Pittsburgh Housing: Cheaper to Own than Rent (Homestead: apartment, foreclosures)

[BrianTH]

Originally Posted by user_id

they do indeed exist in many real estate markets.

With the benefit of hindsight, it is possible to identify many places and points of time in which putting additional capital into your home might have been a decent investment idea. It is also possible to identify many places and points of time in which doing that would have been a poor investment idea.

The reason to care about reasonable expectations, as always, is that you can't invest in the past, only the present. And there is nothing in particular guaranteeing that if it would have been a good idea to invest extra capital in a home in a particular area in the recent past, it is still a good idea to invest extra capital in a home in that particular area now. Indeed, the United States is full of examples of places where as of, say, 2005, using that logic would have led you to make some pretty terrible investments.

If you look instead at the overall, long term, average rate of return on investing in a home, you will find out that it is pretty poor (as in not much, if any, better than the general rate of inflation), and of course there is risk involved, which means this is not a great use of capital. So it is not just theoretical speculation: if you don't cherry-pick your examples with the benefit of hindsight, it turns out that housing performs financially pretty much like you would expect it to perform.

A home is a depreciating asset, but the land underneath it is not. Land appreciates (or depreciates) based on the same sort of economic considerations other assets do. Not sure why you are trying to pretend as if land is not an asset......

Of course both homes and land are "assets". And I never said they didn't generate a return--in fact I specifically noted that return was primarily in the form of providing a place to live. The specific issue we are discussing is whether owning a residential property can be expected to give you an additional return beyond that return, sufficient to make it a good idea to invest additional capital in your home even if you are getting no additional living benefit.

The fact that structures are (usually) depreciating assets and land is (sometimes) an appreciating asset doesn't change the analysis, or what history has shown about the financial performance of residential housing assets. But if you are interested in the topic of speculative investment in land, a few things are worth noting.

First, in many areas the value of the structure is much higher than the value of the land, so the depreciation factor on the structures can easily outweigh the appreciation factor on the land. Which is why in the vast majority of cases, to make an investment in an improved residential property pay off, you need to actually rent it out (or live in it yourself), not just sit on the land with the residential structure empty. In other words, there aren't many cases where land appreciation alone makes it a good idea to invest in a residential property. Of course that idea of making good money by buying and sitting on empty residential structures is conceptually similar to the idea that even with no additional return in the form of the value of living in your home, it is a good thing financially for your home to cost you more.

Second, it is worth noting that most land developed for residential use hasn't appreciated that much in the United States, mostly because we still have lots of land that could be developed for residential use. Again, with the benefit of hindsight we can identify exceptions, but typically we can't know for sure which places will be exceptions going forward.

Third, and perhaps most importantly, there is a lot of diversifiable risk inherent to land investments, such that if you are really interested in investing in land, you should do so on a diversified basis. Otherwise, you are getting an expected risk-adjusted return that is going to be below the market rate.

Hence, if you are really interested in adding some land investments, or real property investments in general, to your portfolio, you should be looking to diversify away from your home, not sink more capital into the exact same land as you are already de facto forced to invest in. Fortunately, there are many vehicles available these days for people to make diversified, low-cost investments in real property.

[BrianTH]

Originally Posted by Copanut

You are the Denver Boot of this forum at times.

Maybe, but I don't see why that particular post fits that metaphor. I'm not trying to keep this conversation from moving forward in general. But I do think it is important for people to resist making financial decisions based on the investments they hear people on the Internet bragging about, because that is not a reliable source of information on the overall performance of possible investments.

In that sense, I would claim in that post I was not being a wheel clamp, but more serving as a sort of caution sign: "Slippery When Wet, And Don't Rely On Internet Anecdotes When Making Financial Decisions."

[Copanut]

It was a joke, Merry Christmas.

[BrianTH]

Originally Posted by Copanut

It was a joke, Merry Christmas.

[Copanut]

I had a great boss years ago who called a "slacker" the Denver Boot of this office. LMAO when I heard it.

As to your photo, I'm doing some contract work with another firm, 2 of the ladies in the office gave me a bag of coal(bubble gum). At least I'm consistent.

[user_id]

Originally Posted by Hopes

Why have you been thinking of moving back to Pittsburgh for the past two years when you like California's real estate market better?

Huh? When did I say I liked California's real estate market? I was speaking about a general issue, namely, that faster appreciation (i.e., a good return) ameliorates a higher purchase price over time. In terms of the California market, I expect fairly flat prices for many years in the coastal markets...pretty much a Pittsburgh style market but for different reasons.

[user_id]

Originally Posted by BrianTH

With the benefit of hindsight, it is possible to identify many places and points of time in which putting additional capital into your home might have been a decent investment idea..

With the benefit of hindsight? What is that suppose to mean exactly? The point of my comment is that an investment in land is just like an investment in other asset classes. There is risk, there is the potential for return, etc. Every home owner, because he is also buying land, is making an investment.

Originally Posted by BrianTH

The reason to care about reasonable expectations, as always, is that you can't invest in the past, only the present.

Gee....really? I really don't get your comment though... You are suggesting that one shouldn't expect to make a return on their home above and beyond the utility one finds in living in it. Yet, if you look at real estate across the country over the last 100 years you see numerous examples of real estate providing return, indeed, if anything that is the norm instead of flat Pittsburgh style real estate market. After all, the market in Pittsburgh is a fact created out of its declining population.....a problem not found in the country as a whole.

Do you find it unreasonable that people expect the stocks in their 401(k) to appreciate and provide a capital return as well?

In terms of your comment about returns, you're ignoring the leverage home owners subject themselves to. When leveraged, even appreciation at the rate of inflation can result in a large return. For example, take a home purchased for $500,000 with 20% down and further assume that it appreciates at 3% a year. After ten years: they will still own around $315,000 and the home will be worth around $670,000, so they gain $170k (ignoring selling fees) from a $100k investment...or around 10%/annual. Now, the home owner is going to have monthly carrying costs...but he will have that whether he rents or owns. And this is with 20% down, the return would be greater with a smaller down-payment which is usually the case.

[BrianTH]

Originally Posted by user_id

Every home owner, because he is also buying land, is making an investment.

Actually, he is making an investment in the structure too. My point is just that most of the return on that investment comes from the value of living there. But that's a crucial point to remember, because it means you are unlikely to be better off paying more for a home that you otherwise don't like living in more.

You are suggesting that one shouldn't expect to make a return on their home above and beyond the utility one finds in living in it. Yet, if you look at real estate across the country over the last 100 years you see numerous examples of real estate providing return

That's why I mentioned the benefit of hindsight--if you look with the benefit of hindsight, you can find such examples. You can also find examples where homes ended up being very bad investments. The problem when buying a home is you don't know for sure how your investment will end up, and thus you should be very cautious about paying more for a home merely because you hope it will be one of the better cases rather than one of the worse ones.

indeed, if anything that is the norm instead of flat Pittsburgh style real estate market.

Nope.

The real long-term return on housing: Zero! | Marketplace from American Public Media



The average real long-term return from housing price appreciation is barely above zero. In that sense, Pittsburgh has indeed been quite typical in recent years--it is the rest of the country that briefly went crazy, and now has crashed back to earth.

After all, the market in Pittsburgh is a fact created out of its declining population.....a problem not found in the country as a whole.

You have to look at both supply and demand, of course. Places with increasing demand won't necessarily see abnormal appreciation if they can also see increasing supply to match at a reasonably low cost.

Do you find it unreasonable that people expect the stocks in their 401(k) to appreciate and provide a capital return as well?

No. But again, I do think people can expect a return from owning their home--it is just that most of that expected return comes from the value of living there.

To draw a proper stock analogy, the fundamental value of a stock is its entitlement to future cash flows to stockholders. That can include dividends, one-time cash buyouts, and so forth. But if two stocks have the same expected future cash flows, you shouldn't prefer to buy the more expensive stock, on the theory that more expensive stocks may appreciate faster. Indeed, why would you think that? The saying for stocks is "buy low, sell high". But lots of people want to believe when it comes to homes that it should be "buy high, sell even higher!" And we recently saw where that notion leads.

Similarly, the value of living in the property is analogous to the cash flow return of owning the stock. And you shouldn't prefer to buy a property that will give you the same return in that sense just because it is more expensive, on the theory that more expensive homes must appreciate faster.

In terms of your comment about returns, you're ignoring the leverage home owners subject themselves to. When leveraged, even appreciation at the rate of inflation can result in a large return.

Not if you are borrowing at higher than the expected rate of inflation, which you almost certainly are.

Now, the home owner is going to have monthly carrying costs...but he will have that whether he rents or owns.

Correct, and whether renting or owning will cost you less in the long run depends on various specific variables.

But what you haven't shown is that increasing the amount you pay for a home, with no additional return in terms of the value of living there, will actually make you better off. And in fact if you run the numbers and assume your borrowing costs are at a rate above inflation, but your appreciation is only at the rate of inflation, it will in fact cost you more if you pay more for your home.

Seriously, though, this should not be a surprise--the oddity is assuming that somehow you would get a nice return for doing nothing other than agreeing to pay more for your house.

[user_id]

Originally Posted by BrianTH

Actually, he is making an investment in the structure too.

The structure isn't an investment, not unless you are using the word "investment" very loosely in which case you're just equivocating. The structure depreciates, the land does not.

Originally Posted by BrianTH

That's why I mentioned the benefit of hindsight--if you look with the benefit of hindsight, you can find such examples.

No investment class provides risk-free returns so what exactly is the point of mentioning this?

Anyhow, I have no idea why you are saying "nope" when the graph you are posting demonstrates that even real prices have a tendency to increase over time. Furthermore, you are once again ignoring the issue of leverage which means you're not even trying to have a serious conversation about investing.......

Originally Posted by BrianTH

Not if you are borrowing at higher than the expected rate of inflation, which you almost certainly are.

This would be true if properties provided zero cash-flow, but alas....they do hence your comment is gibberish...

Originally Posted by BrianTH

But what you haven't shown is that increasing the amount you pay for a home, with no additional return in terms of the value of living there, will actually make you better off.

Umm.....huh? Why would I be trying to prove that? Indeed, this is just vague gibberish to began with.... I really don't care about your desire to justify your choice to live in Pittsburgh on the internet. I'm talking about real estate and my point is rather concrete, namely, higher appreciation will ameliorate a higher purchase price. That is just basic arithmetic. The areas of the country with higher than average real estate prices, by definition, are those that have had higher than average appreciation.... How exactly what predicts which areas are likely to experience high rates of appreciation is another matter entirely....

Originally Posted by BrianTH

-the oddity is assuming that somehow you would get a nice return for doing nothing other than agreeing to pay more for your house...

That is an oddity, who suggested this?

[BrianTH]

Originally Posted by user_id

The structure isn't an investment, not unless you are using the word "investment" very loosely.

I'm using it in the extremely straightforward sense of investing money with the expectation of future gain. If you are the occupant, the future gain just happens to take the form of the value of living there. If you are not the occupant, you instead typically expect to get a return in the form of rent.

Generally, of course you can invest in depreciating assets--you just need to expect the return you get from rent, use, etc. to outweigh the depreciation.

No investment class provides risk-free returns so what exactly is the point of mentioning this?

That when assessing the opportunity cost of your capital, you need to adjust your expected rate of return for risk. If you start with close to a zero real expected rate of return and then add onto that considerable risk, your opportunity cost of capital is going to be pretty high.

Anyhow, I have no idea why you are saying "nope" when the graph you are posting demonstrates that even real prices have a tendency to increase over time.

Yeah, at a low rate perfectly consistent with what Pittsburgh property owners have experience on average in recent years. Which provides a direct refutation of your claim that recent Pittsburgh rates of return are not normal.

Furthermore, you are once again ignoring the issue of leverage

I didn't ignore it, I specifically addressed it. If your rate for borrowing is higher than your risk-adjusted expected rate of return, leverage doesn't turn that into a good investment idea.

This would be true if properties provided zero cash-flow

Um, no, it would be true if you were counting solely on appreciation to provide your return, and your appreciation rate was lower than your borrowing rate.

Again, I keep pointing out that of course your home provides more of a return than that--it provides the value of living there, which is a real, cognizable return, and why home-ownership can be preferable to renting in the right circumstances.

The problem is when people start insisting that deliberately paying more for a place you would personally value the same amount is a good idea from an investment perspective--that is not actually a reasonable expectation in most cases.

Umm.....huh? Why would I be trying to prove that?

Good question. Why would you claim something like this, particularly in light of recent events, I don't know:

"The fact of the matter is that homes in many areas of the country do indeed provide a return in addition to the value of living in the home and these are typically the areas that have more expensive housing."

I really don't care about your desire to justify your choice to live in Pittsburgh on the internet.

Everything I am noting applies to people making property decisions anywhere. There are a lot of people out there pushing the idea that you should spend more on your house even if you don't need more house just because that is a good investment plan. It typically isn't a good investment plan, because housing is actually a cost, and more house will in fact typically cost you more, so you should only spend more on your house if you are getting a compensating increase in the benefit in terms of living there.

That should be common sense, and yet here you are disputing that common sense (I won't speculate on your motives--I know nothing about you).

my point is rather concrete, namely, higher appreciation will ameliorate a higher purchase price.

But again, it isn't reasonable to expect higher appreciation merely because you pay more. And the historical truth is that on average, homes do not appreciate enough to make up for the additional costs of buying a more expensive home.

The areas of the country with higher than average real estate prices, by definition, are those that have had higher than average appreciation.

As an aside, there is nothing definitional about that claim: those homes could have been more expensive when new as well.

But in any event, past results do not guarantee future performance. Again, one would think people would have this truism firmly in mind in light of recent events.

How exactly what predicts which areas are likely to experience high rates of appreciation is another matter entirely.

No, it is the matter we have been discussing, ever since you made the claim above ("The fact of the matter is that homes in many areas of the country do indeed provide a return in addition to the value of living in the home and these are typically the areas that have more expensive housing."). That's a claim about what predicts high rates of appreciation, namely more expensive housing.

That is an oddity, who suggested this?

You, as I keep pointing out. That is simply another way of stating what I have quoted you as saying twice above.