Felix Salmon recently made the case in his post Against Liquidity:
Investing shouldn’t be about safety: it should be about calculated risk.and...
Liquidity is not ever and always a good thing.And I completely agree. But both of those points seem to be in conflict with a more recent post of his The Housing Speculators Return. I don't always agree with Felix Salmon, but I typically understand his thought process. That is not necessarily the case in this post. Per Felix:
It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.Let me go through my grievances with that one paragraph, then I'll detail my personal thoughts on housing more broadly.
Homes Are "Only" Places to Live
In addition to living in a home, a house can serve as a long term investment that produces income (i.e. he makes just that point with his alternative to owning... RENTING, which is just paying another homeowner for the right to live in that home).
Rent Must Be More than a Mortgage Payment to Justify Owning
This ignores the fact that rents (typically) rise, while a fixed rate mortgage payment doesn't. BLS data shows that the cost of renting typically rises by the rate of inflation over the long run.
Thus, if you plan to live in that home for a long period of time (there were previous generations who bought to live in home the rest of one's life), then as long as rent moves higher than a mortgage at some point in time, you may be better off (not to mention the tax benefits of writing off interest). That includes after 30 years when a homeowner no longer has a mortgage, but renters are still paying rent.
Stick to Securities When Investing
The below chart is from another post from June and shows that it wasn't just homes that fell dramatically in value in 2008 (equities, high yield credit, ABS, etc... all fell as much or more than housing in that time frame).
Leverage is Only Done in the Housing Market
Felix stated that securities "won’t drive you into possible bankruptcy and homelessness if they go down rather than up". I believe this is just an argument against an irresponsible investment in housing, as an "investor" could just as easily take on significant leverage investing in securities (think the futures market) or in taking out a loan for one's personal business.
My Thoughts on Housing
So, with that all as a background, do I think now is a time to buy? Depends. I must say that I agree with the post that Felix' was responding to. More specific, Daniel Indiviglio's post up on The Atlantic titled A Great Time to Buy a Home? in which he states:30-year mortgage rates have dropped back down to their record low mark. There are generous government tax credits in place for virtually all Americans to buy a home. Foreclosures also remain high, meaning that there's significant pressure on prices -- it remains a buyer's market in most areas. Those factors combined sound like a good recipe that should result in a great time to buy a home.And...
Despite all those good reasons to do so, it depends. I think short-term real estate speculation is probably still ill-advised. Even if home prices have hit the bottom, I don't think they're likely to increase quickly over the next several years. So if you're hoping to get in and get out, you might be in for a rude awakening.In other words, "shake hands with the government"... sounds like risk, but a calculated risk to me. While I personally do not own a home nor plan to do so in the near future (my investment horizon is too short as I am not sure where I will be living longer term), I couldn't disagree more that a home is not an investment, let alone a potentially good one in today's environment of subsidized financing where there is considerable potential for increased inflation. The key that Daniel points out is that housing is and should be always considered a long term investment by investors seeking an alternative to renting.
But if you're in the market for a home as a long-term investment, say at least 10-15 years, it's pretty hard to make an argument against buying now. Even if we aren't at the precise bottom, it's hard to believe that home prices could plummet much further in most areas. And even if they did continue to decline a little, the tax credit might make up for most or all of that decline anyway. For anyone who can find an especially good deal on a foreclosure or short-sale property, I find it even more difficult to argue against buying.
There are times when any asset class becomes overbought or oversold. This can be clearly seen below when viewing the recent performance of equities (in this case the DJIA) or housing (the Case Shiller Index) over the past 20 years.
The chart above tracks equities and housing price levels against their "fair value" based on an assumption that home prices should rise by inflation and stock indices by nominal GDP (quick and dirty) starting in 1989 (as far back as I could easily get home price info). Regardless of whether this is the best approach, we can see how much the actual price fluctuates around these trends for each (actually equities never retreated below the initial starting trend over this 20 year cycle even with the poor performance over the last decade).
So, do I find value in housing? For the millions of unemployed or underemployed? No. For those that want to buy a home outside their price range? No. For those that want to sell within a short time frame? No.
But, for those with the wealth to make the long-term plunge, are willing to accept the risks of home ownership, and can take advantage of subsidized taxpayer money keeping rates artificially low, while the government throws in a sizable refund to boot? Heck yeah.
Jake,
ReplyDeleteGood post. I could go either way on whether or not a home is an investment or not.
I will say that there are a lot of hidden costs of homeownership that many overlook.
As a saver, I try to do a lot of house repairs and maintenance myself. I'd guess it's about four hours labor a week, plus materials and equipment. With that in mind, I'd say returns on housing are less than commonly believed.
If you want to buy a home and rent it out as an investment, that's fine, but it had better be cashflow-positive: ie the rent has to be higher than the mortgage, tax, maintenance, etc, not to mention all those months the property might be empty or your renters might not pay.
ReplyDeleteAnd if you think that *anything* always goes up in price, you haven't learned much from this financial crisis. Rents here in NYC are falling and will continue to do so; generally so long as house prices fall, rents will too.
What's more, the housing market is now supported pretty much 100% by the US government, which is the buyer of substantially all mortgages in the country. Without the government stepping in to buy mortgages, where do you think prices would be? Do you think the government will buy mortgages forever? Or do you think we'll arrive at a sustainable long-term price level eventually? I think the latter. Which is why I think prices are going to go down rather than up.
Felix-
ReplyDeletePoint 1:
Why does it have to be cash flow positive from day 1 IF the investor has wealth to support the property from day 1?
That is like saying an investor should never invest in a start up if cash flows are negative when they launch and I assume you would disagree to that. As long the investment is cash flow positive in the long run (in present value terms) a home / rent out may make a ton of sense for an investor.
Simplified example with no taxes or extra costs...
Year 1:
Mortgage payment over 30 years = $1000
Rent (on day 1) = $900
This is cash flow negative, but I have the $100 to cover the shortfall.
Year 2:
Mortgage = same
Rent (year 2) = $1000
Year 3:
Mortgage = same
$1000
Rent (year 3) = $1100
And so on... the property in this (simplified) example is not cash flow positive day 1, but IS year 3-30, then hugely cash flow positive years 31 after the mortgage is paid in full.
Point 2:
Of course there is nothing guaranteed in life, but the government is not only supporting the price of a home at this time, but subsidizing the cost of financing (through their Agency MBS program). Even if a home goes down in value in the near term (or heck, a 15-30 year period) the overall cost may be cheap to a buyer because the cost is principal AND interest.
Thus, even if the price of the home goes down (i.e. the buyer paid too much in principal), the "savings" from the subsidized interest )may) make up for it.
Again, I know NOTHING is guaranteed. BUT, the subsidized financing, tax benefits, and possibility of inflation make this an attractive investment for certain individuals that agree with that outlook.
What works as investment and what doesn't "in aggregate" is meaningless. Decisions over such matters are made at an individual level, based on entirely unique circumstances to each actor.
ReplyDeleteYou always have to think of buying a home as both an investment and place to live.
ReplyDeleteImagine if someone had taken Felix's advice and bought a home regardless of market conditions, at the top of the market. Actually, I don't have to imagine that... a former co-worker was in that situation. Her home went underwater. As her family grew and her need for space grew, she was trapped -- either stay in the smaller, inadequate home or lose tens of thousands of dollars. People can't always know how long they are going to stay in one place; life intervenes. Job changes, divorce, kids, deaths. Trying to be a market-timer and aiming for the trough every time is taking it too far, but you have to be at least a little conscious of market conditions.
I think it's best to think of buying a home as a hedge against future rental increases. That is to say, buying a home isn't an investment--it's prepaid rent at a fixed rate. As such, it helps to keep working-class families in neighborhoods and permits the elderly to offset expenses in later years by paying more during working years.
ReplyDeleteThe best study that I know of looked at price/reprice of housing in Amsterdam over several centuries (the Dutch keep very good records). The total increase of housing over inflation was very, very close to zero. Nada. Zilch. Yes, someone might make money off of housing--but it will be due to luck, not skill.
the only reason houses seem to increase in value is because of inflation, ie, the dollars they are "valued" in become worth less at a faster rate than the property deteriorates...absent dollar inflation, houses are a depreciating asset, albeit with a longer time span, just like cars, (every house ever built is eventually torn down)...and as a debt free owner of a home built in 1890, i can tell you there is no end to the upkeep expenses, which is something you shouldnt encounter with an "investment"...
ReplyDeleteLots of logic but the conclusion to only buy when you are rich enough and have a long term horizion is banal as that'a always true.
ReplyDeleteBetter the writer would tell us under what circumstances we should take a big risk and over-buy.
Personally, my experience in home purchasing is that when economists almost all feel that the market is too risky that's when to double your bet and go for it.
rjs- you say a home is a depreciating asset. as the old saying goes "location, location, location"... the real value is the piece of land that depreciating asset sits on. and that asset, especially in a nice location, will become scarcer and scarcer
ReplyDeletejake; ok, then you can buy land as an investment; you'll never have to replace the roof or furnace on your speculative land...
ReplyDeletetell me where there is land that is not developed, cheap, and is develople (a word?) and i'll buy it
ReplyDeletejake; there is a lot of vacant developable land around the lower great lakes that was once bought for speculation which now isnt selling...someday people will have move back to this area where water is plentiful (location, location, location) or you could pick up property in detroit cheap; at a recent tax auction of more than 9000 properties, more than 4 our of five failed to get the minimum $500 bid:
ReplyDeleteDetroit house auction flops for urban wasteland "After five hours of calling out a drumbeat of "no bid" for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag. "OK," he said. "We only have 300 more pages to go.'"