Psychology of losing money in RE vs. equities/bonds

Agreed. My husband owned a one bedroom condo before we got married and when we sold it 14 years ago, it was at a significant loss. But when I see the losses (on paper) in my retirement accounts, it's much more painful. It's an interesting question as to why one loss is felt more deeply.

Weird, isn't it? I've lost an equivalent amount in RE and market over the last 24 months, but one feels WAY more painful than the other.

Maybe losing money in retirement accounts is more frightening because that is what many of us will have to live on in the future. With real estate, we can hope that we can make up the loss in the next 10-20 years. Just a guess.

I have the frightening specter of possibly needing to relocate outside the U.S. and having net worth drastically diminished because of the tanking of USD. There has been a 50% devaluation over the last couple of years - so that's very real, and sitting in cash doesn't help.

As for retiring, I don't think my generation is ever going to retire and that's not something that really troubles me. Can't think of anything more horrible than never working in some capacity (though some would say that I am not working as a housewife right now).

I would guess it has to do with how fungible and liquid the asset is. And you certainly derive more emotional value from your home than any of these other things.

I don't know if you're relocating because of a job situation. When my brother worked all over Europe for a US company, they gave him quite a bit of money to pay for housing and the like and he was able to save most of his salary which helped him when he returned to the US and started his own business.
It's hard to predict the future. You may be able to afford to retire much earlier than you would suspect. Maybe your children will support you (you're pregnant, right?).

My father was always teasing us that we would support him in his old age.

They call it "real property" because it is real. Even if the market value falls to $0, it's still a place to live that satisfies the basic human need for shelter. If it's fee simple, sitting on actual earth, real estate has some value even if vacant, even if it's a very, very, very long-term investment.

For a house or apartment, so long as some humans want to live in that place, it still has value. Stock in Lehman Brothers just ain't the same.

Incidentally....If anyone reading here is interested in a real estate IRA (aka self-directed IRA), and has at least $80,000-$100,000 to invest, I can help.

By luck I took all my own SEP-IRA money out of the stock market just before all financial hell broke lose--I did it to diversify holdings because my husband's retirement is sooo heavily into stock--and I bought a multi-family residential property that has been a cash cow ever since.

What I offer is to help investors find a profitable property in New York State (where I'm a real estate licensee) and to set it up with a company that handles all the IRS red tape for you (Entrust is the one I use, but there are others). Google "self-directed IRA" if you'd like to research this retirement option.

Well, OF COURSE. Ignorance is bliss....

"With real estate, we can hope that we can make up the loss in the next 10-20 years. Just a guess."

Not sure how thats any different than retirement accounts.

The only real difference is that its much easier to sucker people with promised benefits of RE growth that don't materialize...

i also think its because with equity there is an actually price (you can check everyday)

but RE its more fuzzy

What is this blue writing with the word "pro"? Is this a new SE feature?

carbee: What I offer is to help investors find a profitable property in New York State

where would that be??

https://streeteasy.com/nyc/home/industry

> but RE its more fuzzy

Which is exactly why its easier for brokers and such to sucker buyers.

Same thing for private equity... notorious for fuzzy (bordering on complete bs) return numbers.... and a lot of folks get in and get burned.

Don't be so impressed with his blue handle!!!! Invest with me, if you've got $100k therby skirting all sec regs cause you are a 'sophisticated' investor, well what better way to squander I mean invest in a new venture!!!'n

think dogs, cats, salad shooter, hunger and lack of retirement planning by the tsunami of retirees!!!!

Email me tigerwoodinthedogbouse@hotnannies.com.

To sound totally blue-chip legit:
tigerwoodinthedogbourse@hotnannies.com

grrr, tiger, i heard you can use the cash as you're going to have to pony up to keep the wife in the house, both cold hard cash and a new prenup. ain't love grand. or, rather, ain't love millions.

Can't get action on the side, Erin ain't putting out, $300mm if he dares. Much suckiness to be a billionaire and to go to bed horny every nite. Seriusly he should just kill himself.

hey...just like AIG--a stay bonus.

I was waiting for someone else to bring up Tiger Woods again.

IMO, someone with the amount of $, fame, relative attractiveness & easy access to women or men that he has should not get married until he's gotten it all out of his blood (see Warren Beatty). By all means, have baby mommies or whatever but why get married? Prenup or otherwise, it's just hassle.

If you need to pressure someone in marriage, you don't want to marry them.

Trick is to make it seem like it's ALL their idea.

> If you need to pressure someone in marriage, you don't want to marry them.

Tell that to women everywhere...

If I understand correctly, people seem to be saying that the loss of home equity is easier to bear than losses in equity investments. If that's so, I wonder why we so often hear people say that they "can't" sell their apartment/house because they would lose equity but don't often (maybe at all) hear people say they can't sell a stock because the price fell? (BTW, I'm talking about situations where equity is down but still positive, not where equity is negative and the owner would have to write a check at closing in order to sell. In the latter case, can't can be as simple as not having the cash to)

Ssitter: lots of people don't sell stocks when they fall. And sometimes, it is a mistake to sell (as I did back in Oct '08). Just saying that when the amount of home equity loss = equity market loss, for me (one person), it hurts more to lose money in markets (not paper losses, actual losses).

I agree with SLS: the reason people "find it least painful to lose equity in my primary residence" is because they don't see a defined market price every day: so they get to be in denial about it. As soon as it becomes a reality, everything changes. I can't believe I'm going to quote Mike Tyson, but ......

"Everybody has a plan until they get punched in the face. — Mike Tyson.

____________________

David Goldsmith
DG Neary Realty

"They call it "real property" because it is real. Even if the market value falls to $0, it's still a place to live that satisfies the basic human need for shelter. If it's fee simple, sitting on actual earth, real estate has some value even if vacant, even if it's a very, very, very long-term investment."

The attempts to rationalize never cease.

Is a co-op really real property any more than owning part of a business (which itself has real assets)?

The lack of transparency is not only one of the reasons broker shills can sucker people, its also a con of the asset itself...

> Just saying that when the amount of home equity loss = equity market loss, for me (one person), it
> hurts more to lose money in markets

In reality, in most cases, its actually the other way around.

Keep in mind that most RE is bought with LEVERAGE.

Its another one of the ways the reality of RE is ignored by a large portion of those who own it. Your losses are multiplied with a mortgage...

As I said, ignorance is bliss.... and its that ignorance which has allowed the brokers and other re "professionals" to take a whole lot of Americans for a ride...

"If I understand correctly, people seem to be saying that the loss of home equity is easier to bear than losses in equity investments. If that's so, I wonder why we so often hear people say that they "can't" sell their apartment/house because they would lose equity but don't often (maybe at all) hear people say they can't sell a stock because the price fell?"

Its the extra danger of leverage.

The risks of RE are considerable, but the RE industry just does a much better job of hiding them.

Dollar-for-dollar, if I lose 200k in the stock market, it feels worse than losing 200k in home equity. That's all I'm saying.

Yes, but how about $200k in stock equity vs. $500k in home equity. Or $1 mil?
(the joys of 40% or 20% down in a market crash).

And, in the end, it all just goes to show you why so many bad mistakes are made in RE. Folks hear about the "upside" from brokers, but don't really see the downside... or even understand how much they've lost.

Folks who got their 401k balances weren't generally saying "well, they're not REAL losses because I don't have to sell". Yet how many homeowners did... hell, the people on this board.

If you lose 200k in your brokerage, you can blame me.

If you lose 200k in your home and care about it, then you're not thinking about your home correctly. It shouldn't be a investment per se, but some people have made so much $ here in NYC as the city came out of the 70's that it's hard not to measure it to an equity portfolio. Are the days of double digit appreciation in prime neighborhoods gone for a while? I would say so.

Want to hedge a falling dollar? Buy foreign real estate...

If you lose 200k in your brokerage, you can blame me.

If you lose 200k in your home and care about it, then you're not thinking about your home correctly. It shouldn't be a investment per se, but some people have made so much $ here in NYC as the city came out of the 70's that it's hard not to measure it to an equity portfolio. Are the days of double digit appreciation in prime neighborhoods gone for a while? I would say so.

Want to hedge a falling dollar? Buy foreign real estate...

Somewhere else: that's why I said dollar for dollar. Obviously, losing 500k in RE vs. 250k in stock equity is a different story (again, for me).

Positivecarry, your comment about how to think about a home is interesting. If you spend $1M in a home and you don't think of the money as equity or an investment, how do you think of the money? For someone who buys a home without planning to sell it for a long time, how should they think about the money they spent buying the home?

I think if it as money I have to spend to live where I want to live. If I buy a million dollar place in NYC, it would be comparable to a million dollar home I had sold in Paris. It's about a standard of living. Exchange rates f that up a bit in some places, but if you bought a million dollar apartment in Shanghai, I'm sure it wouldn't be too much worse off than a two bedroom on the UWS (not counting the pollution).

In terms of stocks, if you lost $250k on some positions, but you make $250k in 6 months as a stockbroker, you can add to the position if you really like them. If it takes a year for it to go back up, who cares? It's not about whether or not I'm (or my clients) are up by 12/31/09, it's about when I sell them.

In terms of stocks, if you lost $250k on some positions, but you make $250k in 6 months as a stockbroker, you can add to the position if you really like them. If it takes a year for it to go back up, who cares? It's not about whether or not I'm (or my clients) are up by 12/31/09, it's about when I sell them.

F this phone and my double posts. Not even drunk....

If your holding period is more than 10 years; you can afford to make mortgage payments and are living in the property, it hard to lose money. However, the same can not be said about the holders on FNMA, C, AIG, LEH, which will never come back. Most people believe that the markets come back, which may be somewhat true, but most people do not hold S&P ETF's in their portfolio. I would say losing money in equities is lot more painful as you may never recoupe your investment even if you do not panic and sell when the prices are low.

But here's the thing: I own a rental property that has lost at least 30% of its value in the current market. If I had to sell it today, I would lose money for sure, and that would be a genuine loss.

But the rent receipts are exactly the same as they were pre-meltdown. The taxes have gone down maybe 5-10% after recent re-assessment. The landlord insurance package cost has not changed. Maintenance costs will probably be lower this year because a lot of contractors are offering recession pricing.

So, I am actually making more profit on this property than I was when it was valued higher. I never intended to sell it right away, and fortunately, I don't have to sell it.

Call me shrill or any other name you want, this is what's unique about real estate, and I would smile all the way to the bank except that I prefer direct deposit.

but you're assuming that rents won't go down? something doesn't make sense---why would the underlying value of a rental property go down if rents don't?

No, columbia county, I am not assuming rents won't go down. In fact rents are actually going up in some markets even as property values are going down.

This doesn't make sense perhaps until you spend some serious time eyeballing the numbers and doing the market research. You're making assumptions that just are not universally true, although they may be true in some areas. (Staten Island?)

In parts of suburban Detroit, brokers have told me they are wait-listing prospective tenants, and not surprisingly rents have climbed to unexpectedly high levels, because the demand for rental housing exceeds supply. Why? Because people who have lost houses, but still have jobs, need housing but certainly can't buy. Meanwhile the foreclosures, the local business closures, the plant closings, the chain store closures, fear of buying in the area, and other pressures have pushed down property values. In some places I don't think property values will recover in my lifetime.

Even before the financial meltdown, there were (and there are) a number of markets throughout the USA where the demand for rental property is significantly stronger than the demand to purchase property. You would think investors would lap it up and bring things more into balance. But especially now, because of relative lack of financing availability, there aren't enough investors to mop up the surplus supply.

Again, it comes back to the truth that everyone needs, and deserves, a decent place to live. You don't need stock in Lehman Brothers in quite the same way, you don't need Tiffany keys or artwork in quite the same way.

This is the heart of the answer to the OP's question.

ok---you lost me in the first sentence.

"I am not assuming rents won't go down. In fact rents are actually going up" is that an assumption of up or down?

and, suddenly we're talking about detroit?

and since according to you, everyone needs and deserves a decent place to live, its OK to lose money on real estate?

"why would the underlying value of a rental property go down if rents don't?"

The prices that investors will buy at today vs the peak have come down, regardless of whether rents have come down (which they obviously have), because the cap rate that they now want is different from the peak years.

The reason that people care about the $200K loss less in RE is because they pretend it doesn't exist. You buy your RE for $700K, it drops to $500K (though homes in your market only dropped to $650K because they're so special), and you say "so what, I need a place to live; it's a home, not an investment". A decade passes, and you sell it for $750K, and you say to yourself how great it was because even after everything, all the ups and downs, you made $50K. The $75K paid in transaction costs? Ignore. The $120K overpaid in mortgage and taxes as compared to renting those 10 years? Sweep under the rug, pretend renting is more expensive than it really is by comparing to some overpriced rental that no one actually rents. The $30K spent to maintain / improve the home? Disappears from the calculus. Through these illusions, people take a $175K loss over a decade and rationalize it into a $50K profit.

Hard to do that if the profit-and-loss is staring you in the face daily, as it does with stocks.

Yeah, that's why I will never have kids even though millions of others want to.
Have you ever done a cost/benefit analysis of having kids? People are idiots.

Not to mention the fact that having kids is about the worst thing one can do for the environment. Do you know the carbon footprint of each of those little tikes? More impact than you or I would have for the entire rest of our lives. Selfish little imps...

inonada, totally agree with your analysis of how people view real estate. I was just talking about that on the thread about wanting to own. I think what you posited goes directly to why many people are deluded into thinking buying is always a good investment in the long term (I include my younger self in that group, btw).

"If you lose 200k in your home and care about it, then you're not thinking about your home correctly. It shouldn't be a investment per se,"

Yes, its WORSE.

If you lose $200k in something that wasn't an investment... so no real upside, then thats even worse.
If you lost $200k in a CD, you should have your head examined.

"The reason that people care about the $200K loss less in RE is because they pretend it doesn't exist."

Well, bingo. Ignorance is bliss.

Which is why so many mistakes have been made in buying RE in the last 10 years.

But you haven't lost money. You lost potential money. You're still living in it. We got bad advice when we were ready to sell in the summer of 08 and were told to wait until September. In Sept we were advised to wait until January. Theoretically, if we'd sold in the summer or fall, we would have gotten $300,000 more. But we didn't. We got what we got. The $300,000 never existed - it was just fantasy-money.

inonada, over 10 years? That would be about $400,000 "lost" on rent. I think I'd rather take the "175,000 loss" on the purchase.

> But you haven't lost money. You lost potential money.

No, thats simply wrong. A non-realized loss is still... a loss
And it is certainly wrong in the context of comparing it to stock losses, which is the point here.
If your house goes down in value, it doesn't count, but your stock getting cut in half does?

Its this kind of nonsense logic that leads to RE mistakes.

> You're still living in it.

And money losing stocks can pay dividends.

Doesn't change the point... the claim is wrong.

"inonada, over 10 years? That would be about $400,000 "lost" on rent. I think I'd rather take the "175,000 loss" on the purchase."

First of all, your $400K over 10 years translates to a monthly rent of $3333, which is a annual-rent-to-price of 5.7%, which is a pretty crappy amount to pay on a rental. As a point of reference, I pay below 4%. On $700K, 4% translates to a monthly rent of $2333, which means $280K over 10 years, not $400K. If an owner wants to delude themself into thinking a $700K apartment rents for $3333, that's fine and part of the "comparing to some overpriced rental that no one actually rents" that I'm talking about. I can show you multiple same-building / same-line / same-timeframe rent-to-price ratios of 4% if you like.

Second, I already accounted for the $280K paid in rent because you actually spend on the order of $400K in mortgage interest and taxes over 10 years for owning a $700K home, after accounting for tax deductions. Part of my $175K was "$120K overpaid in mortgage and taxes as compared to renting", which is that $400K in mortgage interest and taxes minus the $280K in rent.

How do I get to $400K over 10 years? Assume a 6% interest rate on $700K, which comes to $42K a year, plus $1200 per month on common charges and taxes, which comes to $14K a year, so you're talking about $560K over 10 years in interest, common charges, and taxes. Of course, there's the tax deduction on the $42K annual interest and the say $6K annual tax you pay. These two amount to $48K/year, and say you get to deduct about 1/3rd of these payments, or $16K/year. So you discount that $560K over 10 years in interest, common charges, and taxes down to $400K.

In other word, the renter spent $280K for 10 years of shelter. The owner spent $455K for 10 years of the same shelter. However, the owner rationalizes into thinking he/she "made" $50K because simply because a home purchased for $700K was sold for $750K.

Make sense?

But a monthly rent of $2300 gets you a studio and studios do not cost $700,000. What if the owner were to pay all cash? Does this change the analysis? I know you have to factor in the opportunity cost. At what point does it makes sense to buy?

"But a monthly rent of $2300 gets you a studio and studios do not cost $700,000."

At $2333, you can get a 1BR. For example, here's 723 sq ft 15th-floor 1BR that rented for something at or less than $2550 (last asking price) in August:

http://streeteasy.com/nyc/rental/501324-rental-200-riverside-blvd-lincoln-square-new-york

Here's a 663 sq ft 8th-floor 1BR in the same building with worse views that sold for $645K in October, which means it probably went into contract during that same August timeframe:

http://streeteasy.com/nyc/sale/443315-condo-200-riverside-boulevard-lincoln-square-new-york

On a per-sq-ft basis, you get a rent-to-price ratio of 4.3%, though in this example the rental option is superior on a per-sq-ft basis and we only know the asking price of $2550, not the actual renting price, so the true rent-to-price ratio is something lower. Even ignoring all that and using 4.3% instead of 4.0%, we're talking $2500 per month, not $3333.

"What if the owner were to pay all cash? Does this change the analysis?"

That's a tougher nut to crack because people have a mis-conception about opportunity cost because they compare options with vastly different risk profiles. One school of thought is to look to the market to understand the opportunity cost of $700K. In this case, the analysis is simple: the market prices the opportunity cost of $700K used to finance an apartment for 30-years-fixed at 6% (let's just assume you're doing 100% financing, which is obviously not an option any more). In this case, the analysis remains. I ascribe to this school of thought.

The other school of thought is to look at what you would actually do with the $700K yourself. This is tricky because people might do random things with the money, like stuff it all in a mattress for 30 years, in which case you'd get to an opportunity cost of 0% annually. Hard to argue against locked-up free money for 30 years where you don't need to account for the possibility of not being paid back the entire principal, see my point?

Stated another way, you could take that $700K and get paid 6% by loaning it out to someone else with your same credit profile to buy a home. You'd have the same lock-up terms and credit risk as if you put that $700K in your own home. Some may think that "loaning" the money to yourself is a different credit risk than loaning it to someone else, but it's not. The difference is that when the stranger fails to pay you back fully and only gives you $500K, you think it's a loss. When you are forced to sell at an inopportune time and only get back $500K, you think you were in extenuating circumstances: job loss, worse recession ever, etc. What people will fail to equate is their extentuating circumstance is actually a loss on the "loan" the made to themselves with cash.

Iknowsomething. You can be my wingman on se. 'danger zone!!!!!!'

The cost of your downpayment should be based on the RISK of the investment you are actually making -- i.e., a highly leveraged, undiversified, investment in NYC real estate.

However you value the risk, you should at least recognize this: your investment is riskier than the lenders, by definition, since the mortgagee gets paid off first. So you should always use a rate higher than the rate at which you can borrow on the apartment.

Moreover, the mortgage bank is diversified and you -- unless you are in the 10 houses category -- are not, so your risk is even higher.

Moreover, market mortgage rates reflect government insurance -- meaning that the lender is not taking most of the credit risk. So you are taking far more risk.

If you can borrow at 6%, you should be using a number considerably higher than 6% for your downpayment.

Forget that inonada guy, you can be my wingman, financeguy!

Let's practice......(tune).... You've lost that loving feeling.........

You're such a slut, Iceman.

Financeguy, I agree with you completely. I used a rate of 6% as a blend of the rate of 5% you can get on a conforming loan for 80% and a rate of 10% for the 20% equity portion, but didn't want to go over peoples' heads explaining it as you have so nicely done. Of course, applying a tax deduction for the equity portion is wrong, so the 10% equity rate as what is implied by a 6% overall rate is not right: it's more like 6.7%. Kinda low if you ask me, but I didn't want to get lip about it.

Can I at least be financeguy's navigator, w67th?