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1. 

   secretwealth
   

   Expert
   Joined: Jun '11
   Posts: 1,510

   I was listening to Robert Schiller on the Motley Fool podcast, and he was talking about the intrinsic value of housing. He pointed out that it is an asset in that it can be transferred for cash and an asset that pays in kind by providing a service (i.e., a place to live). However, this doesn't mean that housing will always go up. It's also a depreciating asset because the basic structure of the house--the building itself--goes down in value over time as taste changes and the house ages.

   This applies most immediately to single-family houses, and he of course mentioned the once popular ranch house that most people dislike nowadays. However, I think this also applies to condos and multi-family units.

   What interested me the most about this realization is how it relates to Jacob's idea of buying classics because of their higher resale value. While a 70's ranch-style house will depreciate as tastes change, classics will not. An 18th century French chateau, a Frank Lloyd Wright house in Michigan, and a loft space in Soho will hold their value much more than a McMansion in the suburbs.

   This has enormous implications to anyone who wants to invest in real estate: there is often a premium on classics in the real estate market, but that premium may be more than offset by the lack of future depreciation relative to the loss someone will face on a house that was once trendy and no longer is so. This has a lot of implications for someone wanting to buy a McMansion or a condo in a brand new building.

   I'd love to know everyone's thoughts on this.

   Posted 1 year ago #
2. 

   Felix
   

   Master
   Joined: Nov '10
   Posts: 398

   Well, if you know what you're doing and buy the house at the right price and it keeps its value because you treat it well, you can live rent-free. If the rent you save would be higher that the interest you could get on the capital invested in the house, then it's a great way to use your money.

   One has to be aware of the variables in this equation, but if it works out like this or you even get some appreciation, it's a pretty neat thing.

   Since ERE folks usually live in smaller spaces than average the market for these may be different (less liquid) than for the standard houses/appartements.

   Buying foreclosures or places needing renovation and fixing them up while you live there may work well.

   Posted 1 year ago #
3. 

   JasonR
   

   Master
   Joined: Feb '11
   Posts: 334

   When you say invest you mean as a place to live? If so then you'd have to sell it to realize a loss or gain...so if you're going to live and die in that house does it really matter what the book value does? If I was buying a house I would consider other things first and weight them more heavily than future resale value (which to me is speculation).

   I live in a place similar to this: http://www.visitphilly.com/history/philadelphia/elfreths-alley/ except I look out at a beautiful park instead of my neighbor's faces. Also, our red posts have horse heads.

   It's a "classic" and will hold it's value. But it also costs a lot in upkeep.

   Being on the historical register means everything on the front of the house costs 3x. We can't have energy efficient double pane windows because it's not authentic. We have single pane glass like they did in 1820. Speaking of 1820...guess how much fiberglass insulation they put in the walls when they built it? Now guess our heating bill.

   "Oh but the craftsmanship", you say. It's a classic and they don't build them like this anymore. And for good reason. Any burbs house is 10x better than this place in terms of efficiency and safety and thought for living. You can keep your beautiful woodwork, weird floorplan, and Frankenstein wiring, I want a high R value and an electrical and plumbing system that meets 2010 codes. These classics were built to make sense in 1790 or 1890 but people don't live like that anymore. We don't cook in the basement, we don't use an outhouse so everything has to be added on or retro-fitted. We also use the space and the heat differently so the layout and original ideas don't work anymore.

   As Schiller and you say, a house provides a service. You use it everyday. The classics may keep their monetary value but you pay through the nose in upkeep and inefficient living. I value quality of life over market value.

   +87 for the burbs/modern construction.

   Posted 1 year ago #
4. 

   celliott
   

   Apprentice
   Joined: May '11
   Posts: 63

   Houses are not a depreciating asset. At minimum they have kept up with inflation.

   No need to tell you Schiller's take on the matter is debatable. He's also recently become more bullish on housing.

   I just don't like extreme views which run either direction. Reality is almost invariable somewhere in the middle of the two opposing views.

   Posted 1 year ago #
5. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,941

   > Houses are not a depreciating asset. At minimum they
   > have kept up with inflation.

   I think the proper phrase is that the housing market keeps up with inflation. Individual houses are absolutely subject to depreciation... if you perform no maintenance, a house WILL have less value in the future.

   Posted 1 year ago #
6. 

   jennypenny
   

   Expert
   Joined: Jul '11
   Posts: 1,338

   I’m going to back JasonR here. We used to live in a 150 year-old house in Philly. It was charming, quaint, and a PITA. It was cold in the winter, hot in the summer, and very hard to keep up by yourself. The basement doorway and steps were so narrow that we had a trap door in the living room floor to the basement (like for when we bought a new hot water heater). No one could believe we wanted to sell it (Jason you forgot “but it has character”), but they didn’t have to repel up and down from a 4th floor roof to shovel it off in heavy snows or clean out the gutters.

   And hey, what’s with dissing a 60’s ranch house?! I live in a 46yo ranch and I love it. It’s very easy to maintain. It’s so easy to get onto the roof that my DSs (9 and 13) do it to clean the gutters and wash the glass ceiling. You can easily get through the floor or ceiling to get to anything for repairs or improvements, and it comes with a huge basement (which appeals to the prepper in me).

   I think you have to distinguish what is “classic” about the item in question. Is it the form or the function? IMO it has to excel in both to be a classic.

   Posted 1 year ago #
7. 

   Hoplite
   

   Master
   Joined: Dec '10
   Posts: 489

   First, location is the overriding key to value and that can change over time for better or worse. Business closings or relocations (i.e., the economic lifeline gets cut or reduced), deteriorating neighborhoods, etc., have more effect on price than any structural components. The trouble is that if you’re talking about your personal residence, then these conditions provide motivation to sell and move at a time when it becomes expensive to do so.

   @JasonR’s post on modern conveniences reminded me of a quote, I think it was Mark Twain, saying he would gladly exchange the entire Acropolis (a classic if ever there was one) for one good American bathroom.

   And another Frank Lloyd Wright classic, Falling Waters, has had its problems:
   http://en.wikipedia.org/wiki/Fallingwater:

   Given the humid environment directly over running water, mold had proven a problem. The elder Kaufmann called Fallingwater "a seven-bucket building" for its leaks, and nicknamed it "Rising Mildew".[16] Condensation under roofing membranes was also an issue, due to the lack of damp proofing or thermal breaks.[17]
   Fallingwater's structural system includes a series of very bold reinforced concrete cantilevered balconies; however, the house had problems from the beginning. Pronounced deflection of the concrete cantilevers was noticed as soon as formwork was removed at the construction stage. This deflection continued to increase over time, and eventually reached 7 inches (over a 15-foot span).
   In 1995, the Western Pennsylvania Conservancy commissioned a study of Fallingwater’s structural integrity. Structural engineers analyzed the movement of the cantilevers over time and conducted radar studies of the cantilevers to locate and quantify the reinforcement. These showed that the contractor had indeed added reinforcement over Wright's plan; nevertheless, the cantilevers were still insufficiently reinforced. In fact, both the concrete and its steel reinforcement were shockingly close to their failure limits. As a result, in 1997, temporary girders were installed beneath the cantilevers to carry their weight.[18]

   When it comes to structure though, classics, especially those determined by then-popular taste, is no substitute for knowing the difference between good construction and poor. And it can sometimes go against modern construction. For example, in NYC, “pre-war” is a selling point because the construction was more evenly good back then, as compared with post-war shortcuts. Even now, some luxury buildings with units selling in the millions (one sign advertised the units as being “worth every million”) have all the luxury trimmings but poor underlying construction. Some are built using 10” concrete pads, which will last maybe 10 years before some really expensive and intrusive shoring and repair work will be needed. But they have $25,000 Viking refrigerators!

   Posted 1 year ago #
8. 

   JohnnyH
   

   Expert
   Joined: Jul '10
   Posts: 1,363

   This is certainly true; brick and stone > wood and gypsum... In Europe the old buildings, that people have lived in for hundred of years, are all stone.

   Expensive to build, but the do last forever. Love to have me a masonry house... For all of us with framed houses, new flooring and new drywall every generation isn't that big of a deal.

   On all the houses I've worked on seems like quality really started to decline in 80s and has been constant and worsening since... Some of the new mcmansions have shamefully poor construction/materials. But they require 1k month in taxes/fees and 1k a month to cool and heat, so they're good for the economy.

   Posted 1 year ago #
9. 

   dragoncar
   

   Expert
   Joined: Oct '10
   Posts: 1,287

   Lol, jasonr, what kind of electrical system did they have in 1820?

   House structures are definitely depreciating. They don't get any better unless you put money into them. But they do degrade. The land itself generally will not degrade (there are of course exceptions)

   Posted 1 year ago #
10. 

    JasonR
    

    Master
    Joined: Feb '11
    Posts: 334

    @dragoncar - intermittent at best. They flew kites during thunderstorms. The rest is steam and brass tubes. And one powerful hamster.

    @jennypenny - yes, I forgot it has character. I always get work confused with charm.

    I agree with Marcus Twain via Hoplite. Sometimes progress actually is progress.

    @JohnnyH - I have a nice brick house I'd like to sell you.

    Posted 1 year ago #
11. 

    JohnnyH
    

    Expert
    Joined: Jul '10
    Posts: 1,363

    @JasonR: can I trade you a mobile home for it? :D

    Posted 1 year ago #
12. 

    DutchGirl
    

    Master
    Joined: Sep '11
    Posts: 480

    I grew up on a farm that was probably built in the 16th century. It was a PITA. My parents rented the place, the owner had inherited this house from his father who had bought it around 1900. Since then the family had lost a lot of money, and renovations or repairs had been postponed too long. The attic was dangerous because the floor could cave in when walked on. We were forbidden to go there. The walls are several feet thick (yes, thick), which gives an excellent isolation from the heat in midsummer, but meant higher heating bills and a lot of chills in autumn, winter and spring.

    The house has finally been sold by the owner a year ago. Currently a young couple (the husband works in the financial world) owns it and is renovating it. Renovating costs are millions of euros, at least twice as much as what the house cost. The house will/may look stunning and may also become a lot more comfortable, but I do not think that the couple will recoup all the renovating costs if there goal would be making a profit. If their goal is to impress family and friends, the may succeed...

    Posted 1 year ago #

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