Comment by the_gastropod | Hacker News Reader

Comment by the_gastropod | Hacker News Reader

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No idea why you're being downvoted here. You're absolutely right. As an investment, housing has some incredibly awful attributes:

- Incredibly low liquidity—takes months of effort to buy or sell

- Very complex to buy/sell (usually requires lawyers, lots of inspections, documentation, etc)

- High fees to both buy AND sell it

- It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)

- It's constantly falling apart, and requiring upkeep maintenance

- It's completely undiversified: subject to not only one country, one state, one city, one neighborhood, but a single tiny plot of land at one specific location that could be hit by any sort of natural disaster, get bad neighbors, have the local economy collapse, etc. Its pool of potential buyers is also limited to this very tiny location.

- Returns are relatively low, roughly in-line with inflation

- It's almost always leveraged (often good, but that cuts both ways, and you have to pay the interest on it regardless of what happens)

Sounds like a wonderful deal, eh?

> - Returns are relatively low, roughly in-line with inflation

I wish. The problem with housing is that the returns are not low, they're reasonably high and really safe.

You can buy a property in basically any city, sit on it for 5-30 years, and be guaranteed to beat inflation by at least a small margin -- often a wide one. Sometimes this is true, even if you never maintain the place, even if you level the existing structure, and it's just an empty grass lot.

I wish housing was not a good investment. If housing could depreciate the way a car does, that alone would solve like 40% all problems in the housing market today.

The Case-Shiller Index [1] has increased ~3.4% annually since 1900. The general rate of inflation over that same period has been about 2.9%, leaving you with a ~0.5% rate of return. Savings accounts tend to have significantly better returns. Even if you account for the effects of leverage. Note: this doesn't include maintenance costs, taxes, buy/selling fees, inspections, or anything else. So all-in, RE very likely under-performs inflation.

[1] https://en.wikipedia.org/wiki/Case–Shiller_index#/media/File...

ETA: I wonder why this is such a common belief? Is it because most HN (myself included) readers live in booming real-estate markets like NYC and SF? Those markets have done very well in the past 10 years. But remember: places like Detroit, Atlanta, Chicago, and Cleveland also exist.

How come you count inflation for house and not for savings? :)

As others point out, houses can be easily setup in and around the metros to give a steady 3% return not including appreciation. Considering dense living is the future and the house will materially remain through a market downturn, why wouldn't you diversify your portfolio with a few?

If you have enough money to buy a few metropolitan homes to add "diversification" to your portfolio (you know, well north of a $10 Million net worth), you're not at risk of feeling any sort of pain from major market downturns.

FWIW, broad-market index funds hold REITS, which give you a market-weighted chunk of the RE market. No need to "diversify" into RE. Doing so only skews your portfolio to be overweight in RE.

Savings accounts aren’t inflation protected. You can buy inflation protected assets - US series I savings bonds, and they offer between 0 and 0.5% fixed rate historically on top of inflation and are limited to $10,000 per person per year.

An actual high yield savings account right now gives around 2% nominal interest which is less than inflation.

The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.

> An actual high yield savings account right now gives around 2% nominal interest which is less than inflation.

The inflation rate in 2019 was 1.76% [1]

> The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.

Ok, then look at it from 1970... The results are even worse

[1] https://www.in2013dollars.com/inflation-rate-in-2019

The SF bay area in general has done very well for the past 50 years, not just 10. The San Jose house my parents bought brand new for $34k in 1973 was sold for $95k in 1978. Similar houses in that neighborhood sell for a bit over 1 million dollars today.

Depends on what time period you look at.[1]

Housing in SF was pretty much flat from 1990-1998. It went down by ~30% in 2008 and took 10 years to match the peak in 2006.

[1]https://fred.stlouisfed.org/series/SFXRSA

This is also a fallacy.

Why do you think houses are going for 2 m$ in the bay area? Because the expectation that it goes up is already priced in. Also a good reminder that the return of the past are not an indication of future returns.

Buying in the bay area is de facto a speculative investment as rents are comparatively way cheaper. The only incentive for buying at those prices is the hope to sell it for even more to someone else later (see also, the greatest fool theory).

Those returns can't continue. When people spend 30% of their income on housing and housing doubles in cost, it means they'll now have to spend 60% on housing. From there it simply can't double again, not without coping strategies exceeding anything reasonable (1 family per room, families living in garages, commutes that exceed 6 hours a day).

Every coping strategy has it's limit. You can't commute more hours than there are in the day. YOu can't have more than 3 people living per room (at least not legally). Once you move in with your parents, you can't do it again. etc. I think we've reached that limit in the bayarea (at least the core bay area) so we can look forward to housing returns of roughly inflation.

Even with the severe dystopian restriction on supply, it will just force more and more people out of the bay area.

Maybe some of the outskirt areas still have room to go up, like Tracy, antioch, brentwood, etc. some of those places haven't yet been gentrified.

Multiply that return by the leverage however.

Housing may not depreciate like cars but it doesn't always appreciate at the rate in many areas that justifies keeping it with all the costs. In my neighborhood (with a decent school district and safe/no crime area), housing market has appreciated like 3-4% at best in last 7 years. I like living in my house but looking at it purely from an investment perspective, the returns are terrible because If I sold it today, I don't know if the 3-4% gain would be enough to offset the costs of repairs/taxes etc. that I have spent in last 7 years. And I live in NJ, the highest taxed state in the nation when it comes to property taxes. Sure I could stay in another 5-10 years to find out if appreciation rate goes up but it is more of a gamble then since I am spending tons of money every year to maintain the house in addition to mortgage payments.

Housing is NOT always a good investment from an economic perspective. It depends on the location, market events and most importantly what price you bought it at.

> If I sold it today, I don't know if the 3-4% gain would be enough to offset the costs of repairs/taxes etc. that I have spent in last 7 years.

Sure, agreed, but let's think that through a minute. So your housing has 'only' beaten inflation by ~25%, and that if you sold it today, you would have 'only' gotten 7 years of effectively-rent-free living?

Imagine if you had actually had to rent a house during that time. I don't know what rates are in NJ, but you would have spent about $1200/month in rent (or ~$100k over 7 years) to have done something like that in Michigan.

The common "bad" scenario I hear about is one like yours, where you got 7 years of housing, and the appreciation "only" covered almost all of that maintenance/upkeep, but didn't also cut you a free-money bonus check on top of it.

That's where the "housing is always a good investment" line comes from. Yes, you had to take out a loan and front all the other money out-of-pocket yourself (and not everyone can afford to do that). But if you get it most-to-all of it back when you sell the house, then even in your "bad" example, you came out ~$100,000 ahead of any regular person who had not owned.

Whoa, there! Not so fast. In addition to things like home insurance, maintenance, etc, there's opportunity cost on the (I'm guessing?) 20% down payment. If GP had invested that 20% in a broad-market index fund over the past 7 years, I suspect it'd have grown a hell of a lot more than $100k.

If that was an option, sure absolutely. I've never met a person who could actually afford a 20% downpayment recently (5% downpayments are common here in Michigan, for real humans buying houses in the past decade or so).

But yes, if you are wealthy enough to afford a 20% downpayment on a house, you are wealthy enough to potentially have opportunity costs from other investments at your disposal. Agreed.

The irony of the lower down payment? It increases demand; which obviously increases price.

So they are able to afford what they normally can't afford because of the tool (i.e., lower down payment) which helped make homes unaffordable.

I actually put 20% down 7 years ago on the house and I can tell you that if I had invested that downpayment purely in index funds, I would have a lot more cash today. So again, housing was not a good investment from an economic perspective. I bought it for my children but I look at it as a major expense and not investment.

if you were less risk adverse, it's possible to pull equity out of your house and have that reinvested in stocks, and continue paying the mortgage (and may be work out a way to make it tax efficient, like debt recycling). Then as long as the stock market out-performs the debt cost (which is likely), you win out ahead by quite a bit more.

How would you pull equity out of the house other than doing things like HELOC ? HELOCs have huge interest and doesn't make sense to take that money and reinvest unless you know how to play the risky games like options trading etc.

with a variable mortgage loan, a bank usually has a product called an offset account. When you pay back the principle, this offset account grows. It acts like a line of credit, and the max size is the value of the loan.

So essentially, it is a HELOC. But it's at the same rate as your home loan, which is usually quite a lot lower than the margin rate if you borrowed to buy shares. Of course, this offset loan cannot go higher than the equity you've already paid back, so unlike a margin loan (which can go up to 10x!?).

> effectively-rent-free living?

Not in NJ. Property taxes quickly eliminate any illusion of free. Factor in maintenance, including time, and you're barely breaking even.

Owning provides a sense of stability and community. But investment in many areas is highly overrated.

People might be singing a different tune in a few decades when the ground flood of their buildings are taking on water from rising sea levels and economic activity is ceasing due to environmental effects.

It’s a very idiosyncratic risk you’re taking buying a home. Looking at a primary residence as an investment is silly in my opinion. Treating it as consumption makes more sense.

> I wish. The problem with housing is that the returns are not low, they're reasonably high and really safe.

Where? In high demand areas? Sure. Supply is limited in NYC or SF. But those areas are becoming outliers where buying in (so to speak) is less available.

Or what about trying to sell in 2009 or 2010? People weren't foreclosing because they were in the black.

Agreed in general, but there are some advantages.

> It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)

Property tax is generally lower than your imputed rent. In the US at least, there is a huge advantage of being shielded from capital gains taxes (up to $500k if married)

> Returns are relatively low, roughly in-line with inflation

This is market dependent. SF Bay is something like 5.4% nominally over the past 30 years, which crushes inflation. Housing prices in the Bay Area in fact imply heavy future price appreciation. [1]

Also, the high leverage position (which you point out cuts both ways) does drive expected returns above inflation. Especially with, in the US, interest being somewhat tax deductible.

Also strongest advantage of owning a house over renting is the stability you get. My rent can always go up, potentially above my ability to pay; my ownership costs (esp. in CA with prop 13 limiting property tax rise) only barely goes up. (and far less than inflation)

[1] https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...

> This is market dependent. SF Bay is something like 5.4% nominally over the past 30 years, which crushes inflation. Housing prices in the Bay Area in fact imply heavy future price appreciation. [1]

Yes, but this is cherry-picking. In the US as a whole, RE typically matches the inflation rate. Some physical and temporal locations over- (or under-) perform. But in aggregate, that's the reality. There's no way of knowing ahead of time which market will out-perform. Investing in Bay Area real-estate today very well could continue to out-pace inflation. But that seems as big a risk as dumping $1M into Tesla stock today.

> Also strongest advantage of owning a house over renting is the stability you get.

From:

https://www.zillow.com/homedetails/3203-Benton-St-Santa-Clar...

Neighborhood home value

95051 home values have fallen 8.3 % over the past 12 months. One-year prediction

Zillow predicts the home values in 95051 will fall 9% in the next year.

http://www.stock-market-crash.net/wp-content/uploads/2012/06...

Do you have rent trends? Did they follow the housing trends, or did they just keep going up (either one sometimes happens, I'm not in the market anymore).

From what I can tell, they are roughly flat since around 2016. Example: https://www.zillow.com/homedetails/1174-Pomeroy-Ave-Santa-Cl... . Depends on what and where, of course.

And AFAIK, generally rents are lagging behind house prices and are more sticky. If you're a prospective buyer and houses are loosing and are projected to loose hundreds of thousands of dollars each year, that's pretty big incentive to stick around in your rental and wait.

If I'm planning to live in a home forever, the short term price fluctuations of it are hardly relevant - it does nothing but inform me about the past (I got a great deal or bad deal when I bought.. in hindsight). They are relevant to a renter.

"Short term fluctuations" can last decades. https://fred.stlouisfed.org/series/QJPN628BIS

And "forever" often turns into couple of years because of health problems, job opportunities, personal events, and so and so.

The only reason why houses cost as much as they do is historically low mortgage rates https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate... . And if this (mean reverting) trend is to revert any time soon...

I don't know what actually is going to happen. And maybe FED will eventually decide to hyperinflate the crashing credit bubble which would be great for people with big mortgages. But people that live in oblivion thinking that's the safest investment ever, are completely clueless. But maybe they'll be lucky. :)

Unfortunately I cannot seem to find a much better place than where I currently am. I have tried. Most of the super fancy locations have an awful local purchasing power that can't be offset with better international purchasing power. Sure you might go there for 6 years and save some money but then you will also leave again.

Meanwhile here I am in my little city with barely more than 100k people spending less than 1/3 of my income per month with the help of a stable government job. I could get more if I wanted simply by working at the largest employer in town. So why move?

It’s a terrible investment for many. However the government has made a holy war against tiny houses/high density and anything which costs less than 500k, because tax revenue and vested interests.

I’d say that upkeep and taxes on a house will be much greater than the management fees on a similar investment. In addition you have to deal with multiple government agencies (health dept, municipal tax dept) if you want to continue to live in or sell your house.

Much of the new houses I see being built are prefab hardeeboard which will look atrocious well before the mortgage is paid off.

We should really just get 3D printed high-density concrete houses down and be done with it. This is a solvable problem but everyone with the 1.2mm loan will freak out when you can get a better quality apartment that won’t rot for 200k.

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