Early Retirement Extreme Forums

http thezikomoletter.com/2012/12/10/you-are-naturally-short-housing/

[moderator notice: Link might be infected with malware. Proceed at your own risk.]

Thanks for the link. Good article.

It is an interesting way to look at housing... as a future liability. As one of the commenters pointed out, we are also naturally short for future food, water, clothing...
If we were to stockpile food or water we would not look at the stockpile as an asset. It would be a hedge. Same is true for buying a home.

Well, technically, you can live in the woods or under a bridge. You are definitely short food, water and air.
But it's a very useful perspective on the problem.

You are long on housing when you own more than one...

I have an appartment and a house. One for winter in the mountains, one for the rest of the year near the sea. It is a luxury, but it did not cost too much. No mortgages, I bought them cash. The house was a neglected monument, which I completly refurbished. The small mountain one I bought complete with inventory. Inclusive utilities (heating, electricity, water, insurance, taxes, care-taker for the mountain one, telephone and internet in both, they cost me just under $ 650 ($325 per pers) per month.

Those places cover all my needs for shelter and holiday's.
I does not consider both as assets (as in investment) , but those work indeed as a hedge, but only in case I want to change location(s).

Thanks for the interesting link!

I'm glad some people enjoyed it.
I've always felt that owning a home outright is fundamentally more secure than renting, even if you have enough investment income to cover rent. What I got out of this article was a concise explanation of why that is, in financial terms. I'm uncomfortable with leverage in the context of securities, so it makes sense that I'm also uncomfortable with leverage in the context of housing.

I love how concise the post was. He was able to articulate something that I have known intuitively. Amazing....

Thanks, it's a nice perspective. It reminded me of an old thread asking whether you would take $300,000 or a place to live forever. Sort of like covering your lifetime short
viewtopic.php?t=1261

Thanks--I found this a really interesting read as well. I've always instinctually felt more comfortable investing in real estate (hence my interest in buying a second house) than in investing in stocks and bonds, which seem to have too arbitrary of a value to provide sustainable and reliable appreciation. This article helped me understand that a bit more.

That was good. If it were only up to me I wouldn't own real estate, but DH has always insisted we own where we live (since we were 22). The article helped me to see it as something other than a ball and chain.

In terms of quality and value, I have never seen a case where renting a house yields a better quality dwelling at lower price than owning that same dwelling.

From an investment perspective home ownership is similar to buying an annuity with one's retirement money. Pay a lump sum today (and smaller payments over time) to guarantee a particular return of fixed housing indefinitely. Fixed in size. Fixed in place. Fixed next to the wonderful or horrible neighbors.
Renting on the other hand is similar to self-directed investing. Pay nothing up front and slightly larger regular payments over time to receive the exact size house you need in the exact place you need, near the neighbors you can tolerate.
It is true that for some of the past forty years better quality dwellings could be had for less money by owning rather than renting. Price inflation was the cause. Demographics fueled the price inflation. That ended in 2008.
Housing price vs. median income is still dangerously close to 1 standard deviation above the mean.

From 1971 until now I bought and lived in 8 houses, 6 are sold. From the sold ones, only one was neutral -financially speaking. All my houses I improved, and were sold with "profit". The third -in 1999- gave me such a profit, that since then, I could buy my more modest houses from that moment , inclusif the cost of improvement, out of the selling price of number three. The selling of number 5 and 6 added further to my er fund.

So, to make my point: however it is true that houses where you live in yourself, are only hedges, by improving and a good eye for quality and, as allways- a little luck, they are also opportunities for building wealth. Renting all your life is forgoing those opportunities.

"Renting on the other hand is similar to self-directed investing. Pay nothing up front and slightly larger regular payments over time to receive the exact size house you need in the exact place you need, near the neighbors you can tolerate."
That's one of the big reasons I rent. Though, my historical rent is almost always substantially lower than the equivalent mortgage in my area. Frees up capital for investment, which means more capital in the end, frees up my time (don't have to fix, mow, or repair anything), and frees me from having an anchor holding me back.

J, if you were the same age today that you were in 1971 would you expect the same returns on real estate in the next forty years that you experienced in the past forty? Residential mortgage debt has exploded in the Netherlands in the past decade. Did you have to borrow at these levels in 1971 to buy your first property?

Chad, I agree on all three counts. Rent here is lower than cost of ownership if you factor in all the costs.

The federal government sees owner occupants as receiving a tax subsidy measured as imputed rent:
http://www.cbo.gov/sites/default/files/ ... ousing.pdf
Gross income of the homeowner thus includes the amount that an owner-occupied home would rent for if it were rented to a tenant. Net rental income would be that gross rent less expenses, such as maintenance and operating expenses, mortgage interest payments, property taxes, and an allowance for actual depreciation of the structure. Because the tax code does not require that owners compute the net rental income from their home and include it in adjusted gross income, that omission is treated by the Treasury Department as a tax expenditure in the federal budget. However, people do not observe how much imputed rent they receive, and thus taxing that income would present administrative challenges. The staff of the Joint Committee on Taxation does not include the exclusion of imputed rent on its list of tax expenditures because its exclusion from taxable income may be an administrative necessity.

Unfortunately the government will not be able to collect the income taxes on the imputed rent from owner-occupied property presumably paid for with after-tax dollars. This is due to administrative challenges. On the bright side, however, this should free up resources to go after tax evaders who grow their own vegetables or make their own wine to avoid buying them with taxable dollars.

Oh, quit hijacking a thread. This is a from an organization that studies every aspect of taxation, whether it should be done or not.

Back on topic...
So if we're all naturally short housing, we're also naturally short several other commodities (food, water, etc.). How does this impact the cyclical trendline for these types of assets compared to other assets that we are naturally out of, like bonds, stocks, gold, etc.?

@Ego: The first three houses were, partially, mortgaged. Lowest % was 5, highest was 9% for a short period (less than a year). From 1996, untill now mortgage free + since 1999 all investment in the further 5 houses were out of the surplus from nr 3, and the following sellings. Houses nr 4 and 5 were in United Kingdom, nr 6 and 7 in the Netherlands again and nr 8 in Austria.

I can say that, looking back, I have lived (be housed) for free as I will do for the rest of my life.
One can not say, renting is better than owning or vise versa. It is always: what suites you most. There can come a time that I change to rent again, flexibillity is a boon.
@Chad: Improving a house is work that I like, lawn mowing not. It gives a lot satisfaction when I can say: look what a better layout of the kitchen, or what a rise in comfort after insulation. It is what Mike Bos shows when he presents in his latest post the photos for and after. A kind of craftmanships pride. I suppose George TOO feels the same when he presents his figures in leveraged expirement, one can taste his knowledge and skills on stocks-investment.

IMO the best earnings are those who gives you also a kind of pride.