have to allow for the landlord's profit and you have to move more frequently (and each move costs somewhere between one thousand to ten thousand dollars)

so the whole lie about how if they bought into the stock market instead with the "extra" money is just that a lie, there is no "extra" money from renting, the way they create these lies is that they compare renting a dorm closet in college and buying an entire three bedroom, two bath home and then, yah, since you bought a steak but rented a glass of beer the prices are a little different...

i don't know ANY renter who has extra money to invest, that just can't happen, when you rent, every time some bullshit comes up, you're out on your ass and scrambling for another deposit, movers, etc...

the funniest is the claim we hear in the press and on the internet, that landlords make repairs while homeowners make their own repairs, if those who owned the media had ever been tenants, they would know that you get awfully old and gray waiting for a landlord to make repairs, no landlord ever made a profit doing repairs, sheesh

they either think we're stupid or they aim these nonsense at people who have NEVER rented, so they think it sounds "logical"

if you spent your housing down payment on buying stock (or for that matter, as some people do, on a princess di/kate bullshit type of overpriced wedding) then in a few years i'm living in my paid off home and you're still nowhere

we are low income, if we had not bought our own home and had to rent, we'd be in terrible financial trouble in our middle age and our only hope for our old age would be suicide...renters do not do well in late middle age or in retirement

[Mimosa]

36. ^ YAY! I know it's BS. ^

You described exactly how. :)

[IndyPragmatist]

38. I completely disagree

I rent, and it is by far a much better decision than buying. By renting, I can afford to live downtown, which cuts $200/month for gas. The last time I moved, it only cost me $100. I got my deposits back from my old place, which went to my new place, and my friends volunteered to help me move.

I have experienced my water heater going out...it was replaced that day while I was at work. That would have cost hundreds, if not more.
The heating coil in my oven went out...it was fixed within 24 hours.
A hailstorm cracked my bedroom window...it was replaced within 24 hours.

Additionally, I do not have to pay for homeowners insurance, lawn upkeep, repairs, property taxes (although they are passed on to me through rent).

I rarely invest in the stock market, but I do a lot of currency trading. The excess money that I have each month from renting goes into that account (which has grown 12% this year).

Conversely, my best friend bought a home in the suburbs two years ago. He has had to replace the furnace, garage door, numerous electrical issues, and to top it off, his home is only worth 80% of what it was when he bought it. He and his wife desperately want to move, but they aren't able to take a $20,000 loss. I'm currently looking for a new job, and I'm not limited to my current city, whereas my friend, who is also looking, is limited to Indianapolis until he can sell his home.

I've rented 7 places in my life, and I have only had problems with 1. The other 6 were great. I'm using the money that I save from not owning a home to invest in currencies, and it's quite obvious for me, that I am MUCH better off renting than owning.

I'm sorry you have had crappy landlords...I know they are out there. I've had one, but I tend to believe that he was way because we were college students that tore up the place.

Honestly, being able to move on very short notice is huge for me. There is no way that I can put a dollar value on it, but it is the most important factor in my decision to rent. Factoring that in, it's not even close. Renting, for me, is by far a better choice for me.

[angstlessk]

41. How did you calculate how much you saved by renting?

BTW, we paid cash for our home, no rent, no mortgage...just repairs and maintenance, taxes and insurance...YOU TOO pay for those things, if you look at how to calculate the amount to charge for rent, you not only pay for repairs and maintenance, taxes and insurance, you pay for the time the apartment is expected to be vacant...about 5% of the time, plus the cost to advertise the rental after you move...and those pesky cleaning expenses.

Sorry, Charlie, it might be more 'budget' friendly, (as the owner calculates all costs into one monthly payment) but it ain't cheaper to rent vs own

[Coyote_Bandit]

22. Two Things

One. You can have a house or a rent payment or be homeless or contribute tpo someone else's living situation. Owning a house does give equity value. The only option that does so.

Two. If you only buy the house you need and furnish and equip it in a traditional and energy conscious manner then you will minimize both your investment and your expense. One of the keys to having a sucessful investment is to minimize costs. And if you are willing to save money, buy a saller, older house and so some of the repair work on it yourself then you will further limit your costs and you might find that you are able to pay the thing off in considerably less than 30 years. If you buy more house than you need then you should consider that some of the return comes in th pleasure you get from owing something more than what you require.

[Luciferous]

24. I don't look at my house as an investment anyway. It's just a place to live.

It's better than living in an apartment and we only pay $80 a month more than we did when we were renting.

[raouldukelives]

29. The nice thing is you don't profit from wars

denying health care, big oil, rape of our environment etc. with a home unlike being vested in the stock market.

[Blue_Tires]

33. Someone should check the WSJ archives from five years ago...

I'm pretty sure they were singing a different tune...

[Rex]

34. Yeah, funny I thought it was a place to prolong your life by keeping

you safe from the elements...how fucking stupid I am for thinking such things. Folks MONEY, it is all that matters in this world. MONEY.

[Lex]

39. renting accomplishes keeping you safe from the elements

the article is about renting vs. purchasing

[ileus]

35. but they're pretty damned handy to live in...

[Liberal_in_LA]

40. and quality of life is so much higher...

[WinkyDink]

37. Yes, this is why there are no magazines titled "Estate Homes"; "Dream Homes"; "Unique Homes";....

http://www.estatesandhomesmagazine.com/

http://content.uniquehomes.com/magazines/

http://blog.luxuryhomemagazine.com/tag/estate-homes/

[angstlessk]

44. If teh WSJ believes is own propaganda, it will publish....watch for it...

http://www.rentalestatesandhomesmagazine.com /

http://content.rentaluniquehomes.com/magazines /

http://blog.rentalluxuryhomemagazine.com/tag/estate-homes /

Hey, make em cough it up!

OOPS...'Server cannot be found'

[Blue_In_AK]

42. I bought a foreclosed HUD duplex in 1990

for quite a low price when the real estate market crashed here. We live in half (or actually more like 2/3 since this is a big place), and my tenant, whom I charge about $200 less than the market rate, is still paying about 2/3 of my mortgage. It was the best purchase I ever made. Everyone wins.

ed. And as Slackmaster mentions below -- HUGE tax benefits, especially with the rental, which pretty much runs at a loss every year after all the deductions.

[slackmaster]

43. Mine has been a fabulous investment. I've gotten everything out of it that I expected, and more.

Peace of mind, that I can't be evicted at any time on one month's notice.

No asshole landlord who thinks he's entitled to show up at any time and criticize my possessions.

Huge tax benefits.

A place where I can grow a garden.

A yard for my pets to play in safely.

A secure place to raise a family.

Huge tax benefits.

Fixed, predictable housing expenses.

Growth in equity, so I can borrow a substantial amount of money at any time with tax-deductible interest.

Did I mention huge tax benefits?

[TBF]

45. My take on this is two-fold:

1) trying to get people to put more funds into the market - so they can steal them

2) get people used to the idea of renting because before long the owners (top 3-5%) are going to own all the real estate anyway