Economists raise doubts about homeownership

This is news?

"Yale economist Robert Shiller...notes that U.S. housing prices posted roughly a zero percent gain between 1890 and 1990, after adjusting for inflation...

...Research by Jack Francis, a former Federal Reserve economist and professor at Baruch College...reveals that residential real estate has consistently failed to measure up with other asset classes over the last 30 years.

...From 1978 to 2008, he found, the S&P 500 returned an average of 11% a year, while U.S. small-cap stocks produced an average return of roughly 13%. Single-family homes posted less than a 6% gain...."

This is not news per se, sjmd but any article that can contribute to making people realize that home ownership is not the path to prosperity is a good thing. For a period of over 7 years Americans have been brainwashed with buying, buying, buying and too many got wiped from everything including their life saving and 401K in what proved to be the biggest set up in history by banks, government and Murdoch owned medias...

By the way, there are benefits in homeownership, but not at this price level. If prices come back to 1998 level, then it will be a good time.

What was the ppsf in 1998?

http://www.trulia.com/real_estate/New_York-New_York/market-trends/

"...From 1978 to 2008, he found, the S&P 500 returned an average of 11% a year, while U.S. small-cap stocks produced an average return of roughly 13%. Single-family homes posted less than a 6% gain...."

And yet again, we're comparing apples to oranges.

Housing dollars are NOT investment dollars.

If they weren't going towards a mortgage, those dollars would have been going into the pocket of landlord, not towards other investments.

Home ownership has been for many American generations and is still the best way to ensure family stability. Looking at your home as a Certificate of Deposit or a bar of gold to put into the safe, or on the other hand a risky investment in the stock market, is not how actual families make rational decisions about raising their kids, living in a stable neighborhood, or preparing for the future.

"If they weren't going towards a mortgage, those dollars would have been going into the pocket of landlord, not towards other investments."

Except for the dollars you have to pay that are over and above equivalent rent, of course.

The concept of being a perma-renter is stupid. What are you going to do in retirement, rent a two bedroom in the West Village for $35,000/mo (year 2040 rent levels). Rents in NYC have risen 5% annually since the 1960s. You will spend all the money you made in the stock market (by not buying a house) on rent in your retirement.

The reason you buy a house is the pre-paid rent aspect; a capital gain is gravy on top.

"Except for the dollars you have to pay that are over and above equivalent rent, of course."

Which in the long run, once you assume the fact that your fixed-rate mortgage payment will never ever go up over the lifetime of the loan ... and the mortgage tax deduction ... is almost NEVER the case.

downtownsnob, you clearly did NOT read the article. Please actually read it all the way through and you will realize why your comment is irrelevant to this discussion. Go ahead, I am waiting.

I like it when people revive threads from 2007. Oh wait, people are still saying this crap?

"Home ownership has been for many American generations and is still the best way to ensure family stability."

"a capital gain is gravy on top"

"Which in the long run, once you assume the fact that your fixed-rate mortgage payment will never ever go up over the lifetime of the loan ... and the mortgage tax deduction ... is almost NEVER the case."

If you live in your house 30 years, I'm sure you're right. If you stay there 5 years at curent rent:by differentials, you'd almost always be wrong.

"What are you going to do in retirement, rent a two bedroom in the West Village for $35,000/mo (year 2040 rent levels). Rents in NYC have risen 5% annually since the 1960s. You will spend all the money you made in the stock market (by not buying a house) on rent in your retirement."

If stock market increases outpace rental increases (which historically they have) you'll be better off making that deal.

You do know that people have been beating this drum forever, right? Here are two skeptical analyses from 2003:
From the National Housing Institute: http://www.nhi.org/online/issues/127/homeownership.html
From the Economist: http://www.economist.com/node/1794899

In New York, renting is the right choice for most people. That's why most people in New York rent. For some people, owning makes sense. It's not just about the numbers (though in many cases owning makes more financial sense than renting), it's the sensibility. I know that argument doesn't go over too well on this board, but some people are owners by nature. Yes, some can be reformed. But others (myself included) are incurable.

Tina Fallon
Realty Collective, LLC

Everyone can debate the financial benefits of home ownership. I've been renting for many years and will be buying a place soon. I personally embrace the idea of owning property, having a place to call my own, owning a piece of the Big Apple, potentially passing that benefit to an offspring. You don't get that with renting. Looking forward to home ownership.

I personally embrace the idea of renting, saving money vs. owning and investing in better-performing assets, then passing the even-greater benefit to my offspring. They can then take the assets and do what they want with them, and live where they want to. That's an easy one.

And another benefit of renting is that you don't pay property taxes! It's true.. a renter told me so.

One advantage of owning is that you get that tax deduction! Which, as we all know, justifies buying at any price!

Tina, did you just come out? I've not had a lot of time to be on here.

Own your home at a reasonable cost in relation to your income, plan to live in it at least 10 years + Invest in stocks and bonds= GENIUS!

Sigh. Few of you seem to have actually read the article. Note that it says:

1) "If you're in the 35-percent tax bracket, he explains, then a $1,000 deduction is worth $350 to you. That same deduction is worth just $100 to someone in the 10% bracket. "The advantages of homeownership are extremely skewed to wealthy homeowners," says James."

2) "Conversely, higher-income buyers are more likely to benefit from price appreciation, since homes in better neighborhoods tend to outperform the overall market."

What might this about Manhattan RE versus Queens, or say, Cleavland?

Hi Keith. I've been "out" for a few weeks now. (All the cool kids were doing it.)

> And another benefit of renting is that you don't pay property taxes! It's true.. a renter told me so.

indeed, renters in buildings with tax abatements for sure, plus all the renters that don't cover 100% of the carrying costs of the landlord

yeh about that whole rents up 10% in top metro markets..

yeh about that...

"indeed, renters in buildings with tax abatements for sure,"

Tax abatements do NOT benefit renters at all. Tax abatements only benefit developers.

http://www.urbandigs.com/2006/06/biggest_scam_in.html

"indeed, renters in buildings with tax abatements for sure,"
Tax abatements do NOT benefit renters at all. Tax abatements only benefit developers.

http://www.urbandigs.com/2006/06/biggest_scam_in.html

wrong! those tax abatements are a scam for the buyers. not for those with the rent stabilized on the newly developed buildings with tax abatements. just goes to show that here again, homeownership can be a bad deal.

The rent in an abated building is the exact same as rent in a comparable non abated building. Whatever savings the landlord of the abated apartment incurs, he pockets.

NYMATT is right. Mortgage dollars are not an equal trade out to investment dollars. You have to live somewhere.

Housing was never considered a sterling investment, before the boom. And suddenly people expect to make a profit, and they really shouldn't.

Home ownership is a break-even proposition, a way to keep pace with inflation, and that's it.

Think it through; you buy a 3 bed home for $100K. Thirty years later you sell it for 300K. Which is pretty close to what you put into it. But to replace it with another 3 bed, it costs 300K. So, you never really take cash out unless you downsize.

Meanwhile, your neighbor rents for 30 years. They started out renting a 3 bed for less than your purchase payment. But by year 30, their rent was about FOUR times your payment. (check the stats before you refute this) And they don't have a chance to break even, or EVER get ANY of that money back.

Home ownership is basically a forced savings plan with low return, but it's bonus is you live under a roof.

Once the abatement expires and the owner is paying full tax...will it not fall in line with what taxes are for apartments that didn't have the abatement? Or are you saying it will be much higher in many of these new Condos? The projected numbers always seem really high to me but it's hard to project what everyone will be paying 5-10 years down.

"The rent in an abated building is the exact same as rent in a comparable non abated building. Whatever savings the landlord of the abated apartment incurs, he pockets."

Since the rents in the abated buildings are stabilized, this is not necessarily so. Although they're market rate when you sign the lease, if market rents outpace what the stabilization board allows, the renter can end up with below market rents.

And needsadvice, two problems with your analysis:

- Why would rents increase 4x and the price of your house only increase 3x? If that were the case, I'd suspect your house had actually lost money in real terms.

- Moreover, you're ignoring the fact that in some markets (including NYC right now) it costs considerably more to buy or to rent the equivalent unit, so you're definitely "throwing away" the money above and beyond the rental price; and you're also ignoring the returns you'd get on your downpayment by doing something more useful with it.

@JORDYN I can think of one example; my grandmother bought a house in the '60's for $29K. Her payment for 30 years was $300 per month. By the time she was done paying principle and interest, her total bill was 3X the mortgage amount, or $90K. She sold the house for $90K. She lost a little in transaction costs, but got the MAJORITY of her money back.

Meanwhile, the rental price on the 4 beds in her area went from $250 a month in the '60's, to $1200 (and MORE) a month in the '90's. Yes, in the beginning, renting was less. But rental rates aren't locked in, and the "savings" doesn't last.

Get out your calculator, and figure it out. Grandma, and home ownership, wins in the long term.

Also, everyone should realize that rents, throughout the US, have not increased in a substantial way for over a decade.

That, my friends, is not going to last.

See this CNN article: http://money.cnn.com/2011/03/15/real_estate/rent_rise_housing/

Excerpt:

"Renters beware: Double-digit rent hikes may be coming soon.

Already, rental vacancy rates have dipped below the 10% mark, where they had been lodged for most of the past three years.

"The demand for rental housing has already started to increase," said Peggy Alford, president of Rent.com. "Young people are starting to get rid of their roommates and move out of their parent's basements."

By 2012, she predicts the vacancy rate will hover at a mere 5%. And with fewer units on the market, prices will explode."

If you live in your house for 30+ years, you're likely to come out ahead renting.

If you live in your house for less than ten years, not so much.

Providing advice as if there's always a right answer is a bit silly, as a result.

P.S. What would have happened if your grandma bought stock in, say, Berkshire Hathaway, instead of her house? Obviously, that's an exceptional example, but it demonstrates that focusing on individual examples is probably not that interesting in this discussion.

P.P.S. The reason rents haven't gone up is because incomes haven't gone up. There's tons of evidence demonstrating that these things are well correlated, and it makes sense to think the relationship is actually causal.

Eep, the first line of that last post should have been: If you live in your house for 30+ years, you're likely to come out ahead BUYING.

"P.S. What would have happened if your grandma bought stock in, say, Berkshire Hathaway, instead of her house? Obviously, that's an exceptional example, but it demonstrates that focusing on individual examples is probably not that interesting in this discussion."

Again, Grandma has to LIVE somewhere. Unless Warren has a spare room, this point is moot.

"Homeownership has long been associated with the American dream and investment prowess". Statistics surely make it clear that, with the exception of unique circumstances (buying early in 'bubble' and 'flipping', buying unique distressed properties, etc.), home ownership is not an incredibly exciting investment. If a loss or dimimishment of mortgage tax deductions are to come to fruition, it will be even less so. For the overwhelming majority of us, however, owning a home should not be seen as an investment - it is home.

Why would anyone want to catch a falling knife?
Every analysts says it's gonna drop 20% and for once they are probably true so why would someone want to consciously lose 20%?
Needsadvice's GrandMa did the right thing at a time when it actually made sense. We live in a VERY different economic environment right now when the same decision as GrandMa doesn't apply...

"Again, Grandma has to LIVE somewhere. Unless Warren has a spare room, this point is moot."

You already acknowledged that it started off more expensive to rent *and* she needed a downpayment. That money can be invested way more productively than in housing.

I did the math for you. If grandma took her 20% downpayment of $5800 and bought Berkshire Hathaway in 1962 instead, today she'd have $92 million. Of course you're right that she would have paid an extra ~$150K in housing costs versus buying, but I'd say that's the right call to come out $91.85 million dollars ahead.

@needsadvice. My calculator tells me your grandma sold her house for 6.25x the annual rent roll in her area. Now show me where houses go for 6.25x the annual rent roll and I will become a landlord there tomorrow. In other words, presuming your memory is correct, your scenario is a distant, distant outlier.

Just a reminder to some people who think NY is correctly valued:
http://streeteasy.com/nyc/talk/discussion/18274-a-little-bit-of-history-gross-rent-multipliers-in-new-york-city-over-time

========================================================================
Data compiled between 1890 and 1892 for New York from the Real Estate Record and Guide indicated gross rent multipliers between 9.5 and 10.1 for tenements and apartment houses respectively.

In the Appraisal Journal, October 1942, the “typical speculative buyer” who acquires property with debt would pay about 6.4 times the gross rent.

1975, gross rent multipliers fell. The gross rent multiplier ranged between 5 and 6 times the gross rent roll.

By 1988, gross income multipliers peaked at an average of 9.32 for walk-ups and, then, declined during the 1990’s recession to a low of 3.57 in 1992.

As the market improved, gross rent multipliers began their move peaking in 2006 or 2007 at more than 15 time gross annual rental income.

Gross income multipliers must fall because vacancy rates are increasing, operating expenses, especially real estate taxes, are increasing, and the cost of debt and equity are higher. Recent sales clearly indicate the downward momentum in gross income multipliers.

====================================================================

So, economists are finally getting that what was true for hundreds of years - and wasn't as clear for a few decades because of a bubble, which has popped - might actually be true?

"The concept of being a perma-renter is stupid. What are you going to do in retirement, rent a two bedroom in the West Village for $35,000/mo (year 2040 rent levels). Rents in NYC have risen 5% annually since the 1960s. You will spend all the money you made in the stock market (by not buying a house) on rent in your retirement.
The reason you buy a house is the pre-paid rent aspect; a capital gain is gravy on top. "

This is the incorrect logic that led so many to HUGE problems.

If you pay too much for said prepaid rent, which is what happened in a price bubble, then you do exactly the opposite of what you are claiming.

Ignoring the actual prices for buy vs. rent in saying one is better is simply ignorant.

@JORDYN; okay, I like it. I'll rent and buy stocks instead.

Which stocks do you suggest?

simple... index funds

@SOMEWHERE; Okay, but what if I bought in 2000 and sold in 2009?

What index would have worked for that?

What if you bought your house in 2006 and sold in 2008? Choosing arbitrary periods to confine your search to is silly.

Over long periods of time, stocks vastly outperform housing. Not as much as Berkshire Hathaway versus your grandma's house in most cases, but enough that it is foolish to discount the value of the money that you could have invested elsewhere when doing you buy vs. rent analysis.

I could be wrong, but most multimillionaires own their homes.

"What stocks do you suggest?" Really good question. I'd like to know as well. Exactly.

"I could be wrong, but most multimillionaires own their homes."

http://en.wikipedia.org/wiki/Correlation_does_not_imply_causation

Multimillionaires are also more likely to have private jets. Do you think that buying a private jet will make you rich?

"Multimillionaires are also more likely to have private jets. Do you think that buying a private jet will make you rich?"

Stupid analogy.

That is an incredibly well reasoned response. Thanks for your valuable contribution to this discussion.

But if you don't like the initial analogy, let's choose any other luxury item: Do you think owning a Ferrari will make you rich? Do you think going on vacation to the Four Seasons will make you rich? Do you think wearing a Patek Philippe watch will make you rich?

If owning your home is just a more expensive way of obtaining housing, then it's just a way to spend discretionary money. So of course rich people will be more likely to do it--they have more money to spend on luxury goods. In other words, BillyRes has the causation backwards.

OK, multi-millionaires are much more likely to have expensive cars, fly first class, and have personal pilates instructors. Is that why they are rich, or as a result of it?

the wealthy don't have more than 10% of their total wealth tied up in real estate in average. the avg joe has more than 50% tied up on his own home!!! an indivisible asset without having much of a liquid cushion htat carries huge transaction costs. can joe do better than that? i think so! the american dream had been the american scam so far for Gen X and younger, we need to get smarter imho.

renting will not make you rich, but buying an overpriced home is sure gonna make you more poor and increase the likelihood of dire financial distress.

Well said notadmin! We're on the same page!

"What would have happened if your grandma bought stock in, say, Berkshire Hathaway, instead of her house?"

And what if she would have taken her down payment to the horse races or Vegas?

Matt--way to miss the point again, which is remarkable since it's in the very next sentence from the one you quoted: "it demonstrates that focusing on individual examples is probably not that interesting in this discussion."