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The cold hard truth is that real estate is not really an investment. Its a liability. Plain and simple. Secondly, anyone making the claim that real estate outperforms stocks isn't using historical data. If you look at the long-term trend, stocks have delivered a 7%-10% annual median return for the past 100 years. In the same time period housing has returned barely 4%, which barely keeps up with inflation. The golden rule which very few people do is that by the time you are 30, you should have anywhere from $10,000 to $30,000 saved in retirement. That's it! If you do so, you will be set by the time you're 60. But most people don't do that. Instead that figure that since they're married, they gotta' buy that house, and thus starts the whole pattern of blowing most of the income on an underperforming asset while ignoring the stock market mainly because the average person only looks at negative performance versus overall. The richest people in the world made billions investing in everyday, ordinary stocks. Not houses. I'll be honest- I have been renting for over 10 years and its been just fine. I've already saved up for my retirement and will save more bfore I buy a house and when I do so, It'll be the cheapest house I can find just because to me a house is nothing more than a box you store your things in.
Lastly, Its the nature of salespeople to cast a glowing, positive light on their product, and its no different for real estate agents. All I can say is that when my Wife and I visited awhile back and saw how much taxes on property cost, it blew me away that there were 600k houses. The taxes must eat these people alive. I would bet anything a LOT of them bought and didn't even think about the taxes. Given Austin's median income, some areas we saw were wayyyy out of line with fundementals. I too have read a number of negative reports concerning Austin's housing market and I can see why because a lot of the market is overpriced.
The cold hard truth is that real estate is not really an investment. Its a liability. Plain and simple.
Real Estate is an asset. A mortgage is a liability. The difference is equity, which is added to your net worth and contributes to your wealth.
Quote:
Secondly, anyone making the claim that real estate outperforms stocks isn't using historical data. If you look at the long-term trend, stocks have delivered a 7%-10% annual median return for the past 100 years. In the same time period housing has returned barely 4%, which barely keeps up with inflation.
You're ignoring leverage. If I invest $50K (25%) in down payment for a $200K home, and the home appreciates 4%, than my net worth increases $8,000, not counting the equity paydown on the mortgage, and tax advantages for deductions in property taxes, interest, insurance and maintenance.
If I invest $50K in the stock market and it goes up 10% in that same year, my net worth increases $5,000. If I started investing on Sept 10, 2001, I'm currently right back at scratch, with zero appreciation in my stock account (and I do have retirement accounts that have in fact done just that).
Meanwhile, our real estate investments have appreciate nicely and several are close to being paid off completely.
I completely reject your assertion, as would my accountant, that real estate is not an investment. So too would the many very informed investors who have achieved financial independence and wealth through real estate.
If you ask any economist about what makes for a better investment, they will tell you pretty much the same thing I did. A home is a liability as long as you are making payments. The most simple reason I can give is that let's say that you lose your job. Suddenly you are in a situation where if you fail to make the payments, you will lose your house along with all your equity. That and you will also have bad credit. This is a very realistic scenario given the current economy. A person who rents can just move somewhere else.
Secondly, you are doing exactly what I mentioned above, which is that you are merely looking at recent stock market performance and applying it to a long-term strategy. That's why most people wind up either losing money, pulling out at the wrong time, or not investing enough period. What you're telling me is that performance from 2001-2009 was flat. But that's an overly simplistic approach. For starters, a retirement strategy is long-term, as in 30-40 years. Looking at it that way, if you looked at performance from 1969-2009 and had invested all along, you would have done extremely well for yourself by now since the stock market has gone up considerably since then.
Sounds to me like its time to fire your accountant.
If I invest $50K in the stock market and it goes up 10% in that same year, my net worth increases $5,000. If I started investing on Sept 10, 2001, I'm currently right back at scratch, with zero appreciation in my stock account (and I do have retirement accounts that have in fact done just that).
Meanwhile, our real estate investments have appreciate nicely and several are close to being paid off completely.
I completely reject your assertion, as would my accountant, that real estate is not an investment. So too would the many very informed investors who have achieved financial independence and wealth through real estate.
Steve
Steve, How conveniently, you picked that cherry-picked that time period (note even the start date) to evaluate stocks.
Maybe i'll tell you this: If you bought the S&P 500 on March 9th of this year, you would be up more than 60%. During that period, how did your housing investments do?
BTW, much of your posts have invaluable insights and analytical data, as does your blog. Very thankful that you continue to post here.
But this is one of the rare posts that makes you come across as a RE shill. Remember David Lereah?
do you know that there are dozens of high quality housing and economic blogs out there? Seriously great posting and commenting. I think you'd enjoy it. Places like Calculated Risk, Naked Capitalism, Jessie's Cafe American, Mish, Dr. Housing bubble.
There are lots of places "out there" that are engaging in exactly the kind of discussion that you seem to want.
Thanks for the "heads-up"......it prob isn't fair for me to be on here if I don't fit the prevailing dynamic.......those do sound like what I'm looking for...I might start my own blog as well.....again, thanks
The cold hard truth is that real estate is not really an investment. Its a liability. Plain and simple. Secondly, anyone making the claim that real estate outperforms stocks isn't using historical data. If you look at the long-term trend, stocks have delivered a 7%-10% annual median return for the past 100 years. In the same time period housing has returned barely 4%, which barely keeps up with inflation. The golden rule which very few people do is that by the time you are 30, you should have anywhere from $10,000 to $30,000 saved in retirement. That's it! If you do so, you will be set by the time you're 60. But most people don't do that. Instead that figure that since they're married, they gotta' buy that house, and thus starts the whole pattern of blowing most of the income on an underperforming asset while ignoring the stock market mainly because the average person only looks at negative performance versus overall. The richest people in the world made billions investing in everyday, ordinary stocks. Not houses. I'll be honest- I have been renting for over 10 years and its been just fine. I've already saved up for my retirement and will save more bfore I buy a house and when I do so, It'll be the cheapest house I can find just because to me a house is nothing more than a box you store your things in.
Lastly, Its the nature of salespeople to cast a glowing, positive light on their product, and its no different for real estate agents. All I can say is that when my Wife and I visited awhile back and saw how much taxes on property cost, it blew me away that there were 600k houses. The taxes must eat these people alive. I would bet anything a LOT of them bought and didn't even think about the taxes. Given Austin's median income, some areas we saw were wayyyy out of line with fundementals. I too have read a number of negative reports concerning Austin's housing market and I can see why because a lot of the market is overpriced.
Well, the buying a home as an "investment" has only been around since the turn of the millenium, and has pretty much died now, per the "underwater" situation all over the USA. Many buyers who drank the collective "Kool-Aid" per the Ponzi-ish
appreciation rates, which would last for "years", are collectively hee-hawing like Pinnochio at the end of that same story....
So, that whole "home as main investment/Perpetual ATM Machine" meme has largely played itself out, and surely will be put to rest permanently....actually, it only lasted 8-10 years tops.....
I think of it as a California meme that temporarily spread and ran rampant across the USA, like a Inland Empire Wildfire,
before decimating California itself(and the statehouse in Sacramento), along with the rest of the country....you can even say it spread over much of the WORLD from Cal.........
Real Estate is an asset. A mortgage is a liability. The difference is equity, which is added to your net worth and contributes to your wealth.
You're ignoring leverage. If I invest $50K (25%) in down payment for a $200K home, and the home appreciates 4%, than my net worth increases $8,000, not counting the equity paydown on the mortgage, and tax advantages for deductions in property taxes, interest, insurance and maintenance.
If I invest $50K in the stock market and it goes up 10% in that same year, my net worth increases $5,000. If I started investing on Sept 10, 2001, I'm currently right back at scratch, with zero appreciation in my stock account (and I do have retirement accounts that have in fact done just that).
Meanwhile, our real estate investments have appreciate nicely and several are close to being paid off completely.
I completely reject your assertion, as would my accountant, that real estate is not an investment. So too would the many very informed investors who have achieved financial independence and wealth through real estate.
Steve
Steve, there is no leverage anymore...that was when the ratios were still in the easy money period.....those ratios are not leverage friendly anymore, and, in light of the negative/flat "appreciation", would be useless even if the old loan ratios still existed......
Those old roaring, animal spirit days of false appreciation are long gone....
Steve, there is no leverage anymore...that was when the ratios were still in the easy money period.....those ratios are not leverage friendly anymore, and, in light of the negative/flat "appreciation", would be useless even if the old loan ratios still existed......
Those old roaring, animal spirit days of false appreciation are long gone....
There is still plenty of leverage. The federal government will give you a mortgage with only 3.5% down via FHA which is close to 28x leverage plus a 7k tax credit which will pay for your 3.5% down so the leverage ratio is even higher.
If you ask any economist about what makes for a better investment, they will tell you pretty much the same thing I did. A home is a liability as long as you are making payments. The most simple reason I can give is that let's say that you lose your job. Suddenly you are in a situation where if you fail to make the payments,[ B]you will lose your house along with all your equity[/b]. That and you will also have bad credit. This is a very realistic scenario given the current economy. A person who rents can just move somewhere else.
That's not true. If you fail to make the payments, and the bank forecloses and sells your property, you receive any proceeds over the amount owed to the bank. So you would get your equity. If the sales price is close to or less than what you owe, then you had no equity in the first place.
Of course, that typically wouldn't happen because if you had equity, you'd just sell it yourself prior to foreclosure.
I agree with Steve's points, and have found them to be true in my own life. However, you need a long time horizon -- it mitigates the risk.
I believe there is probably opportunity both in real estate AND the stock market right now. The conditions are like this because no one has any money! Most people are overborrowed or living (somewhat) off savings. However, for those who aren't, opportunity is being served up on a silver platter.
In real estate, particularly if you are buying as your primary residence, money is about as cheap as ever. And the government will pay you $8K. It's just a matter of finding the right deal and motivated seller.
As for the stock market, we're dealing with levels not seen in 8-10 years. It seems to be recovering a bit, so that window may be closing... but for those that have the money to invest, the appreciation will be there.
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