30-year home appreciation by city

S&P500 over the past 30 years returned 10.4% annualized versus 5.4% annualized in the top US city (Portland OR). One dollar invested in a Portland home got you $4.84 after 30 years, $19.46 if invested in the S&P500.

https://compoundadvisors.com/2020/homes-castles-and-price-ex…

People hate to hear it, but the money you have tied up in residential real estate likely delayed your retirement. I saved about $1 million over the past 40 years by using a rent vs. buy calculation to inform my housing decisions. And that $1 million compounded into millions more because it was invested in the stock market rather than under-performing residential real estate.

There’s a reason that Robert Shiller (of Case-Shiller US Home Price Index fame) got a Nobel Prize in Economics.

intercst

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I saved about $1 million over the past 40 years by using a rent vs. buy calculation to inform my housing decisions.

Glad you used the tools available to you for the locations you lived in. I’ve used the rent vs buy calculators for our area and they scream buy. May have something to do with rents going up about 10 percent per year, (I will leave out the outlier of 20+% increases in rent this year,) and property values having going up significantly as well. Of course if you listen to the old timers here, 30 years ago this was a sleepy town, not a city.

Of course, it’s not all or nothing. Diversification in investments is about more than stocks and bonds. Somehow I still managed to retire in my early 50’s while living in my own home and having a vacation home, and sending two kids through college on our dime, which I know is another thing you sneer at. The only reason it took so long was to get the kids out of the house and into college.

There’s more than one way to achieve a goal, and my preference does not include having to deal with a landlord.

YMMV. Mine works for me.

IP,
with a rental property currently making about 25% ROI per year

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The important message, to me, always seemed like, “Do not think of your housing decisions as part of your investment portfolio.” Housing represents a lifestyle choice . . . and comes with a cost associated with that choice. As long as you realize that, then you can decide on your lifestyle housing choice based on the expense. And that’s really what we all do every day with every purchase. We seek optimum value from our spending. We won’t all agree on what has value and how much because we don’t share identical values.

If you want to use real estate (other than housing) as an investment, then this data simply tells you that you better be really good at picking the right real estate or you would be far better off investing in the stock market.

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“Do not think of your housing decisions as part of your investment portfolio.” Housing represents a lifestyle choice . . . and comes with a cost associated with that choice.

Heh. I run a 10 year profit projection spreadsheet for every property we buy. It helps you to account for the costs associated with the purchase and to keep from making a poor choice. The key is being able to hold on to it until it is your choice of when to sell. If you can’t pick your sale date, then you are increasing the chances of losing money.

IP,
who made that mistake once, but since the consequences were in part due to marrying an incredibly wonderful husband and provider, it’s hard to call it a mistake even though it resulted in about a 10% loss rather than a 100% gain had we sold two years later

“I saved about $1 million over the past 40 years by using a rent vs. buy calculation to inform my housing decisions.”

Glad you used the tools available to you for the locations you lived in. I’ve used the rent vs buy calculators for our area and they scream buy.

Just about any area, they scream BUY.

A few years ago there was a local interest story in our local newspaper. This lady’s husband died in the war and she stayed on in their apartment for 35 years. The landlord painted it every 10 or so years. Raised the rent almost every year.

If she had bought a house instead of renting for 35 years, her payment would have not gone up (except for property tax & insurance) and her payments would have stopped 5 years ago.

If she had rented a house from inparadise, she would have paid it off for inparadise.

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Where were you living while you invested that dollar in the S&P 500? I bought my house (with assistance from a bank) 30 years ago for 200k and I have lived here since then with the same monthly “rent”. The house is a row house with plenty of room for my family. In the meantime, actual rents have gone way up in my neighborhood since I bought my house. So much, in fact, that the rent on a house like mine grew to be much more than my mortgage payment. But I continued to make the mortgage payments until…I owned the house, now worth 1.6 million.

In order to put all of that money into the S&P 500 for 30 years, I would have lived with my family in a tent?

But I have a friend who made a different choice 30 years ago. She rented. Initially, I was paying more, but as rents increased, she paid more. And she is still paying rent.

She is not rich from all of the money she invested in the S&P 500 because she needed to have a place to live, and that is where her money went.

So, when we talk about a dollar “invested in a Portland home” is it really an investment, or is it the place we live?

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So, when we talk about a dollar “invested in a Portland home” is it really an investment, or is it the place we live?

You have to understand that Intercst lived in TX for years as a single man that did not require attention to the school district in which he lived and could rent as low as he could go. Tx had decades of stagnation in real estate values. Had he lived in Portland during his rental years, (or just about anywhere else for that matter,) he would most likely have not benefitted from renting, but he likes to extrapolate his bachelor years in Tx rentals to the rest of the country and to families, who he also criticizes for having children since that too detracts from how early you can retire.

He lives in a very small world.

IP

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NessieTheBruce writes,

The important message, to me, always seemed like, “Do not think of your housing decisions as part of your investment portfolio.” Housing represents a lifestyle choice . . . and comes with a cost associated with that choice. As long as you realize that, then you can decide on your lifestyle housing choice based on the expense. And that’s really what we all do every day with every purchase. We seek optimum value from our spending. We won’t all agree on what has value and how much because we don’t share identical values.

If you want to use real estate (other than housing) as an investment, then this data simply tells you that you better be really good at picking the right real estate or you would be far better off investing in the stock market.

Absolutely! I’m not arguing that people live in a smaller, less luxurious property than they’d like, or a crappier neighborhood. Just make sure to use a rent vs. buy calculation to investigate if it’s cheaper to rent for whatever your housing requirements are.

My taste in housing tended towards resort-style living with palm trees, pools and tennis courts. It was always cheaper for me to acquire that by renting rather than purchasing a condo with the same amenities and professional management. (I’ve never rented from a mom & pop landlord.)

The rent vs. buy calculation didn’t turn sufficiently positive for me until 2012, at the tail end of the 2008 housing crash when I bought a home for 70% off it’s 2008 value. It’s since tripled in value about what the S&P 500 has returned.

About the only way I can see that real estate makes sense as an investment is if you’re a landlord doing all the leasing, property management, repairs and clean-out & painting between tenants yourself. At least real estate allows you capture the value of all that labor in whatever appreciation you get as a lightly taxed part-time job. Certainly the tax rate on all that labor would have been less than the tax I was paying as a salaried engineer. (One problem is the high transaction costs in real estate (8%-11% of the sales price) You’d need to be your own real estate broker/agent to put much of a dent in that.)

But of course, I played golf and tennis on the weekends. I wasn’t interested in a part-time job managing a rental property like some of my Exxon colleagues.

intercst

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One problem is the high transaction costs in real estate (8%-11% of the sales price)

Yes, transaction costs can be high for real estate sales, (not purchase,) unless one makes use of sites like Zillow or a 1-2% Realtor rather than a full price broker, but even so, 8-11%? Where? How? With the internet costs for sale have come way down.

IP

1 Like

"He lives in a very small world.

IP "


Every individual’s circumstance creates an individual response and individual knowledge.
However, the concept of viewing a home as an investment requires selling that home - moving
out - either renting or purchasing someplace to live elsewhere. As such the investment in a “home”
is not going to reproduce the returns seen in equity investing since the late 1940s. But the
potential to copy returns for the early 1930s - say in the mid-west - is quite possible.

Howie52
The issues of investing tend to be different than for “setting down roots” or establishing a
family.

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About the only way I can see that real estate makes sense as an investment is if you’re a landlord doing all the leasing, property management, repairs and clean-out & painting between tenants yourself.

The basic thing to understand about real estate is that the bank and the government will help you; there is no other investment I know of where that is true.

Nearly anyone can get a bank loan for 80% of the purchase price given the right property. Sometimes they will front you 90%, even more. There are few cases where you can apply 4 to 1 leverage, even 5 to 1 - then let the investment pay it all back with someone else’s dollars, meanwhile getting a generous deduction from the government for your trouble in the way of reduced taxes. You can even offset some of your other income! I can’t think of another investment that lets you do all that.

I wasn’t interested in a part time job managing a rental property

Our condo in Boston required a day or two every few years. One tenant stayed for 11 years, another for 6. I hired painters and Merry Maids to do a clean out if necessary, and for most years the prospective tenant paid the agency fee as well as first, last, security. We didn’t get many vagabonds with those requirements. Nor did we spend a lot of time worrying about it.

Lucky maybe, but it was almost 40 years worth.

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Goofy writes,

The basic thing to understand about real estate is that the bank and the government will help you; there is no other investment I know of where that is true.

Sure. But anytime you’re buying an asset with leverage, you’re increasing risk.

Some of you may remember golfwaymore from RetireEarly/Campfire. A 30-year-old who diversified the $25 or $30 million he netted from the sale of his company in the late 1990’s tech boom into real estate. And as I remember he was very conservative and was only operating with about 30% leverage, not the 80% or 90% Goofy is talking about.

http://nofeeboards.com/rehp/viewtopic.php?f=2&t=3487&…

Maybe someone can find the thread on TMF. It’s a cautionary tale.

intercst

1 Like

IP anlayzes,

You have to understand that Intercst lived in TX for years as a single man that did not require attention to the school district in which he lived and could rent as low as he could go.

I lived just South of the Memorial School District in Houston, one of the best in the state. There are 2 and 3 bedroom apartments in Memorial renting for about the same price as where I lived.

Shiller got the Nobel for highlighting IP’s thought processes – and that thinking isn’t unique to IP.

https://en.wikipedia.org/wiki/Robert_J._Shiller

His lecture at the [2013 Nobel] prize ceremony explained why markets are not efficient.

… only one-half to one-third of the fluctuations in the stock market are explained by the expected dividends model. Also, in the lecture, Shiller pointed out that variables such as interest rates and building costs did not explain the movement of the housing market.

On the other hand, Shiller believes that more information regarding the asset market is crucial for its efficiency. [Like for instance the wide gap between stock market and housing returns] Additionally, he alluded to John Maynard Keynes’s explanation of stock markets to point out the irrationality of people while making decisions. Keynes compared the stock market to a beauty contest where people instead of betting on who they find attractive, bet on the contestant who the majority of people find attractive. Therefore, he believes that people do not use complicated mathematical calculations and a sophisticated economic model while participating in the asset market.

It’s fashionable to be able to say you’re a homeowner or a landlord, even if the investment returns are lacking.

intercst

4 Likes

IP writes,

Had he lived in Portland during his rental years, (or just about anywhere else for that matter,) he would most likely have not benefitted from renting, but he likes to extrapolate his bachelor years in Tx rentals to the rest of the country and to families, who he also criticizes for having children since that too detracts from how early you can retire.

Did you not read the first post in this thread highlighting the wide gap in the 30-year return between Portland housing and the S&P 500? Honestly, this is like talking to a COVID denier.

intercst

4 Likes

S&P500 over the past 30 years returned 10.4% annualized versus 5.4% annualized in the top US city (Portland OR). One dollar invested in a Portland home got you $4.84 after 30 years, $19.46 if invested in the S&P500.

There’s a reason that Robert Shiller (of Case-Shiller US Home Price Index fame) got a Nobel Prize in Economics.

Yes, but he didn’t get it for his work on home prices.

It was for his work on stock prices. Like this:

https://dqydj.com/shiller-pe-cape-ratio-calculator/

Over 30 years, the 10 Year Shiller PE (or CAPE) of the S&P500 has gone from 19 to 38.

Some of that 10.4% annualized gain is from stocks getting more expensive relative to earnings.

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It’s fashionable to be able to say you’re a homeowner or a landlord, even if the investment returns are lacking.

Yeah, this is the conclusion I came to, too. I rented out my house when I moved from Texas in 2012 because I was upside down at the time.

I sold it last year; the value had appreciated a lot, and being a long-distance landlord, even with a management company, was becoming a hassle. Doing all of the math at the end of the day considering repairs, upgrades, management fees, etc., I probably would have come out the same in 9 years if I’d just sold at the loss back in 2012 and taken the next 9 years to make up for it in a nice index fund.

I like being a homeowner because I like my home and yard (though not right now after the recent ice storm and a million downed limbs :slightly_frowning_face:), but I really don’t consider it an investment. It’s where I live.

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Sure. But anytime you’re buying an asset with leverage, you’re increasing risk.

Some of you may remember golfwaymore from RetireEarly/Campfire. A 30-year-old who diversified the $25 or $30 million he netted from the sale of his company in the late 1990’s tech boom into real estate. And as I remember he was very conservative and was only operating with about 30% leverage, not the 80% or 90% Goofy is talking about.

I liked Golfwaymore and used to email back and forth with him quite a bit. It’s been a while and I have lost contact with him some time ago, but IMO Golfwaymore was highly speculative in his real estate investment, focusing on a single area and a single market…vacation homes in the North GA mountains. Additionally, he had no cash flow to be able to continue payments on those properties since he was a speculative builder for resale not rental. His lack of diversification, both in and out of real estate was in part what killed his finances. His aggressive approach had helped make him in the first place with his cell phone sleeves, but he had no contingency plans in place. His approach to real estate was like putting all your money on one high flying internet stock and buying on margin. Great while it’s going up, but at some point you may find that earnings do matter. He failed to have a comeback plan in place when his speculative approach to real estate failed, and could not ride out the tough times until the market came back. I frankly don’t recall the amount of leverage he used to buy the properties, but whether you can’t pay back $1 or $1mm, the bank can and will foreclose. It’s one reason why we keep more cash on hand rather than pay down mortgages.

It is important to look for properties in an area that has constraints to new entries, which again was seriously lacking for GWM. There are glorious views all over the place in those mountains, and anyone could throw up a house if they bought the land. We actually looked at buying a place in the area at the high demand part of that time, when there had not yet been pile on by everyone and a dilution of profit caused by over supply, but because there was a seeming endless supply for others to do a vacation rental there, making it a how low can you charge business rather than a premium business, we chose not to buy. Then came a tightening of lending and a cratering of buyers for the properties, and without rental income coming in, GWM had to continue paying the mortgages from his own pocket.

Geographical constraints to building is a great way to improve the marketability of your property and the appreciation, because it makes your house a limited commodity. Our riverfront vacation home is kayakable upstream and down, private, (but not so private that someone would break in to put up a meth lab,) pristine environmentally, easy to access from a highway but not so close that you hear it, out of the flood plain, and with other things to enjoy should kayaking not be your thing. With a National Forest across the road, there is further constraints to building and enhancements to enjoyment. There are great put ins and take outs upstream and down for kayakers.

Our city rental is in a city that is highly constrained to new building, to the point where it is now eliminating single family home zoning to allow for conversions for up to 3 units. With a little investment we will be able to take our existing SFH and convert it to a duplex with an accessory dwelling unit, (think tiny home,) in the yard. This will increase our ROI over the 25% return we are already getting on the 20% down plus improvements that we spent buying the property. With it’s diverse employers, (a university, medical and law school, two hospitals, military employers, defense contractors, and tourism,) the area is less exposed to downturns in the economy. Even the 2008 housing downturn was barely felt here. There are a lot of people rotating in and out of this area for a few years at a time, and a high demand for quality rentals.

Our real estate investments are pre-tax cash flow positive, even with considering 10% vacancy and collection as well as projected maintenance costs of 10% income, advertising and management fee. The tenants pay our mortgage but we reap the benefit of appreciation on the whole house, not just the amount of cash we put into it. I run a 10 year profit projection spreadsheet that does not initially take appreciation into account, and the property must be both profitable and cash flow positive to be considered. If I can do better by buying a bond or a dividend paying stock, I do not touch that property.

Even our home has to pass the alternative use spreadsheet of being a rental. We are only 5 miles to center city, on a small lake and with a pool. Not easily duplicated, the value of this property, which we bought with 30% down and a 2% 30 year FRM, has almost doubled in the 2.5 years we have had it, making the ROI on our primary residence very high. Yes, Covid has changed what people are looking for in a home, but it was a screaming buy when it was placed on the market by a Realtor who did not understand the market and priced it too low, ignoring the pool and lake. There are great values to be had if you understand your market and can move fast, though they are few and far between. Our riverfront vacation home was one of those great deals as well, as was our rental. I am a patient buyer.

We have a very healthy stock portfolio as well, and a heavy cash position at this time while we look for well priced investments in both the real estate and stock market. Almost bought another property this week, (deciding against it for personal reasons though my spreadsheet said it was a screaming buy,) telling the seller to move on to the next buyer when they came back to accept our initial offer after we declined their counter. I also am working on a list of stocks that we would be willing to buy at a certain price, in anticipation of a decline in the market when rates go up. We have no bonds, considering our real estate to be a bond alternative. All investments require work and a strategy to rebound should the unthinkable happen. You must have a survival strategy in place. GWM did not.

I am not a fan of index investing, but know that it works for many who prefer to avoid the hunt of individual stocks and real estate. If that’s your jam, go for it, but know that there are other options that can work very well also.

IP

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I like being a homeowner because I like my home and yard (though not right now after the recent ice storm and a million downed limbs :slightly_frowning_face:), but I really don’t consider it an investment. It’s where I live.

And this is the whole point. It’s hard to make sense when half the people in the room are talking about investments and the other half are talking about what to buy with their investments. You gotta live somewhere. What floats your boat? It has a price.
Some people are weirdly OCD and see the whole process simply as dying with the highest stack of pennies. Some want a back yard, a big dog, their own apple tree, or just want to play the piano. That will cost some of the money that otherwise would have gone into the stack of pennies.

You can’t just run numbers are say “See, if you had done this or that you’d have more money” because everybody knows that. There’s always something else. What’s it mean? Unless you’re talking to a person who went broke without a plan or a clue, it doesn’t mean anything.

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Shiller got the Nobel for highlighting IP’s thought processes – and that thinking isn’t unique to IP.

He got the Nobel prize for pointing out that you lived in a small world? That I find surprising. As to what you quoted, I see no reason for referencing me in it, nor what it has to do with your comments at the end.

Therefore, he believes that people do not use complicated mathematical calculations and a sophisticated economic model while participating in the asset market.

So because most people do not put the work in, it’s not doable? Most people don’t retire early either. I am used to not being “most people.”

This is a big reason why I take exception to looking at real estate on a national level. It’s possible that “most real estate” will never be a good investment. Same can be said for “most stocks.” Real estate always will be local, when it comes to making a good investment, though there can be some national impacts on all housing, like the state of lending. Even looking at it on a state wide basis or city wide basis is problematic as some neighborhoods are better investments than others. It requires personal knowledge to make a good investment in real estate, which is why there are often inefficiencies in the market that can be taken advantage of.

There’s a place for lazy too. You be you, just stop insisting everyone is wrong to be them.

IP

Yeah, this is the conclusion I came to, too. I rented out my house when I moved from Texas in 2012 because I was upside down at the time.

I would not have bought in TX either, though I considered it when offered a transfer which we then declined.

IP