Anyone else feeling depressed about global equities 10 year outlook?

[Lemur]

@Lemur - The financial answer is given by the NAV equation. It's in the ERE book if you have it, otherwise, it's nothing special/found everywhere. A simplification of the NAV equation is to compare the price of the house to the price of the rent. If the rent is higher than 1% of the price of the house, it's cheaper to own.

I may have to re-read this section...I probably skipped (skimmed) over it thinking I'm going to rent forever. I do like this in bold though...useful for some very quick comparisons.

OTH...I have forgotten the fact that should I buy I could be within non-car commuting distance to work. Would certainly offset some of the costs in the area I'm looking at.

[Lemur]

Not relevant if you are able to rent around the same distance

Also true but the area I'm looking at, I'm assuming it is highly unlikely that rent will be cheaper than owning. Still need to see the numbers though.
Also feel like I'm hijacking this thread a bit so I'll leave it at that.

[arcyallen]

So much for the myth of getting rich by working hard, making sacrifices, saving and investing. None of that means zilch if you happened to be born and enter the economy in the wrong period and all your hard work, blood sweat and tears pays only a measly pathetic 1% p/a.

The next decade is just one of many. You, I, and the "experts" don't know what's going to happen in the shorter term despite what we're so damn sure of. What we do know is time is your friend, and it sounds like you'll be invested for many decades. You don't normally "uninvest" when you retire, you will likely uninvest when you die. That's a ways away.

If you really want to pull yourself out of the pity party, remember you're living in the greatest time we've ever seen despite what the media tells you!

[Salathor]

Salathor. I like this idea and contemplated this myself but I'm absolutely gun shy about buying house for multiple reasons...how would you value the purchasing of a home? How does one know whether they're getting screwed or not? For a stock, I can always sell and take a small loss. For a house though....geez the transaction costs are astronomical if one wants to back out.

I look at it like this: would I rather have my housing situation covered forever at the cost of (.03 x [HOUSE VALUE])+[TAXES]+[MAINTENANCE], or would I rather have the 3% withdrawal income and have inflation-adjusted rent bill?

If you think you're going to be getting very low stock returns for the next decade, you're probably going to weight the house higher since that 3% SWR will be less likely to be during a "good" historical returns period. In 1965, you'd probably be happier retiring with a paid-for house than an equally-larger investment portfolio.

[Lemur]

I look at it like this: would I rather have my housing situation covered forever at the cost of (.03 x [HOUSE VALUE])+[TAXES]+[MAINTENANCE], or would I rather have the 3% withdrawal income and have inflation-adjusted rent bill?

If you think you're going to be getting very low stock returns for the next decade, you're probably going to weight the house higher since that 3% SWR will be less likely to be during a "good" historical returns period. In 1965, you'd probably be happier retiring with a paid-for house than an equally-larger investment portfolio.

Let me know if I'm understanding this right...
Assuming a $150,000 home, 1.15% property taxes, and 1% of home value in maintenance per year:
(0.03 * [150,000] + [1,725] + [1,500]) = $7,725 Per Year / 12 = $643.75

The final number above is the comparabe rent bill so this would require assets of $7,725 / 0.03 = $257,500

Choices are:
(1) Have a paid-off $150,000 Home and amass enough equity to cover property taxes and maintenance ($1,725 + $1500 = $3,225 / 0.03 = $107,500). Choose if you believe stock market (real) return will be <3%.
(2) Amass equity of $257,500 to pay the rent equivalent forever? Choose if you believe stock market (real) return will be >3%.

[Salathor]

Let me know if I'm understanding this right...
Assuming a $150,000 home, 1.15% property taxes, and 1% of home value in maintenance per year:
(0.03 * [150,000] + [1,725] + [1,500]) = $7,725 Per Year / 12 = $643.75

The final number above is the comparabe rent bill so this would require assets of $7,725 / 0.03 = $257,500

Choices are:
(1) Have a paid-off $150,000 Home and amass enough equity to cover property taxes and maintenance ($1,725 + $1500 = $3,225 / 0.03 = $107,500). Choose if you believe stock market (real) return will be <3%.
(2) Amass equity of $257,500 to pay the rent equivalent forever? Choose if you believe stock market (real) return will be >3%.

Kind of. But the real return situation differs in that you need to assume 3%+a rate of inflation for the rental solution, so your break-even is probably closer to needing 7% (since you will have to pay current rent and keep pace with annual rent increases) for the rental solution to work with those numbers.

There's also the mental advantage of no volatility in "paid for house" utility/returns, which may bring peace of mind for some (it does for me). I would personally rather have $12,000/yr lower expenses than $12,000/yr greater income and proportionally greater expenses, since it makes your budget more resilient. Taken to the extreme: would you rather someone give you enough money today to cover all of your current expenses at a 3% SWR, or would you rather have an iron-clad guarantee that they will pay for you to live at your current lifestyle, forever? The lump sum will PROBABLY work out to be worth more in the end, but I'd rather have the guaranteed living--I can always save up extra cash if I want more income.

You can defer maintenance for a few years in a bad time. You can't defer rent.

[prognastat]

The inflation of rent though is very unpredictable as it varies a lot depending on location. On average it's over 3%, but some places last year were as high as 8%. If you live in an area where the rental price goes up 8% you would effectively need a return of 11% on your investments to match the increase of your rent while owning a house would have kept your housing costs mostly the same.

[jacob]

To add to what prognastat said about the unpredictability of rent, the same might hold for fixed homeownership costs like RE taxes and insurance rates. In my case, I suspect living in IL (second worst state in terms of finances after Puerto Rico which isn't technically a state) has something to do with the rapid increase in taxes but real estate appreciation is also a big driver. The latter is nice on paper but you don't get the money until/unless you sell again.

[prognastat]

RE tax increases are going to lead on to rental increase too as the cost is passed on to the renter whereas rental increases due to increased demand aren't to the buyer.

Of course here the freedom by renting can be a plus though that if the tax situation drastically changes you can choose to move to a better area tax wise with less impediment than if you own a place and need to sell first.

[Salathor]

To add to what prognastat said about the unpredictability of rent, the same might hold for fixed homeownership costs like RE taxes and insurance rates. In my case, I suspect living in IL (second worst state in terms of finances after Puerto Rico which isn't technically a state) has something to do with the rapid increase in taxes but real estate appreciation is also a big driver. The latter is nice on paper but you don't get the money until/unless you sell again.

This is heavily location dependent, though--in CA we have prop 13 (for now) which limits RE tax increases to practically nothing outside of certain controllable events. You would definitely want to adjust this part of the equation if you're in a place with both (a) property that appreciates and (b) property taxes that reassess regularly.