how did people get it in their heads that long housing is an investment

Discussion in 'Economics' started by KINGOFSHORTS, Aug 25, 2009.

  1. First the margin loan rate of 6% lets say for 30 years.

    Second is the cost of insurance,taxes,fees,etc. another 3%

    Maintenance/upkeep (ie: repairs) 1%

    Total carrying cost over 30 years = 10% annually.

    And I am not including the wide bid/ask spreads and fees etc.. when taking on a long position in housing.

    Someone putting down 10% towards a 200,000K long position in housing will have taken a 10:1 leveraged position without the upside potential you get with a 10:1 leverage.

    So you take the risk of 10:1 and you have to return 20% annually on your long position to at least break 10% a year.

    And at the end if you want to unlock value on your equity you have to borrow on it and pay who knows what. So you get screwed anyhow.

    You cant sell a position and cash in or hedge with calls or collect dividends etc.., its either sell the whole house or borrow against it.

    Buy a home because you like it. ie: beachfront,nice place etc... and take a 15 year loan or less.
  2. Suze Orman told them so!

    But seriously. If you are paying the same in rent as your PITI it makes sense because you are locked in for 30 years (if you are fixed) Over the years as your salary increases, your monthly payments stay the same. Cost to rent a house 20 years ago was $420 per month. Today its at least 3 times that. If there was none of this economic crisis happening, then in 20 years you can expect the average house to rent for about $3,500 per month. With the inflation that we are probably going to experience in the next 20 years, it will most likely be way higher than that.

    The good news is that by then the average monthly income should be about 100-150k per year. Min wage will probably only be a paltry 40-50k though.
  3. If you have cash and can afford tying it up for a long term it might not be a bad idea to buy some distressed properties right now however that depends on the local market. I live in Atlanta and there are some fantastic REO deals on the market right now and you can buy bulk in cash and get some absolute steals even after taking into account the current market conditions.

    It all depends, obviously, on your exit strategy down the road. It helps to have some experienced local disposition professionals to handle this.
  4. isn't it because they can get rental income as well as the value rising. so there are two potential cash flows. plus it is security so even if there is less return it makes people feel safer.
  5. I know!

    I always instinctively hated housing as an investment. I live in Canada and I still hear so many people say how housing is a great investment. All they look is at the $. They forget the huge financing cost, they forget the maintenance, they forget the long term average equaling inflation.

    All they see is the leverage, terrible one at that. You could turn 5000-10000 equity into double or triple that quickly.

    But in the meantime, you must wait 1-3 years in an illiquid market :eek:

    Screw that. I think that it's a gambling mentality. No one wants a stock portfolio, but maybe that one stock will hit it big..

    I have to agree the only benefit is the lack of rent. But then, a mortgage is $1000+ easily. You can find rent for half of that if you have roomies etc.
  6. AyeYo


    Because most people are told from a young age, "A house is a great investment. They never lose value." Those parents are now $100k flipped on delinquent mortgages.

    It's also because the average American has absolutely no concept of money and investment. Owning a house is a status symbol in this society. People don't buy them because they need them or can afford them, they buy them because it's expected.
  7. clacy


    Your money is made on the purchase, IMO with real estate. Now is a good time to buy, IMO, with beaten down prices and low interest rates. Choose wisely though, as maintenance and taxes (as mentioned) can kill you.

    With that said, it's greatly overrated by many people.
  8. TGregg


    Wifey. Get married and the Mrs. wants a house for her kids. Men will live in a cardboard box. But not if they are married.
  9. When your rental property goes from 125 to 300k in 10 years as the neighborhood improves. Thats a good investment. When you rent from a landlord you get back nothing however when you pay a mortgage the equity you pay into monthly is like a piggy bank. Not to mention you cannot borrow using a rental apartment as collateral. Housing is a 6% loan with 30% downside and unlimited upside.

    did you know you can buy Real Estate in an IRA?
  10. JAP


    How did people get it in their heads that long housing is an investment?

    Water cooler conversation, that's how.
    #10     Aug 25, 2009