Why do articles like this come out just before I buy a big house?

[RikaKazak]

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I am buying it to live in as my primary residence. My hope is that I can get some appreciation from it and make some bank in <5 years. The home is in the best area of the Bay (San Mateo) and I'm paying like 1.35 million. I would like to be able to turn around and sell it in <5 years for at least 1.5 million but these damn articles get me a little scared. It is possible that I will live there longer, but I'd like to keep the option open to make a decent short-term profit.

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1.35 million will be worth over 1.7 million in 5 years just by putting in a savings account paying 5% interest per year. If your buying the house as an investment and only want it to appreciate to 1.5 million you are missing out.

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you're missing 1 very important aspect, and that's the power of leveraging your money. I'm assuming he's starting with something like 20% down...so it's no like he's taking 1.35 million out of pocket.

[Strickly Bidness]

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I am buying it to live in as my primary residence. My hope is that I can get some appreciation from it and make some bank in <5 years. The home is in the best area of the Bay (San Mateo) and I'm paying like 1.35 million. I would like to be able to turn around and sell it in <5 years for at least 1.5 million but these damn articles get me a little scared. It is possible that I will live there longer, but I'd like to keep the option open to make a decent short-term profit.

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1.35 million will be worth over 1.7 million in 5 years just by putting in a savings account paying 5% interest per year. If your buying the house as an investment and only want it to appreciate to 1.5 million you are missing out.

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This logic is badly flawed because almost everybody who has a 1 million dollar home carries a mortgage. Now, if I had cash to buy this house then yes, your argument would make sense. Remember, I am not able to sock 1.3 million away into a savings account because I dont have that much cash on hand. I am making 5% per year on the bank's money because they are giving me a mortgage. In return for letting me make cash on their loan, I pay them interest and get to live in their house as part of the deal.

[Girchuck]

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I am buying it to live in as my primary residence. My hope is that I can get some appreciation from it and make some bank in <5 years. The home is in the best area of the Bay (San Mateo) and I'm paying like 1.35 million. I would like to be able to turn around and sell it in <5 years for at least 1.5 million but these damn articles get me a little scared. It is possible that I will live there longer, but I'd like to keep the option open to make a decent short-term profit.

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1.35 million will be worth over 1.7 million in 5 years just by putting in a savings account paying 5% interest per year. If your buying the house as an investment and only want it to appreciate to 1.5 million you are missing out.

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This logic is badly flawed because almost everybody who has a 1 million dollar home carries a mortgage. Now, if I had cash to buy this house then yes, your argument would make sense. Remember, I am not able to sock 1.3 million away into a savings account because I dont have that much cash on hand. I am making 5% per year on the bank's money because they are giving me a mortgage. In return for letting me make cash on their loan, I pay them interest and get to live in their house as part of the deal.

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Mortgage is not free. It carries an interest rate which you now have to pay to the bank. Their interest rate is greater than 5%, so your interest costs are bigger than the assumed 5% gain on the house price. In effect, you are paying bank a rent for the use of their money. Mortgage is +EV for the bank, and should be a losing proposition for you, if not for appreciation of the house price. However, if the appreciation is not rapid enough you still lose on the deal. It is the price you pay for housing your family in comfort, your benefits are intangible, appreciation is just a bonus.

[Strickly Bidness]

Girchuck,

Very true. We all do have to live somewhere and living in a nice place is a great way to spend your money. I just don't want to lose my shirt with this house. Actually, I drove around the neighborhood where I will live today and there isn't a single house for sale there. Its such a hot spot to live that as soon as somebody puts a house on the market there are like 20 bidders. That does make me feel somewhat good about the deal.

[squiffy]

Capt. This is a quote or paraphrase from the article.

"Unfortunately for both groups, however, houses are not great investments."

Compare this with Peter Lynch "Learn to Earn" at p. 102. "Buying a house or apartment is the most profitable purchase most people ever make."

See also Peter Lynch "One Up on Wall Street" at p. 77.

"Before you do invest anything in stocks, you ought to consider buying a house, since a house, after all, is the one good investment that almost everyone manages to make. I'm sure there are exceptions, such as houses built over sink holes and houses in fancy neighborhoods that take a dive, but in 99 cases out of 100, a house will be a money-maker."

Does anyone know who Peter Lynch is?

And is anyone surprised to learn that in two separate books about how to make money in stocks,he devotes several pages urging people to buy a home first, because it's probably the best investment most people will ever make, then goes on to give reasons why.

Has anyone read these books?

Is anyone going to read them?

[squiffy]

The problem is that the economy is kind of like an ecosystem or pyramid.

If all the little fish and plankton die because factories dump too many nasty chemicals into the ocean, then everything that feeds on them die too. We are all interconnected. No man is a donkey, er, i mean an Island.

Do you know how many poor people there are in this country? The huge base of our economic pyramid is formed by the poor and middle class. Do you know how many Bill Gates' and Warren Buffets there are? Not many. Do you know how many people there are working at McDonalds and Wal-Mart. A lot.

If poor people cannot borrow money or stop spending money or go bankrupt, it will ultimately affect our entire economy, through a ripple effect.

Everything in life is cyclical. The sun goes up in the morning and down at night. The seasons change. Etc. etc. Stock prices go up and down. They peak and trough. Same with real estate prices. There is a slow, gradual long term increase, because the population is increasing and land becomes more scarce. But prices go up and down, boom and bust.

Don't kid yourself. Pharoah and the Egyptian royalty and upper class may think they are immune and above the fray, but if the peasants and middle class start to suffer, problems will eventually trickle up the food chain.

[Jcrew]

Here is my wild azz guess probability distribution what your house would be worth in 5 years before transaction fees.

Gains_________Probability
5%+___________.10
0 to +5%_______.25
0 to -5%________.50
-5%+__________.15

This is before the 6% agent commissions, but I predict that via technology these fees will be minuscule(less than 2%) or non-existent by then.

Edit: Percentages are in Nominal dollars. Are you asking this because you are planning to get an ARM?

[scotchnrocks]

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If you and your spouse love the home and location, then there's an intangible but very important benefit you receive which can't be quantified.

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I think this is worth repeating. Don't let your decision be 100% based on the financial aspect.

My experience in purchasing a home is that it is so situational dependent that the question shouldn't even be posed unless you have a lot more financial data you want to tell folks about and a lot of information on the local rental market. There is no cookie cutter answer for most situations.

Squiffy's posts are good too.

[SplawnDarts]

I would not make a major leveraged investment in real estate at this time unless the tax and rent-avoidance bennifits were good. I would also not tie up more than 1/4 of your investment capital in even a first home.

[Strickly Bidness]

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Here is my wild azz guess probability distribution what your house would be worth in 5 years before transaction fees.

Gains_________Probability
5%+___________.10
0 to +5%_______.25
0 to -5%________.50
-5%+__________.15

This is before the 6% agent commissions, but I predict that via technology these fees will be minuscule(less than 2%) or non-existent by then.

Edit: Percentages are in Nominal dollars. Are you asking this because you are planning to get an ARM?

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No ARM for me Hey, do you know much about the Bay Area? I think your distribution would only be helpful if you knew a lot about the area. There are thousands of buyers looking at like 30 decent houses in the two hottest parts of the Bay right now (Burlingame and North San Mateo). Does that change your distribution any?