Thought you all might find this interesting..... By NEAL TEMPLIN, JULY 15, 2009, 8:40 P.M. ET The biggest value you derive from a home isn’t appreciation. It’s avoiding the rent you would otherwise have to pay -- and pocketing the difference. My wife and I have sold all of our four previous homes for more than we paid for them—sometimes a lot more. We’ve been pretty lucky. We’ve never overpaid... [more]
Thought you all might find this interesting.....
By NEAL TEMPLIN, JULY 15, 2009, 8:40 P.M. ET
The biggest value you derive from a home isn’t appreciation. It’s avoiding the rent you would otherwise have to pay -- and pocketing the difference.
My wife and I have sold all of our four previous homes for more than we paid for them—sometimes a lot more.
We’ve been pretty lucky. We’ve never overpaid much for a house, we’ve always bought in good school districts and decent neighborhoods, we’ve lived in neighborhoods where prices soared during the real-estate bubble, and we’ve been hurt but not decimated by the bursting of that bubble.
When I constructed a very basic cash-flow model for our home-buying history—selling price minus purchase price, renovations and repairs—it showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year. That’s when we sold our last home and bought our current one.
Then things got ugly. If we were forced to sell our current home, which I estimate has lost 5% or so of its value in our 10 months of ownership—despite the more than $20,000 we’ve made in improvements—our cumulative return over the years sinks to approximately 2% annually. And if prices keep falling in our northern New Jersey neighborhood, as is likely for a while, that return will shrink even further.
So do I regret owning a home? Heck, no. It’s not a get-rich scheme, and Americans never should have viewed it as one. Owning a home has given my family a series of anchors to cling to as we’ve moved around the country for my job. It’s allowed us to live in pleasant neighborhoods where it would have been tough to find a rental house. And paying down a mortgage is a form of forced savings, which should help us in retirement.
Columbia Business School’s Christopher Mayer, who has studied housing markets, says our experience with home-price gains is pretty typical. Home appreciation nationally has run about 1% above inflation over time.
The big price run-ups from the late 1990s through 2006 or 2007 were an aberration. The biggest value you derive from home ownership isn’t appreciation. “It’s being able to live in it,” Prof. Mayer says, and avoiding the rent you would otherwise have to pay.
Once you add in imputed rent and subtract property taxes, Prof. Mayer estimates, my 2% annual home-ownership return looks more like 6%.
That’s why you should buy as much home as you need—but no more. A bigger home than you need isn’t an investment—it’s an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesn’t make it a smart move financially.
Another reason home ownership isn’t the road to riches: Most houses—especially the old ones my wife and I favor—are money pits.
Consider the house we owned in Verona, N.J., from 2001 to 2004. We bought it for $335,000 and sold it for $455,000 near the height of the real-estate boom. That’s nearly an 11% annualized return. The only problem was that we sunk $45,000 into renovating the bathrooms, spiffing up the kitchen, refinishing the floors and the like. The result: Our actual return was less than 7%.
Contrast that with our current house. Counting the money we’ve sunk into it and its decline in value, I estimate close to a 10% loss on our investment since we bought it last year. Prof. Mayer predicts house prices in the New York metropolitan area will fall an additional 10% over the next couple of years.
That’s the brutal financial reality of home ownership in today’s market. But the consolation is this: I really like our house, our neighbors and the quaint suburban town where we’re now putting down roots. In other words, I’m happy being a tenant in this building I happen to own.
—Email: cheapskate@wsj.com
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Response by Mhillqt
over 16 years ago
Posts: 405
Member since: Feb 2007
well if i would have purchased a 1 bedroom in 1996 in murray hill at 175k.....it is now worth 850k......a noticeable appreciation.......so i dont believe that these arguments really apply to manhattan....the article notes the aberration from the 90s thru current........eventhough they are an aberration ....we are living thru that esp difficult if you are a 1st time buyer.
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Response by RE_PRO
over 16 years ago
Posts: 161
Member since: May 2009
850k.. for a one bedroom is over priced.. how big is it in sqft terms?
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Response by Mhillqt
over 16 years ago
Posts: 405
Member since: Feb 2007
Its a 1 bedroom prewar condo on park avenue...approx 750 sq ft....
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Response by evnyc
over 16 years ago
Posts: 1844
Member since: Aug 2008
$1133 a sq ft is a daydreaming in Murray Hill in this market.
The article sort of misses the point, in one respect: housing is one of the very few ways to make inflation work for you rather than against you. Rent goes up over time, as do housing prices; locking in a price means that your rate doesn't go up. Not sure this particular example is very good, but my older relatives who purchased one house and lived in it for 20+ years have a laughably low mortgage payment.
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Response by The_President
over 16 years ago
Posts: 2412
Member since: Jun 2009
My grandmother owns a 2 family house in Brooklyn she bought in 1981. Her housing payments are about -$800. It is negative since the tenant's annual rent is 4 times the property taxes and there is no mortgage. I think it would be fdifficult to argue that she would have been better off renting.
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Response by mjsalisb
over 16 years ago
Posts: 177
Member since: Sep 2006
With the benefit of hindsight, in 1981 everyone should have put all their money into US Treasury bonds maturing in 2011...I think the coupon on the 30 year was around 14% at that time
That's the problem with all backward looking assessments.....your grandmother probably did well in Brooklyn....so did the buyer of the 30 year bond.....the fellow who bought (name your bankrupt company from 1981 here....Pam Am?) is conveniently forgotten.
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Response by mjsalisb
over 16 years ago
Posts: 177
Member since: Sep 2006
Better than Pam Am, Gen Motor
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Response by patient09
over 16 years ago
Posts: 1571
Member since: Nov 2008
mjsalisb: You are almost correct. The 14's of '11 which were auctioned in 1981 had a 5 yr call feature in 2006. They are all gone.
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Response by notadmin
over 16 years ago
Posts: 3835
Member since: Jul 2008
the owner in New Jersey conveniently forgot that his property taxes along with all other taxes are gonna go up for him big time cause of living in a bankrupt state. he has some mobility but it's costly due to high transaction costs.
so chose wisely when buying for the long haul. how financially literate your state gov is should be up there with "nice neighborhood", "nice schools", ...
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Response by stevejhx
over 16 years ago
Posts: 12656
Member since: Feb 2008
"The biggest value you derive from a home isn’t appreciation. It’s avoiding the rent you would otherwise have to pay -- and pocketing the difference."
This is what I've been arguing for over a year, and it's not MY argument: it's accepted economic theory backed by years of empirical data. Only recently has homeownership been seen as a source of capital appreciation, which it's not: except for the effect of leverage, home prices cannot increase faster than incomes.
LICC - any comments?
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Response by SkinnyNsweet
over 16 years ago
Posts: 408
Member since: Jun 2006
Yield? What's that? These egghead fools just don't know how to play the game. Their time horizon just isn't long enough.
If you want to really make money in real estate, you've got to read this great book I've got: Rich Dad, Poor Dad -- and go to a lot of Tony Robbins seminars.
In order to be successful, one must project an image of success at all times.
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Response by Mhillqt
over 16 years ago
Posts: 405
Member since: Feb 2007
A prewar condo 1 bed on park avenue would go for what these days - ie 750 sq ft....remember....condo not coop ...
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Response by LICComment
over 16 years ago
Posts: 3610
Member since: Dec 2007
Read the article more carefully steve. The Columbia University professor said that over time home price appreciation has run 1% above inflations. This is on a leveraged asset. And "avoiding the rent you would otherwise have to pay" becomes very significant as rents increase over time.
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Response by Ubottom
over 16 years ago
Posts: 740
Member since: Apr 2009
mjsa--dont sweat the call feature on the 14's of 11-- there were non-callables galore priced similarly in 81, and so what if they got caled three years ago---the cash flow comparison is astounding--and you are conservative in your assessment--corps gnma's and all sorts of other FI securities (none any riskier thatn RE) were yielding well in excess of 14% in 81---also you treat the 14's as unleveraged--imagine if youd leveraged the 14's 2:1 or even 4:1 like most homeowners levearge their RE investments!!
ah the myth's of homeownership as an investment!!
as with all volatile investments, buy the trough or stay away--
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Response by watchnwait
over 16 years ago
Posts: 19
Member since: Mar 2009
If you haven't read Rich Dad/Poor Dad, don't bother, I can summarize for you...
My dad always rented our family home...In late 90s real estate market went up...my dad realized he should have been owner...I tell people don't rent like my dad did, buy real estate instead...I wrote book called Rich Dad/Poor Dad...everyone in America could relate to title...it made me rich...then, real estate prices went through roof...no one could believe how right I was about buying real estate...EVERYONE bought book...now, I'm really rich! THE END
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Response by alanhart
over 16 years ago
Posts: 12397
Member since: Feb 2007
Please act that out with finger puppets, watchnwait.
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Response by ab_11218
over 16 years ago
Posts: 2017
Member since: May 2009
the real consideration in purchases should be is mortgage+maintenance+taxes - tax benefit = current rent or close to it. if the answer is yes, then you buy.
i purchased my first apartment in 2002-3 and ended up paying about $300 less per month (maint+mortgage-tax benefit) than if i would have rented a similar unit in the neighborhood. i then updated it and purchased a much larger unit and sold the old one. my new unit, using the proceeds from the previous one, costs me $500 less per month then comparable apartments.
when you buy something, you know what you'll be paying. yes the maintenance increases by 1-2% per year on the average, but the mortgage is steady. if the maintenance is 1/2 of the total cost of ownership, then you are getting increases of .5-1% per year. this is steady. with most apartments, you have to expect to have your rent increase 3-4% per year. i know that this is not the case now, but you have to look at it in the long run. if you purchased a place that cost you the same as rent, within 10 year timeframe, the owner becomes ahead every month. this is not taken into consideration when selling.
profit from a sale is the sale price - purchase price - updates - closing costs + calculation of the monthly savings that you received over rent for the period of time.
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Response by stevejhx
over 16 years ago
Posts: 12656
Member since: Feb 2008
RDPD says very clearly: owning real estate to live in is a liability.
"The Columbia University professor said that over time home price appreciation has run 1% above inflations"
That's right - at the same level as incomes, which is what I said.
It is indeed a levered asset. If property prices rise at 1% real, and your mortgage rate is 2% real, and you multiply that by your 4x leverage, you're losing 7% per year.
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Response by LICComment
over 16 years ago
Posts: 3610
Member since: Dec 2007
steve that makes no sense. You are assuming an adjustable rate mortgage that increases every year?
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Response by Special_K
over 16 years ago
Posts: 638
Member since: Aug 2008
"Then things got ugly. If we were forced to sell our current home, which I estimate has lost 5% or so of its value in our 10 months of ownership—despite the more than $20,000 we’ve made in improvements—our cumulative return over the years sinks to approximately 2% annually"
Yeah right. And I wonder how the math would change if he really marked his current home to market (i.e., down 15-20% in a year). Oh, then his cumulative return would have been negative... surprise, surprise. Funny how this guy writes this article but then is in denial how far northern NJ has fallen already.
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Response by SkinnyNsweet
over 16 years ago
Posts: 408
Member since: Jun 2006
Special_K: Anyone who is losing money on their real estate investment is clearly not ignoring the right data.
Realism is the new pessimism. Or is it pessimism is the new realism? I can't figure this out. Anyway, just be positive and project an image of success at all times.
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Response by stevejhx
over 16 years ago
Posts: 12656
Member since: Feb 2008
"You are assuming an adjustable rate mortgage that increases every year?"
No. I guess you don't know how leverage works.
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Response by printer
over 16 years ago
Posts: 1219
Member since: Jan 2008
steve - It is indeed a levered asset. If property prices rise at 1% real, and your mortgage rate is 2% real, and you multiply that by your 4x leverage, you're losing 7% per year.
this is by far the dumbest thing you have ever written. I am giving you a chance now to back out and pretend you never said it.
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Response by LICComment
over 16 years ago
Posts: 3610
Member since: Dec 2007
steve, that statement made no sense whatsoever.
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Response by waverly
over 16 years ago
Posts: 1638
Member since: Jul 2008
WSJ: Home Ownership Isn’t a Road to Riches
Apparently, owning the WSJ isn't either.
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Response by BSexposer
over 16 years ago
Posts: 1009
Member since: Oct 2008
It's real simple - you will not get rich owning RE unless you buy at the bottom and sell at the top of RE cycles. Obviously, the top was in late 2007 and early 2008. We are nowhere near the bottom of the cycle. Buy in 2-5 years when things bottom out.
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Response by BSexposer
over 16 years ago
Posts: 1009
Member since: Oct 2008
"Apparently, owning the WSJ isn't either"
Really? Rupert Murdoch seems pretty rich to me.
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Response by BSexposer
over 16 years ago
Posts: 1009
Member since: Oct 2008
Murdoch Family Trust owns over 300,000,000 shares of NWS. Worth over $3 billion.
"well if i would have purchased a 1 bedroom in 1996 in murray hill at 175k.....it is now worth 850k......a noticeable appreciation.......so i dont believe that these arguments really apply to manhattan....the article notes the aberration from the 90s thru current........eventhough they are an aberration ....we are living thru that esp difficult if you are a 1st time buyer."
uh, yeah, at the top of a bubble, the asset always looks like a good "investment".
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Response by nyc10022
over 16 years ago
Posts: 9868
Member since: Aug 2008
"Special_K: Anyone who is losing money on their real estate investment is clearly not ignoring the right data."
well if i would have purchased a 1 bedroom in 1996 in murray hill at 175k.....it is now worth 850k......a noticeable appreciation.......so i dont believe that these arguments really apply to manhattan....the article notes the aberration from the 90s thru current........eventhough they are an aberration ....we are living thru that esp difficult if you are a 1st time buyer.
850k.. for a one bedroom is over priced.. how big is it in sqft terms?
Its a 1 bedroom prewar condo on park avenue...approx 750 sq ft....
$1133 a sq ft is a daydreaming in Murray Hill in this market.
The article sort of misses the point, in one respect: housing is one of the very few ways to make inflation work for you rather than against you. Rent goes up over time, as do housing prices; locking in a price means that your rate doesn't go up. Not sure this particular example is very good, but my older relatives who purchased one house and lived in it for 20+ years have a laughably low mortgage payment.
My grandmother owns a 2 family house in Brooklyn she bought in 1981. Her housing payments are about -$800. It is negative since the tenant's annual rent is 4 times the property taxes and there is no mortgage. I think it would be fdifficult to argue that she would have been better off renting.
With the benefit of hindsight, in 1981 everyone should have put all their money into US Treasury bonds maturing in 2011...I think the coupon on the 30 year was around 14% at that time
That's the problem with all backward looking assessments.....your grandmother probably did well in Brooklyn....so did the buyer of the 30 year bond.....the fellow who bought (name your bankrupt company from 1981 here....Pam Am?) is conveniently forgotten.
Better than Pam Am, Gen Motor
mjsalisb: You are almost correct. The 14's of '11 which were auctioned in 1981 had a 5 yr call feature in 2006. They are all gone.
the owner in New Jersey conveniently forgot that his property taxes along with all other taxes are gonna go up for him big time cause of living in a bankrupt state. he has some mobility but it's costly due to high transaction costs.
so chose wisely when buying for the long haul. how financially literate your state gov is should be up there with "nice neighborhood", "nice schools", ...
"The biggest value you derive from a home isn’t appreciation. It’s avoiding the rent you would otherwise have to pay -- and pocketing the difference."
This is what I've been arguing for over a year, and it's not MY argument: it's accepted economic theory backed by years of empirical data. Only recently has homeownership been seen as a source of capital appreciation, which it's not: except for the effect of leverage, home prices cannot increase faster than incomes.
LICC - any comments?
Yield? What's that? These egghead fools just don't know how to play the game. Their time horizon just isn't long enough.
If you want to really make money in real estate, you've got to read this great book I've got: Rich Dad, Poor Dad -- and go to a lot of Tony Robbins seminars.
In order to be successful, one must project an image of success at all times.
A prewar condo 1 bed on park avenue would go for what these days - ie 750 sq ft....remember....condo not coop ...
Read the article more carefully steve. The Columbia University professor said that over time home price appreciation has run 1% above inflations. This is on a leveraged asset. And "avoiding the rent you would otherwise have to pay" becomes very significant as rents increase over time.
mjsa--dont sweat the call feature on the 14's of 11-- there were non-callables galore priced similarly in 81, and so what if they got caled three years ago---the cash flow comparison is astounding--and you are conservative in your assessment--corps gnma's and all sorts of other FI securities (none any riskier thatn RE) were yielding well in excess of 14% in 81---also you treat the 14's as unleveraged--imagine if youd leveraged the 14's 2:1 or even 4:1 like most homeowners levearge their RE investments!!
ah the myth's of homeownership as an investment!!
as with all volatile investments, buy the trough or stay away--
If you haven't read Rich Dad/Poor Dad, don't bother, I can summarize for you...
My dad always rented our family home...In late 90s real estate market went up...my dad realized he should have been owner...I tell people don't rent like my dad did, buy real estate instead...I wrote book called Rich Dad/Poor Dad...everyone in America could relate to title...it made me rich...then, real estate prices went through roof...no one could believe how right I was about buying real estate...EVERYONE bought book...now, I'm really rich! THE END
Please act that out with finger puppets, watchnwait.
the real consideration in purchases should be is mortgage+maintenance+taxes - tax benefit = current rent or close to it. if the answer is yes, then you buy.
i purchased my first apartment in 2002-3 and ended up paying about $300 less per month (maint+mortgage-tax benefit) than if i would have rented a similar unit in the neighborhood. i then updated it and purchased a much larger unit and sold the old one. my new unit, using the proceeds from the previous one, costs me $500 less per month then comparable apartments.
when you buy something, you know what you'll be paying. yes the maintenance increases by 1-2% per year on the average, but the mortgage is steady. if the maintenance is 1/2 of the total cost of ownership, then you are getting increases of .5-1% per year. this is steady. with most apartments, you have to expect to have your rent increase 3-4% per year. i know that this is not the case now, but you have to look at it in the long run. if you purchased a place that cost you the same as rent, within 10 year timeframe, the owner becomes ahead every month. this is not taken into consideration when selling.
profit from a sale is the sale price - purchase price - updates - closing costs + calculation of the monthly savings that you received over rent for the period of time.
RDPD says very clearly: owning real estate to live in is a liability.
"The Columbia University professor said that over time home price appreciation has run 1% above inflations"
That's right - at the same level as incomes, which is what I said.
It is indeed a levered asset. If property prices rise at 1% real, and your mortgage rate is 2% real, and you multiply that by your 4x leverage, you're losing 7% per year.
steve that makes no sense. You are assuming an adjustable rate mortgage that increases every year?
"Then things got ugly. If we were forced to sell our current home, which I estimate has lost 5% or so of its value in our 10 months of ownership—despite the more than $20,000 we’ve made in improvements—our cumulative return over the years sinks to approximately 2% annually"
Yeah right. And I wonder how the math would change if he really marked his current home to market (i.e., down 15-20% in a year). Oh, then his cumulative return would have been negative... surprise, surprise. Funny how this guy writes this article but then is in denial how far northern NJ has fallen already.
Special_K: Anyone who is losing money on their real estate investment is clearly not ignoring the right data.
Realism is the new pessimism. Or is it pessimism is the new realism? I can't figure this out. Anyway, just be positive and project an image of success at all times.
"You are assuming an adjustable rate mortgage that increases every year?"
No. I guess you don't know how leverage works.
steve - It is indeed a levered asset. If property prices rise at 1% real, and your mortgage rate is 2% real, and you multiply that by your 4x leverage, you're losing 7% per year.
this is by far the dumbest thing you have ever written. I am giving you a chance now to back out and pretend you never said it.
steve, that statement made no sense whatsoever.
WSJ: Home Ownership Isn’t a Road to Riches
Apparently, owning the WSJ isn't either.
It's real simple - you will not get rich owning RE unless you buy at the bottom and sell at the top of RE cycles. Obviously, the top was in late 2007 and early 2008. We are nowhere near the bottom of the cycle. Buy in 2-5 years when things bottom out.
"Apparently, owning the WSJ isn't either"
Really? Rupert Murdoch seems pretty rich to me.
Murdoch Family Trust owns over 300,000,000 shares of NWS. Worth over $3 billion.
http://biz.yahoo.com/t/09/7291.html
Not from the WSJ.
"well if i would have purchased a 1 bedroom in 1996 in murray hill at 175k.....it is now worth 850k......a noticeable appreciation.......so i dont believe that these arguments really apply to manhattan....the article notes the aberration from the 90s thru current........eventhough they are an aberration ....we are living thru that esp difficult if you are a 1st time buyer."
uh, yeah, at the top of a bubble, the asset always looks like a good "investment".
"Special_K: Anyone who is losing money on their real estate investment is clearly not ignoring the right data."
LOL