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Delusional Homedebtors



December 02, 2008 – Comments (16)


Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now...

In a poll of 2,000 adults, real-estate-data provider found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.

The reality?

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

The only reason that homes have ever been a reasonable"investment" is that they were a forced, lleveraged savings account for many people, who stuck around for a long time. Of course, most of those people didn't buy at Ponzi-scheme prices years ago. Now, everyone still seems to be conned by the snake-oil salesmen like Yun at the National Association of Realtors, and they think that homes can somehow, magically appreciate at 10% per year, despite the fact that wage growth has been flat or negative.


16 Comments – Post Your Own

#1) On December 02, 2008 at 12:13 PM, TMFBent (99.47) wrote:

Here's some stuff from Zillow.

Homeowner Confidence Survey: The perception-reality gap persists. Despite the turbulent quarter, half of U.S homeowners do not think their home’s value has decreased. In reality, nearly three-quarters of homes lost value in the past 12 months.

For more information about the survey, check out the press release and blog post.

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#2) On December 02, 2008 at 12:29 PM, ikkyu2 (98.48) wrote:

Mortgage interest is tax-deductible.  This little fact makes a home a much better investment than it would otherwise be.

Think about it with regard to stocks.  What if margin interest were tax deductible?  Don't you think we'd all be in the market?

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#3) On December 02, 2008 at 1:05 PM, threepaweddog (28.15) wrote:

I wonder what will happen when perception catches up with reality?  When people finally realize that their personal wealth has declined dramatically -- in both their home values as well as their 401(k) plans that now they're just sure will "bounce back" -- they will be forced to reduce spending and have much more reasonable wealth expectations in life.  That is good for the country, but probably not so good for the stocks that have profited from the credit bubble and absurd consumer spending. 

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#4) On December 02, 2008 at 2:24 PM, outoffocus (24.05) wrote:

The only reason why buying a home right now would be a good investment is because in come cases buying a home (using like-kind analysis) is cheaper than renting.

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#5) On December 02, 2008 at 2:32 PM, saunafool (94.43) wrote:


Mortgage interest is only tax deductible to the extent that it is more than the personal deductions. In other words, the first $200,000 of house has no tax advantage for a couple.

Second, houses are not investments; a house is a place to live. As outoffocus points out, buying a home is a good place to put your money when it is cheaper than renting an equivalent place.

Evidently from your CAPS rating, you must not be totally out of touch. My guess is that you don't live in a bubble city and or have not witnessed the insanity of the past 7-8 years for some reason.

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#6) On December 02, 2008 at 2:54 PM, mysoftballcoach (70.56) wrote:

I'll chime in to state the obvious.  What makes buying a home a great investment for most Americans, is the so called Forced Savings.  I believe just a few months back I read that the average household was actually spending more than they earned.

So, is a house a great investment?  Not necessarily, but given that Americans save NOTHING, it makes that 2.5 to 3% in a house look pretty good.


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#7) On December 02, 2008 at 3:07 PM, EspressoSW (< 20) wrote:

saunafool: you're right, except... if your state income tax and charitable contributions are already more than the standard deduction (a common situation), you're already itemizing and should count all mortgage interest as deductible.

mysoftballcoach: historically, a house was the only way most people could beat inflation, paying back the loan with cheaper dollars and enjoying a leveraged appreciation.  The forced savings aspect was important to people who "burned the mortgage" and had a house to live in for retirement, but became meaningless in the cash-out-refi era; it may come back now that it's getting harder to cash out.

ikkyu2: actually, margin interest is deductible.  So tell all your friends to get into the market and buy things I want to go up :-)


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#8) On December 02, 2008 at 3:10 PM, starbucks4ever (69.26) wrote:

RE is virtually guaranteed to outperform equities over the next 20 years, possibly by a wide margin. But equities should do well enough, too.

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#9) On December 02, 2008 at 3:22 PM, eliassonsr (< 20) wrote:

A home increases your networth in multiple ways: Leverage - the 3% increase in value is on the whole house not your 20% down (if that much), the tax deduction, principle reduction and other intangible benefits (owning vs renting, full control of the asset, Etc) 


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#10) On December 02, 2008 at 3:50 PM, johnw106 (< 20) wrote:

A house is and has always been a terrible way to build wealth. Houes do not create wealth. They destroy it. Property taxes. Maintenance. Repairs. Then there is always the very real chance that the neighborhood takes a turn for the worse and the property goes down in value.

You buy a house for one reason. To give your family a home. Shelter and security. A place to live out your last years. Buying a house with the idea of selling it in a few years at a profit is a huge gamble that the average family should never take.

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#11) On December 02, 2008 at 8:16 PM, TMFBent (99.47) wrote:

"RE is virtually guaranteed to outperform equities over the next 20 years"

Care to offer some support for this opinion? (Be sure to include discussion of transaction costs, taxes, mainenance, repairs, and the likely reversion to the usual price/income mean, which requires, in many places, a further 30% drop in home prices...)

Bonus points for explaining how people who are heavily levered into such depreciating assets will, with them, outperform equities.


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#12) On December 03, 2008 at 12:06 AM, xserver (85.80) wrote:

I did some quick checking around for buying and renting a home out in my area.  I figure I could rent a $400,000 home for $2000/month, so that means my investment will appreciate 3% per year with a 6.0% "dividend".  Now even without maintenance, mortgage interest, taxes, etc it doesn't look that great compared to some of the projected returns in equities for the next 5-10 years...way more than 3% per year (10%, 15% maybe?) and 2-3% dividend for something as simple as a S&P500 index.


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#13) On December 03, 2008 at 3:23 AM, saunafool (94.43) wrote:

"RE is virtually guaranteed to outperform equities over the next 20 years"

I challenge you to find any 20-year time period where RE outperformed equities. Even during the super-boom in housing from 1987 to 2007, equities outperformed.

And I love how people talk about the "leverage" associated with real estate gains. The belief is that you put $20,000 down on your $200,000 house and every 10% gain on the value is a 100% gain on your initial investment. That would only be true if you never had to make another house payment again. In reality, you are paying 6% interest, plus taxes and maintenance making the real carrying costs over 7%, on all that leverage. You have to make payments for 30 years.

Plus, no one ever runs the numbers assuming housing prices will go down. That's basically at the heart of this discussion--homeowners still refuse to believe that the price of their most precious "asset" has fallen and they still believe it will go up in value as early as next year. For most of the world, where housing prices are way overvalued compared to rents, price appreciation is very unlikely for several years.

Look at the Japanese. After their housing bubble popped, prices went down for 15 years in a row. In some cases, the inflation adjusted prices have fallen by 80%. (In Japan, equities haven't been so hot, either, which might be a lesson for all of us that cash paying 2% might be the best we can hope for.)

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#14) On December 03, 2008 at 5:02 AM, StockSpreadsheet (64.37) wrote:

Benefits of home ownership, (home loan):

1)  Tax deductability of interest.  (Of course, the fact that you are paying interest in the first place is a negative.  Therefore, you need to look closely at the renting/owning costs to see where you fall on the benefits line.)

2)  Fixed payments, (assuming no refi).  Apartment rents tend to go up, sometimes fairly quickly in bubble states.  Fixed-interest mortgage payments don't go up, so years down the road, (if you stay in the house for years), that can be a big benefit. 

3)  You can make modifications to your home, (add rooms, repaint, replace fixtures, etc.), pretty much to your hearts and wallets content.  Not true of apartments and less true for condos.

4)  You can borrow against the home for major expenses, (talking large medical bills, other necessities here, not counting you wanting a new big-screen plasma TV and don't want to wait while you save for it).  Not true for apartments.

5)  When you retire, or when the kids have left the nest, you have the chance to sell the house and cash out the equity, if there is any, (or get a reverse mortgage if you retire), and use the money to buy a smaller place or to help suppliment your retirement, (in the case of a reverse mortgage).  Not true of an apartment.

Bad parts of home ownership:

1)  You pay all maintenence.  Major repairs are done by the apartment owners at their expense, (unless you caused the repair by punching a hole in the wall).  Minor ones they might have you do, (replace a faucet, etc.), though you can often deduct reasonable expenses, (such as the cost of the faucet), from your rent or get reimbursed by the apartment owner.

2)  You pay all taxes.  (Though it would be assumed that the apartment owner will charge you enough in rent to cover his taxes and maintenence costs, sometimes that is not true if rents have not been rising and costs have been.)

3)  You pay the interest on a home loan.  No interest on apartment rents, so they can often be lower than mortgage payments. 

4)  If you have a kid, or adopt one, or if your neighborhood goes to hell in a handbasket, it is easier to move if you are in an apartment.  No house to sell.  (Of course, if you have a lease on the apartment, this will make it harder to move, but the leases are usually fairly short, (a year or less), so this is not usually too bad of a thing.)

5)  Home prices can depreciate in value.   That is not usually a concern in an apartment.  (Of course, if the owner doesn't keep up maintenence, then the apartment can effectively depreciate in value, at least to you, but then you can always move, (See #4).)

Those are what I thought of off the top of my head in a few minutes.  If I forgot something, I'm sure you all can help fill in the missing pieces.

Take care and have a nice day.



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#15) On December 03, 2008 at 9:13 AM, TMFBent (99.47) wrote:

I have always thought the home price appreciation math as understood by most people was too flawed to be anything but funny. Everyone says things like "I paid $80,000."

Sure ya did. What did the prin + interest payments really cost you over those 3 decades? And taxes and upkeep?

Those are conveniently forgotten as everyone marvels about how much their home is worth in (much less valuable later) dollars...

Ya buy a house when it's a better deal than renting, end o' story. Given that house prices (and rents) are both going to fall for large parts of this country for a long time, and renting is still much cheaper, it's a pretty easy decision for people who actually run the math.

But as we've seen, and as the increasing deliquency rates prove, most people don't run the math. That's why they're victims in need of saving. Get out your wallets.


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#16) On December 03, 2008 at 12:08 PM, engstocker (54.71) wrote:

Realestate is a great way to wealth. I'm talking about being a landlord. I bought my first rental in 03 and have bought and sold 5 more since then. I buy fix up and rent out for a 1+ years (to save on cap gains) and then have sold. I took 20,000 of the banks money and turned it into 135,000 (now in the bank) over the last 4 years. I live in a state that has had no housing bubble and a 135,000 can buy you a 1600 square foot 10 year old house in a nice neighboorhood with great public schools. So if you don't thing realestate can be a great investment your crazy. It's just like anything have to buy stuff thats UNDERVALUED and sell it for a higher price. Realestate has great leverage potential to it....that is one of its main attractions. It is disinformation to blanketly state that realestate is not a good investment. I challeng anyone who has gone from 20k to 135k over the last four years in equities with very little to no risk because that is what realestate and sweat equity has done for me. I am in no way trying to brag, just offering facts to the other side of the argument.

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