I agree with this comment: "But for "normal" people, house is not an investment, it's a life-savior. Someone decides that he doesn't want to "run an opportunity cost" of not having that money available...and 30 years later, he's 60, cannot live on his rent, lost 50% of his money in lousy investments , and suddenly his owner wants to repossess the place where the shrewd guy was renting to avoid "opportunity costs". What happens? He's a homeless poor guy till he dies."
Buying your home is a hedge, as discussed here: viewtopic.php?t=3060
Jacob's other journal
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frugaladventurer
- Posts: 118
- Joined: Sat Sep 15, 2012 11:05 pm
Advantages of owning a home:
1) You can buy a fixer-upper and build sweat equity in your spare time.
2) You don't have to worry about your landlord kicking you out.
3) You don't have to worry about rent increases pricing you out of your neighborhood in your old age.
4) There are certain tax breaks and deductions that reduce costs for some people.
5) You can take in any friends or family you want to help in a pinch without complaints from a landlord.
6) You can paint any color you like, and modify the home to suit you.
7) You can have as many pets or children as you want (well, within reason lol)
Disadvantages to owning a home:
1) If you are likely to move often or in the next few years, it may be a bad investment.
2) Depending on when/where you buy, renting may be cheaper. (Although right now, in my area, house payments are likely less than rent - it's about a wash when all costs are figured).
3) Home ownership involves repairs. If you're not handy, that means repair bills and hassle - it's definitely easier to call the landlord.
4) You're not locked into a particular neighborhood if you rent - you can move more easily than someone who has to sell or rent out their home.
For those with the discipline to pay off their mortgage, owning a home outright provides a level of security in retirement that is probably priceless. After all, you won't lose a paid up home in a financial crisis. But for people who stay locked into chronic debt (like a friend of mine, who has owned a modest house for 30 years, but has refinanced it so often that they have very little equity in it) it may not be the best choice to own, Then again, those are the very people least likely to discipline themselves to invest that money elsewhere.
1) You can buy a fixer-upper and build sweat equity in your spare time.
2) You don't have to worry about your landlord kicking you out.
3) You don't have to worry about rent increases pricing you out of your neighborhood in your old age.
4) There are certain tax breaks and deductions that reduce costs for some people.
5) You can take in any friends or family you want to help in a pinch without complaints from a landlord.
6) You can paint any color you like, and modify the home to suit you.
7) You can have as many pets or children as you want (well, within reason lol)
Disadvantages to owning a home:
1) If you are likely to move often or in the next few years, it may be a bad investment.
2) Depending on when/where you buy, renting may be cheaper. (Although right now, in my area, house payments are likely less than rent - it's about a wash when all costs are figured).
3) Home ownership involves repairs. If you're not handy, that means repair bills and hassle - it's definitely easier to call the landlord.
4) You're not locked into a particular neighborhood if you rent - you can move more easily than someone who has to sell or rent out their home.
For those with the discipline to pay off their mortgage, owning a home outright provides a level of security in retirement that is probably priceless. After all, you won't lose a paid up home in a financial crisis. But for people who stay locked into chronic debt (like a friend of mine, who has owned a modest house for 30 years, but has refinanced it so often that they have very little equity in it) it may not be the best choice to own, Then again, those are the very people least likely to discipline themselves to invest that money elsewhere.
Hedges are not free. They have costs. They have benefits.
There is such a strong emotional component to buying a home, a component that has been manipulated by the real estate industry to extract extremely high hidden costs while at the same time undermining the benefits of the hedge.
One of the reasons I am so tenacious about this subject is because I have people regularly come to me desperate for a place to live who had played by the rules, bought the reasonable sized home, fixed it up, paid their bills and yet they now find themselves with a negative net worth so large they cannot fathom it. They have to move for one reason or another and they just want out from under the mountain of debt. Shame keeps them quiet. That's a shame because they could help so many people if they just spoke up.
I derailed this into a rent vs. buy argument once again... my specialty. Jacob feel free to delete to keep your journal on track.
There is such a strong emotional component to buying a home, a component that has been manipulated by the real estate industry to extract extremely high hidden costs while at the same time undermining the benefits of the hedge.
One of the reasons I am so tenacious about this subject is because I have people regularly come to me desperate for a place to live who had played by the rules, bought the reasonable sized home, fixed it up, paid their bills and yet they now find themselves with a negative net worth so large they cannot fathom it. They have to move for one reason or another and they just want out from under the mountain of debt. Shame keeps them quiet. That's a shame because they could help so many people if they just spoke up.
I derailed this into a rent vs. buy argument once again... my specialty. Jacob feel free to delete to keep your journal on track.
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DividendGuy
- Posts: 441
- Joined: Sun Dec 05, 2010 9:58 pm
@Jacob,
I never thought I'd see you buy a house. Jacob is settling down! Crazy. Of course, you have the asset base now to give you that kind of flexibility to fan out and diversify out of paper assets. I have a question though...for someone with less than $200k in assets would you still recommend buying a house? I suppose having a lot of paper assets gives you motivation to buy, correct? Especially if you're particularly fond of your new area.
As a side note, this comment on the Shiller video is the best I've seen yet in regards to buying vs. renting. It gets to the point: buying is typically more expensive, but that doesn't make it the wrong choice. Eating filet mignon is more expensive than eating peanut butter and jelly. That doesn't mean you're not going to eat that filet once in a while. The comment:
"Amazing. Its literally impossible to have a rational conversation with Americans. They are constantly looking for arguments where there isn't any need for one.
All Shiller is saying is, it's a FACT that renting is cheaper than buying in the long run. This is simply due to maintanence, taxes, and the adjusted real return of housing vs adjusted real return of investing in the markets, and the opporunitiy cost of the additional purchase money that you would be able to invest elsewhere if you rent instead.
It's a FACT people. Why not argue about gravity? You'll get just as far.
Now to the point. Just because something isn't a good investment does in no way shape or form mean you can't buy one. A porsche is not a good investment either, but I like mine just fine thank you very much. It's a horrible investment, and I know this. It's actually a FACT that it's a horrible investment, but I still have one. If an economist came along and said, you know, buying a Porsche is actually a pretty terrible investment for these reasons, i'd agree. So what?
So if you want to buy a house for all the reasons you people stated, FINE ! If you feel more secure owning a home, FINE ! If you want your family to live in the same place for 30 years, FINE ! If you think you will beat the odds and buy a location that will actually appreciate more than the average home, FINE !
There is absolutely nothing wrong with buying a home. The only point of the article is, from a purely mathimticaly stand point, owning a home ends up losing out to the alternative combination of renting and investing the remaining money.
That is of course based on AVERAGES. He is obviously not saying that all home owners lose, and all investors win. He's simply stated facts, given over 100 years of statistics that show that homes appreciate in real terms by 0%, and other investment vehicles can appreciate as much as 7% in real adjusted returns.
I always laugh when I listen to Americans argue with Math. What they always fail to realize is, Math ALWAYS wins !
That's it people ! Quit arguing about FACTS. It makes you look completely rediculous..."
I never thought I'd see you buy a house. Jacob is settling down! Crazy. Of course, you have the asset base now to give you that kind of flexibility to fan out and diversify out of paper assets. I have a question though...for someone with less than $200k in assets would you still recommend buying a house? I suppose having a lot of paper assets gives you motivation to buy, correct? Especially if you're particularly fond of your new area.
As a side note, this comment on the Shiller video is the best I've seen yet in regards to buying vs. renting. It gets to the point: buying is typically more expensive, but that doesn't make it the wrong choice. Eating filet mignon is more expensive than eating peanut butter and jelly. That doesn't mean you're not going to eat that filet once in a while. The comment:
"Amazing. Its literally impossible to have a rational conversation with Americans. They are constantly looking for arguments where there isn't any need for one.
All Shiller is saying is, it's a FACT that renting is cheaper than buying in the long run. This is simply due to maintanence, taxes, and the adjusted real return of housing vs adjusted real return of investing in the markets, and the opporunitiy cost of the additional purchase money that you would be able to invest elsewhere if you rent instead.
It's a FACT people. Why not argue about gravity? You'll get just as far.
Now to the point. Just because something isn't a good investment does in no way shape or form mean you can't buy one. A porsche is not a good investment either, but I like mine just fine thank you very much. It's a horrible investment, and I know this. It's actually a FACT that it's a horrible investment, but I still have one. If an economist came along and said, you know, buying a Porsche is actually a pretty terrible investment for these reasons, i'd agree. So what?
So if you want to buy a house for all the reasons you people stated, FINE ! If you feel more secure owning a home, FINE ! If you want your family to live in the same place for 30 years, FINE ! If you think you will beat the odds and buy a location that will actually appreciate more than the average home, FINE !
There is absolutely nothing wrong with buying a home. The only point of the article is, from a purely mathimticaly stand point, owning a home ends up losing out to the alternative combination of renting and investing the remaining money.
That is of course based on AVERAGES. He is obviously not saying that all home owners lose, and all investors win. He's simply stated facts, given over 100 years of statistics that show that homes appreciate in real terms by 0%, and other investment vehicles can appreciate as much as 7% in real adjusted returns.
I always laugh when I listen to Americans argue with Math. What they always fail to realize is, Math ALWAYS wins !
That's it people ! Quit arguing about FACTS. It makes you look completely rediculous..."
"I always laugh when I listen to Americans argue with Math. What they always fail to realize is, Math ALWAYS wins !
That's it people ! Quit arguing about FACTS. It makes you look completely rediculous..."
Why does this have to be so black and white?
For example, you didn't mention behavioral finance...which for most is the most important part of personal finance. Dave Ramsey points out that more 15yr mortgages payoff early than 30yr. He plausibly attributes to people being able to actually focus on a finish line. (Though of course it could be many other things) For many it's also a great way to be forced to save money in something likely to appreciate. This doesn't apply to Jacob, but he's an outlier among outliers.
Another BIG piece of this discussion is that real estate cost to rent spreads are highly variable by region. A taste-
http://finance.yahoo.com/news/amid-risi ... 00552.html
We just sold a house in SF Bay Area that had price appreciation of about 18% in the 3 years we owned it. We had about $5000 in improvements so most of that was due only to market timing (bought in 2009). I did a pretty detailed financial analysis of this. I used a cost of capital as the weighted avg rate on our debt as most of the time we lived there we were paying off student loans, I took into account the mortgage deduction, first time homebuyer's credit etc and then subtracted costs of selling. Even with that sort of big return...we'd have been financially ahead had we just stayed in our previous rental home before we bought. This supports you (and Shiller)
But, the Bay is famous for having a huge spread between renting and buying.
If you did this same analysis in Texas, you would find a different result most likely. My parents just bought a new home there and it is several hundred dollars cheaper in total payments, not to mention as an energy star home they are saving $150-200/mo in utilities.
That's it people ! Quit arguing about FACTS. It makes you look completely rediculous..."
Why does this have to be so black and white?
For example, you didn't mention behavioral finance...which for most is the most important part of personal finance. Dave Ramsey points out that more 15yr mortgages payoff early than 30yr. He plausibly attributes to people being able to actually focus on a finish line. (Though of course it could be many other things) For many it's also a great way to be forced to save money in something likely to appreciate. This doesn't apply to Jacob, but he's an outlier among outliers.
Another BIG piece of this discussion is that real estate cost to rent spreads are highly variable by region. A taste-
http://finance.yahoo.com/news/amid-risi ... 00552.html
We just sold a house in SF Bay Area that had price appreciation of about 18% in the 3 years we owned it. We had about $5000 in improvements so most of that was due only to market timing (bought in 2009). I did a pretty detailed financial analysis of this. I used a cost of capital as the weighted avg rate on our debt as most of the time we lived there we were paying off student loans, I took into account the mortgage deduction, first time homebuyer's credit etc and then subtracted costs of selling. Even with that sort of big return...we'd have been financially ahead had we just stayed in our previous rental home before we bought. This supports you (and Shiller)
But, the Bay is famous for having a huge spread between renting and buying.
If you did this same analysis in Texas, you would find a different result most likely. My parents just bought a new home there and it is several hundred dollars cheaper in total payments, not to mention as an energy star home they are saving $150-200/mo in utilities.
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skintstudent
- Posts: 82
- Joined: Thu Feb 07, 2013 12:52 am
"That is of course based on AVERAGES. He is obviously not saying that all home owners lose, and all investors win."
"The only point of the article is, from a purely mathimticaly stand point, owning a home ends up losing out to the alternative combination of renting and investing the remaining money."
These pretty much cover it. Cause and correlation are not the same.
"Dave Ramsey points out that more 15yr mortgages payoff early than 30yr. He plausibly attributes to people being able to actually focus on a finish line."
All other things being equal, taking out a 15 year mortgage, as opposed to a 30 year mortgage, would suggest that paying off the loan takes priority over smaller repayments. My behavioural reaction to this is that the length of the mortgage is a result of the intent to pay it off, as opposed to the shorter term mortgage being the trigger for early repayment.
"The only point of the article is, from a purely mathimticaly stand point, owning a home ends up losing out to the alternative combination of renting and investing the remaining money."
These pretty much cover it. Cause and correlation are not the same.
"Dave Ramsey points out that more 15yr mortgages payoff early than 30yr. He plausibly attributes to people being able to actually focus on a finish line."
All other things being equal, taking out a 15 year mortgage, as opposed to a 30 year mortgage, would suggest that paying off the loan takes priority over smaller repayments. My behavioural reaction to this is that the length of the mortgage is a result of the intent to pay it off, as opposed to the shorter term mortgage being the trigger for early repayment.
Jacob is going to personally make a choice on statistics, and should because he is a hyper-rational economic participant.
This is not typical for an American, and because of that, following some statistical proof doesn't make it right for the majority, or mean they're stupid for acting against what the "proof" says...
I'd love to continue, but suspect Jacob would/will delete it.
This is not typical for an American, and because of that, following some statistical proof doesn't make it right for the majority, or mean they're stupid for acting against what the "proof" says...
I'd love to continue, but suspect Jacob would/will delete it.
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jacob
- Site Admin
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- Joined: Fri Jun 28, 2013 8:38 pm
- Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
- Contact:
Ha! Is it just me or does my journal seem particularly vulnerable to hijacking? First a 50+ post discussion on the efficient market hypothesis and now one on the merits of renting vs owning.
Useful to this journal/me: Insights about where to live in the northern IL area.
Not useful to this journal/belongs in another thread: General insights or preferences about real estate in Arizona, Sweden, or the year 1985. Renting vs owning. Financing. I can look that stuff up (and have). Local knowledge is much harder to come by.
Useful to this journal/me: Insights about where to live in the northern IL area.
Not useful to this journal/belongs in another thread: General insights or preferences about real estate in Arizona, Sweden, or the year 1985. Renting vs owning. Financing. I can look that stuff up (and have). Local knowledge is much harder to come by.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
"Insights about where to live in the northern IL area."
If you're really up for a challenge--and not worried about school zones--there are a lot of really, really cheap fixer-uppers in the south side and East Garfield Park areas. My wife and I were considering that as an alternative before settling on NYC.
If you're really up for a challenge--and not worried about school zones--there are a lot of really, really cheap fixer-uppers in the south side and East Garfield Park areas. My wife and I were considering that as an alternative before settling on NYC.
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jacob
- Site Admin
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@secretwealth - I'm not as worried about school zones as I am about war zones. During the worst days of the summer those areas rack up the murder count by as much as a few per hour(!).
Last summer, 13 people got shot within 30 minutes...
http://articles.chicagotribune.com/2012 ... eople-shot
YMMW... but we're basically looking to buy in an area where stray bullets and street loitering are not part of the environment. We use Trulia's crime heat map to screen out areas. They should be green or at worst light yellow.
Last summer, 13 people got shot within 30 minutes...
http://articles.chicagotribune.com/2012 ... eople-shot
YMMW... but we're basically looking to buy in an area where stray bullets and street loitering are not part of the environment. We use Trulia's crime heat map to screen out areas. They should be green or at worst light yellow.
Delete the tangents. People will stop.
Concern over crime in Chicago is very well founded. 505 murders in the city in 2012:
https://data.cityofchicago.org/Public-S ... /ws3w-ba2s
This is way down from the early 90's and probably not going to improve further. Most of the violent crime is black on black and localized. Outside of safety, I imagine Jacob wouldn't mesh well with the culture in the high crime areas.
Living near those areas can suck too. I worked with a guy who lived just south of Ravenswood, in a million dollar house. His wife actually had to confront a homeless man that had decided to start living under their porch. Screw that. I'll take my suburban bubble every time.
Concern over crime in Chicago is very well founded. 505 murders in the city in 2012:
https://data.cityofchicago.org/Public-S ... /ws3w-ba2s
This is way down from the early 90's and probably not going to improve further. Most of the violent crime is black on black and localized. Outside of safety, I imagine Jacob wouldn't mesh well with the culture in the high crime areas.
Living near those areas can suck too. I worked with a guy who lived just south of Ravenswood, in a million dollar house. His wife actually had to confront a homeless man that had decided to start living under their porch. Screw that. I'll take my suburban bubble every time.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
To be sure; there are problems with living in the ghetto that I certainly would prefer to live without. Fortunately NYC doesn't have the crime problems Chicago does.
In all seriousness: doesn't Chicago have a happy medium between the ghetto and the yuppie enclaves? Last time I was there, I really fell in love with the inner loop area, but I imagine that wouldn't fit Jacob's desire to have a garden.
In all seriousness: doesn't Chicago have a happy medium between the ghetto and the yuppie enclaves? Last time I was there, I really fell in love with the inner loop area, but I imagine that wouldn't fit Jacob's desire to have a garden.
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jacob
- Site Admin
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1) Perfect illustration of our house buying _issues_. Looking at what, say $150k, buys, Chicago/burbs is not a winner compared to our old RE hunting grounds in the Pacific Northwest. Nothing around here really screams "I'd be happy to stay there for at least 10 years", rather it's more a "I'd rather live there than keep renting an apartment, but...".
2) The invitation for a free trip to Switzerland was just reiterated. That reminded me how much I hate traveling. If I was really rich, I'd be happy to pay people to come to me just so I wouldn't have to go to them.
3) I just cut my first set of perfect dovetails. Fit the first time with no gaps. That was a frigging awesome feeling. Dovetails are so hard to get right that people write entire books on just how to cut that joint. That said, the set I cut after the perfect set had gaps, so there's some ways to go.
This was for a 11"x6" pine box which went surprisingly fast. I feel like I'm ready to take on bigger dovetailing projects now.
I also made a merry-go-round toy. Building things that move are just inherently more fun that building static things. On the wish-list is a medieval pole lathe... and a more modern tread wheel powered scroll saw. Why buy, when you can make, right? My only concern is running out of space.
4) DW switched to paleo. I'm tagging along in the sense that I'll add some grains to her concoctions. In that regard, we boosted the food budget from $250 per month for the two of us to $350. I'd expect this $$-measure to be a temporary compensation for not knowing where to buy the meat efficiently.
2) The invitation for a free trip to Switzerland was just reiterated. That reminded me how much I hate traveling. If I was really rich, I'd be happy to pay people to come to me just so I wouldn't have to go to them.
3) I just cut my first set of perfect dovetails. Fit the first time with no gaps. That was a frigging awesome feeling. Dovetails are so hard to get right that people write entire books on just how to cut that joint. That said, the set I cut after the perfect set had gaps, so there's some ways to go.
This was for a 11"x6" pine box which went surprisingly fast. I feel like I'm ready to take on bigger dovetailing projects now.
I also made a merry-go-round toy. Building things that move are just inherently more fun that building static things. On the wish-list is a medieval pole lathe... and a more modern tread wheel powered scroll saw. Why buy, when you can make, right? My only concern is running out of space.
4) DW switched to paleo. I'm tagging along in the sense that I'll add some grains to her concoctions. In that regard, we boosted the food budget from $250 per month for the two of us to $350. I'd expect this $$-measure to be a temporary compensation for not knowing where to buy the meat efficiently.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am