Više Sljedeći blog» Stvori blog Prijava

PIAW'S BLOG
I'M A HUSBAND, FATHER, AUTHOR, CYCLIST, SAILOR, TRAVEL ADDICT, AND FORMER SILICON
VALLEY SOFTWARE ENGINEER. I'VE WRITTEN 3 BOOKS AND ACTIVELY REVIEW BOOKS ON THIS BLOG.
COMMENTS ON THIS BLOG ARE AGGRESSIVELY MODERATED AGAINST LINK-SPAM AND RUDE OR
MEANINGLESS COMMENTS.

WEDNESDAY, AUGUST 06, 2008

-75%
Is housing a good investment?
I was recently on an email thread where people were talking about housing as an
investment. In response to an assertion that housing has historically returned less
than the S&P 500, someone asked, "Are you counting the rent that you aren't
paying?" My answer:

-67%
Yes.

House prices nationwide (sorry for the US-bias, but I don't have data for
international markets) have very poor inflation-adjusted returns. Shiller (of the
Case-Shiller house price indices) showed that house prices appreciated by 0.4% a
year after inflation, from 1870-2004.
-75%
http://en.wikipedia.org/wiki/United_States_housing_bubble

If you buy a house, you don't pay rent. But instead, you either pay for your
mortgage interest, or you lose out on the return you could have had if your house
were invested in stocks. Assume that you're paying your mortgage interest. At a 6%
mortgage rate, you're paying .5% of your house price a month in mortgage. People
-62%
don't call it rent, but that's exactly what you're doing -- renting money to "own" the
house so that you can live in it. Even at the highest tax brackets and the mortgage
deduction (call it ~40%) that's still .3% of the house price a month in mortgage
costs. Historically, house prices and rents have moved together (and there's good
reason for them to -- if house prices rise relative to rents, people will choose to
rent, driving up rents and driving down house prices). That ratio (house price to
yearly rent) has been about 21 or so. When that ratio goes higher, houses are
expensive and renting is cheap. When it goes lower, renting is expensive.

http://www.frbsf.org/news/speeches/2008/charts.pdf, page 20.

BUY MY BOOKS So if your house is $X, and you're paying .3% (after taxes) a month in mortgage
"rent", that's .036X a year in mortgage "rent". The inverse of that, 27.8, is the price
to rent ratio. But remember that that simple calculation ignores costs of ownership
-- property taxes (add 1% of X yearly), maintenance (another 1% ish), and so forth.
You get to the point where the cost of home ownership is very similar to the cost of
renting. Add .6% for property taxes (after the tax deduction), 1% for maintenance
(no tax deduction there!), and you're paying .052X a year to own the house. That's
 a price to rent of about 19.2. With an historical ratio of about 21, you could have
rented an equivalent apartment (or house) for less money. Suddenly renting looks
Ova web-lokacija upotrebljavalike the better deal.
Googleove The point
kolačiće radihere is that owning
pružanja a home,
usluga, by way of a mortgage,
prilagođavanja oglasa isi
analiziranja prometa. Upotrebom ove web-lokacije pristajete na njezinu upotrebu kolačića.
expensive.

SAZNAJTE VIŠE SHVAĆAM

Choose instead to pay cash for the house so there is no mortgage. (We can all
dream.) Now, instead you're losing out on the possibility of investing that money.
If your house is $X, you lose out on the risk-free rate times X. Right now, that's the
t-bill rate of about 1.52%, or almost 1% after taxes (no state taxes on treasuries).
(I note here for completeness that this is an historically low rate.) You still have to
pay property taxes and maintenance (1.6% after taxes). Now, you're paying .026X a
year to own the house, for a price to rent of about 38. Wow, ownership looks great!

Of course, you could have taken that money and invested it in something slightly
riskier, like a diversified stock+bond portfolio, making something like 7% a year.
(And that's certainly a more liquid asset than a house!) There will be up and down
years, but say long-term you can make 7% a year. You have to pay taxes, so
let's generously (from a "woohoo housing" perspective) assume it's all taxed as
income at your marginal tax rate. That's 4.2% after taxes. Add in property taxes
and maintenance, that's 5.8% after taxes. Ouch. Price to rent is just 17.2.

We haven't even considered the transaction costs of home ownership. For starters,
you pay 6% to a realtor just to move, which you have to remember to subtract from
your returns. There's the cost of applying for the mortgage, ...

In short, home ownership isn't a good deal. There are certainly regions of the US
where it *has* been a good deal in the past. However, the main reason people make
money on home ownership is because of their leveraged investment by way of a
mortgage. If you want leverage, start stocking up on S&P 500 futures or something.

If you want a nice place to live in, buy a home. :)

POSTED BY DAVID ZIEGLER AT 2:11 PM

LABELS: ECONOMICS, FINANCE
 2 comments

Add a comment as Goran Dobrojević

Top comments
Hire Piaw By The Hour

SUBSCRIBE Piaw Na 9 years ago

 
Trust me, I've seen more people talk about how he/she will make a k
Atom Feed
people claim to understand stocks (or at least corporate earnings). E
RSS Feed

LINKS OF NOTE ChiaLea 9 years ago

2018 Book Reviews  
Seriously, does anyone still think buying a house is a particularly goo
2017 Video Game Reviews the landlords do things like refuse to x your hot water when it's -10F
less often and x things when they're broken and hang pictures and s
2017 Book Reviews
2016 Video Game Reviews
2016 Book Reviews
2015 Video Game Reviews
2015 Book Reviews
2014 Video Game Reviews
2014 Book Reviews
Post a Comment
2013 Book Reviews
2012 Book Reviews
2011 Book Reviews
2010 Book Reviews
Newer Post Home Older Post
2009 Book Reviews
2008 Book Reviews Subscribe to: Post Comments (Atom)
2007 Book Reviews
2006 Book Reviews
2005 Book Reviews
Trips Index
Consolidated Cycle Touring
Index
S&S couplers considered
harmful
Ancient Home Page

BLOG ARCHIVE

► 2017 (181)
► 2016 (172)
► 2015 (194)
► 2014 (182)
► 2013 (113)
► 2012 (174)
► 2011 (195)
► 2010 (260)
► 2009 (232)
▼ 2008 (313)
► December (21)
► November (26)
► October (30)
► September (43)
▼ August (25)
Satellite tracking for the
2008 Pyrenees trip
Review: Matter
$70 off Kindle
Review: Grossan Nasal
Irrigator
Review: Waterpik Ultra
Wolfrathausen/Schielers
ee/Holzkirchen
Panoromic Photos from
Rosenlaui
Review: Soul, by Tobsha
Learner
Review: To Home and
Ehvenor
Trip Report: Rosenlaui
Another Rosenlaui
Picture
Back from Rosenlaui
The True Cost of Cheap
Parts
The Security Boondoggle
Walchensee Loop
Review: Steel Beach
Holzkirchen Loop Ride
Review: The
Munich/Paris Night
Train
Commuting
Is housing a good
investment?
Breaking News:
Vanguard Total
International Stock ...
 Review: Tarzan of the
Apes
Erding Radmarathon
(not quite a century)
Review: The Last
Unicorn
Cultural Differences III:
Messages Society
Sends

► July (22)
► June (22)
► May (26)
► April (22)
► March (24)
► February (12)
► January (40)

► 2007 (171)
► 2006 (295)
► 2005 (321)
► 2004 (4)
► 2003 (10)
► 2002 (1)
► 1999 (1)

LABELS

articles (4) australia (22) baby

(65) books (820)

business (45) camping (23) car
(22) coding (8) coffee (2) comics
(47) comptuers (1) computers
(240) concerts (2) culture (7)
cycling (438) cyclling (3)
dental (2) discounts (1) diving (12)
economics (26) emacs (1)
enivronment (1) environment (2)
finance
environmentalism (8)
(109) food (17) funny (5)
games (99) google (74)
Greece (7) health (46) help (1)
hiking (41) house (18) iceland
(14) japan (35) japana (1) kids
(42) Life on Mars (1) magazines (1)
management (11) marathon (3)
movie (22) movies (18) munich
(57) music (16) nasal irrigation (2)
oral (2) orbituary (1) PC (18)
performance arts (2) personal (10)
personal hygeine (3)
photography (57) photos
(88) pic (1) Pictures (125)
politics (7) programming (3) rant
(1) recomm (1)

recommended
(865) republicans are evil
(24) reread (1) revews (1) review (8)
reviews (1139) reviwes
(1) running (5) sailing (67) scuba
(5) shen wei dance (1) singapore (2)
singularity (1) sleep apnea (3)
slideshow (3) software (25) spam
(1) startups (62) switzerland (1)

touring (3) toys (97) travel

(508) trips (3) tv (34)
vacaiton (1) vacation (444)
vacaton (1) vaction (1) video (10)
work (5) writing (6) Youtube (3)

OTHER INTERESTING BLOGS

Pengtoh's Blog
Hector's Blog
Buddha Mouse's Blog
Ovidiu's Blog
Terence Chua's Blog
Amy Platt's Blog
Larry Hosken's Blog
Angry Bear
Scarlet's Blog
Brad DeLong's Blog
Calculated Risk

FOLLOWERS

Sljedbenici (86) Dalje

CONTRIBUTORS

ChiaLea
David Ziegler
Matt Hiller
Mike Samuel
Piaw Na
Roberto
Sy
cyn
xiaoqin ma

NETWORKED BLOGS

Follow this blog

GAYLE'S AD

AMAZONWWLINK

ANALYTICS

AMAZON CPM ADS