Comment by bombcar | Hacker News Reader

Comment by bombcar | Hacker News Reader

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Calculate appreciation in a hot market area over time, and the returns aren't terribly exciting. Short periods of wild appreciation and decades of nothing.

I picked a random house in Southern California, it is up 42% in the last 10 years, sounds great, right?

But that is only an annual rate of return of 3.572%. Nothing at all exciting.

Where it becomes exciting is where you bought that $500k house ten years ago with $50k down, and sell today for $800k - ignoring everything else like taxes, etc, you made $300k on a $50k investment (leveraged) - which is an 18% a year return. THAT is something to take notice of! Of course, you have to factor out all the associated costs, but the leverage is the be-all and end-all of your "investment". If you could leverage against stocks the way you can against single-family houses, you could go nuts.

The advantage to leveraging real estate that you live in is that you basically have a heads I win, tails you lose scenario; if the house crashes you walk away (at least in non-recourse states like California, and practically almost everywhere).

It can be even more insane than that. Not knowing what I was doing, I bought a house during the sub-prime boom thing (2004). I paid $10k in fees (zero down) for a $400k house with an interest only mortgage because I was able to "finance" the %20 down payment as a home equity loan. Fun times! I remember paying about $1700/mo total in interest payments ($20k/year). I checked Zillow all the time and the house was "making" 50k a year in appreciation just sitting there so it was essentially free. I sold it after 3 years (dec 2007, good timing) and after all the fees I walked away with $130k in cash right before the housing market crash (tax free!). I didn't know what I was doing then either.

The people who bought it from me tried to flip it but walked right into the chainsaw of 2008 and had to sell it at a loss. I could have bought it back for even less than I paid for it the first time a year later! Whoever did buy it got a great deal because now 15 years later it's worth $1.3 million and I feel like I should have just kept it. I definitely haven't managed to save $1m in the last 20 years.

"where you bought that $500k house ten years ago with $50k down, and sell today for $800k"

The problem is that in those 10 years you also paid a bunch of interest on the mortgage necessary to buy that house. For instance:

Assuming a 20 year mortgage with a fixed 5% interest rate, in 10 years you paid 200k just in interest. Makes that 300k look really much less appealing.

>Makes that 300k look really much less appealing.

It's a bit more complicated than that though:

- A house mortgaged 10y ago isn't paying 5% interest.

- A house mortgaged today isn't necessarily going to be paying 5% interest for the life of the loan, one can refinance if/when interest rates become more favorable. Interest rates are set to start coming down next month.

- 20k/yr in interest isn't really 20k once one factors in the tax deduction on that money.

- Making 300k by other means is a lot harder, requires a lot more capital or much riskier leveraging than an asset like a home.

>>- 20k/yr in interest isn't really 20k once one factors in the tax deduction on that money.

You get any tax deduction on your mortgage payments???

On the mortgage interest, yes (U.S.)

That's crazy. Wish that was a case here in UK.

As a beneficiary, it's nice, but overall I believe it's unfair that homeowners get a tax break, while renters do not.

Also it's a bit of a wash, as prices end up reflecting the tax break because bidders are ultimately going right up to their budget, and they take that into account.

I wish there was enough housing so that it isn't seen as some sort of investment vehicle that distorts prices for basic human necessities.

It's no longer a factor for many (most?) in the USA because the standard deduction went so high.

And even then, only the amount above the standard deduction is effectively deductible, so it kind of is a wash.

(Fun fact - if you have an expensive enough house it is better NOT to be married to your spouse, as if so each can claim up to $750k of mortgage, whereas as married it's only a total of $750k or something. I don't know the actual numbers, never been close to that.)

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