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Old 03-29-2019, 11:50 AM
 
Location: Olympus Mons, Mars
5,677 posts, read 8,590,315 times
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Love this JL Collins (of Simple Path to Wealth fame) article about why Housing done wrong can be the biggest obstacle to building wealth.

https://jlcollinsnh.com/2013/05/29/w...le-investment/

Now, I am generally in favor of buying your primary residence BUT WITH A HUGE CAVEAT - if it is done right within very conservative metrics and if renting a similar place is on par with buying.

However, the vast majority of people I see these days, mostly in the big metros, are extending themselves to the HILT, buying homes with super low down payments, crazy long terms, super high DTIs and most importantly at the cost of saving adequately in investments.

The primary wealth building tool is investing the stock market - not your primary residence. Historically Primary residences have just maintained inflation and when to take into account the total spend on lost opportunity of down payment capital, interest paid, maintenance, property taxes, HOAs etc. it is NOT a great return on capital.

Also a large majority of these people are overestimating their ability to maintain their income for such a long period of time and underestimating the total costs of ownership. Also a large number of people just don't get it financially - they claim that they are using leverage to their advantage by "using" the bank's money to get the appreciation on their home. This is actually a ridiculous argument. Actually you pay for the use of that capital by paying interest, capital is never free so no you don't get to use the bank's money for free unless you don't understand math.

Also, leverage is actually bad... you owe that money. A stock purchase is fully funded and that is 100% yours. If you lose your job you can just hold your stocks but if you don't pay your mortgage you lose your house and everything you have put towards it. Also, you can't just sell part of your house like the kitchen. You could get roommates but that can have it's own issues. Housing is just a very very inflexible and illiquid asset compared to equities. Selling a home is difficult in a bad market and is super expensive, stocks are free to sell and have demand even in bad markets.

It's crazy how many people think that once they "get in" their house is going to make them rich! Biggest myth out there.
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Old 03-29-2019, 12:32 PM
 
Location: Portal to the Pacific
5,128 posts, read 5,088,076 times
Reputation: 6343
Quote:
Originally Posted by k374 View Post
Love this JL Collins (of Simple Path to Wealth fame) article about why Housing done wrong can be the biggest obstacle to building wealth.

https://jlcollinsnh.com/2013/05/29/w...le-investment/

Now, I am generally in favor of buying your primary residence BUT WITH A HUGE CAVEAT - if it is done right within very conservative metrics and if renting a similar place is on par with buying.

However, the vast majority of people I see these days, mostly in the big metros, are extending themselves to the HILT, buying homes with super low down payments, crazy long terms, super high DTIs and most importantly at the cost of saving adequately in investments.

The primary wealth building tool is investing the stock market - not your primary residence. Historically Primary residences have just maintained inflation and when to take into account the total spend on lost opportunity of down payment capital, interest paid, maintenance, property taxes, HOAs etc. it is NOT a great return on capital.

Also a large majority of these people are overestimating their ability to maintain their income for such a long period of time and underestimating the total costs of ownership. Also a large number of people just don't get it financially - they claim that they are using leverage to their advantage by "using" the bank's money to get the appreciation on their home. This is actually a ridiculous argument. Actually you pay for the use of that capital by paying interest, capital is never free so no you don't get to use the bank's money for free unless you don't understand math.

Also, leverage is actually bad... you owe that money. A stock purchase is fully funded and that is 100% yours. If you lose your job you can just hold your stocks but if you don't pay your mortgage you lose your house and everything you have put towards it. Also, you can't just sell part of your house like the kitchen. You could get roommates but that can have it's own issues. Housing is just a very very inflexible and illiquid asset compared to equities. Selling a home is difficult in a bad market and is super expensive, stocks are free to sell and have demand even in bad markets.

It's crazy how many people think that once they "get in" their house is going to make them rich! Biggest myth out there.
Most people can't pay $400 in emergency bills and many people in HCOL cities are extending themselves to the HILT in RENTING as much as buying... they have a hard enough time living paycheck to paycheck much less coming up up with money to invest.. in a home or the market.

Also Vanguard released growth projections recently and I think it's like 5-6%. Well, guess what? My mortgage interest rate is 5%... and I just realized we might be able to pay it off by our third anniversary of owning it... so I just pivoted to working on that.

Your information is biased. I think we're at a point where the majority of economists predict a contraction of the economy... where does that put the stock market?
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Old 03-29-2019, 12:48 PM
 
18,848 posts, read 13,592,109 times
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A lot goes into this imo

1. People often buy more than they would/could rent
2. People grossly overvalue their “profit” on a house most often knowing only what they get back at closing not recognizing all expenses paid over the time period, the transaction costs to buy/sell or that some of the money they get back was from the monthly payments they made
3. People have a hard time actually executing buy less or rent and invest the difference
4. There is still a stigma against renting for long periods of time
5. Buying is often considered a sense of accomplishment
6. The tax benefits to owning have for a long time been grossly overvalued and 2018 tax law changes only served to greatly diminish it even more
7. Leverage one good investment experience with high leverage can permanently cloud judgement

There’s more in my head but I’m blanking now
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Old 03-29-2019, 12:52 PM
 
Location: Aurora Denveralis
8,586 posts, read 3,010,942 times
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Quote:
Originally Posted by flyingsaucermom View Post
Your information is biased. I think we're at a point where the majority of economists predict a contraction of the economy... where does that put the stock market?
Irrelevant, I think. Market fluctuations rarely last more than a few years, and even during the Recession many of us watched portfolios grow.

I think arguments about housing as investment/wealth builder are mostly nonsense and highly dependent on factors outside "the market" - but acquiring and maintaining cost-effective housing, NOT paying immense rent costs, is a key foundation to being able to acquire wealth. You simply can't get ahead if half your net pay goes to rent. Even in a flat housing market, equivalent ownership costs go towards equity and ownership.
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Old 03-29-2019, 01:11 PM
 
71,490 posts, read 71,652,652 times
Reputation: 49069
Quote:
Originally Posted by Lowexpectations View Post
A lot goes into this imo

1. People often buy more than they would/could rent
2. People grossly overvalue their “profit” on a house most often knowing only what they get back at closing not recognizing all expenses paid over the time period, the transaction costs to buy/sell or that some of the money they get back was from the monthly payments they made
3. People have a hard time actually executing buy less or rent and invest the difference
4. There is still a stigma against renting for long periods of time
5. Buying is often considered a sense of accomplishment
6. The tax benefits to owning have for a long time been grossly overvalued and 2018 tax law changes only served to greatly diminish it even more
7. Leverage one good investment experience with high leverage can permanently cloud judgement

There’s more in my head but I’m blanking now
tax wise it is the renters who tend to get the best deal .. many get to fly the empty seats ... while the homeowner actually pays potentially deductible items like real estate taxes and mortgage interest and spends that money , the renter does not ..so tax wise the renter may get back far more from the standard deduction without spending those dollars on deductible items ...
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Old 03-29-2019, 01:21 PM
 
Location: Aurora Denveralis
8,586 posts, read 3,010,942 times
Reputation: 12804
Tax issues are another red herring. Neither deduction makes housing costs go away, they just make the expended funds partially tax-exempt. At modest income levels, it's not a meaningful amount of money either way.
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Old 03-29-2019, 01:26 PM
 
18,848 posts, read 13,592,109 times
Reputation: 14263
Quote:
Originally Posted by Quietude View Post
Tax issues are another red herring. Neither deduction makes housing costs go away, they just make the expended funds partially tax-exempt. At modest income levels, it's not a meaningful amount of money either way.
It’s not a red herring if you know the definition

something, especially a clue, that is or is intended to be misleading or distracting.


The tax issue is real and can impact your next costs and in doing so impacts how much money you have at your disposal to build wealth. If you and I both made 150k a year and on a net basis I keep 5k more than you I have an opportunity to build wealth that you may not. Even at modest income levels I may rent at low cost and get a large benefit or the standard deduction without spending the money as mathjak points outs. The secondary issue with respect to the taxes is how much it is misinterpreted leading to ill advised money being spent which also impacts one’s ability to build wealth
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Old 03-29-2019, 01:32 PM
 
642 posts, read 173,010 times
Reputation: 1563
[oQUOTE=Lowexpectations;54809164]A lot goes into this imo

1. People often buy more than they would/could rent
2. People grossly overvalue their “profit” on a house most often knowing only what they get back at closing not recognizing all expenses paid over the time period, the transaction costs to buy/sell or that some of the money they get back was from the monthly payments they made
3. People have a hard time actually executing buy less or rent and invest the difference
4. There is still a stigma against renting for long periods of time
5. Buying is often considered a sense of accomplishment
6. The tax benefits to owning have for a long time been grossly overvalued and 2018 tax law changes only served to greatly diminish it even more
7. Leverage one good investment experience with high leverage can permanently cloud judgement

There’s more in my head but I’m blanking now[/quote]

Just one more consideration: the houses are mostly bought not as investment but as a life necessity and a life style choice.
How much value you can put on actually using your “ investment” every day to rest, enjoy your family, recuperate, create, hang out with friends, have fun with your dogs, cats, horses or just walk around naked if you wish?
And you don’t have to ask a landlord what color your walls could be?
If one ended up making money on it- great!
Living is expensive, living great even more so!
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Old 03-29-2019, 01:44 PM
 
684 posts, read 182,893 times
Reputation: 1082
Two words come to mind - Greed and Fear. People waste just as much money having children and shopping at their favorite junk store, i.e. walmart.
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Old 03-29-2019, 01:54 PM
 
Location: Aurora Denveralis
8,586 posts, read 3,010,942 times
Reputation: 12804
Quote:
Originally Posted by Snowpacked View Post
Two words come to mind - Greed and Fear. People waste just as much money having children and shopping at their favorite junk store, i.e. walmart.
Whoa, nothing classist here.
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