So what? All he proved is that real estate is an excellent hedge against inflation. Isn't that the point?
Real Estate: Fundamentals
- Thread starter The Kin
- Start date
So what? All he proved is that real estate is an excellent hedge against inflation. Isn't that the point?
My assumption is more carefully stated in the spreadsheet, that "Property, rent, and cash savings all appreciate at the same rate of total return." This is not necessarily the risk free rate; I do not invest my cash risk free. While real estate as an investment does quite well over the long run, I don't think there's much evidence that it consistently outperforms other similarly risky investments.
To my mind, the one unbeatable advantage of home ownership as an investment is the extraordinary tax breaks; and that is already cooked into my model.
Martin
another advantage is the equity one builds in a fast moving market...I have yet to pull a dime out of my house..but at my fingertips without as much as moving a furniture ( ie. selling the house ) i have funds at my disposal...the reason I dont sell is because i would sell myself out of my neighborhood...
OldTrader,
Thanks for the comments.
I don't really find much in your comments that I disagree with, but that's fine. We don't always have to disagree.
For many Americans having a home as a forced savings plan is the only way they will save at all. For them, that is indeed a good reason to buy a house. For me, I've never had any trouble saving.
The median home may not lose value but unfortunately you do not buy the median home. It is an interesting statistic but not terribly useful for someone buying just one actual home.
You say that prices relative to rent never made sense in California. That may be true, but it certainly makes a lot less sense now than it did five years ago. In 2000, using my assumptions, buying the house in question and selling it after 10 years would have cost 93% as much as renting it for the same time period. In 2005, buying costs 120% as much as renting.
By the way, if you had trouble with the spreadsheet, it might be because cell B41 was "=2300*B8*12" instead of "=B3*B8*12". I only used one value for rent so I didn't notice this problem until now.
Martin
Thanks for the comments.
I don't really find much in your comments that I disagree with, but that's fine. We don't always have to disagree.
For many Americans having a home as a forced savings plan is the only way they will save at all. For them, that is indeed a good reason to buy a house. For me, I've never had any trouble saving.
The median home may not lose value but unfortunately you do not buy the median home. It is an interesting statistic but not terribly useful for someone buying just one actual home.
You say that prices relative to rent never made sense in California. That may be true, but it certainly makes a lot less sense now than it did five years ago. In 2000, using my assumptions, buying the house in question and selling it after 10 years would have cost 93% as much as renting it for the same time period. In 2005, buying costs 120% as much as renting.
By the way, if you had trouble with the spreadsheet, it might be because cell B41 was "=2300*B8*12" instead of "=B3*B8*12". I only used one value for rent so I didn't notice this problem until now.
Martin
I'm not sure I would agree with that assumption. I would think the return on cash savings, ie interest rates, would be negatively correlated with real estate. Some commentators have suggested that rents do not track very well either. In periods of rapid appreciation, there is such demand to own that rental returns actually suffer, at least they lag.
Also, there is the leverage factor to consider. Of course it can work against you, but over time it has been an excellent bet.
In the short term, I don't agree with the assumption either. This is a financial model, not a crystal ball. It's an assumption, not a prediction.
In the long term, there is no historical or theoretical reason to believe that either real estate price appreciation or rent appreciation will diverge significantly from the return on investments in other similarly risky asset categories.
Martin
Wow, 77% of Americans claim to have heard nothing about a Real Estate Bubble:
http://post.polls.yahoo.com/quiz/financeresults.php
http://post.polls.yahoo.com/quiz/financeresults.php
Yes, but since we are trying to figure out where prices are going, then we need to be looking at what drives price changes. Wives in 2000 looked at pretty much the same factors as wives in 2005, yet prices have changed massively. That's why we're trying to focus on dynamic factors which are likely to be driving prices, and discounting stable & relatively unchanging factors such as the typical desire to own a home. I would argue that the increased demand for RE has not been due to desire for a place to live, but rather due to fear of missing out on price rises, speculative demand, ability to finance higher levels of debt at the same monthly payment, and other factors unrelated to the general desire to own your own place for lifestyle reasons.
As for rental values, they do matter a lot to landlords, who are present in most RE markets. And they do matter to the marginal owner-occupier - if even 1 potential buyer is comparing mortgage payments to rental payments as a cheaper alternative, then rents do have an impact on prices. According to your logic, if it cost $1 per year to rent a $200k house, versus $12k a year to own, then no one at all would sell up and start renting to save themselves $11,999 per year. Clearly this is not that case - and therefore rental yields do have some impact on the relative preference to own rather than rent.
Let me ask you, how many real estate investments would you have made if your gross rental yield had been 1%, and your mortgage payments 10%? How would you have held on for 30 years with a negative cashflow of 10%+ per year? Even your own example shows how rental yields affect demand for real estate.
Trying to compare single family home ownership to some kind of real estate investment property is simply nonsense. The only thing in common is they both require a Deed. There is no comparison. Never has been, never will be.
The vast majority of "renters" are there as a matter of need, not desire. Very few make this a lifestyle choice. Even as the country ages, most people say they would rather stay in the existing home than move to a "retirement type of apartment".
The reason rents diverge from home ownership is simple.
Harry is paying $1000/month in an apartment. Sally is paying $800/ month for her smaller apartment. Harry and Sally meet, start dating and get married. Bingo!! They can afford a $1800 a month mortgage payment. They move out and buy a home, This takes one home off of the market but leaves TWO vacant apartment units.
New immigrants and new family formations are a huge driving force behind the sale of single family homes. Most of the time upon death of a spouse the survivor will stay in the home. True also of divorce. Wife stays and hubby goes to apartment.
But in almost all cases there is a net positive absorption of the single family homeownership.
Even new low income Hispanic immigrants are desperate to own their own home. They can bring in the parents, two kids, three dogs, work on truck in driveway, cook out in back yard etc etc. This is a very basic human need.
The speculators could get hurt but it depends on what "hurt" really is. Unlike Worldcom, a house has a value. It may drop down a big amount but it is not worthless, by any stretch of the imagination.
If you want to understand the housing situation, read a book called "Liar's Poker" which deals with Salomon Bros and the bond market. But, it is the beginning of the securitization of the home mortgage business. This changed real estate more than anything else since the establishment of personal property ownership at the founding of America. IMHO
SteveD
The vast majority of "renters" are there as a matter of need, not desire. Very few make this a lifestyle choice. Even as the country ages, most people say they would rather stay in the existing home than move to a "retirement type of apartment".
The reason rents diverge from home ownership is simple.
Harry is paying $1000/month in an apartment. Sally is paying $800/ month for her smaller apartment. Harry and Sally meet, start dating and get married. Bingo!! They can afford a $1800 a month mortgage payment. They move out and buy a home, This takes one home off of the market but leaves TWO vacant apartment units.
New immigrants and new family formations are a huge driving force behind the sale of single family homes. Most of the time upon death of a spouse the survivor will stay in the home. True also of divorce. Wife stays and hubby goes to apartment.
But in almost all cases there is a net positive absorption of the single family homeownership.
Even new low income Hispanic immigrants are desperate to own their own home. They can bring in the parents, two kids, three dogs, work on truck in driveway, cook out in back yard etc etc. This is a very basic human need.
The speculators could get hurt but it depends on what "hurt" really is. Unlike Worldcom, a house has a value. It may drop down a big amount but it is not worthless, by any stretch of the imagination.
If you want to understand the housing situation, read a book called "Liar's Poker" which deals with Salomon Bros and the bond market. But, it is the beginning of the securitization of the home mortgage business. This changed real estate more than anything else since the establishment of personal property ownership at the founding of America. IMHO
SteveD