Thursday, May 28, 2009

Investment vs. Shelter

Adjusted for inflation, a home is not a very good investment, especially if you consider transaction costs and maintenance. So if you are looking for long term gains on investment, there are many other relatively safe alternatives that offer higher returns.

This is why I have never been very concerned with when the bottom of the cycle occurs. If I were looking at a home as an investment, the buy low, sell high, would be the rule to follow.

So if it's not an investment (as many were led to believe during the boom), then what exactly is it?
  • As long as you don't have a neg-am loan, a home is a forced savings account. With each payment, your equity grows (in a normal market).
  • If you do have equity, a home can also be a source of emergency cash in times of crisis (medical bills etc.).
  • It could also be a hedge against inflation should it spiral out of control as it did several decades ago.
  • And of course most importantly, buying is an alternative to renting.
Hence, I always get a chuckle out of the "now is a great time to buy," which I have heard countless times since we bought our home in Feb. This is part of an investment mindset. When I meet people who are thinking of buying a home because "now is a great time to buy," I always bring up the analogy that they aren't stocking up on gas, since it is now half off what it cost last summer. Why is a home any different?


Husmanen said...
This comment has been removed by the author.
husmanen said...

True, and I love the gas analogy. I think I will use it.

Bryan said...

I think you're right. If you're residential timeline is right, hitting the bottom just exactly right isn't important. Longer time-lines longer tolerance.

I do note though, that to the extent that a deeper bottom might be ahead shortly (purely hypothetically...), taking into account of course the rent paid in the mean time, paying less for a commodity (even when it is considered as a pure consumable) by waiting a while longer may still be desirable (like waiting for next month's special on a TV or a Disney vacation package, or whatever). Many of the not-investment virtues you list are still augmented by buying more cheaply (e.g. a house's use as source of emergency capital is nullified or significanly curtailed in the short term if the house immediately loses value. For a house not bought at the bottom--in the absence of a hefty down payment--it might be a few years before this function comes back into play).

sacramentia said...

That's a funny analogy. It is much easier to store an extra 1000 square feet of house than a 6 month supply of gas.

radiophilejapan said...

I think owning a house provides an emotional comfort hard to measure against financial gains. And I agree it is not a better investment than securities, including commodity ETFs which doesn't take much space for storage. I've been mulling over timing the market to buy a house in the area, but I'm changing my mind. Thanks for the blog.

sacramentia said...

It doesn't look like USO correlated to gas prices very well. Which ETFs do you use to hedge fuel prices? I've looked into this but couldn't find anything that seemed like it would work.

Giacomo said...

I'll be unconcerned about the timing of a house purchase when I stop caring about money. These are unique, dangerous times to be house shopping.

Don't kid yourself. If you buy a house and its value drops 100K in 2 years, no amount of "long time-line" rationalizations make that a winning decision. You've LOST, as surely as any badly-timed stock market pick. Buying a house is a de facto investment, whether you want to call it that or not.

radiophilejapan said...

Well, there is UGA which correlates directly with gas future contract prices, but I was being facetious. Although I am concerned about future inflation and I'm looking for hedges against it (commodities, real estate, inflation indexed securites), I haven't made up my mind as yet. Very uncertain times, overall.

Buying Time said...

Giacomo -

If we somehow hit bottom and never reach rent parity (still costing more to buy), then it may not ever make sense to buy (this is often the case in rent controlled areas like NY or Santa Monica), conversely, if buying is way cheaper than renting, then, you are also throwing away money each month. There is a fine line, and when you pull the trigger depends on how much you think it's going to continue to drop.

Paul said...

But there has never been a better time to buy ... and this time, I really mean it!

Giacomo said...

It's the "how much you think it's going to continue to drop" factor that REALLY makes buying a house in this environment a serious, and risky, investment decision.

It is such over-riding factor, I would argue, that any transient rent/buy calculation is not very meaningful. I think it's entirely possible that BOTH rents and house prices are still over-inflated, and the fact that prices have fallen faster than rents in some areas may not be any indication of a bottom (for prices).

I still see renting in a very positive light. It's a housing solution that just leaves out the investment component. In a shaky economy it just doesn't make sense to me to make a long-term commitment on a huge asset that carries a lot of downside risk. Better to stay flexible.

and check out:
Do We Really Need to Own Our Homes?

Buying Time said...

Wow, great article Giacomo! As a renter during various times in my life (more years than as an owner)...I do resent our society's penchant to treat renters as second class citizens.

As I have said before (and as the article points out), ownership is a the majority of the cases, it's the bank that owns the house.

Renting allows for workforce mobility, and also allows people to tailor their living situation to their immediate needs.....