
Why a house is a terrible investment (2013) - nreece
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
======
ajross
This is awful analysis. Almost every one of the bullet points is just wrong,
or at least terribly spun. I mean, one of them argues that homes are "heavily
taxed" when of course they are the source of the biggest single deduction
category in the whole budget, another claims with a straight face that the
ability to leverage the investment via a (again, government subsidized!) loan
is a _bad_ thing!

Now, obviously not all investments are winners, even if they are "good"
investments in principle. And there are all sorts of very good arguments about
why homes _should not_ be subsidized in the way they are, and that our
government has made them "too good" in a way that harms the public as a whole.
But nonetheless homes in almost all of the US are absolutely good investments.
They have been for going on three quarters of a century now and certainly
don't show signs of stopping.

~~~
timr
This is excellent analysis. Every one of the bullet points is correct, and
you've picked one to debate (and misinterpreted the argument): relative to
virtually every other investment you can make, homes _are_ heavily taxed.
Arguing that you can (possibly) deduct some of those taxes misses the point. I
don't have to pay my state and local governments annual taxes on the stocks
and bonds that I own.

On average, homes in the US appreciate at about the rate of inflation, and the
choice to rent vs. buy is favorable in some markets, unfavorable in many
others. It's nowhere near as clear-cut as the comments in this thread would
lead you to believe.

~~~
sulam
I recently sold and bought a house, and as far as I know I paid no taxes on
it, and I am still deducting mortgage payments. I could pay off my mortgage
tomorrow (it's Sunday here, so I'd have to wait for my bank to open) but my
accountant tells me that's a horrible idea.

~~~
DrScump
In the USA, you would face capital gains taxes if your sales basis was greater
than your cost basis.

~~~
pragmatic
Do I have to pay taxes on the profit I made selling my home?

It depends on how long you owned and lived in the home before the sale and how
much profit you made. If you owned and lived in the place for two of the five
years before the sale, then up to $250,000 of profit is tax-free.

If you are married and file a joint return, the tax-free amount doubles to
$500,000. The law lets you "exclude" this much otherwise taxable profit from
your taxable income. (If you sold for a loss, though, you can't take a
deduction for that loss.)

~~~
DrScump

      up to $250,000 of profit is tax-free
    

You get that exemption _once_ in a _lifetime_. (If you are married filing
together, that's once for _both parties_.)

If your profit isn't 6 figures, choose this option carefully.

~~~
meritt
Under current law, you can take the exclusion every two years:
[https://www.irs.gov/publications/p523#en_US_2017_publink1000...](https://www.irs.gov/publications/p523#en_US_2017_publink10008998)

Are you referring to the over-55-once-in-a-lifetime exemption that was
replaced in 1997 with the introduction of the Taxpayer Relief Act?
[https://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997](https://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997)

------
013a
I really fail to see how most of those points are relevant when you consider
that a home is an investment you can, you know, live in. The alternative would
be to rent indefinitely, which apparently we're ok with even though its not
just a 0% return on investment, its an infinitely negative percent return on
investment. Even if your house breaks even over 10 years, you still got to
live in it for ten years for what is, functionally, the cost of interest +
upkeep, which would often easily amount to less than rent.

If I stayed where I rented last year for ten years, the total cost over ten
years (assuming the rent is never increased) (rent is _always_ increased) is
$132,0000. Even if my house cost that much to maintain over ten years plus
interest (it won't), I'll still break even on the principal and enjoy the
benefits of home ownership.

That's not to say that home ownership is always the right choice for everyone
in every stage of life. But to sweep a broad generality like "houses are a
terrible investment"...

~~~
smnrchrds
> I really fail to see how most of those points are relevant when you consider
> that a home is an investment you can, you know, live in. The alternative
> would be to rent indefinitely, which apparently we're ok with even though
> its not just a 0% return on investment, its an infinitely negative percent
> return on investment.

This would only make sense if you want to live in a place indefinitely. When
the economy here (Alberta, Canada) tanked due to falling oil prices, people
who were renting and were laid off simply gave their 1-2 month notice to their
landlord and moved to Montreal or Southern Ontario for better employment
opportunities. Those who owned could not do that without taking a huge loss,
selling their house for less than the price they bought it for, potentially
less than the remaining mortgage obligation, potentially leading to their
bankruptcy. As for renting it out? Forget about finding a tenant in that
economy. And even if they did, how could they manage a property from the other
side of the country?

Mobility is worth more than zero. If you think the economy in the place you
are living is going to be good for the rest of your life (or at least the rest
of your mortgage term) and you are certain you would not want to move during
this time, go ahead and buy a place. Otherwise, it makes sense to rent.

~~~
asfasgasg
> potentially leading to their bankruptcy

Whoa, you have to go bankrupt to stop paying a mortgage in Canada? In the US,
these are (in my experience) secured, non-recourse loans. That means that the
bank's final option is to take the house, but if they do that, you owe them
nothing else.

~~~
DrScump

      the bank's final option is to take the house
    

Sometimes not even _that_ , in states with homestead exemption protections.

~~~
asfasgasg
Normally the homestead exemption would protect the homestead from creditors
_other than_ the mortgage lender. Otherwise, it would be substantially
impossible to induce banks to give mortgages.

------
asfasgasg
I am generally sympathetic to the idea that homes are a bad investment. The
fundamentals are terrible, as discussed in the article, the most important one
probably being the lack of diversification. But I wonder how it meshes with
the results proposed by the article "The Rate of Return of Everything." That
article found that housing has only slightly underperformed stocks as an
investment.

Now, obviously, if you're living in your house, you're not going to get nearly
the same return -- this is the _total return_ on housing, so a house you're
living at could be expected to provide returns on average as listed, minus the
annual value of rent. But that means its overall performance as an investment
is actually better than observed appreciation.

[https://www.frbsf.org/economic-
research/files/wp2017-25.pdf](https://www.frbsf.org/economic-
research/files/wp2017-25.pdf)

------
wl78393
"Don't worry millenials! You didn't really want a house anyway, it's a
terrible idea! Keep paying those student loan payments and renting!" \--
Retired boomer with $1MM+ equity in their suburban California home purchased
in 1975 for $10k.

~~~
0x00000000
*with 1975 property tax locked in thanks to prop 13

~~~
Overtonwindow
Is that accurate? Property taxes can change

~~~
jurassic
Property taxes are locked to the purchase price of the home in California
because of a law called Proposition 13. It's a been major contributor to the
housing crisis but is extremely popular with everyone who currently owns
property. It lets owners benefit from appreciation of their property without
any increase in their tax liability while newer (and often younger) buyers
must pay taxes based on the current absurd home prices.

------
jpmattia
No one has touched on

1\. Interest rates are at historic lows. Real interest rates have recently
been negative. When this changes in the next decades, interesting things will
occur.

2\. It is time for the baby boomers to leave their houses and move into
smaller digs. There is a demographic shift on the horizon.

3\. The Republican tax legislation just hammered home deductions in many
areas.

There are interesting times ahead.

------
awat
As a younger millennial I find myself far more interested in a home from a
Maslow’s hierarchy perspective than an investment at this point.

~~~
Simulacra
Yes! Tbh I wasn’t really all that interested in buying. I finally gave in
after spending a summer working with the homeless, and reading a Priceonomics
article about David Raether. I got really afraid.

[https://priceonomics.com/what-its-like-to-
fail/](https://priceonomics.com/what-its-like-to-fail/)

~~~
ckdarby
This article didn't scare me just shined the light that people are truly not
willing to sacrifice.

They had a $500k nest egg and living in a 4000 sqf home. The decision could
have been to sell the home, downgrade to a home half the size, cut all 'future
children investments' and lived a frugal life.

The best future investment that could have been made here is living within the
reality of the numbers.

~~~
Simulacra
Absolutely agree. He should’ve downsized and cut expenditures, but for
whatever reason (maybe hubris? Pride?) he allowed things to get out of
control. For me, I know that I can get a job at Home Depot and make the
mortgage payments, and that’s why I stuck with something small and affordable.

------
haberman
When I was house-hunting, I found it really frustrating how difficult it is to
truly price out the total cost of owning a house.

Many people think that renting is throwing your money away, and buying is
acquiring equity. This is true as a first-order approximation, but far from
the whole story. Home ownership also has ton of non-recoverable costs:

    
    
        - interest on your mortgage
        - mortgage insurance (if you have >80% LTV)
        - closing costs on your loan (2-5% when you buy)
        - property taxes
        - homeowners insurance
        - yard care / landscaping
        - HOA fees
        - home maintenance (estimated: 1%/year)
        - realtor fees (6% when you sell!)
        - excise tax (~1% when you sell, in my locale)
    

All of these costs come before you have contributed a single dollar of equity
to pay down your loan. If you rent, your rent check covers all of the above
expenses.

I'm still really happy to be a homeowner. I love my house and I love being
able to do what I want to it. I just wish it was easier to price out the total
cost of ownership prior to buying, so that rent vs. buy comparisons could be
more enlightened. I certainly felt like I didn't have enough information to
make a totally informed decision when I was choosing to rent vs. buy.

Part of what complicates this analysis is: a lot of the financial benefit
arises from the house's _appreciation_ , not your accumulated equity. But
betting on home appreciation is a bit of a gamble. Home values are subject to
a lot of economic and political factors that you can't control. If the
mortgage interest deduction went away, or mortgage interest rates rose
significantly, it could devalue houses a lot.

------
Simulacra
I bought a house in 2015 (at 32) and it was the best thing I ever did. Even
though I had to move away, I turned it into a rental property, and it’s
earning $380 a month in profit. I’ve been using that profit to pay down the
principal and add to my 401(k). My only regret is that I didn’t buy a lot
sooner.

~~~
asfasgasg
I bought a house in 2013 and sold it in 2016 for a total return of probably
close to 50% -- not including leverage, after factoring in avoided rents and
all costs. If you include the leverage, the ROI was probably >100%. What's
more, the cash I invested was at the moment of my investment significant with
respect to my net worth -- something like 33%. So this was a great outcome.

However, that does not mean I made a _wise_ financial decision. I made a
_lucky_ financial decision, which is very different. This article is about
making wise decisions, and it's very hard to reason about this from results in
a single investment.

I just want to add that a lot of people account very poorly for their real
estate profits. Whether that number is good depends on how leveraged you are
and the value of the property, and many other variables, like your costs and
(unknowable) future vacancy rates. (If you have a lot of leverage and the
property is only worth a little, that's great! It would not be very good in a
scenario where the the property is paid off and worth $2M.)

~~~
Simulacra
My leverage wasn’t that bad. To close I had to spend about $4,000. No down
payment. It’s an FHA 30-year fixed at 3.85%, so I bought really at the bottom
of the market. I’ve got a great tenant and about to renew them for another
year with no increase in the rent. The income from that has been a god send
and I’m net positive on expenditures. I’ve managed to get 3 months ahead on
the mortgage payments to account in case I DO have a vacancy and need time to
find soenone. I just got extremely lucky. I bought out of a fear of being
homeless (for whatever reason) and to secure a foudnation for myself as I grow
older. It’s become much more and I’ve learned a helluva lot.

~~~
asfasgasg
I'm sorry, but the numbers you're putting out there indicate that you might be
a person who does not understand how to value their investment property. The
typical baseline number to have is one of the expected or historical cap rate.
The terms of your mortgage and down payment are almost wholly irrelevant. And
leverage is often considered good in real estate investing.

------
dawhizkid
For a lot of people the "investment" piece of owning their home is secondary
to having a home to live in and raise their family in. Especially in the US,
there are tax benefits to owning, and depending on the market owning could
make more sense than renting.

~~~
imron
Exactly. A house is more than an investment, it's a place to live. My sister
and her family are living in their 3rd home in as many years because the
owners of the places they are renting keep selling and don't renew their
lease.

Then it's a hectic couple of months of finding somewhere new (but close enough
to the same location so kids don't have to change schools) packing up
everything in to boxes, moving and unpacking everything. It's 2-3 months of
hassle they would love to avoid. Not everyone is buying a house as an
investment.

------
SCAQTony
I own my own home and this idea being pimped to millennials that they should
lease everything from car rides, music, movies, bicyles, and shelter is a fast
curtain to a bad "third act." (read that as old age)

John Goodman said it best while playing a loan shark in the the film "The
Gambler..."

Frank: You get up two and a half million dollars, any a-hole in the world
knows what to do: you get a house with a 25-year roof, an indestructible
[Japanese]-economy shit box, you put the rest into the system at three to five
percent to pay your taxes and that’s your base, get me? That’s your fortress
of Fucking solitude. That puts you, for the rest of your life, at a level of
fuck you. Somebody wants you to do something, fuck you. Boss pisses you off,
fuck you! — Own your house. Have a couple bucks in the bank. Don’t drink.
That’s all I have to say to anybody on any social level... Did your
grandfather take risks?

Jim Bennett: Yes.

Frank: I guarantee he did it from a position of f __k you. A wise man’s life
is based around fuck you. The United States of America is based on fuck you.
You have a navy? Greatest army in the history of mankind? Fuck you! Blow me.
We’ll fuck it up ourselves.

[https://www.youtube.com/watch?v=xdfeXqHFmPI](https://www.youtube.com/watch?v=xdfeXqHFmPI)

------
Spooky23
This logic is so specious.

Renting and owning from a cash flow perspective are usually pretty close, and
you need to live, so a suboptimal investment with any return is better than
making a landlord money and investing the scraps into 401ks.

I’m in my late 30s and missed the gogo crazy years. But everyone I know in my
age cohort has had a positive, meaningful ROI in trading houses up at least
once.

The supposed flexibility of renting is overrated as well. No decent landlord
will take less than a 1 year lease, and some premium properties will demand a
premium if you refuse a 2 year lease. Getting jammed up with buying out a
lease early, or getting stuck with a high rent when the market cools is
another way that renting is almost always a bad deal for the tenant.

This sounds like a corporate accounting analysis, not advice for people.
People don’t benefit from deducting opex.

~~~
smallnamespace
> The supposed flexibility of renting is overrated as well.

Plus there's nothing keeping you from renting out your property and then
living somewhere else.

You lose some of the nicer deductions and time spent being a landlord, and
that certainly hurts ROI, but it's definitely not the case that you must live
in what you own.

------
SQL2219
There was a flyer on my door yesterday. We pay cash for your home, close in 3
days. Avoid realtor fees. There is only one problem, I have to live somewhere.

I'm not huge fan of being a homeowner, but if I decided to rent, my rent would
be almost twice what my mortgage is.

------
paxys
The author makes a few good points, but IMO most others are negated by the two
he conveniently skips:

1\. Your house is usually generating income (for a rental property) or
offsetting the rent you would otherwise have to pay. Saying "you have to pay a
lot of taxes" doesn't mean much unless you compare the numbers.

2\. He mentions that property value is tied to a specific geographical area
(and that's a bad thing), but then contradicts himself by calculating
appreciation based on the _national_ average. If you live in a fast-growing
city then it's pretty certain that you're going to make more than inflation.

~~~
shanghaiaway
You're assuming that housing prices always increase. If they decrease, the
property is not generating income but losses even if you rent it out.

~~~
AstralStorm
That is equivalent to any investment. The difference is that the property
still generates income if not capital total gain. A depreciated stock
generates no dividend.

Moreover there is a floor on a value of a home unless you let it completely
unmaintained or it gets bombed in a war. There is no floor on stocks. There is
such a floor on some material futures. (Though probably lower.)

------
bigcostooge
Houses do pay dividends. You have to live somewhere, and you get to live in
your house for free (in the analogy where it’s discussed as an investment.)

The alternative is much worse in many markets.

------
abootstrapper
This is such a line of bullshit they’re feeding the millennials. They want you
to work without benefits in the “gig economy” and rent forever. Don’t fall for
it.

------
tomasien
This makes great points that shouldn't be ignored. But here's the reality:
most people don't invest in anything but do pay rent. If you just shift that
rent into a mortgage + repairs, at least you're investing in something that
will slightly under-perform inflation (maybe).

It's lower risk / higher return when you think of it that way.

(I do not own a house nor do I plan to own one, however)

------
Ancalagon
I actually agree with a lot of the points made here. Still terrible advice.
Youre always gonna need somewhere to live. Guess whats a better bet to invest
in than an apartment? A house. If you buy though, check all your bases. Whats
appreciation looked like for the last 10 years in this neighborhood? How are
the schools? Hows the job market for professionals? etc.

------
pzone
Reasons why your house is a good investment:

\- Massive tax subsidies provided by the government. Seriously apalling if you
think about it hard enough, but since they're available, you should try to
take advantage of them.

That list is sufficient.

------
bartart
Homes are a bad investment except that we all need somewhere to live. Even if
you're renting many of the costs and risks the article mentions are borne by
the landlord and then passed on to you.

------
hsnewman
This is totally a biased article against home ownership. Not one positive
toward home ownership...I can't believe the author would be so biased.

~~~
Finnucane
One could write a similarly ridiculous article about how renting is flushing
your money down the drain, you're paying someone else's mortgage, etc.
Worrying about the rent going up, hoping your landlord isn't too much of a
scumbag, and so on.

Sure, a house is not a great investment. But there's more to housing than
investment. You have to live somewhere, and you're probably going to be paying
for it one way or another. There's no perfect solution--you have to figure out
what works for you.

We bought this house nine years ago, and hope that we never have to move
again. Now the mortgage is about half of what it would cost to rent an
apartment in this neighborhood. That's kind of a trap, too. There's no point
to thinking about moving--there's no place we could go that would be cheaper
than what we have unless we leave the area entirely.

------
ThrustVectoring
My financial roadmap has "buy and live in a duplex to quadplex in Texas" on
it, just for creditor protection purposes.

------
hacknat
Anyone who responds to this article by saying their particular house was a
good investment didn’t read the article.

------
jeremymcanally
Every house I've ever owned has (a) cost _way_ less per month than rent (I
know it will cost less, but I mean on the order of nearly 50% less) and (b)
appreciated enough after a short time that it made a sale worth it. The first
house we owned appreciated by about $25k in 2 years, and the house we're in
now (according to comps we just ran as we're preparing to sell) has
appreciated about $80k+ in 3 years.

You can make smart property choices, even for the home you occupy (i.e., not
just rental properties). But "smart" includes evaluating all the criteria. If
you live in an area with a ridiculous property market (e.g., the Bay Area) or
a very, very slow one, then the investment isn't as enticing. I'm blessed to
live in a market with a lot of movement for a variety of reasons, not just
being a "hot" area to live in, but others are not so much. I'm also blessed to
work remotely, so I can choose to live in an area like this. :)

tl;dr: this is probably true in a lot of America, but it's not universal by
any means.

------
SirLJ
The point is quality of life... Under the bridge is free...

~~~
pdpi
The article doesn’t say that buying a house is a bad idea — just that it’s a
bad investment. There’s many reasonable motives for buying a house, you’re
just better off making sure that those motives are strong enough by themselves
and you’re not doing it “because it’s a good investment”

------
raspasov
The article is basically correct. Let's explore the options.

BUYING REAL ESTATE

\------------------

Take the average price of a home in the USA, according to a google's top
result, approximately 200,000.

Take the average APR at the moment, 4.5%.

That results in a $800 payment per month for 30 years if you put 20%
downpayment of 40,000. (source [https://www.dollartimes.com/loans/mortgage-
rate.php?length=3...](https://www.dollartimes.com/loans/mortgage-
rate.php?length=30&amount=160000))

Depending on the area, you'll most likely be able to rent a similar home for
the same or lower amount.

BUYING STOCKS

\-------------

Take the same 40,000 downpayment and invest them in a low cost broad market
index fund such as Vanguard, SPDR, etc.

Assuming an average long term return of around 9% for the stocks, after 30
years this will result in around $600,000.

(source [https://www.investor.gov/additional-resources/free-
financial...](https://www.investor.gov/additional-resources/free-financial-
planning-tools/compound-interest-calculator))

WHERE IT GETS INTERESTING

\-------------------------

Let's look at what happens after only 5 more years. Your investment has now
grown to over %933,000! If you wait 5 more years (40 years total), the sum is
now $1,400,000+ !

Why? Because investments in stocks are compounded! I believe one of the
reasons why people think a house is an OK investment is because they don't
realize the biggest flaw of one house - it does not really compound the way
liquid stocks or ETFs do. In the short run it's hard to see the difference but
given a long horizon the differences become enormous.

There's reasons to own a home such a sentimental value, ability to modify it
just you like it, etc. But people who believe it has been or is a great
investment in the long term are deluding themselves. Look at it as something
that's nice to have, or luxury if you will.

PARTING THOUGHTS

\-------------------------

You can always come with an example where real estate was a great investment.
You can make that argument both ways. If you bought real estate in 2009, you
made great returns but if you do the above calculation for the average broad
market ETF chances are the returns are even better!

In the long term, history is on the side of dynamic stocks/companies and not
real estate. I don't have a crystal ball and can't promise you that choosing
one or the other will be better next month/year/decade etc(aka past results do
not guarantee future returns). After all, this is all facts of the past :).

~~~
AstralStorm
I'd like to see a stock that reliably compounds in the way described. It'd be
a killer. What I see is at best stable few percent smoothed compounding. Not
100%. Please consider historical variance at the very least which vastly
outstrips APR. Losses get compounded to and there are major opportunity costs
when you actually need cash for any of various reasons.

I have seen people get totally wiped out in a market crash. Some of them
managed to keep property they owned.

History is not on anybody's side. Companies can fall too. Houses can be
incorporated or stolen or get dilapidated.

~~~
raspasov
You don't buy a single stock, you buy a basket of stocks which reduces the
risk of some companies failing or losing value. Absolute minimum 5, preferably
10+ or an ETF which effectively combines dozens or hundreds of companies under
one ticker.

It's easy to find one stock with way better returns than what I described over
the long run, say 20+ years (example AAPL). It's also easy to find a stock
that's way worse over 20 years (example HPQ). You have to keep up with that,
sell the companies which are not good anymore, buy new ones, etc.

That's why an ETF is an "easy way out" for a small fee (usually 0.1% of the
money invested or lower).

You can check the historical returns here and do the numbers for this ETF
[https://personal.vanguard.com/us/funds/snapshot?FundId=0970&...](https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT&funds_disable_redirect=true)
. You'll find it's very close to what I am describing.

------
matte_black
_Your_ house might be a terrible investment. Rental properties not so much.

