Average US home is 44 years old and needs a ton of work.
intercst
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The home used as an example:
Bought for 765,000;
lived there 29 years;
Now valued about 3,200,000.
Perplexity says that’s 4.46% CAGR.
That does not include annual overhead n maintenance costs.
3500 ft2 on two acres with pool, in a neighborhood that locals think is affluent.
LOLOL.
I simp their pain.
ralph
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On a minor side note, as we bathe in AI glory.
Can AI do (basic) math?
3.2/0.765 = 4.183
compounded annual rate = ( 4.183 )^( 1/29 ) = 1.05058 or 5.06% CAGR
No, this AI cannot do basic math.
Perplexity loses the human versus machine basic math challenge.
If you think 4.46% is “close enough” (I don’t), then you take the Perplexity CAGR and I’ll take the 5.06% CAGR over 29 years.
Remember, when you use AI, they say: “you need to check its work.”
That’s how we reap the immense time productivity gains and don’t unnecessarily burn data center capacity and electricity.
See the benefits?
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property taxes, insurance and maintenance costs affect your investment return.
intercst
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You probably used a woke calculator.
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I understand that you think renters somehow don’t have to pay for this, but as a (former) landlord I assure you they pay every penny and then some. And at the end of that 30 year period have … nothing. And I have an asset worth significant dollars.
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Not at all.
But I do understand that large commercial landlords are typically doing maintenance with their own, mostly immigrant employees, while most single family homeowners are calling in a contractor at a much higher cost. As a small landlord, I assume you also called in a contractor to resolve any maintenance issues. The fact that you made a fortune on your Boston condo over a decades long holding period is very unusual versus the rest of the country. Kind of like me saying that the returns I’ve enjoyed on Dell, Eli Lilly and most recently Corning are typical of the average investor.
If you happen to live in a very competitive rental market like Houston (1980-2005), a good portion of that savings may accrue to the renter.
That’s why it makes sense to do a rent vs. buy analysis to inform your real estate decisions.
intercst
One reason I’m considering adding CSL to my portfolio.
Most of the people I call in turn out to be immigrants as well. We just replaced our crackled concrete driveway with pavers. A well appointed white woman in her 30’s came and made the measurements, gave the estimate, kept in touch as we awaited the scheduling of the crew and so on. When they showed up? Eight immigrants, who, incidentally, did terrific work.
Our landscapers? Immigrants.
The guy who hand washes my car? Immigrant.
The team who cleaned up our side yard earlier this year? One and one.
I’m not “hiring immigrants”, that’s just who it mostly turns out to be when I hire somebody.
And yet the single biggest determinant of generational wealthy has turned out to be home ownership, which is why minorities were kept down so long by redlining and other practices.
So landlords went out of business in Houston during that period? I must have missed that news.
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Obviously not. Houston had/has a thriving residential real estate market. It just offered much lower returns than putting your money in the S&P 500. I guess a lot of people believe that real estate is the “bedrock of generational wealth” and are afraid of the stock market. It wouldn’t be the first time you were able to fool a large percentage of the public.
intercst
The blood plasma donation people?
That’s a shrewd idea. Many senior homeowners could use the extra income to help with maintenance, but they may not meet the minimal health requirements for frequent donations.
intercst
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Because real estate can be the bedrock of generating wealth (though not generational wealth). They shouldn’t be afraid of the stock market, but neither should anyone believe that the stock market is vastly better than investing in real estate.
Just look at the numbers. The median sales price for house sold in the United States thirty years ago was approximately $137,000. The price of the median house sold today in the United States is about $403,000. So if you took $27,400 of your capital in 1996 and used it as the down payment on a house as a primary residence, and serviced the mortgage with the money you would otherwise be spending on rent, then over that thirty years it would have grown to $403,000. That’s an approximately 9.4% CAGR, which is very comparable to equities over that period of time. The S&P 500 returned about a point higher (10.4%), but the entire value of that median house is exempt from capital gains tax if you’re married and 2/3 of it is exempt if you’re not.
It’s a very good way to build up wealth, because even though the increase in home prices is lower than the S&P 500, the leverage you have on residential real estate makes it much more remunerative than just looking at the delta in prices of the asset.
Median Sales Price of Houses Sold for the United States (MSPUS) | FRED | St. Louis Fed
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Yep. The real estate industry keeps selling leverage and tax breaks. But there is no way for me to guarantee that I’ll get the 4% median US residential real estate return on an individual home purchase. About half of homeowners are below 4% with some way below. That’s why it makes sense to do a rent vs. buy analysis to inform your housing decisions.
Meanwhile, I can buy a low-fee S&P 500 index fund no matter where I live in the country, and get an investment return that puts me in the top 5% of equity investors when compared to people pursuing just about any other equity investing strategy over time. I can long-term buy & hold with minimal transaction costs (i.e., Fidelity will sell me an index fund with just a 1.5 basis point expense ratio ($150 annually on a $1 million account.)
Residential real estate comes with confiscatory transaction costs. Less than 15% of homeowners remain in their residence for 30 years or more. The median US homeowner has a “time in residence” of 10 to 12 years, so they are buying and selling 2 or 3 homes over their lifetime, incurring transaction costs of 8% to 12% of the home value on a sale and 3% to 5% on a new home purchased with a mortgage. The stock market would be a poor place to invest if it came with these kinds of transaction costs.
Like I’ve said, I’m willing to buy a home if I have some prospect of earning the unleveraged return of the S&P 500 on the purchase, and did so (with a cash purchase) in 2012 when my rent vs. buy calculation turned positive while living in a Portland OR suburb. But failing that, I’d still happily and profitably be a renter with the money most people have tied up in their residence invested in the stock market.
intercst
It’s more than just numbers. It’s liquidity. I can sell stock today (it’s Friday, market is open). Selling my house is a lot more difficult. First, it has appreciated such that most people couldn’t afford it. When we built it, it was in the upper range for a middle class home. It’s doubled or tripled, depending on the source you use (e.g. Zillow). It’s simply out of the price range of 90% of the people.
We didn’t deliberately build it that way. But today’s younger people (like our daughter) can’t afford even more basic homes anywhere near the metro area (which is where the jobs are…in her case, downtown). They certainly can’t afford this home in a good neighborhood with decent schools and convenient shopping.
It would take a year or more to sell it, unless we got really fortunate.
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Fortunately, the cheap condo I purchased in 2012 is still selling for almost 4 times what I paid for it and I regularly get postcards and letters in the mail asking if I want to sell. There are 150 virtually identical units in my condo complex and at least 2 or 3 seem to change hands each year, so I have good data on the current value.
No way I’d buy at current prices, but since it’s only a small percentage of my net worth, it’s too much trouble to move and realize the gain by returning to a rental. {{ LOL }}
intercst
True. How often have housing prices gone down significantly over the past, say, 100 years? How often has that happened to stocks?
How many people get scared out of stocks when that happens? How many people get scared out of, and sell their home, when that happens?
Human psychology. It’s a real thing.
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A mortgage payment is also a form of forced savings. Which lots of people have trouble with.
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Of course. There’s definitely risk associated with that investment that may present a different risk profile than the S&P 500.
It’s worth noting, however, that a person doesn’t avoid that risk simply by choosing the S&P 500 investment rather than equity in a home - rent vs. buy. That’s because you have to live somewhere, and because rental prices tend to correlate very closely with property prices. If you choose to rent your home, rather than buy it, you’re still facing risk with what will happen to future prices in your community - you’re just taking the other side of that risk. It’s bad to buy a house if your house is one of the ones that goes up materially less than the 4% national average; but it’s bad to rent that house if it’s one of the ones that goes up materially more than the 4% national average, because then your future rental payments go up faster.
That affects your S&P 500 investments. You have to pay your rent. If your rent goes up, you’ve either got to withdraw more money from your portfolio over time, or invest less new money in our portfolio over time. You don’t avoid the risk associated with betting on your community home prices, you’re just betting on lower rather than higher.
Transaction costs are absolutely a killer - you get a very illiquid asset. You just have to set that against the 15% you pay in capital gains taxes when you cash out of your S&P 500 fund, which you can (mostly) avoid with your primary home if you’re at or near the median price. And the transaction costs that come with being subject to having to move your residence involuntarily a few times in your life.
Or dozens of other factors. I’m not saying it’s a no brainer - there’s a ton to consider, and everyone should do a rent vs. own comparison. I just continue to point out that even though the gross rates of return on residential property vs. the S&P 500 are very different, because residential property is heavily leveraged (and because you have to pay rent, which is the flip side of that) the actual CAGR on those two investments is going to be much closer than those gross rates of return would suggest.
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Absolutely! I’m not arguing that the average person isn’t making suboptimal decisions due to their prehistoric, inbred instincts and susceptibility to good sales and marketing. Just that if you have the ability to do simple arithmetic and understand the long-term data, you’ll usually come to a different decision.
That’s also why Reagan had such an easy time selling trickle-down and tax cuts for the rich, while distracting such a large portion of the population with the racist dog whistling – effective sales and marketing. I had a high school classmate who made a fortune as a young real estate broker blockbusting the Irish and Italian Catholic neighborhoods in Hartford by marketing to blacks and Puerto Ricans, and moving them in. That’s how fortunes are made in America. {{ LOL }}
intercst
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Yes, I know that’s what real estate economics tells you, but when I’ve done the simple rent vs. buy calculation while residing in Texas, Louisiana, California, and the Portland OR metro area over the past 45 years, it came up “rent” save for a 1-2 year window at the tail end of the 2008-2012 residential mortgage meltdown. (Admittedly, I’ve never had any interest in living in a single family home on a suburban lot, so I’ve been comparing rental apartments with condos or town homes in densely populated close in suburbs or urban areas.)
Perhaps I’ve lived an usually charmed life to date, despite losing a leg. {{ LOL }}
intercst
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