Owning a house.

[Pokeraddict]

Forget that property taxes go into the cost of owning a house because they are a hidden cost in your rent so that cost is not relevent. The only difference is that the valuation on an apartment is going to be lower but if it is a comparable rental house you will pay more in property taxes as the landlord has to pay a higher taxr rate on a house that is an investment as opposed to one that he would occupy. The property taxes are certainly considered when it comes to fair market value on rent.

Also the point I made about the mortgage interest deduction is not relevent if you are donating many thousands of dolars to charities or have other write offs. This only applies if before you bought a house you always took the standard deduction because of a lack of any other deductions.

[DesertCat]

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in a typical market, a house appreciates about 8% every year or another way to think about it is it doubles in value every 10 years. that does much better than inflation.


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Even if this were true, home price increases would outpace growth in personal income by 4-5% per year, meaning after 15-17 years the average american would only be able to afford half as much house. After 30 years, the average american would have to move down to a house in one quarter price range. I.e. if the average american can afford a $250k house today in 15 years they'll be buying houses that used to sell for $125k, and after 30 years, a $63k house. This can't happen, as housing prices can't outstrip the abilities of buyers to buy them.

In reality numbers like 8% come about because

1) People over-rate recent price increases that are clearly unsustainable (and reversing as we speak).

2) Houses have grown enormously over the years. The average house size in square feet constantly increases. This drives up the average house price, making the average increase look larger than it is. The average home size was 1,400 SF in 1970, and 2,300 SF in 2004. Over that span the average home price increased about 700% (from around $23k to $180k according to NAR). If you adjust for home size, the price increase would likely be closer to 400%. This one change alone lowers the gross annualized increase from 6.2% (not 8%) to only 3.7%.

So when you buy a 2,300 SF house, you will be getting the 3.7% gain, not the 6.2% going forward because your house doesn't grow in size. Of course you can do an addition, but you have to pay for that, it's not a free lunch.

My guess is that real long term appreciation will match personal income growth, somewhere between 3-5%. Houses can still be an excellent long term investment because of financial leverage, but each house is different. It all depends upon your rent vs. buy costs.

[SossMan]

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in a typical market, a house appreciates about 8% every year or another way to think about it is it doubles in value every 10 years. that does much better than inflation.


[/ QUOTE ]

Even if this were true, home price increases would outpace growth in personal income by 4-5% per year, meaning after 15-17 years the average american would only be able to afford half as much house. After 30 years, the average american would have to move down to a house in one quarter price range. I.e. if the average american can afford a $250k house today in 15 years they'll be buying houses that used to sell for $125k, and after 30 years, a $63k house. This can't happen, as housing prices can't outstrip the abilities of buyers to buy them.

In reality numbers like 8% come about because

1) People over-rate recent price increases that are clearly unsustainable (and reversing as we speak).

2) Houses have grown enormously over the years. The average house size in square feet constantly increases. This drives up the average house price, making the average increase look larger than it is. The average home size was 1,400 SF in 1970, and 2,300 SF in 2004. Over that span the average home price increased about 700% (from around $23k to $180k according to NAR). If you adjust for home size, the price increase would likely be closer to 400%. This one change alone lowers the gross annualized increase from 6.2% (not 8%) to only 3.7%.

So when you buy a 2,300 SF house, you will be getting the 3.7% gain, not the 6.2% going forward because your house doesn't grow in size. Of course you can do an addition, but you have to pay for that, it's not a free lunch.

My guess is that real long term appreciation will match personal income growth, somewhere between 3-5%. Houses can still be an excellent long term investment because of financial leverage, but each house is different. It all depends upon your rent vs. buy costs.

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omg, a sane post.

[TheMetetron]

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in a typical market, a house appreciates about 8% every year or another way to think about it is it doubles in value every 10 years. that does much better than inflation.


[/ QUOTE ]

Even if this were true, home price increases would outpace growth in personal income by 4-5% per year, meaning after 15-17 years the average american would only be able to afford half as much house. After 30 years, the average american would have to move down to a house in one quarter price range. I.e. if the average american can afford a $250k house today in 15 years they'll be buying houses that used to sell for $125k, and after 30 years, a $63k house. This can't happen, as housing prices can't outstrip the abilities of buyers to buy them.

In reality numbers like 8% come about because

1) People over-rate recent price increases that are clearly unsustainable (and reversing as we speak).

2) Houses have grown enormously over the years. The average house size in square feet constantly increases. This drives up the average house price, making the average increase look larger than it is. The average home size was 1,400 SF in 1970, and 2,300 SF in 2004. Over that span the average home price increased about 700% (from around $23k to $180k according to NAR). If you adjust for home size, the price increase would likely be closer to 400%. This one change alone lowers the gross annualized increase from 6.2% (not 8%) to only 3.7%.

So when you buy a 2,300 SF house, you will be getting the 3.7% gain, not the 6.2% going forward because your house doesn't grow in size. Of course you can do an addition, but you have to pay for that, it's not a free lunch.

My guess is that real long term appreciation will match personal income growth, somewhere between 3-5%. Houses can still be an excellent long term investment because of financial leverage, but each house is different. It all depends upon your rent vs. buy costs.

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omg, a sane post.

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So .7% after inflation per year? Sounds about what I thought.

[stewartkev]

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I'm watching TLC about couples buying houses and living together. It seems to me the thought of buying a house is worthless for the fact that the bank owns it and you're going to end up paying 3x the price if you dont just pay up front. Your thoughts?

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If we go back to the original post, rather than debating appreciation, short and long term options, etc...

I just bought a 2 bed house in the UK, where the market is WAY overheated, for £130K. True cost over 25 years works out at £215k inc all interest payments, fees, etc. Nothing like 3 times the cost of the house. The way I look as is that:

REPAYMENTS + INTEREST + MAINTENANCE - DEDUCTIONS = RENT + MOVING COSTS

When looked at over 25 years. But in 25 years I have a house. What do you have?

[eastbay]

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in a typical market, a house appreciates about 8% every year or another way to think about it is it doubles in value every 10 years. that does much better than inflation.


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Even if this were true, home price increases would outpace growth in personal income by 4-5% per year, meaning after 15-17 years the average american would only be able to afford half as much house.


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While I generally agree with what you're saying, one point of slippage is that the definition of "afford" keeps changing, which allows for prices to move somewhat faster than wage growth. This has an obvious upper bound, but there always seems to be more room to run.

I have seen stats that show the average % of net people spend on their homes, and it has been increasing significantly over time, according to the numbers I remember.

eastbay

[TheMetetron]

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But in 25 years I have a house. What do you have?

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In 25 years, I have the total cost of your house - rent costs invested at something that was returning actual money.

[stewartkev]

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But in 25 years I have a house. What do you have?

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In 25 years, I have the total cost of your house - rent costs invested at something that was returning actual money.

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Where I live the cost of renting roughly approximates the cost of buying, as my post states.

Edit: For clarity, mortgage + insurance comes to £605. Rent would be £600 for a 2 bed house in similar area. For the previous 5 years, I was in before the boom so my mortgage was <£300 and to rent a similar apartment was £375.

[DesertCat]

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But in 25 years I have a house. What do you have?

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In 25 years, I have the total cost of your house - rent costs invested at something that was returning actual money.

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Where I live the cost of renting roughly approximates the cost of buying, as my post states.

Edit: For clarity, mortgage + insurance comes to £605. Rent would be £600 for a 2 bed house in similar area. For the previous 5 years, I was in before the boom so my mortgage was <£300 and to rent a similar apartment was £375.

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what about maintenance + taxes? if it works out the way you describe, it would be a no brainer.

[Jeffmet3]

a few things.

1) Buying a house gives you many more options then renting. Most people don't rent, they sell.

2) Psychological effects of owning your home.

3) Regardless of the change in value, you can always live in your home and it provides you the same value. home is also a safe asset.

4) most people live in the same place for most of their lives. this board is so far from an accurate representation of the average american.