Why your home is a lousy investment when you think it's great


On Jan. 1, 1995, San Mateo’s median home price was $305,083. Suppose you bought and put 20% down plus 1% closing costs. With 1995, 30-year fixed-rate mortgages going for 7.5%, your monthly payments were about $1,700.

Jump to 2005, when you sold for $763,100 (2005’s median price), a perfectly timed deal months before home prices peaked. After amortization payments, your remaining mortgage balance was $184,091. After paying that off, you had a gain of $579,000. Then, subtracting your down payment, you had a whopping 849% return, or 25.2% annualized. Problem is you forgot a megaboatload of expenses, all of which must be subtracted.

Over those 10 years, you paid more than $60,000 in principal and more than $247,000 in interest. Subtract them, and your return falls to 174%, or 10.6% annualized. San Mateo’s annual home upkeep averaged $1,820 (general maintenance, HOA fees, yard care, etc.). Don’t forget your 1995 closing costs and 2005 realtor’s commission (about 5%). And property tax! In San Mateo, you paid 1.125% of your purchase price, increasing 2% every year. Over 10 years, that’s more than $37,000. Maybe you remodeled for $40,000 and added a patio for $15,000. Median homes grew 500 square feet between 1995 and 2015. To generate average prices you must maintain average size.

After all this, your amazingly lucky timing rendered a mere 59% cumulative return, 3.1% annualized. That’s way worse than stocks or bonds over that period. The one important difference since then? Uncle Sam foots less of your bill since Congress capped property tax and mortgage interest deductibility.

Posting a lesson for BAGB?

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The analysis is ignoring the tax benefit or mortgage interest and property tax deduction. Also, people need to live somewhere. If the person wasn’t paying a mortgage, then what would their rent have been? Any analysis that ignores the cost of other housing options isn’t an accurate picture. You can’t live in stocks and bonds.

It’s a terrible comparison for owning a rental property, since the renter is making the payments for you. I think it’s tough to beat properties that are break even or better on cash flow. You put the 25% down, and let someone else pay all the monthly costs. You get to keep all the profits at the end. Even if appreciation is only 3% a year, you’re getting 12% a year on your down payment.

The math gets really messy if you start talking about cash flow negative. Also, if you’re cash flow positive you can keep acquiring more properties. You can only acquire as many cash flow negative properties as you can subsidize the cost with other income.


Can’t live in your stock portfolio… What was market Rent?
Generally rent is similar to expenses, so expenses don’t count in comparing returns to stocks.
I bet that place rented for $1700 in 1995 and went up to $2700in 2000 and back to $2000 in 1995.

Still want to talk % and qualitatively when I have posted a detailed cost computation.

What is the point of raising objections, include those savings and tell us what is the annualized return?

The point of the article is that the annualized return is not fantastic as claimed by RE pumpers, in his article, is not 25.2%. Obviously, is not so low as 3.1%. He was exaggerating. Countering that 3.1% is too low have not disproved his point that the investment is not that great i.e. not 25.2%. His article is accurate but not precise. So what is the annualized return for his example? Historical annualized return of S&P 500 index is 7-11%.

Like @marcus335 said you do need to compare with renting. Renting’s ROI is most likely negative.

The timeframe in the article is 1995 to 2005 with the dot com crash in the middle. How many stock investors were calm and wise enough to hold on? Meanwhile the house owner saved 60k in principle thru forced saving.

I think the real moral of the article is that one should not go all crazy on their primaries. Spending 3.5M on a Palo Alto house is most likely a very bad investment.

I can accept this higher level message.

As we know from data, most Americans save nothing. They have less than $1,000 saved. The forced savings from a mortgage is a great thing for them. Yes, they could earn better returns elsewhere, but that depends on them having the discipline to save.

I made all my money in real estate…I don’t give a crap what stock pickers tout…

What you’ve said is correct but don’t think is the message of the article. What do you think is the message?

I wonder how to make my statement precise. How expensive is too expensive compared to replacement rent? Long term appreciation rate according Case Shiller is around 5.5% a year for SF. SP500 is around 10.5%? Accounting for other benefits perhaps 2x rent is acceptable?

SFBA: 6-8% post-war. Post-financial crisis is double digits.
S&P 500: 7-11% post-war. Post-Financial crisis is 15-25%.

Didn’t do any computation, my WAG ideal price for primary (if buying now) in SFBA is $1.5-2.0M, higher is too expensive.

Maybe we will see reversion to the long time mean?

A home isn’t as great of investment as people think. You should buy a home for other benefits and not because it is the best ROI for your money. I think that’s what most people do. That’s why most people don’t buy until they are married or even later when they have kids.

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Bingo! People seem to forget that small but important point…

Having a place to live is an evidently underrated aspect of home ownership. Worst case scenario - we pay off this whole mortgage thing and have a place to live for the next 30 years until I retire, then sell a who-knows-how-many-million-dollars-it-will-be-by-then house and retire to wherever. Lousy investment indeed.

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Bought my first flip house at 22. Never looked back. Been a fun ride for 42 years. Wish I kept them all. Never felt the same about stocks. What was the hot stock in 1976? Was it Xerox? Is it even still around today?
In fact stocks sucked in the 70s and real estate skyrocketed.

in the 1970s
The process of change, as far as investing was concerned, accelerated in the 1970s, although the U.S.stock market meandered through this decade of stagflation. The DJIA, which was just above 800 at the start of the 1970s, had only advanced to about 839 by the end of the decade, an overall gain of 5% over this 10-year period. (For details see, Stagflation, 1970s Style

All the houses I bought and sold still exist and all have appreciated a whole bunch.

These were the hot stocks in 1970. Most didn’t gain any value by 1980. In fact with 10% annualized inflation they lost a lot of real value. How many of these would you buy today?


Based on my experience:

Best investment: worked for a startup that goes IPO (stock grew exponentially)
2nd best: worked for a good company (company stock options grew 1000+%)
3rd best: investing in tech stocks (grew ~300%)
4th best: investing in Bay Area rental properties (grew ~150%)
Lastly: primary home (grew ~150% but not counting expenses through the years)


Stocks come and go . Real estate lasts forever.

Everyone who bought since 2009 looks like genius. Wait for the next downturn when the tide goes out to find out who is swiming naked

I’m all naked and over-exposed even before the tide goes out… :rofl: