If the housing crisis wasn’t enough to turn you off of buying real estate, listen to economist Robert Shiller: Houses are poor investments, and they pretty much always have been. Shiller was one of three economists to win a Nobel Prizeon Monday “for their empirical analysis of asset prices.” He is famous for predicting—in his book “Irrational Exuberance”—that the real estate bubble would burst long before the crash.
Totally depends on the market and what the rent/own cost spreads are like. True, a house is not an investment. It is a place to live, a utility, something you need. If you can get a better deal buying than renting, then you should buy. Fact: my monthly payment including insurance and taxes is roughly 60% of what the rental would cost. Net of taxes exemption for interest it’s roughly 52%. Yep, definitely made a mistake with that one./s
It’s ridiculous to say that nobody should buy a house to live in, such an absurd generalization. I kind of hope that happens because rental demand will drive my rental properties cash flows through the roof.
Definitely True. No other investment has 6% transaction costs on both the front and back end also the illquidity of a house makes it a bad investment because you will certainly take a huge hair cut if you need to sell fast. Also, here’s the kicker…You live there so it is not an investment.
But you also probably paid money for the downpayment. That money could have been used to buy stocks or other investments. I’m not saying that the economics won’t still work, but monthly payment comparison alone is not the whole picture, particularly on a risk adjusted basis, since the house is undiversified.
Shiller does not say that people should not own houses. He just says that a house should not be classified as an investment: something that you buy for the purpose of producing money over time.
Shiller, respect. I’m so sick of the old addage of “Buy a home, it’s a great investment!” No, it’s a use of funds, a large assumption of risk (big sht breaks and it’s all on your dime baby!), and you essentially grow roots making a move more difficult than had you been renting.
If you can rent cheap and invest the difference, do it. It makes me groan hearing about how people have nearly all of their net worth tied into their home…
Which is what I said, although I would change the statement to “the house you live in should not be classified as an investment”. I mostly took issue with this absurd ending to the article:
“And whatever you do, don’t buy a house. That is unless, as Atlantic Cities staff writer Emily Badger points out, “you don’t want to deal with a landlord [or] you want the freedom to remodel your bathroom.””
Anyhow, it worked out in my case, net of down payment. I’ve lived in the house for four years, saving about $1000 a month on rent which is roughly equivalent to my downpayment. That is, renting I would be absolutely certain to lose roughly $48,000 over that time frame. Instead I have a bunch of home equity, which may be risky but is definately better than a certain loss. It is just penny saved, penny earned in this scenario.
Even say I’ve done $15k in upgrades/maintenance (which is certainly overstating it), it still is a good deal. In certain areas (gentrifying, particularly) the rent/own spread is quite wide, likely because of the risk. In SF or NYC that is not the case: RE is crazy expensive.
But if house prices nosedive, you might be stuck writing a big check just to move out of your house.
But I agree–Will Rogers said, “Never invest in anything that eats or needs repainting.” Buying/renting real estate as an investment is generally a bad idea. (And your primary residence is a place to live, not an investment.)
Hey CvM–next time somebody tell you, “My home is the best investment I ever made”, you should immediately ask them, “Tell me about some of the other investments that you made.” I’ll bet you $100 that they give you a deer-in-the-headlights look.
And I don’t think that’s the argument he makes. His point is more that you shouldn’t expect houses to be a great investment, not that it doesn’t make sense to buy a home. You also shouldn’t expect huge increases in home prices (relative to inflation) over the long-run, and you shouldn’t make your decision to buy a home conditional on that.
My parents home has appreciated 800% since they bought it in 1987. Their equity portfolio hasn’t appreciated that much.
As a very rough comparison, S&P 500 in Oc t 1987 was 247 and it’s now 1744, so roughly +600% appreciation (you can also add in dividends). Factor in the house’s property tax, real estate agent fees, housing maintenance, and suddenly it doesn’t seem like much of a success story anymore.
A house should be a place to live not an investment.
On a side note, renting and owning both have there advantages and disadvantages.
Funny…my guess is Mr. Shiller is making long bets in the housing sector as he speaks. The question is not nearly as black and white as is suggested by this statement and is typical of “guru” proclamations that folks give far too much weight to.
A house you live in has a consumption value and an investment value. The importance is to discount the consumption value as an annuity of equivalent rent from the price paid, then decide how the remainder fits into your investment asset mix. The real problem is that most people’s home is tier biggest asset so they end up being highly concentrated in real estate, so something like a swap against the Case Shiller index would be useful to diversify.
The other issue is that mortgages are one of the few places that ordinary consumers can get lots of leverage, so that tends to tempt people into taking on a lot more risk than they think they are doing.
I’m surprised the leverage point took 12 posts to come up. If you buy a house after a major downturn at historical low interest rates using 10 or 20 to 1 leverage, you have good odds of making a good investment.
I think I make more a year in income off my property than I paid in cash. But most people don’t want to rent out portions of their primary residence. Has worked out well for me – depreciation recapture will be the only downside if I have to sell for whatever reason. Hopefully the exchange system still is a law