What I figured out recently is that the “price” of a house is NOT the sticker price but is better judged as the monthly “p&i,” which of course is the manipulated cost described in the article. The thing is that this cost is locked in level for the life of the loan. Inflation lowers your cost over time. Even if the sticker price of your house drops 50%, it is almost certain that all other houses have done the same or similar. Nevertheless, central banks will ensure the actual P&I stays the same. It is actually cheaper today on a p&i basis to own a home than it was in 1990 (us average), after adjusting for even simple CPI. While I doubt anyone in the future will get sticker price gains like they have for the last 30 years, a mortgage is still attractive as a means of payment, as it leverages inflation to the home owner’s advantage. Rents move up over time. Mortgages move down relatively. Even if your house rises 100% in value over 10 years, you still need to live somewhere and your new home will likely also have increased 100%. The net effect is a wash.
So yes, homes are not investments but are durable goods, with decreasing adjusted costs if using a mortgage. Sticker price is irrelevant.
A more important metric to look at is property tax and upkeep costs. Those always go up. Many people today have property taxes in excess of their original mortgage p&i. Now that is truly where they come to steal from you. Giveth in one hand and taketh away with the other.
Yes, I didn't mention the upkeep required for a home other than comparing it to caring for your car.
With maintenance, updates, and property taxes thrown it, most people don't make any money after selling. Those costs get memory-holed. Much different accountant compared to owning RE as an investment where the NOI is the Number to Rule Them All.
There's a lot of magical thinking in the real estate world. I had a friend build a whole spreadsheet to attempt to convince me that taking on a mortgage vs renting was superior to investing the difference in price. His point was that even with very modest appreciation, the ending balance would be higher. I kept trying to point out that this was all predicated on the fact that in order to "realize" that "gain" one would need to move into a cheaper area, downsize the home, or move back to renting. The reason is that prices of homes move in concert with one another. If I have any appreciation, it'll simply get gobbled up on purchase of my next home! You never actually get this mythical "equity" cashed out. You just roll it into the next house, which has equally appreciated. Might as well just keep renting or buy a home that is similarly priced. In my market it is cheaper to rent. It's only relevant to compare monthly TOTAL costs, including upkeep and taxes.
Only thinking about the current transaction instead of the future. People have plans to make money on their homes but no plans to keep it. They trade up to bigger/nicer and get themselves further into debt. Expenses go up, etc. No bueno!
What I figured out recently is that the “price” of a house is NOT the sticker price but is better judged as the monthly “p&i,” which of course is the manipulated cost described in the article. The thing is that this cost is locked in level for the life of the loan. Inflation lowers your cost over time. Even if the sticker price of your house drops 50%, it is almost certain that all other houses have done the same or similar. Nevertheless, central banks will ensure the actual P&I stays the same. It is actually cheaper today on a p&i basis to own a home than it was in 1990 (us average), after adjusting for even simple CPI. While I doubt anyone in the future will get sticker price gains like they have for the last 30 years, a mortgage is still attractive as a means of payment, as it leverages inflation to the home owner’s advantage. Rents move up over time. Mortgages move down relatively. Even if your house rises 100% in value over 10 years, you still need to live somewhere and your new home will likely also have increased 100%. The net effect is a wash.
So yes, homes are not investments but are durable goods, with decreasing adjusted costs if using a mortgage. Sticker price is irrelevant.
A more important metric to look at is property tax and upkeep costs. Those always go up. Many people today have property taxes in excess of their original mortgage p&i. Now that is truly where they come to steal from you. Giveth in one hand and taketh away with the other.
Yes, I didn't mention the upkeep required for a home other than comparing it to caring for your car.
With maintenance, updates, and property taxes thrown it, most people don't make any money after selling. Those costs get memory-holed. Much different accountant compared to owning RE as an investment where the NOI is the Number to Rule Them All.
There's a lot of magical thinking in the real estate world. I had a friend build a whole spreadsheet to attempt to convince me that taking on a mortgage vs renting was superior to investing the difference in price. His point was that even with very modest appreciation, the ending balance would be higher. I kept trying to point out that this was all predicated on the fact that in order to "realize" that "gain" one would need to move into a cheaper area, downsize the home, or move back to renting. The reason is that prices of homes move in concert with one another. If I have any appreciation, it'll simply get gobbled up on purchase of my next home! You never actually get this mythical "equity" cashed out. You just roll it into the next house, which has equally appreciated. Might as well just keep renting or buy a home that is similarly priced. In my market it is cheaper to rent. It's only relevant to compare monthly TOTAL costs, including upkeep and taxes.
Only thinking about the current transaction instead of the future. People have plans to make money on their homes but no plans to keep it. They trade up to bigger/nicer and get themselves further into debt. Expenses go up, etc. No bueno!
“Castles made of sand....slip into the sea, eventually”.
Great read! Something I was told young in my career a house is NOT an investment but a place to live.
Whoever told you was wise!