Your (Mortgaged) Home is Not an Investment

In late June’s post where I plotted the long-term trend of inflation-adjusted local home prices, there was some disagreement with my snarky insinuation that zero real appreciation over thirteen years (1999 to 2012) represents a lousy investment.

As one reader correctly pointed out, the stock market’s total non-inflation-adjusted return over the same time period is a paltry 5.1%, which turns into a loss of 26% after you adjust for inflation. Even if you ignore the leverage you get from your down payment and the additional principal you paid into the mortgage over that time period, zero growth in home prices still beats a 26% loss in the stock market, right?

Of course, home ownership is a complex financial commitment, and simple comparisons of purchase and sales prices don’t tell the whole story.

Five years ago I published a rent vs. purchase spreadsheet that takes into account interest rates, home appreciation, maintenance costs, insurance, income tax deductions, and as many other factors as I could fit into a single spreadsheet. I’ve maintained and updated that spreadsheet over the years, so let’s use it to run a few sample scenarios for various investments between Q2 1999 and Q2 2012.

I’m not going to get into every little detail of how I’m coming up with the numbers below. If you want to see the complete breakdown, just download the spreadsheet and play around with it yourself.1

For the purposes of this post, I’ll be comparing the purchase of a median-priced King County home in the second quarter of 1999 ($229,650) financed with a fixed-rate 30-year mortgage and 20% down ($45,930), with renting and using two possible alternative investment options for the down payment: Buying an S&P 500 stock index (average yearly gain of 0.38%) or buying 10-year Treasury bonds (average yearly gain of 4.2%).2 For the rent scenario we’ll be adding the renter’s monthly savings to the investment.

Here’s a table of the total net costs for each option at various points:

  Buy a Home Rent+Stocks Rent+Treas.
Year 5 ($76,080) ($27,221) ($20,128)
Year 10 ($130,115) ($67,736) ($48,379)
Today ($159,780) ($98,914) ($69,427)

Buying a home in 1999 becomes the better financial choice than renting and investing in the stock market by year 22 (2021), while it takes until year 27 (2026) to beat investing in 10-year treasuries.

Here’s what the buy vs. rent scenario looks like in chart form out to 30 years if the renter had invested in treasury bonds.

Net Cost / Gain of Owning vs. Renting

20 years is a pretty long time by most people’s standards, and yet it isn’t long enough for buying with a mortgage to beat renting and investing your savings.

However, if you’re the kind of person that is pursuing actual home ownership instead of serial debtorship, the situation gets dramatically better for you once you finally pay off the mortgage:

Net Cost / Gain of Owning vs. Renting

Home ownership can be a good investment, but not the way most people do it. Buying a home and “trading up” or moving around every seven to ten years is not investing in real estate. It’s renting money from a bank so you can enjoy the perks of “ownership.”

Actually owning your home—debt free—is the only way to make your home an actual investment.

1 I’d also like to take this opportunity to put in another plug for the definitive online buy-vs-rent calculator over at the New York Times. Be sure to open the “Advanced Settings” box and adjust the HOA dues, buying/selling costs, and all the other little details. When you put similar settings into my spreadsheet and the New York Times tool, you’ll end up with similar results. The New York Times tool has a more user-friendly interface, while my spreadsheet provides more nitty-gritty behind-the-scenes details.

2 Note that for both investment options I’ve simplified the returns to a simple yearly average. In reality treasuries would return more than that over the 13-year period since most of the 10-year bonds you would have purchased would have been at rates closer to 5.5%, and stocks would have performed better since you would have continued investing as the market crashed in 2001 and 2008.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

128 comments:

  1. 1
    Marc says:

    I would hope the homeowner would have seen the value of refinancing their 7.25% mortgage at least once, if not more than once since 1999. Heck, if they only refinanced this year into a 15 year fixed loan they could lower the P&I payment to $1,033 ($142k, 180 mos. at 3.75%) and still pay the loan off earlier than the original loan. What if they refi’d and kept paying the same $1,253 all the while?

  2. 2
    Marc says:

    Tim,

    Forgive my ignorance/laziness but how is the value of the owner’s shelter accounted for in this analysis?

  3. 3
    The Tim says:

    RE: Marc @ 2 – I’m not sure exactly what you mean by that, but I’m comparing total shelter + investment costs for the renter and the owner, so it’s apples to apples as much as is possible…

  4. 5
    Anthony Cacallori says:

    Actually owning your home—debt free—is the only way to make your home an actual investment.

    This should be a banner at the top of your website.

  5. 6

    By Ben @ 4:

    “Trading up” is spending more money. The RE industry tried to get people to believe that it magically made you more rich, but if you ignore the lies of anybody telling you RE can beat inflation long term, then trading up your house is just like trading up your car. It spends more money.

    I don’t think what people saw in it was a chance to get rich. What they saw in it was a way to appear rich–to live in a house which was better than what they could initially afford. With steadily rising prices that was possible.

    Buy a house for $100,000 with $10,000 down. Owe $90,000.
    Sell that house for $200,000 and put $95,000 down on a $300,000 house. Owe $205,000.
    Sell that house for $400,000 and put $185,000 down on a $500,000 house. Owe $315,000.

    What people were focusing on was the nicer and nicer house. What they were ignoring was the larger and larger mortgage. There was no way to “trade-up” without increasing the mortgage.

    Of course there were others who operating differently. Some would do the above, but when they bought the $500,000 house they would borrow only $50,000 and pocket/spend $135,000 of the remaining funds. If they invested that money well that could work out. If they squandered it, they should thank god that we no longer have the tax system where you avoid tax gain by rolling over your basis into the new home.

  6. 7
    Marc says:

    Tim,

    I was thinking about the concept of implied rental value. When the rental value rises to the point of exceeding the owner’s cost there’s arguably a benefit the owner gains (admittedly intangible). Or pehaps more accurately, an opportunity cost.

    http://www.investopedia.com/terms/o/owners-equivalent-rent.asp#axzz20KywHJBk

  7. 8
    Marc says:

    RE: Ben @ 4
    the term “rich” means different things to different people. To me it’s more than just living comfortably and the advice I received early in life and believe in is that the only way to get rich is to have money or people working for you. Trying to get there working 9 to 5 ain’t gonna happen for the vast majority of people especially as the self imposed burden to look successful leads most to spend more and more as their income rises.

  8. 9
    Marc says:

    5 out of the first 9 posts are mine! What, am I the new Kary? Back to work.

  9. 10

    By Marc @ 8:

    RE: Ben @ 4
    The advice I received early in life and believe in is that the only way to get rich is to have money or people working for you. Trying to get there working 9 to 5 ain’t gonna happen . . ..

    By Marc @ 9:

    5 out of the first 9 posts are mine! What, am I the new Kary? Back to work.

    Why? It won’t make you rich. ;-)

    Actually, the best way to get rich is to do something very small for a large number of people. Have a hit song, or a hit movie. Design the clip that holds their bread in the bag.

  10. 11
    Blurtman says:

    Aaahhh, the 4.2% ten year Treasury. I have heard stories told of such a beast by ancient mariners of times of old.

  11. 12
    The Tim says:

    RE: Blurtman @ 11 – FWIW, here’s a plot of 10-year yields back through 1990:

    If you started investing your monthly savings from renting in 10-year treasuries you would have gotten some with rates over 6% for most of 2000.

  12. 13
    ARDELL says:

    RE: Blurtman @ 11

    LOL! That would make me MUCH older than an Ancient Mariner given I remember their being in double digits. :) Pretty high double digits at that. 14% to 15% and I can’t even say that was when I first started working. I was already working 10 years at the Bank when I was buying them as an Investment Officer in the 14% to 15% range.

    Those were the days when banks were almost going under for locking in long rates at 9% because they couldn’t imagine rates getting higher…and they did. The banks who put a lot of their money into 9% long bonds were getting killed. 1982 I think, or thereabouts.

  13. 14
    Blurtman says:

    RE: ARDELL @ 13RE: The Tim @ 12 – Historical inflation chart. http://inflationdata.com/inflation/inflation_rate/historicalinflation.aspx

    ’79, 80, 81 – Wow!

    Treasuries would have to adjust, and not because of fear of a default, I would think.

  14. 15

    RE: Blurtman @ 14 – I assume buying long term government bonds (or almost any other long term interest obligation) in the very early 80s would have earned you a nice gain on sale if you sold five years later.

  15. 16
    David Losh says:

    Once you take away the appreciated value of the property, either due to inflation, or, as we saw simple exuberance, the family home becomes a drain on your expenses.

    We own homes for the kids to play, and go to school, and have a better life than we had, or at least the same.

    Home Owners buy white picket fences, and an American Dream. Most people pay a high premium for that dream, because, after all it’s for the children.

    In terms of Real Estate as an investment, that’s over. We got played by high-end financiers. Here in the United States we got off pretty easy, but Europe? forget about it, those consumers are toast.

    Fortunately here in the United States we have bankruptcy which will save a lot of people.

    You don’t want to know from me what’s coming, but look around at today’s development. Development never stops. We will see massive amounts of rentals to make way for the next round of investment, for the consumer.

    The consumer is going to have to bite the bullet, and settle debt before they can free up the cash for the next part of their lives.

    We got had, let’s move on.

  16. 17
    David Losh says:

    RE: The Tim @ 12

    I would always love to discuss owning a small business as an investment compared to stocks, or bonds.

  17. 18
    Blurtman says:

    RE: Kary L. Krismer @ 15 – I am not a bond trader, but the spread between Treasury returns and inflation is where your true return is if you are long Treasuries. But in spite of inflation, a 15% nominal return still sounds great, like a double scoop of Ben and Jerrey’s in a waffle cone.

  18. 19

    RE: Blurtman @ 18 – Here’s an article explaining how you could have made over 16% buying low interest government debt at the beginning of 2011 and selling it near the end of the year.

    http://articles.chicagotribune.com/2012-01-20/business/sc-cons-0119-marksjarvis-20120120_1_individual-bonds-yields-slide-treasury-bond

  19. 20
    ARDELL says:

    RE: Blurtman @ 14

    That chart looks about right to me for those years. But at the same time I had a 33% increase in salary with 16% and 17% raises back to back in 79 and 80 or thereabouts. About 20% was for inflation and the rest was for a promotion and getting me up to male salary rates during the Women’s Lib days. My starting salary in 72 was $4,800 a year, so they had a lot of catch up to do between equalizing make and female salaries and keeping up with inflation back then.

    No wonder a lot of banks merged or failed back in 82 to 84 or so. There were rumors then that they would merge to the point where there would only be 3 banks left in the U.S. :) The bank where I worked merged with Mellon in 84.

    That was just before the first ever taxpayer funds were called in to save the banks around 89 during the S&L crisis. Home prices plummeted about the same time…not here in Seattle Area but most everywhere else.

    I find it odd when people say the whole lending and home price crisis never happened before or since the depression. It clearly did in the 80’s with the same bubble in home prices and crash after the peak. The reason the banks were failing and home prices were crashing was different…but still…it happened almost exactly like this run up and crash.

    If history repeats itself that that would put the recovery to happen between 2015 to 2018 with prices continuing to rise more dramatically at the end of the recovery (once no one is underwater) beginning at the end of 2018.

  20. 21
    ChrisM says:

    RE: ARDELL @ 20 – My first house was courtesy of the Resolution Trust Corp.

    Silly me, back in 2007-2008 I thought we’d see another RTC and the whole foreclosure mess would be resolved in 2 years or less….

  21. 22
    David Losh says:

    RE: ARDELL @ 20

    This is nothing like the 1980s, or 1970s. I’ve never seen anything like this before.

  22. 23
    HappyRenter says:

    By David Losh @ 16:

    In terms of Real Estate as an investment, that’s over. We got played by high-end financiers. Here in the United States we got off pretty easy, but Europe? forget about it, those consumers are toast.

    I’m not sure where you get your facts from. From my personal experience, homes in Europe are built much more solidly than in the US. Today the roofs are built in such a way that they never need to be replaced. Insulation and heating are much more efficient. It’s an indication that homes in Europe are meant to be a place for people to live, not a vehicle to become rich. Also, Europeans are culturally much more comfortable renting if they think that they cannot afford to buy a home. In the US you are often looked down at if your are a renter.

    I think that people who got off “pretty easy” are those who were and are financially responsible.

    Purchasing a home versus renting is a question about how you want to live. Do you want a backyard? Do you want to be able to do upgrades? Are you interested in a particular architecture? As you say, you pay a premium for that. But it might pay off once you have paid down your mortgage.

    Fortunately here in the United States we have bankruptcy which will save a lot of people.

    It would be much more efficient to be educated about financial responsibility.

  23. 24
    ARDELL says:

    RE: David Losh @ 22

    I have David. In fact it is pretty identical to the market I started in in Jersey in 1990. Prices doubled from 85 to 87 or 89 depending on neighborhood and then fell 50% from there almost overnight and slowly thereafter through 1991. 1991 to 1995 was pretty flat to a slow recovery until 1995 when enough of the people who bought early in the upswing were no longer underwater. By 1998 no one was underwater and the market started a new upswing until the recent crash.

    I think the businesses here like Microsoft and Amazon had something to do with this area not experiencing the same market swings during that time. Don’t know for sure as I wasn’t here, but I can tell from doing stats that the Seattle Area was not subject to the similar movement back in that time period.

    Just because you haven’t seen it, doesn’t mean it hasn’t happened. It did where I was. Likely the first upswing happened when double digit interest rates went down to single digit rates, then it bubbled out from there until it crashed.

    Speaking of which…I hear Greenspan is speaking tonight. :)

  24. 25
    ARDELL says:

    RE: ChrisM @ 21

    Housing markets crash quickly and recover slowly. That is always the case in housing because of the way the appraisal process works. Takes many, many years for a housing recovery, though a crash usually happens over an 18 month timeframe and then a little leaking, i.e. flatish, for a short while afterward. A full recovery usually takes at least 8 years.

  25. 26
    Blurtman says:

    RE: ARDELL @ 20RE: ARDELL @ 20 – I don’t think folks can conceive of significant, predictable salary increases these days. From comments on the internet, it seems that folks even look fondly at the average stock index fund’s returns during Clinton’s reign.

    I ilived in the Sierra foothills during the late ’90’s, early ’00’s, when home prices were just getting back to the ’80’s bubble levels after a long swoon. So I, too, cannot understand the explanation that home prices never crashed in the USA. It was not that long ago.

  26. 27
    David Losh says:

    RE: HappyRenter @ 23

    Economy is what I’m referring to. Millions of people were convinced they should buy property, not just here, but in Europe, China, South America, and Africa.

    You can talk financial responsibility all you want, but you are going to pay for some one else’s greed. That some one else is a banker, stock trader, and hedge fund manager.

    It’s simple, if you build them they will buy, at historically low interest rates.

    In Europe some families rent from wealthy land owners for generations, it’s a part of the have, and have not culture.

    Let’s talk simple facts.

    In Ballard there are thousands of town homes that should be bulldozed to make way for apartment buildings. That would be the highest, and best use of that property. Belltown should be bulldozed, as well as Fremont.

    Remember that the Burke Property along the canal used to house hundreds of small businesses? Well it’s the same idea. We bulldoze Fremont to make way for higher density.

    Everett? Absolutely let’s bulldoze all around the downtown core, and build higher density housing units. The same at InterBay South of Ballard. Wink, wink nod, nod.

    The more density we have the lower the price of property.

    What? That would be unfair to those good decent hard working people who bought those things? They should have known better.

    Another thing is that we need airplanes, lots of them, because the fleets we have are old. Where should we build those. Here? Where wages are horrendously expensive? or would it be better for the stock holders to import, and assembe parts robotically?

    Tacoma? The fleet is in, it is a major Port, let’s develop housing for a transient population that is younger, and harder working.

    If you buy into the supply, and demand argument of Real Estate then you need to be aware of highest, and best use, coupled with obsolescence.

    Most housing in this last run up in building became obsolete. We have the ability now, and the duty, to build more units for people to have decent living conditions. We can not allow people to live in the filth, and squalor that slum lords are forcing onto renters.

    We need cheaper housing, and have the ability, the duty, to build it.

    So yes, if we build with the idea the property will be there for fifty to a hundred years the return get much better.

  27. 28
    Toddius says:

    Tim,

    I agree with your calculations entirely, but I think that you should to stress the importance of the savings aspect to your calculations more. The calc assume that you put the down payment away and that put away the monthly savings realized from renting (monthly out of pocket for owning will be greater than renting). Most Americans have trouble saving for a down payment, let alone saving the extra cash on hand from renting. Houses force us to save money.

    Also, I realize that this is a retrospective look at 1999, but for those of use who are trying to make this decision today I think it is important to adjust the interest rate to something closer to what we are seeing these days (7.25% is a bit higher then we see today). This creates a bit of a different picture, which is probably why you’ve made the decision to buy.

    Todd

  28. 29
    David Losh says:

    RE: ARDELL @ 24

    OK, this is the same argument I see on these threads all the time.

    You saw a price run up, and collapse in an area, so that must mean that is what is going on today.

    It’s like saying that I have a job so unemployment isn’t real.

    Unemployment is very real. Unemployment is global. Did that happen in the 1980s?

    You go onto say that you had two wage increases in the 1980s. I had two wage increases in the 1980s. As a matter fo fact my wages doubled between the beginning, and end of the decade, and I was about at evens financially.

    It’s not an argument, or proof that we will recover.

  29. 30
    MMM says:

    Interesting spreadsheet. I’ve put my numbers:

    Purchasing
    Home Price: $555,000
    Down Payment: $138,750
    Interest Rate: 3.500%
    Loan Term: 30
    Property Tax Rate: 1.15%
    Maintenance Cost: 1.0%
    Utilities (monthly): $300
    Home Appreciation: 2.5%
    Annual Insurance: $500
    Annual HOA Dues: $0
    Standard Deduction: $7,200
    If Married Enter “1”: 1
    Tax Bracket: 28%
    Excise Tax Rate: 1.78%
    Sale Fees: 6.0%

    Renting
    Monthly Rent: $3,000
    Initial Investment: $138,750
    Inflation: 3.1%

    Utilities (monthly): $200
    Investment Return: 5.5%
    Annual Insurance: $0

    I left the inflation and investment return rates. Anyway I’m not better at predicting them. I assumed the rent would be $3000 after I looked at padmapper.com.

    Results:

    1) I live in my house for free for the next 30 years (according to the graph).
    2) Renting is less expensive only in the first year. If I plan to live 2 or more years then it’s better to buy.

    If you bought a home in the last two years then it was probably a good decision.

  30. 31
    ray pepper says:

    pay off 3.5% loans?……………….NEVER!!!!!!!!!!………….extend the term as long as possible and keep your powder dry!….15 year term? r u nutts!……………extend to 99 years if you could…3% money is the BEST in a lifetime………..

    I will say it again…………taxes,insurance,utilities,maintenance, and the tons of other bills associated with home ownership each month make it RIDICULOUS to EVER pay off one extra bill @ 3% rates with the current tax laws we have now. Not to mention sheltering your equity position with a mortgage wrap. Leaving your unencumbered property open to millions of potential lawsuits as the years pass is simply put………..Horrible investment advice!

    But, go ahead BubbleHeads ! Investment advise here at the Bubble reminds me of one of my favorite clips I seem to post here very often:

    http://www.youtube.com/watch?v=0iqFO-Udq6s

  31. 32

    What’s not accounted for in the numbers is the value of a person’s free time.

    When a person is a homeowner there will always be a never ending to-do list that eats away at your free time from mowing the lawn/yard work to routine maintenance tasks like changing the furnace filter and cleaning out the gutters, scrubbing the hardwoods, cleaning the windows. Granted some of this, like weekly housecleaning, you’d do anyways as a renter.

    But with more free time, a person could “invest” their time into other tasks that could yield a greater ROI in a person’s life like starting a side business or writing that novel, joining a band, etc.

    Maybe that’s a good excuse for a new graph.

  32. 33
    Pegasus says:

    RE: Jill Schlicke @ 32 – We better hope that Kary never starts renting…..the incessant posting would become infinite….

  33. 34
    David Losh says:

    RE: ray pepper @ 31

    Is it a centipede clip? I’m always afraid to open a Ray Pepper clip since that one. I still have nightmares.

  34. 35
    ARDELL says:

    RE: David Losh @ 29

    There’s an old saying in the Investment Biz. “Where it has been.. It will be again.” That does apply to every stock or every house, but the market WILL recover.2018…I’ll give you a call. :)

  35. 36
    David Losh says:

    RE: MMM @ 30

    Purchase Price $555,000, 3.5% interest for thirty years you paid $897K, plus your expense.

    The renter paid $1,080,000.

    The big assumption is that the rent will remain $3000 per month.

    What happens, if according to me, the rents go down?

    Oh, yeah, you get to sell the house after 30 years of maintaining it. Do you have numbers for maintaining the property? Yes you do, $166500.

    Oh yeah, and wait, what if the property you bought goes down 10% in the first five years?

    A housing unit is a small cog in a greater economy.

  36. 37
    David Losh says:

    RE: ARDELL @ 35

    Each region, and housing unit has it’s own set of values, you were saying so yourself.

    I go into a lot, and I mean a lot, of town homes that are less than 10 years old that are lost causes. Sorry, it’s a fact of life that you can have two different builders on the same block turn out two vastly different products for the same price.

    We built millions of housing units nationally.

    Those units still exist, as mortgaged properties.

    Now we have thousands of nicer, and newer rental units coming onto the market, nationally. When you compare the town home to the newer nicer rental units those rentals are looking very nice.

    In investing you need to know when to hold them, know when to fold them, know when to walk away, and when to run.

    I mean as long as we are throwing around old sayings.

    Lots of investors are dumping properties right now. Lots of people who have money, I mean real money, who can afford to take the loss, are dumping properties, right now. You, and I dumped properties. Ray dumped properties. What do we know that we aren’t saying?

    I’m saying get rid of it, wait out the market, and buy for cash. That’s going to be the smart thing.

  37. 38
    Jonness says:

    We haven’t hit bottom yet. Only take out a mortgage if you can truly afford it.

  38. 39
    Jonness says:

    By Marc @ 1:

    I would hope the homeowner would have seen the value of refinancing their 7.25% mortgage at least once, if not more than once since 1999. Heck, if they only refinanced this year into a 15 year fixed loan they could lower the P&I payment to $1,033 ($142k, 180 mos. at 3.75%) and still pay the loan off earlier than the original loan. What if they refi’d and kept paying the same $1,253 all the while?

    What if they already refied at 6% and bought a crap load of points?

  39. 40
    Jonness says:

    RE: Ben @ 4 – Not that I disagree with what you said, but I say live frugally, save your money, and buy a cheap house with cash or pay it off quickly. Then invest all the extra money you get each month from not having a mortgage payment. At first, for the equities portion of your portfolio, buy the easy to pick stocks, like aapl when it was cheap, that you have studied the patterns of and know well. Also study the patterns of the market in each specific investing climate, and study macro economics. Know the market you are trading in, and understand human nature. Yesterday’s winning strategy will not work today if the market sentiment has changed.

    The game is rigged, and you need to know the players and what it means when they make their moves. If you don’t at least partially understand how the game is rigged, then it’s probably best to paper trade until you figure it out. Otherwise, the more experienced players will prey upon your emotions and newbie status. Stay diversified. “All in” only works in Texas Holdem, and even then only when your entire financial future is not on the line.

    Investing is a second job (don’t do it unless you really enjoy it). IMO, a home is an investment. In fact, it’s the most important investment people can make who are just starting out in the game (as well as those who have yet to accumulate a decent amount of extra wealth that they can afford to invest). That’s why it must be chosen well, and the price paid must be relative to the income of the family purchasing the house. Going all in on the house right out of the starting gate is probably the stupidest decision you can make. Even if it turns out well, risk taking in this manner is not sustainable over the long term.

  40. 41
    Eastsider says:

    Your (Mortgaged) Home is ABSOLUTELY an Investment. As in any other investment, you can make or lose money. Where else can you make such a disproportionately large long term investment with as little as 3% down? This is such a good deal for home buyers that only the government, not private investors, will make such a loan at this low rate today. Further, when you are in trouble, the bank, or the government, is the one losing the money. Heads I win, tails you lose. How good can it get?

    If the timeframe is changed to the 1960’s-70’s, you would have made the greatest investment in your lifetime.

  41. 42
    David Losh says:

    RE: Eastsider @ 41

    You and Ardell should get a cheer leading section going. This is different than the 1960s, 1970s, 1980s, even the 1990s.

    We had a global economic crash that is still yet to be resolved. Municipalities are going bankrupt because it’s our edge. I’d love to post the entire Section 8 of Article 1 of the Constitution, because it’s relevant, but 4: To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

    Let me also include a definition of bankruptcy here: A federally authorized procedure by which a debtor—an individual, corporation, or municipality— is relieved of total liability for its debts by making court-approved arrangements for their partial repayment.

    The shocker for many of you here is that most people are cash strapped, and using low interest credit to float a life style. That may be wrong to you, but some of you are still drinking the Kool Aid, and going along like things will go back to “normal.”

    Soveriegn governments are struggling with budgets, austerity, printing money, stimulus, and taxation. We just kind of forget when they are done the individuals, the tax payers, are still cash strapped, and loaded with debt.

    Did we have student loan debt in the 1960s, 1970s? Did a young couple start out with student loans and a $400K mortgage while making $150K between the two of them? or $200K?

    How about job stability, because we seem to be the only corner of the country paying good wages? better yet how about those pensions, and Social Security? will those be around five, ten years from now?

    Do you really think a housing unit will continue to be a good investment, or will it be an over priced money pit?

  42. 43
    David Losh says:

    Credit card debt jumped by the biggest month-over-month percentage since November 2007 (the month before the official start of the Great Recession, if you’re keeping count). Revolving balances increased by $8 billion in May to $870.2 billion from the month before, according to the Federal Reserve’s latest stats released Monday.

    Read more: May credit card debt surges | Bankrate.com http://www.bankrate.com/financing/credit-cards/may-credit-card-debt-surges/#ixzz20NnoQRdI

  43. 44
    Hugh Dominic says:

    I’m no derivatives trader, The Tim, but I can say you’re comparing AAPLs to oranges.

    You have multiple investments that start at the same level of liquidity (cash) but end at different levels of liquidity. You should apply a premium to the more liquid investments, to offset the disadvantage of being stuck fairly illiquid for 10 years. You should also have all the investments end the same, i.e. converted to cash. That means you have to sell the house and pay the liquidation costs. If you bought those bonds directly from the treasury, they will have matured and you can redeem them without a fee, but you would pay a fee for early redemption. You also have to pay taxes on the gains.

    You should adjust the investments based on their risk/reward levels. Comparing the three in hindsight is zero risk, but at the time the investments are made the results are unknown. In this case you would want to assume an investment objective for the buyer; growth, income, asset protection, etc. The investment that aligns better with the buyer’s objective should get a premium.

    tl;dr true investing is complicated and depends on the buyer’s objectives.

  44. 45
    MMM says:

    RE: David Losh @ 36

    If you apply my numbers to Tim’s spreadsheet then you will get better estimates (with inflation, investment returns, tax deductions, etc):

    Renting total cost: $1,843,583
    Purchase total cost: $874,686 (that include maintenance)

    That’s $1M in favor for purchase if you compare TCO. Do you want to pay $1M more for the privilege of renting?

    You have very big assumption that the rents will go down. It may happen, may not. But what if not? If Microsoft and Boing will not lay off people. What if they hire more as they do today? What if the home price will go +10% in the next five year?
    There is a lot “what if” question. If I know what will be in five years I would be rich. You can stick with your assumption. One of us will be right in 5 or 30 years. But I will stick with my assumptions:

    Rents will be same or higher in 1 year. There are few new constructions both for rent and for sale. The rent vacancies is very low. This can be changed by people buying their own home or some layoffs. I don’t see any layoffs. There are also few properties to buy right now. I know couple families that are looking to buy a home and are still renting because they can’t find it. Where will all renters go? Are they going to emigrate?
    In longer term everything will depend on homes/rents supply. And this supply will depend on banks because they will have to lend money to investors. And banks will depend on market condition and confidence. It will take several years to bring back the confidence to banks and investors so they will start to take the risk and build new properties. Don’t expect too many new rental properties soon.

    In 2007 I paid $1100 for 2BR/1BA /mo. Today the same condo is rented for $1400. So the rent prices are really high and maybe even too high. Many renters hope that you are right and rent prices will go down. Let’s see what happens.

    My biggest fear isn’t supply. It’s failure of Windows 8 or Dreamliner. I think that’s even more important than changes in economy overall.

  45. 46
    drakob says:

    I’ve been living in Seattle for about 4 years now. Every 6 months or so, I dust off my Discounted Cashflow model of buy v. rent and see if anything’s changed. I compare the rent I’m currently paying ($1800 at present for a nice 3/2 in Kirkland) with what I figure my true monthly stroke would be if I purchased the exact same house – let’s say $450K.

    20% down is $90K of cash that is, for all purposes completely dead. I figure that my average monthly stroke all in (mortgage P&I, maintenance/repairs, tax, insurance, less my tax bennies for interest & prop tax) is somewhere north of $2200/mo.

    I run the DCF calculator out 30 years and compare:
    1. NPV of all cashflows for purchase, including sale price of the appreciated property at Year 30 back to 2012 dollars.
    2. NPV of all cashflows for rent paid, including investment capital at Year 30 back to 2012 dollars.

    Maintenance/Repair/Insurance = c. 1.75%
    Prop Tax = 1.25%
    Investment/Discount Rate = 5%
    Rent escalation = 3%
    Home value escalation = 3%

    Results:
    NPV Purchase = -415K
    NPV Rent/Invest = -237K
    delta NPV = $178K in 2012 dollars

    Pretty clear to me. Honestly, I would really like to be able to justify buying a house and every time I’ve run the DCF, I’m forced to conclude it doesn’t pencil, at least for what I’m looking for. What’s interesting (to me anyways) is that from a pure investment standpoint, it seems to look somewhat reasonable in the $350K range, but by the time I get to $400K houses, it turns south.

    Problem is, I like our house and our neighborhood and I know I’m not likely going to find something comparable for anything less than $450K. In addition, if and when I buy, I’d probably want something a little bit bigger and nicer for my growing family, so my DCF analysis will likely only turn uglier as I move into the $500’s and $600’s.

    At this point, I can’t see how things can change significantly enough to flip Buying back on top of Renting (for me). The only scenario that seems to maybe make sense is that we experience some significant inflation and see a correction in terms of much higher interest rates in response. This sort of environment could potentially drive down Real home values (and rents up) to the point where the DCF analysis flips.

    Last thought – my biggest takeaway from the exercise is the realization that there’s absolutely no way to justify classifying Buying as an investment. An investment with a negative NPV over 30 years? Hmm… no thanks. Buying a house is as much consumption as renting is… or buying cars, cheeseburgers or sneakers. Tough pill to swallow for some. I contend it’s true.

    Thanks for letting me ramble.

  46. 47
    corndogs says:

    RE: David Losh @ 17 – Owning a small business is not an investment replacement for stocks and bonds it’s a replacement for your current job and if you want to be successful it will probably replace most of your life on a day to day basis. There’s a major difference between passive and active investments, it makes no sense to compare the two… I think that was ECON 101?

    I will say one thing, you’d have a lot more options for starting a business if you owned a home with some land!!…

  47. 48
    MMM says:

    RE: Jill Schlicke @ 32

    I agree that owning a property takes more time. But right now you have to pay extra if you want to rent. Owning a house like mine costs $2000/mo. Rent is about $3000/mo. Are you going to pay $1000 more so you have time for other stuff?

    You could also own a home and use some portion of this $1000 to hire a contractor who will mow your lawn, clean your windows or even home. Then you can still own and have time to write that novel.

  48. 49
    corndogs says:

    The Tim says: “Actually owning your home—debt free—is the only way to make your home an actual investment”.

    I don’t need a chart/graph to prove the fallacy of your argument.

    Is it not obvious to you, that if i have a property paid off cash (and according to you a good investment), that if I take a loan out at 3.5% and invest it at something that pays a higher return that the investment overall just got better?

    It’s as simple as that! You’ve somehow got it in your head that a mortgage is a bad thing, so you make charts and graphs and put the numbers in to prove your point… fact is…. you’re just wrong…

  49. 50
    John Berkowitz says:

    I think your blog is relevant nation-wide and country-wide. I hope you will affect decisions of more people. There is nothing I could not agree with. Your calculator is much more precise than the others. Finally someone is counting with all costs that property includes.

    Is mortgage an investment? Absolutely not. It is a tool of enslavement. You loose your work? You become ill? Anything else happens? It will only bring you problems.

    I´m still following the situation in Vancouver. Their home prices are insanely high having the benchmark price of housing in Greater Vancouver for March 2012 $607,700. Home Price Index reached 161.8 per cent. And guess what? People are still buying. The number of sales just slowed down while number of listings increased, but there was no big burst in the end. I´m amazed how people are still crazy about “owning a property”.

  50. 51
    interested says:

    RE: corndogs @ 48 – spoken by cornie the one who ALWAYS wins on his investments.

  51. 52
    interested says:

    RE: ARDELL @ 24 – what happens when historically low rates go UP?

  52. 53

    By Pegasus @ 33:

    RE: We better hope that Kary never starts renting…..the incessant posting would become infinite….

    We know you’re admitted troll. You don’t need to repeatedly prove that point.

  53. 54

    By corndogs @ 48:

    The Tim says: “Actually owning your homeâ��debt freeâ��is the only way to make your home an actual investment”.

    I don’t need a chart/graph to prove the fallacy of your argument.

    While I have advocated owning free and clear as being a good thing (something even Jonness now advocates–apparently he’s listened), I would agree with corndogs that it’s not the only way.

    If your view of the world is that we’re going to see inflation, then being leveraged with a mortgage would be a good thing. And before someone says we need wage pressure for inflation, that is not necessarily true. You can have inflation drive wages or wages drive inflation.

  54. 55

    By interested @ 51:

    RE: ARDELL @ 24 – what happens when historically low rates go UP?

    If you have an FHA loan, your loan becomes valuable.

    But as to the value of the property itself, that would depend on why the rates are going up.

  55. 56
    corndogs says:

    RE: Kary L. Krismer @ 53 – Kary, I appreciate you agreeing with me but Tims statement isn’t right or wrong depending only on inflation, as his spreadsheet shows, there are many variables that influence the outcome, Tims just picked them so he can appear to have corroborated his stance. The rule of thumb has been that you need to hold a property for 5 years to break even. MMM posted that his purchase pencils out better than that, I have no reason to doubt that.

  56. 57
    David Losh says:

    RE: MMM @ 45

    $3000 for a year is $36000 per year, and over 30 years that’s $1080000. I walk away with nothing, but I can walk away at any time.

    30 years is an economic life that can present thousands of opportunities.

    That mortgage is $897K plus expenses. You end up with a property, in 30 years that may, or may not be worth twice the price, but you paid that price for the property.

  57. 58
    corndogs says:

    RE: David Losh @ 56 – MMM used the same spreadsheet as ‘The Tim’ and he says he’s in the black after year one, therefore he can walk away as well anytime after year one…. your post is a waste of time, because he’s already addressed your point.

  58. 59
    David Losh says:

    RE: corndogs @ 46

    ECON 101 says to buy low, and sell high.

    The price of Real Estate is very high, and the only reason it cash flows is because of historically low interest rates, and the fact there has been very little to no rental property development since 2005. Builders made more by building, and selling cracker boxes. People bought cacker boxes for, let’s say $250K.

    Now apartment building is higher density, cheaper to build, and has the ability to offer the consumer a better product at a reasonable price. The price of rent will be what the market will bear.

    Supply, and demand indicates to me that we will see rents fall as more, and more rental units come on the market. Mortgages will remain the same.

    As rents fall the value of property will fall, no matter how low the interest rates go.

    The interest rates are another indication that property may not recover as an investment. I don’t see where we would get inflation with rates on a downward trend. If anything it would indicate a flat return all the way around. Once rates increase the price of property will decline, inflation will be kept in check, and what is invested in rental property may have a higher return elsewhere.

    I just think the money has been wrung out of Real Estate, and it’s time to move on.

  59. 60
    David Losh says:

    RE: corndogs @ 58

    Sorry to interject reality, but really? after one year he can walk away with a return?

  60. 61
    Mel Torme says:

    RE: David Losh @ 42, 43 – It sounds like someone has started reading zerohedge.com (I won’t mention any names). You are starting to make sense now, David. I will delete my commie-losh-auto-redthumb.exe script … no, wait, I’ll just put it into the recycle bin for now ;-) Your take on the big picture of the economy is what I agree with; I don’t know if I would agree with your solutions (in fact, don’t get me started, please).

  61. 62
    corndogs says:

    RE: David Losh @ 60 – Maybe this whole things over your head, but the game we’re playing here is comparing renting with buying, He’s saying after one year, he’s not wasted any more money than if he had rented. Try following along a little better.

    MMM has picked a real example, Tim’s picked one that suits his purpose. The fact is both scenarios may be true. The problem with Tim’s example is he tries to use it to say ALL houses with mortgages are bad investments. That’s the part that’s wrong.

  62. 63

    RE: The Tim @ 12

    G F C I S
    Jun 0.11% 0.05% 4.13% 3.25% 7.08%
    YTD 0.79% 2.41% 9.58% 9.21% 3.25%
    Last 12 mo 1.81% 7.53% 5.55% (1.54%) (13.51%)

    G= Longterm CD
    F= Longterm Bond
    C= American Stock Market
    I & S= Foreign Stock Markets

    Yep Tim, your longterm treasuries [F fund] pegging down to .05% for June even lowballs the dinky 2% YOY Growth from your chart. I invest [gamble…LOL] heavily in C fund too, American Stocks….they’ve been tanking the last few days, making even that 9.58% growth I got YTD tenacious at best.

  63. 64

    RE: Kary L. Krismer @ 15

    Hindsight Is the Best Investor Kary

    Ask the billionaires that lost their shirts investing on advice from their brokers.

  64. 65

    RE: Kary L. Krismer @ 55

    IMO Kary

    The most valuable wealth assets ya got today aren’t interest dividends anymore, they’re monthly dividends ya accumulate in cash from your own paycheck.

    I do this “straight-forward investing” separate from Las Vegas matching stock funds investing and guess what…..the growth far exceeds the like 10% of your gross invested in broker advice/fees areas; assuming ya got the savvy and ability to save like crazy.

    Its a completely new paradigm we’re in, throw out the old “loss” leverage thinking and get totally new age, if you want wealth accumulation, instead of degradation.

  65. 66
    Tim McB says:

    Similar to MMM I did calcs on our home situation and it really comes down to what you compare to. If I compared our old 1 bed, 1 bath 550 sf rental in Ballard (currently $875 a month) to our mortgage payment for our 4 bed, 1 bath 1,900 sf home in Maple Leaf then even after 30 years the numbers look grim for home ownership. If I compare what I think our house would rent for based on zillow and craigslist (about $1900 a month) vs. our financial numbers for our home, like MMM, it starts to pan out on the first year. But I’d say, at least for myself, this is a bit dishonest as well. If given my current circumstances (married, one child) I were to rent I’d rent something in between, a smaller 2 bedroom house or apartment (probably house due to wife’s input.) This would be more than our Ballard apartment but less than our current home. I suspect we could haggle for something like this in the $1400-1450 range in our area. When I take $1400 and comparing those two, it pans out at the 8 year mark which sounds about right. The point of this rambling post (sorry) is that you can dramatically alter the results to suit whatever agenda you want simply by adjusting the base numbers (especially assumed rent). If I’m truly honest with myself and the current projections on rent and home appreciation hold, we will break even somewhere in the 5-8 year mark (assuming in the rent scenario we would move again to something larger after another child is born).

  66. 67
    David Losh says:

    RE: corndogs @ 62

    Let’s make it even more simple.

    A $200K house rents for $1500 per month. You get an $18000 return every year.

    Is that what you want to tell me? Is that what all of you Real Estate Investors want to tell me?

    OK, I’ve got it.

    I have a different opinion, both about future value, and future returns.

  67. 68

    RE: David Losh @ 67

    Here’s a Simple Way of Looking at It

    Ya spend $200K cash for the rental say [Sounds Condo-ish right now in the Seattle area at our prices] and 12-15 years later ya might get your money back at $18/K rental yearly gains.

    Now let’s subtract the rental investors’ broker costs:

    Income tax on gains
    Maintenance on the possible money pit
    Property tax
    Insurance
    Water/sewer
    HOAs Fees
    Empty Unit Costs Between rentors
    Price Degradation Due to Deterioration and Future Value

    What’s your final net income after costs? Lord only knows.

  68. 69
    David Losh says:

    RE: Tim McB @ 66

    Never mind about the rambling because this is a tough one to pencil out, and it depends on the future. That is the biggest part of investing, knowing, or speculating on the future.

    What I know is that I can tax defer dollars into a 401(k) for a 5% return, but it is tax deferred, and I’m old.

    You have to consider the economic life you have, and if for 30 years you want to bet your $500K leveraged investment will pay that kind of return.

  69. 70

    RE: David Losh @ 69

    Yes David

    I stay clear of un-matched tax differred investments for one simple reason, ya can’t access the funds without big penalties or at all…..when you do access the money, ya owe back taxes then too. Nope, I like my money invested “mattress style”….its there ready to plan to spend without some ambiguous 1040 Form clouding its real value.

    The bottom line, there’s no free lunch.

  70. 71
    ChrisM says:

    I’m surprised no one has mentioned the lucrative option of setting up a grow operation in your house.

    Can someone run the numbers on that?

  71. 72
    David S says:

    RE: ChrisM @ 71 – Now you’re talking some serious TAX deference.

  72. 73
    corndogs says:

    RE: Tim McB @ 66 – The rule of thumb has always been that you should plan to hold your house for 5 years or more. It’s nice that you have given us another real life and honest example that this is still a decent rule of thumb and owning a house beats renting.

  73. 74

    By softwarengineer @ 64:

    RE: Kary L. Krismer @ 15

    Hindsight Is the Best Investor Kary.

    No, the best investors are anonymous posters on Internet websites. ;-)

    You should always do what they suggest.

  74. 75
    Tim McB says:

    RE: David Losh @ 69

    Yeah. Its scary to think that after the Stock Market Crash at the start of the Great Depression it took 20 years to recover losses. 5.5% per year return, I’d definitely take that; at least over the next few years. I do have it on good authority that a taxi cab ride will cost $174.50 in the year 2015 though, at least according to Back to the Future Part 2…oh and the taxi will be able to fly. I just watched it again with the wife. Maybe median home prices will be 2.6 million?

  75. 76
    Blurtman says:

    RE: softwarengineer @ 63 – Risk versus reward. But when the risk is knowingly misrepresented and hidden by not only the financial firms, but the USG, investors become ruminants.

  76. 77
    Mel Torme says:

    RE: ChrisM @ 71 – The numbers penciled out (back-o-the-envelope) real good for you, Chris, until you let your IP number, MAC address and such be sucked in along with your post 71 for later analysis in the Utah Motherland Security Data Center.

    The grow operation ROI is a tough calculation for you now, as more variables are involved. How will lawyer fees change over the next few years? How long will the sentence be? Will you be able to rent out your current home during your incarceration? Will your friend Big Eddie come through with the bribe to the probation board? How much will his rates change (perhaps higher than inflation)? How much will gasoline go up in the near future along with incendiary devices? Will the bubble in Mary Jane go up in smoke?

    I’m gonna’ need a bigger spreadsheet, people!

    (along with a large pizza, hold the anchovies this time)

  77. 78

    By ChrisM @ 71:

    I’m surprised no one has mentioned the lucrative option of setting up a grow operation in your house.

    Can someone run the numbers on that?

    I’ve shown a whole bunch of homes that were very obviously former grow operations( odd wiring, mysterious venting, etc) . These homes were foreclosed on following the arrest of the owners. It’s hard to make mortgage payments when you’re in jail. Too often also, the owners don’t think of how to best maintain the condition of the house when they’re converting into a grow operation. The house next door to mine got busted for that and foreclosed on about six years ago. The cops removed about 700 mature marijuana plants. I had no idea. I just thougt I had very quiet neighbors.

  78. 79

    RE: Ira Sacharoff @ 78 – The authorities might move to have the owner’s interest in the house terminated (I can’t think of the proper legal term). There was one near me where the owner was trying a short sale, and the county’s actions were something that a buyer would have to deal with.

  79. 80
    David S says:

    RE: Ira Sacharoff @ 78 – Yes, me too. You living in Kent?

  80. 81
    David Losh says:

    RE: Tim McB @ 75

    The stock market crash of the 1920s, and Great Deppression was resolved with back to back world wars.

    The returning war veterans, and VA, made Real Estate one of the best investments you could make.

    I’ll say again, this is different.

  81. 82

    By David S @ 80:

    RE: Ira Sacharoff @ 78 – Yes, me too. You living in Kent?

    Renton

  82. 83

    By Kary L. Krismer @ 79:

    RE: Ira Sacharoff @ 78 – The authorities might move to have the owner’s interest in the house terminated (I can’t think of the proper legal term). There was one near me where the owner was trying a short sale, and the county’s actions were something that a buyer would have to deal with.

    In the City of Seattle, the term used by the police referring to an owner losing their legal ownership in a home as a result of a drug seizure was “abatement”.

  83. 84
    Blurtman says:

    RE: Ira Sacharoff @ 78 – I thought power usage was always the giveaway.

  84. 85

    By Blurtman @ 84:

    RE: Ira Sacharoff @ 78 – I thought power usage was always the giveaway.

    I’ve got no idea how my next door neighbor’s grow house got busted. Maybe it was power usage, but I think I heard something about them stealing electricity. Hopefully it wasn’t their dumb next door neighbor just paying all the bills without looking at them.

  85. 86
    Blurtman says:

    RE: Ira Sacharoff @ 85 – A very good friend of mine did some guerilla farming. Bought seeds in Amsterdam, sprouted the plants indoors to sex them, and transported the females to two outdoor sites on public land. One got ripped off, but the other survived. He said it was a blast, working the sites under moonlight with flashlight in teeth, carrying the odd bits to tend to the plants. Water was the biggest challenge.

    A friend of a friend was busted for an indoor grow operation in WA state. A neighbor turned him in. Smelled the plants, apparently. The dude fled to Hawaii, but returned to face the music under advice of his lawyer. His considerable savings and other assets were forfeited. He now works as a dive instructor in Hawaii, living as a freeman ever still. I asked him why he would not get licensed as a legal grower of medicinal pot, and I got the impression that would be too conventional.

  86. 87

    RE: Blurtman @ 84RE: Ira Sacharoff @ 83 – Ira, thanks.

    Blurtman, bypassing the meter is just one of the changes they make to the home’s electrical system.

  87. 88
    Nick says:

    I would consider the US 10-yr bond yield to be a risk-free investment. Certainly the yield was higher than what it is now (1.48%). Putting a 2% average return on savings made by renting, on a 15-year rate of 3%, I break-even at 11th year. Going forward that may very well be the norm. I am not considering the threat of 10-yr bond not being considered risk-free anymore considering high US debt levels.

    So overall, I agree with Tim – a mortgaged home is not an investment.

  88. 89
    David Losh says:

    RE: MMM @ 45

    Still, most of what’s being built these days are apartments. The Downtown Seattle Association says almost 4,000 apartment units are under construction right now. That’s up from just over 400 in 2010. Jon Scholes tracks economic development for the association.

    http://downtownseattle.com/files/file/June2012DevelopmentGuide.pdf

  89. 90
    MichaelB says:

    The Tim says: “Actually owning your home—debt free—is the only way to make your home an actual investment”.

    Thought experiment: If all homes had to be purchased with 100% cash – what would be the median home price? Much lower I suspect….Therefore, the median price of homes is driven by access to debt. As availability of debt decreases, home prices will also decrease.

    Conclusion – home buyers in the current economic environment are irrational.

  90. 91
    Andy says:

    Fidelity ran an article about this in their newsletter a few years ago. You can probably find it by searching their website. They showed that buying a home sucked as in investment just about any time since 1950.

    If you are in an inflationary time, then buying a home to remortgage and use that money to buy a second, third, fourth, etc. can be a decent investment. if there is not rapid and substantial home price appreciation however it bankrupts you. Lots and lots of risk there. In the 1970’s this was competitive with putting money into money market funds, but those are very low risk.

    If you did it in the early 1990’s and sold out before the peak it also worked well. However the stock market had a really impressive run in the 1990’s and probably beat it.

  91. 92
    corndogs says:

    RE: MichaelB @ 90 – yeah good idea, you can take your savings of 2 months wages and build a house out of dirt and ferns…. or buy a really nice tent or rent…. they had that in Russia till recently, ever been there?. You need to clue in.. prices of houses won’t go too far below build cost…. right?…. The prices are already there…. so your idea is irrational. There’s nothing wrong with borrowing money on interest. Now making people but down 20% so they have some skin in the game is rational.

  92. 93
    David Losh says:

    RE: corndogs @ 92

    Did I get here just in time or what?

    Henderson Nevada is a perfect example of new construstion selling for far less than construction cost. OK, let’s throw in every urban center, and most rural construction that is in the foreclosure mill.

    We could include Europe, and China, but have no fear the emerging markets of South America, Mexico, and well let’s throw Canada in there also, are still chugging along.

    By using the term chugging I mean people are still chugging the Kool Aid.

    Borrowed money is debt. You only have the use of it if it gives you a profit. So far Real Estate, purchased in the last five years, is showing a loss. In ten years all you have is debt.
    In fifteen years you have lost opportunity, but never fear, after thirty years you get what you paid for.

    I was thinking today that I would like to run the numbers more concerning population, and migration, because I think that last bubble was predicated on the number of people who wanted to own a home, and would pay any price to do that.

  93. 94
    whatsmyname says:

    Marc hit it in post 1. Seemingly small static assumptions make big differences over time. No one who has been paying attention has been sitting on a 7+% mortgage in years.

    This spreadsheet won’t work where it counts with my Mac Excel, but the HP tells me that the loan payment at 4% is $384/month lower. Say you lose $50/month in tax benefit, that’s still $80,000 over 20 years – and doesn’t count the years you were refi’d in the 5’s.

    Similarly, 5% is pretty reasonable investment return at 1999, but where have you been getting that lately? Your 10 year T is matured. Your 2009’s are only pulling in 2.5% for the next 10. You’re running negative savings at rent versus realistic current mortgage payment, so at least you don’t have to worry about the current 1.5% rates. But the basic reversal in which side has excess cash flow is going to really do a number on your numbers on a look forward from this point. Then again, who knows what the next 10 years will bring.

  94. 95
    David Losh says:

    RE: whatsmyname @ 94

    Even at 0% interest the home purchase price would need to in line with its actual value. If you pay $250K for a property that will be worth $180K in today’s dollars you over paid.

    It’s like Sleep Country’s mattress sale with 0% interest for three years. You pay $700 for a mattress that is worth $300 but the interest is free.

    The elephant in the room is Real Estate pricing. Is the property you bought worth anything for the structure or is only worth the dirt it sits on?

  95. 96

    By David Losh @ 95:

    RE: whatsmyname @ 94 – Even at 0% interest the home purchase price would need to in line with its actual value. If you pay $250K for a property that will be worth $180K in today’s dollars you over paid.

    Well of course you’d have overpaid if you bought something worth only $180,000 for $250,000. But to know that you’d have to know how to value something. That is beyond your abilities.

  96. 97
    Macro Investor says:

    Language is important here. Investment implies the goal of a positive cash flow. For real estate that means your monthly expense is less than equivalent rent. Very few people think that way. That means their real estate purchase is either speculation — buying with the dream that it goes up in value; Or consumption — basically, a big ticket shopping experience.

    The real estate industry calls homes an investment, because that’s part of the sales pitch. It sounds more sophisticated than saying you’re buying something to make your friends envious, or to make yourself feel better. You don’t want to kid yourself here.

    Stock buying is always speculation, unless it pays a dividend.

    You NEVER borrow money to invest, unless the % return is LARGER THAN THE INTEREST RATE. Read that again. It’s really that simple.

  97. 98
    Macro Investor says:

    By MMM @ 30:

    Interesting spreadsheet. I’ve put my numbers:

    Renting
    Monthly Rent: $3,000
    Initial Investment: $138,750
    Inflation: 3.1%

    If you can really buy for that much lower than the rent, then you’ve hit on a great business plan. You should do that 20 times and become rich…

    … which is why I doubt your assumptions. You probably can’t really get more than $2000 unless it’s in city, highly sought after location.

  98. 99

    By Macro Investor @ 97:

    Language is important here. Investment implies the goal of a positive cash flow. .

    I don’t think so, unless you’re talking about the net cash at the end of the transaction. Lots of investments have negative cash flow during the ownership period.

  99. 100
    David Losh says:

    RE: Macro Investor @ 97

    You have to look at the value of the property at the end, supposedly when you own it free, and clear. Just because some place rents for more than the mortgage payment doen’t make it a good investment. You are stuck for at least fifteen years before the loan amount decreases dramatically.

    There are, now, millions of examples where the end result of managing a property nets you what you paid over the life of the loan. Your only “profit” is the residual rental income.

    You got the cash part right. If I buy it for $100K cash, rent it, and sell it for a profit, then it’s a good investment, when I sell it.

    The trick is when you capture the equity, when you capture the after tax profit. That’s getting tricky to do.

  100. 101
    J says:

    I’m glad I found this … because some of these numbers don’t take into account the sum-total experience of being a renter. Or even a property “mortgage renter”

    We moved into our apartment 6 months after our landlord purchased this multi-family property. In 1994.

    All these years we’ve had the benefit of easy access to city, job commute under 20min most days and quiet neighborhood. Low rent for tiny sq. ft apartment. Still low rent compared to others in area.

    Downsides are MANY: plumbing floods basement nearly quarterly. Only got permission to paint one room in all these years and I had to do the labor and get his pre-approval on paint. Electrical scary. Deck rotted completely thru in places before he replaced…only half the deck. Wavy, WWII era glass in windows that seeps the marine air year-round which equals, you guessed it, massive electrical heat bills. We don’t average $200 a month for utilities, we beat that YEAR ROUND. And we’re conservative users. Toilet seat breaks, he tells me “just pick one up at home depot”. I could go on and on.

    Yes, I am the idiot for staying and believe me it’s been hard. All these years of burgeoning economy (before the big kaput) and all my friends buying and selling homes like mad. Well meaning friends, who are in RE, tsk tsk’ing at us for never buying. And my boyfriend and I feeling like chumps for basically paying for our landlords mortgage all these years.

    I saved like a fiend but now, thanks to the big kaput, I earn 1/10th of what I earned 5 years ago.

    Here we are, 2012. Landlord finally decides to list his property and possibly sell in hopes of funding retirement. Doesn’t tell anyone. Just lets us discover a stranger roaming, taking pics.

    Then today, as I do yardwork (to help it look nice instead of letting his renegade so-called landscaper decimate the plants) guess what happens:

    Two unmarked double length vans pull up and block me in and out pile about 30 people w/ name tags. When I kindly ask what’s up, they simply say “a tour”. A “tour” of my alley? When I ask what kind, the photographer for the group (yes, this white-bread, generic-looking group had a photographer with them) he freaking ignored me. Cleared his throat and even though 3 ft away, ignored me. He and one driver exchanged snickers and walked away.

    I follow this group down to the adjacent property, only to overhear the button-down RE guy giving his spiel: “here we have a building that sold in 1990 for $$$ and today it’s valued at……..”

    So, let me guess, in exchange for a stay in a downtown condo, these idiots are being given a tour of the potential investment value in near-downtown Seattle multi-units. And to do this, they have to box me in, block an entire street with 3 vehicles, act rude and put numbers on the side of their vehicles using blue painters tape, so there’s no evidence what business they’re associated with. I guess they use the numbers to help herd their groups into the right car.

    They missed getting towed by mere minutes; the neighbors and I rallied to get them identified but they sped off. They knew what they were doing and they call themselves legit?!

    Trying to research on-line and identify these yahoos, I stumble on your site today. And believe me, it’s timely! Because if I could scrape together the pennies to “buy” my own 4 walls and be done with listening to my neighbors intimate moments, or never again have to come home and find out the neighboring property manager cut down my lilac or wait for my landlord to come clean the sewage out of my laundry room at his leisure, I’d do it.

    I’ll read your site for education but you folks are tossing around numbers as if investment means only one thing; return on invested money over a certain %. And it doesn’t. It means if an idiot drives on my property, I can kick him off it.

    GRRRRR ;-)

  101. 102
    Pegasus says:

    RE: J @ 101 – Was there a point here?

  102. 103
    whee says:

    J apparently doesn’t know anything about HOAs, which provide most of the inconveniences of renting at a mortgage premium, with the bonus that they can seize your home if the idiot you kicked off your property is an HOA board member.

  103. 104
    J says:

    Pegasus — The point is, value is in the eye of the beholder and if you all are going to discuss value only as a numbers game then you are just pushing peanut shells around and talking to each other in a self-made bubble.

    I’ll learn from reading this sites content but if you can’t glean some info from what I shared, but instead what to debate which neighborhood should be razed next so you can fit in more aPODments, then, your loss.

    Whee — And no, I don’t participate in a HOA living situation; this is a public neighborhood I live in, not one of our gated, measure-the-height-of-your-lawn communities. Thank god. Sounds like you know all too well about HOA.

  104. 105
    whee says:

    J, you already said you were a renter, not a home buyer. I was just pointing out that buying is not guaranteed to remove all the problems of renting, as HOAs and the like are quite common all over this region, in city and out, and for homes of all sizes, including condos and townhomes.

  105. 106
    ChrisM says:

    RE: J @ 101 – You have rights. Enforce them.

    “Electrical scary.” – call the city

    “Deck rotted completely thru in places before he replaced…only half the deck.:” – call the city

    “Landlord finally decides to list his property and possibly sell in hopes of funding retirement. Doesn’t tell anyone. Just lets us discover a stranger roaming, taking pics.” – get a lawyer and go over your lease. You should have “enjoyment” of your property, etc.

    This is not legal advice, to forestall Kary.

    Get some balls – this is also not legal advice, but geez, when do you stand up for yourself?

  106. 107

    By whee @ 3:

    J apparently doesn’t know anything about HOAs, which provide most of the inconveniences of renting at a mortgage premium, with the bonus that they can seize your home if the idiot you kicked off your property is an HOA board member.

    Total nonsense and ignorance.

    If you complain about HOAs, chances are you’re the type of person others don’t want to live next to. HOAs protect people from people who show little or no consideration for other people. They shouldn’t be necessary, but some people are pigs.

  107. 108
    Pegasus says:

    RE: J @ 104 – What I “gleaned” through your lengthy discourse was that you have been a renter by choice for 18 years in a small apartment while paying a below market rent. Now that the landlord is selling you are suddenly angry that you might lose your gravy train and now all you can think about are some of the unpleasantries that occurred over the years that obviously you were willing to endure until you were suddenly confronted with the reality that you may have to move or your rent may go up in the future. Having real estate agents suddenly appear in your neighborhood must be unbearable…..

  108. 109

    RE: ChrisM @ 6 – Standing up for yourself can often result in your getting thrown out, at least in low income housing where the conditions are bad.

    Years ago I had a friend without much in the way of income who was renting an apartment for the first time. I tried to advise him before hand to avoid situations where the heat bill would be high. He apparently took that advice to heart, because he rented a ground floor apartment which didn’t have any heat! It also seemingly hadn’t been painted in over 10 years, and when we painted we found hypodermic needles lying around. Clearly the owner was what you would typically call a slumlord.

    If my friend had complained, the owner might not have been able to do anything to bring heat to that unit. I don’t remember it’s electrical system (other than the fact the stove was mis-wired in such a way that you didn’t want to touch it while being grounded to something else). If it had not been possible for the unit to have heat, the city probably would have shut down that unit, forcing my friend to move.

    But clearly the neighbor would have been kicked out. I never went inside her unit, but I’m pretty sure an apartment with only one door and no windows is not a legal apartment.

    Anyway, my point is simply there are sometimes reasons people don’t complain. I’m sure there are other reasons too.

  109. 110

    RE: Pegasus @ 8 – That actually sounds like a fair assessment. To the extent he’s upset about the rent possibly increasing, that’s life. But some of the concerns are legitimate.

    I would add that any time you rent that is a possibility that the owner will sell. Even if you rent a house, that is a possibility. You can demand 24 hour notice for trips inside your house or apartment, but that’s about it. If you live in multi-unit housing, there is no reason for the owner to notify you of their intention to sell prior to someone actually wanting to look. For houses though, the owner would typically list the house, which would entail a sign and the agent presumably contacting you to discuss showing terms.

    Clearly J is upset about this, and to some extent I think those concerns are legitimate. It’s part of the reason I wouldn’t want to be a renter. I’m happy knowing that I’m not at the whim of some owner and their plans on whether or not to sell.

  110. 111
    David Losh says:

    RE: J @ 104

    Yours is a typical story of some one who has had long term cheap rent. You must of known the day would come when the truck would back up and the Real Estate weasel would hop out.

    Well that day has come, and the owner, who neglected the building, is going to sell, or is being forced to sell.

    The good news is you can maybe ride out this transition because your land lord is also typical of what’s going on today.

    Depending on the condition of the building it may be cheaper to tear the thing down, and start over. That would give you some time. If the new owner wants to come in and start charging higher rent, they have to improve the building.

    For most new owners it’s better, and cheaper to make the numbers work in the easiest way possible.

    When the property sells, check the public records to see what the sales price is. Call the City to have the property inspected. Express your concerns that the past land lord has promised to make repairs, and you want to ensure those repairs will be made. The City doesn’t disclose the source of the complaint.

    If all settles out, you should be in a better place with a slight increase in rent. If it turns bad, and the new owner wants to play hard ball, well you have recourses, based on your loyalty.

    You have been lied to and taken advantage of for over twenty years. You have rights that the new land lord, or property manager, has to honor. The worst thing that can happen is you have to move; well you are kind of at that point anyway.

  111. 112
    J says:

    Bingo – Thank you ChrisM, Kary and David, your feedback is exactly what I was hoping to create from my expansive post. It’s appreciated immensely. However, I’m not genetically suited to have balls but grow them I must. HA

    There has been some discussion with landlord that a renewed lease protects the renters, so that if a new owner wants to tear down or re-organize tenants, they need to “buy” out the remaining lease. Still researching the legality or truth of that….

    Pegasus – I did take a risk by posting not only lengthy, but emotional info about what is technically a housing decision. This wasn’t a gravy train was my point and I’m sorry you missed that. But I chose to rip back the curtain, if you will, yesterday and just put all the ugly emotional details out there. I suppose I wanted to vent but also because I saw a lack of connection in some comments about rent vs. buy as to what constitutes VALUE. And given the recent upheaval in my hot RE neighborhood, I was feeling a little frustrated.

    Good grief — I just had an epiphany. I come here looking for info, learn what steps I can take and see what RE educated people are talking about. And in getting so frustrated about the situation, I’m busy trying to tell YOU to stop talking statistics and numbers when in reality, that probably is exactly what I should be focusing on.

    harumph. shoot, I have to give up feeling like a victim in this. Darn, I’d hoped to hang onto that longer….

    Come on folks, I’m joking. Have a laugh already.

  112. 113

    By J @ 112:

    There has been some discussion with landlord that a renewed lease protects the renters, so that if a new owner wants to tear down or re-organize tenants, they need to “buy” out the remaining lease. Still researching the legality or truth of that….

    Off the top of my head I don’t know why that wouldn’t be correct. Assuming a valid lease, that would typically apply to a new owner too.

    Keep in mind though that new leases also benefit the seller. They would have a more firm income flow for the next year, and that would help the price in many markets, especially ones where conversion to condo is not a real option. Also keep in mind that the transfer of an apartment building can be a somewhat lengthy process compared to the transfer of a house, and when the parties have come to terms on price the buyer will typically limit what the seller can do if the plan is to make major changes. So for example, if condos or a tear down were contemplated, the buyer would request that leases be limited to six months, or some such thing.

  113. 114
    Pegasus says:

    RE: J @ 112 – Now you got it….;^)

  114. 115
    whee says:

    I choose not to consider HOA properties because of the horror stories I’ve heard about things like hanging a clothesline or having a decorative tree and being threatened with massive fines. People who love HOAs tend to love being rude and invasive themselves, far more so than people who live in normal places without HOAs.

    Plus out in the boonies, HOAs are often a way for people to pay extra to not socialize with each other on their 5 acres of woods nobody is allowed to trim or maintain or landscape. Seems more piggish than not, to me.

  115. 116

    RE: whee @ 115 – You shouldn’t believe what you read in newspaper articles. They try to make things sound sensational so that people get upset.

    The most recent example of that in HOA land was our local Carriagewood, where an owner was violating the provisions of the covenants by running a daycare out of their home. Rather than making any attempt to get the rules changed, they sued the association and its board members (who were able to get the action quickly dismissed as to them), ratted out two other owners running daycares, and then ended up with a judgment against him for about $100,000 or so. But KOMO made it sound like the HOA was beating up on the guy. He brought it all upon himself, first by ignoring the rules, and second by taking the most aggressive stance possible when someone complained.

    I would agree though you probably don’t need an HOA for a 5 acre parcel. Two acres and I would still want it, depending on the placement of the houses.

  116. 117
    Pegasus says:

    RE: Kary L. Krismer @ 116 – Speaking of Carriagewood was there a specific prohibition of daycares or just operating a business out of your home, like two real estate agents selling real estate from their home?

  117. 118
    whee says:

    Kary, the HOA horror stories are from people I know, not news stories, and it is stuff like a decorative but edible tree, not a shade tree mechanic shop or illegal daycare.

  118. 119

    By Pegasus @ 17:

    RE: Kary L. Krismer @ 116 – Speaking of Carriagewood was there a specific prohibition of daycares or just operating a business out of your home, like two real estate agents selling real estate from their home?

    Thank you for your concern, but it’s perfectly fine. From our rules:

    Hereafter, the Association will interpret and enforce those parts of Article IX, Section 4 (hereinafter the “Section”), regarding prohibiting business conduct or activities on lots or homes, by considering whether the particular conduct or activity involved in each case has any impact on the neighbors, the neighborhood and/or the community as a whole (hereinafter collectively the “community”). If the conduct or activity of an owner/member of the Association would otherwise normally be considered a business or commercial activity but has no impact or effect on the community and its residential character, the Association will not seek to shut it down or ban it under this Section.

    In determining whether a particular Homeowner’s business activity or conduct has no impact on the community, certain factors will be considered by the Board or Committee appointed to deal with enforcement, including without limitation the following:
    (1) There are no signs or advertising of any kind posted, displayed, exhibited or visible on or near any lot or from any building or vehicle parked on or near the lot. However, this shall not apply to magnetic signs or advertising printing on vehicles unless the vehicle is parked on or near the lot for unreasonably long periods of time;
    (2) The business activities do not utilize, include, or involve the use of any heavy equipment, power tools or power sources not common to residential use;
    (3) There are no employees of owner, part or full time, on or about the lot or in any buildings on the lot;
    (4) There is no regular use of or frequent delivery by commercial delivery or supply companies that aid in conducting a commercial enterprise;
    (5) The owner’s conduct or activity does not cause, result in, or contribute to anything which has a visible or auditory impact outside of the lot, including without limitation exterior noise, dust, glare, vibration, odor or smoke;
    (6) There are no additional vehicles being parked on, about or near the lot, or any other indications that any business conduct or activities are being conducted on the lot or within any building located on the lot.

    Seemingly we don’t impact any of those concerns.

    Daycare and auto repair are specifically prohibited activities, as I believe was the case in Carriagewood.

  119. 120
    Pegasus says:

    RE: Kary L. Krismer @ 119 – “Auto repair” ? Hahaha is that what they call some idiot parting out his old junker in his front yard? So you never have documents delivered to your home or client cars parked at your home? ;^)

  120. 121

    By Pegasus @ 120:

    RE: Kary L. Krismer @ 119 – “Auto repair” ? Hahaha is that what they call some idiot parting out his old junker in his front yard? So you never have documents delivered to your home or client cars parked at your home? ;^)

    Nope.

    It always amazes me how anonymous Internet posters can make such incredibly bad guesses about what I do. Documents delivered to my home? What century are you from?

    FYI, you need to deliver documents to the designated broker’s office (the firm’s office) for the delivery to be effective. The best method for doing that is fax.

    Clients get to ride in my 1989 Ranger, but they don’t come to my house. For that there’s the office.

    BTW, the auto repair thing can be a big problem. It’s not repairing your own automobile that is prohibited, it’s repairing other peoples’ cars as part of a business. I had that activity going on when I lived in Skyway, and it was annoying to another neighbor. Without an HOA, apparently not much can be done about it, or at least that neighbor wasn’t successful in his efforts.

  121. 122
    Daniel says:

    From The Tim:

    ‘Home ownership can be a good investment, but not the way most people do it. Buying a home and “trading up” or moving around every seven to ten years is not investing in real estate. It’s renting money from a bank so you can enjoy the perks of “ownership.”’

    I would just like to point out that “most people do it” probably is almost exclusively true in North America. In many countries (especially in Europe) buying a home is a lifetime decision and people only sell their homes when they either need to downsize late in their life due to health issues or when severe changes in the local economy create enough impetus for moving.

    This can however also have bad consequences for the economy as a whole: I know quite a few people in Germany who refuse much better jobs and living conditions and instead scrape by or make crazy commutes as they do not want to sell their family home. In every single case this decision is up to the person but for a society as a whole this extreme lack of mobility is probably not desirable either.

  122. 123
    Daniel says:

    By Kary L. Krismer @ 21:

    What century are you from?
    […]
    The best method for doing that is fax.

    While I of course do not question your point it is amusing to me to read those two statements in one post. After all the unencrypted archaic technology that is known as foxing… uhm I mean faxing is about as outdated as giving smoke signals.

    I can not understand why so many people still rely on this even though the fact that the communication is unencrypted should mean that it is an absolute no go for anything of importance. I am also aware that with some alternatives there are legal issues which keep up this archaic approach, but that simply should be changes and should not serve to defend a legacy system.

  123. 124

    By Daniel @ 123:

    By Kary L. Krismer @ 21:

    What century are you from?
    […]
    The best method for doing that is fax.

    While I of course do not question your point it is amusing to me to read those two statements in one post. After all the unencrypted archaic technology that is known as foxing… uhm I mean faxing is about as outdated as giving smoke signals.

    I can not understand why so many people still rely on this even though the fact that the communication is unencrypted should mean that it is an absolute no go for anything of importance. I am also aware that with some alternatives there are legal issues which keep up this archaic approach, but that simply should be changes and should not serve to defend a legacy system.

    Yep, legal issues keep it in place. Faxing has the advantage of having a built in system for acknowledging receipt of pages. Email is problematic in that regard because transmission of emails with attachments is often delayed, and receipt requests are optional responses. For time critical documents neither is a good thing.

    My practice is to create a PDF, fax that from my computer & multi-function machine, then scan the fax confirmation document into the PDF, then email that to the other agent representing to them that’s the document which was faxed, with the confirmation attached. That way they have a clean copy to work with. I’d also note that only time critical documents need to be faxed, so you don’t have to fax back and forth repeatedly.

    I’ll note though that Pegasus was talking about physical delivery of documents. One wonders whether he was envisioning the document copy being created by use of carbon paper or a mimeograph. Don’t assume when I asked what century I was limiting him to either the 20th or 21st. ;-)

  124. 125
    Pegasus says:

    RE: Kary L. Krismer @ 124 – Actually Kary I was thinking that you might require an actual signature on an offer and an actual check for the money down. Have you stopped requiring a signature on a listing agreement? Using your home to collect those would, it appears, violate the HOA agreement that you cited as would having clients come to your home, etc. which as you probably don’t recall was the reason I posed some questions about two real estate agents operating a business from their home and questioned whether that would be legal under the HOA for Carriagewood. You tried to deflect those questions with your typical nonsensical responses that had little if anything to do with my original questions and since I appear to have hit close to home, you can’t let it go….

  125. 126
    Rob says:

    The New York Times have a pretty fantastic interactive graph that I used when making the rent vs buy decision: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

  126. 127
    The Tim says:

    RE: Rob @ 126 – I agree, that’s the best online rent vs. buy calculator out there. That’s why I linked to it right in the footnote of this post…

  127. 128

    […] happen to have a convenient spreadsheet I designed to tackle nearly this exact same problem. I last posted data generated by this spreadsheet in July. Here’s a link to the spreadsheet so you can download it yourself. Let’s plug in some […]

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