Investing in Homes - Not worth it per Robert Shiller?

Question

Hello all,

I was just reading an article in the NYTIMES from Robert Shiller:

http://www.nytimes.com/2016/06/12/upshot/the-overi...

where he states:

"Historically, however, investing in homes just hasn’t rewarded most homeowners that much. As I have calculated, home prices corrected for Consumer Price Index inflation nationally were nearly flat for the century ending in 1990.

And when nominal home prices are deflated by per capita disposable  personal income, it turns out that real prices of existing homes fell 12  percent while real prices of newly built homes fell 30 percent from  1975 to 2015."

I am assuming that he is not taking into account factors such as leverage, depreciation, cash flow but I would love to hear back from the experienced investors, especially in comparison with investing in an index fund.  Real examples with macro numbers would be appreciated.

Thanks,

Sonny

Joel Owens · Answer

To properly maintain a house you put about 1 to 2% into it a year in some markets.

So a 200k house would need about 2,000 to 4,000 a year to optimally maintain it.

Of course people cut corners and run their houses into the ground not spending the money. Later on you just get  a reduced sales price or tens of thousands in repairs needed to compensate for decades of neglect and rigging stuff.

So houses over time do tend to go up with inflation but I am not counting on that. I know the market is back close to 2005 again because I get refi letters now about 4 times a week from different lenders even waiving any appraisal or cost on my primary residence. They want to charge .125 rolled into the loan and give 3.5 fixed rate.

What's scary is I have seen all of this before in 2005. These home owners will start using refi's as piggy banks again to buy a bunch of crap, take vacations, and load up on debt. It's the American way to stay poor it seems. People tend to buy crap in the moment but pay for it 10 times worse later on.

To get truly financially free takes a ton of work and most people just do not want to do it.

Jay Hinrichs · Answer

@Russell Brazil  not to mention the tax free 250 ( single) 500k ( married) that homeowners in high appreciation markets enjoy... No need to keep rolling up in 1031.. you can take cash off the table at anytime.

Russell Brazil · Answer

Case/Shiller index does not take leverage into account. The average home owner is putting 3.5% down on their property which is a huge amount of leverage which is giving a huge amount of juice to their returns.

Also just look up average net worth of homeowners vs renters and the discussion becomes an  obvious moot point.

As @Elizabeth Colegrove points out, owning in major metropolitan areas with high amounts of appreciation is even more beneficial. Ive seen many many individuals become millionaires and multi-millionaires simply by buying their own home, and a single rental property in the Boston and DC areas where I have lived.

Mike R. · Answer

smart man but an academic (i.e. doesnt deal with real world)...tell his results to all the individuals that have made millions investing in real estate.

Thomas S. · Answer

In most markets historically house prices have increased in value at the same rate as the cost of living. Personal home ownership over a life time costs far more than the end value based on interest, repairs, capitol expenses, taxes etc. making personal home ownership a liability as opposed to a real investment. Home ownership is a lifestyle choice not a investment (in normal markets).

Renting is less expensive but home ownership can be viewed as forced savings to be used to pay or retirement/nursing home costs or as inheritance for children.

Sonny Sach · Answer

I believe that he was referring to primary home ownership as well.  Thank you all for the feedback, I really appreciate it.

Jay Hinrichs · Answer

@Joel Owens  Very very true...  we are shopping for a second home in Vegas...

I was looking at lending options for that place.... the loan broker says to me.. Heck you have massive equity in your Lake Oswego home.. just refi and pay cash for Vegas.

I said you nuts my home will be paid for in a few years.. I want less debt not more.. and Vegas will stand on its own.. or pay cash there.. but pressing very hard for me to get that big loan so they could make a fat fee  LOL...

I saw this refi model pre 08... were folks were ripping all this cash out of property.. Banks thinking they may actually use it as reserves etc.. but what do we do.. especially W 2 folks that got into deals with only their fico or liar loans.. next thing you know they pull 30k or more out and they do exactly what your saying.. instead of using it as reserves it goes for everything.. but .... the joke of paying off high interest credit cards .. then just repeat the cycle.. run them right back up.. or buy that Jet ski you always wanted and deserve.. or the RV or the trip to Fiji  etc etc.. it is for all these reasons there will always be deals and distressed assets in the US... a certain % of the public simply cannot handle their personal credit no matter what

David Faulkner · Answer

Agree it matters WHERE, but also matters HOW. In a big picture sense with the data he is analyzing, buying an average property, in an average market, at retail price, I actually agree with him. It is the skill and hard work of the investor/entrepreneur to choose above average property (or one that has immediate realizable potential to be above average), in above average markets, at below current market intrinsic value that makes it a good investment. If your plan is to not spend much time or effort on education, buy some random property in some random market that you know nothing about but read on BP that it is good, and kick back and watch the rent checks roll in, then you'd be better off buying a low cost stock market index fund IMHO.

Elizabeth Colegrove · Answer

Like everything it really depends WHERE! As @jay Henrichs mention it really depends where the house is located. As a military spouse you see this alot. I know those who have been stationed in big cities make 500,000-600,000 in one 3 year station, while other have made 50-60k during the same boom. I know for my family growing up in the DC area getting their foot in the door in a great school district with a house that has appreciate a huge amount. Was a huge factor in their finances.

I personally am a huge believer in owning a house. Everyone has to live someone where. If you own your home you have more options. You can rent a mother in law suite, rooms out, etc if you need money. Unless your rent control, owning a house locks in prices, as only taxes/insurance increase.  Of course, these aren't as sexy as the NY time article ;)

David Dachtera · Answer

@Sonny Sach,

As the others point out: he's talking about home owners, not property owners like us. Aside from our own primary residence, our perspective is rather different.

To a degree, what he says may also hold true for residential multi-family (2-4 units). However, their income-producing aspect pretty much over-rides Shiller's other points.

The game is changing even as you read this. The coming elections will also have a major impact which is yet to be seen.

For now at least, maybe best to stay on course, but ease up a little so you can be nimble if the situation calls for it.

One of the "universal constants" is change, ironically.

David J Dachtera

Investing in Homes - Not worth it per Robert Shiller?

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