Is the house you live in an asset?

[Hazir]

On the old CC a debate had started after the media in the US started talking about home-owners who were 'under water' and who defaulted on their mortgage even though they were still able to pay their installments.

The debate sort of withered after Phoxe messed up, but I think it's still interesting to ask this question. In the US, The Netherlands and I imagine most of the countries where the members of this forum come from there has been a consistent push towards people owning the place where they live. Tax deductability of interest paid on mortgages is one clear example of that.

This has created, I think, in people an idea that the moeny you put into a house somehow is different than the money you have put in a savings account or in stocks. I personally think that approach is based on the false idea that the fact that you 'need a place to stay' means that you couldn't use your money better than by owning your own home. Sure enough, that strategy worked out very nicely for me over the last 25 years; I own 2 homes. One little townhouse in Istanbul free of any obligations and one appartment in Amsterdam that is burdened with a mortgage which (after taxes) costs me less than €60 a month in interest.

However, this relative success, doesn't make me think that I couldn't have done better necessarily if I had rented and put the money that went to the people who sold me those places and the interest I paid to the banks into other types of investment.

Maybe my view on this is colored a bit by the fact that I don't have any children and that I don't feel any need for estate planning, other than having the aim of being a relatively poor corpse at some day in the future.

So , is your house an asset if you own it or is it just your home?

[GGT]

I've been thinking about it too, Hazir. I get hung up on terminology and definitions, argh.

My house is my home, where my children sleep tucked safely in their beds, where we meet up to share family meals face-to-face and talk about our days--it's an emotional connection to the dwelling.

Take away the sentimental value and it's just like any other "asset". Without us in it, it's a storage unit to keep our family 'stuff', pictures and photo albums, grandma's antique chest. I could rent a storage bay and rent an apartment, but instead I bought this place for the sense of place and permanence. Not sure how to place a dollar value on that.

Houses that are our homes (yet carry a mortgage) have an emotioanl component that can get us into trouble. If I view it as stocks or bonds or a retirement fund, then it turns into a thing I'm supposed to follow for its trade value, flipping for profit. Putting more into the 'investment' by upgrading kitchens and baths with any eye toward return. If I view it as our home, I want it to be comfortable and safe, and spending money on it has a good purpose, even if it becomes a money pit.

I've built, bought and sold homes many times over the years. By far the hardest part is the emotional attachment we give to places, homesteads, where we love and play and make babies, where grandma has a room or grandpa took his last breath, where door jams have magic marker height charts as kids grow up....

Not sure if a 'strategy of investment' can include a home that way. But as our societies became more mobile and short-term oriented, we all moved around, buying and selling, and lots of people wanted brand spanking new. Enter the building and real estate bubble, The American Dream?

[littlelolligagged]

I would move out of my house in an instant if I could do so, but all the foreclosed on and otherwise abandoned properties in my subdivision have made its value drop drastically. Eventually the market will improve, the empty houses will be bought and repaired, and I won't lose money getting out of here.

I have no sentimental attachment to my house. The only point of home ownership to me is not simply throwing money away in rent, but to (presumably) build equity.

[Hazir]

That emotional attachment sure blurs things. But maybe what the present crisis is showing us is that if a society puts so much of its investments in real estate the logical result is that real estate, including homes become just an other asset for more and more people, where the emotional attachment counts just as little as with the money in your savings account.

If I would liquidate all my real estate, I could rent a place and invest the money in a potentially more effective way. It might enable me to have a lifestyle better than the one I have right now.

[Hazir]

I would move out of my house in an instant if I could do so, but all the foreclosed on and otherwise abandoned properties in my subdivision have made its value drop drastically. Eventually the market will improve, the empty houses will be bought and repaired, and I won't lose money getting out of here.

I have no sentimental attachment to my house. The only point of home ownership to me is not simply throwing money away in rent, but to (presumably) build equity.

But are you throwing money away in rent? Didn't you pay for your house? How much would you have paid in rent for a similar house over the same amount of time. Is that really more than the pruchase price? Because that is the only way that renting could be more expensive than buying. The only 'equity built' is the increase in the value of your home. And most of that is only price-inflation anyway over a longer time-frame. You (and I ) could have rented, put an amount similar to the interest we paid on our mortgages in other investments and be better off.

You for example could see that too many houses in your area are empty and/or neglected and simply tell your landlord you want either a lower rent or will move out. Options you (nor I) have at the moment since all/most of our money is tied in bricks and mortar that won't move.

[littlelolligagged]

But are you throwing money away in rent? Didn't you pay for your house? How much would you have paid in rent for a similar house over the same amount of time. Is that really more than the pruchase price? Because that is the only way that renting could be more expensive than buying. The only 'equity built' is the increase in the value of your home. And most of that is only price-inflation anyway over a longer time-frame. You (and I ) could have rented, put an amount similar to the interest we paid on our mortgages in other investments and be better off.

You for example could see that too many houses in your area are empty and/or neglected and simply tell your landlord you want either a lower rent or will move out. Options you (nor I) have at the moment since all/most of our money is tied in bricks and mortar that won't move.

My house is paid for, because our old house in the middle of nowhere hit the other end of the spectrum, and was sold for a LOT more than we had put into it. If I sold now, I would lose. So we stay. We do, at least, have the benefit of decent schools - and since private school really isn't an option anymore that matters.

If I rented I'd be throwing away $1000 - $1500 a month that I have no hope of ever getting back.

[GGT]

My house is paid for, because our old house in the middle of nowhere hit the other end of the spectrum, and was sold for a LOT more than we had put into it. If I sold now, I would lose. So we stay. We do, at least, have the benefit of decent schools - and since private school really isn't an option anymore that matters.

If I rented I'd be throwing away $1000 - $1500 a month that I have no hope of ever getting back.

So that means you bought your current house at the height of the bubble, and you paid more than it was truly worth?

[littlelolligagged]

So that means you bought your current house at the height of the bubble, and you paid more than it was truly worth?

Not particularly, no.

The lessening in value is coming from the fact that the houses around me are going to shit, not that I overpaid like some sort of idiot.

[Hazir]

If I rented I'd be throwing away $1000 - $1500 a month that I have no hope of ever getting back.

You just said that you actually lost money on your home and yet you call rent 'throwing money' away. Is the money you pay to the bank in interest not 'money thrown away'? Will you ever have any hope of getting that back ?

If you did the actual calculations you would see how indoctrinated you are. In your particular situation you could have a ton of money in the bank and rent a place where you really want to live, rather than being forced to live in a house that is losing its value.

The problem is, people don't really do the calculus under the false pretense that you need a place to live in after all. The reality is that this need does not mean you need to put every cent you own into that brick and mortar.

The only hard advantage of buying a house is that is disciplines your savings behaviour. More or less at least.

[littlelolligagged]

You just said that you actually lost money on your home and yet you call rent 'throwing money' away. Is the money you pay to the bank in interest not 'money thrown away'? Will you ever have any hope of getting that back ?

If you did the actual calculations you would see how indoctrinated you are. In your particular situation you could have a ton of money in the bank and rent a place where you really want to live, rather than being forced to live in a house that is losing its value.

The problem is, people don't really do the calculus under the false pretense that you need a place to live in after all. The reality is that this need does not mean you need to put every cent you own into that brick and mortar.

I don't pay money in interest to the bank, Hazir. My house is paid for. So I'm not sure how I have lost money.

And yes, I should be able to get the money back. Just because I can't move now without losing money doesn't mean that will always be the case. And if I really wanted to move, I could easily rent this house out to someone. Of course, then I'd have to waste money on a place for us to live.

There is really no benefit at all to renting other than ease of changing address.

[GGT]

The problem is, people don't really do the calculus under the false pretense that you need a place to live in after all. The reality is that this need does not mean you need to put every cent you own into that brick and mortar.

The only hard advantage of buying a house is that is disciplines your savings behaviour. More or less at least.

That's where the bankers came in--put your cash to "work", don't tie it up in brick and mortar--let me put you in a house with this structured loan....cough

I did the math, added up the cash for deposit, the portion paid to realtors and title/deed search, other up front closing costs, looked at amortization schedule and interest tax deduction, even the property taxes that were escalating at ~%10/year. Added homeowner's insurance, maintenance costs, things I'd have to hire-out, even the outside chance I'd need a new roof.

That adds up to a ton of cash. I could have put that cash "to work" but look at our savings and CD interest rates, or the lost value in mutual funds, stocks etc. Which was the bigger gamble?

I can't sleep in a mutual fund or have a holiday dinner in an IRA.

[Hazir]

I don't pay money in interest to the bank, Hazir. My house is paid for. So I'm not sure how I have lost money.

And yes, I should be able to get the money back. Just because I can't move now without losing money doesn't mean that will always be the case. And if I really wanted to move, I could easily rent this house out to someone. Of course, then I'd have to waste money on a place for us to live.

There is really no benefit at all to renting other than ease of changing address.

You paid your home cash? What would the returns have been if you hadn't put all that money in a house but in investments or even bonds? Couldn't that have easily covered the money you supposedly would 'throw away' (or more).

Do you even know how much your house has cost you since you bought it? That would be in maintenance, taxes, lost interest and not to forget depreciation of value?

Let me repeat; I have a home in full ownership in Istanbul and another place almost entirely paid for in Amsterdam.

[littlelolligagged]

You paid your home cash? What would the returns have been if you hadn't put all that money in a house but in investments or even bonds? Couldn't that have easily covered the money you supposedly would 'throw away' (or more).

Do you even know how much your house has cost you since you bought it? That would be in maintenance, taxes, lost interest and not to forget depreciation of value?

Let me repeat; I have a home in full ownership in Istanbul and another place almost entirely paid for in Amsterdam.

Now what the returns would have been if it had been in investments I couldn't tell you (other than most peoples investments in other areas have gone to hell in a handbasket, too). But yes, I paid cash. There is a parking lot where my former digs used to be, and an auto parts store where my pool was (that is the only thing I miss about that place). They were widening the road and we took the opportunity and ran with it.

But I am reasonably sure it would cost me more to rent than to own. This mess will pass, and I will move on.

And if I have some reason to want to move before I can sell, I can always rent this house out to someone.

[GGT]

Do you even know how much your house has cost you since you bought it? That would be in maintenance, taxes, lost interest and not to forget depreciation of value?

Let me repeat; I have a home in full ownership in Istanbul and another place almost entirely paid for in Amsterdam.

Do you know all your "true costs"? That would have to include all the plane flights, and even viewing your "wasted" time in airports and planes, as "lost". Lost time that could have been spent working to make moar money, or lost time for leisure or hobby.

Or if you view property as income, then a vacant space is also a loss of potential renter revenue. That's another area people got into trouble, buying second properties, vacation homes, thinking they could rent the space out when not being used. Or letting it sit vacant while they paid the loan. Is that money down the drain?

[Hazir]

Do you know all your "true costs"? That would have to include all the plane flights, and even viewing your "wasted" time in airports and planes, as "lost". Lost time that could have been spent working to make moar money, or lost time for leisure or hobby.

Or if you view property as income, then a vacant space is also a loss of potential renter revenue. That's another area people got into trouble, buying second properties, vacation homes, thinking they could rent the space out when not being used. Or letting it sit vacant while they paid the loan. Is that money down the drain?

That house in Istanbul is a special case; it didn't really cost me so much at all over the last few years. I paid next to nothing for it in cash and that money and all the money that went into it in renovations so far came out of the rent I earned with it. As an investment that place has been perfect, but that's more of a side effect. I bought it on a whim more or less.

The house in Amsterdam is a different story; there's over half a million dollars tied up in what I call 'my appartment' and I honestly don't know if buying really gave me any real returns on investment if I take into account all the factors. I understand Lolli's defensiveness; I am not inclined to do the maths myself either

[GGT]

Sure. Just curious if you'd have spent the transport monies, going back and forth, in different way, or how you view "assets that cost money". Or the proverbial "spending money to make money" by sinking cash into a property, and no real return until it's sold. Hoping to come out ahead or at least even.

My sisters made that mistake with our mother's Florida property.

[Hazir]

Sure. Just curious if you'd have spent the transport monies, going back and forth, in different way, or how you view "assets that cost money". Or the proverbial "spending money to make money" by sinking cash into a property, and no real return until it's sold. Hoping to come out ahead or at least even.

My sisters made that mistake with our mother's Florida property.

The house in Istanbul wasn't a mistake by any metric; I will admit it was pure luck, but I dare to venture that even the time lost and airfare are covered

This might give an interesting perspective on my situation.

As things stand today I have some money in a savings account which gives me 2.6% interest.

The mortgage I have on my home costs me 1.8% before taxes which adds up to 1.2% after taxes.

If I would be able to easily access the money tied up in my appartment in Amsterdam I could
have 1.3% extra income by simply shifting money from one type of deposit (bricks) to the other
(cash). With over half a million of dollars tied up, that really made me think again.

Does it suprise you that once this situation started to present itself I stopped paying off my loan and started putting similar amounts in the savingsaccount? As things stand I need only half of the amount of the loan in savings to cover the interest payments and I'm pretty close to that break even point.

[GGT]

Viewing property as an ATM got people into a morass, is what I'm saying. Taking equity out in the form of loans was a very attractive lure that most folks now regret.

Second homes also tie us into mandated or limited vacation spots, but banks and RE investors tried to make it look nicer with time shares, or rental management companies and whatnot.

Home "ownership" realities depend on age, location, income, lifestyle, lots of things. Older people and/or those with young children want to set down roots, so being mobile isn't that important.

But if there's even a remote chance that someone has to relocate within five years or so, renting makes more sense. That used to be a rule-of-thumb that bankers and realtors tried to turn on its head. It backfired.

[GGT]

edit: Hazir you're lucky to be paying an insanely low interest rate on your loan, most Americans aren't, even if it's an ARM. Yours is tied to LIBOR, yes? New buyers get a super low rate they can lock in over 15 or 30 years, but to do that they (the Fed) has sold out the savers.

Our US savings deposits and CD interest rates are under 2% these days. Even NYSE assets have to be held for around ten years to capital gains, unless we get into speculating.

(not sure I used the edit button right oops sry)

[Hazir]

It's linked to the Euribor, which is pretty much the same as the Libor but then euro-centrered.

I do realise the interest is very low, though not insanely low, if I had signed the papers a month earlier it would have been 0.7% lower even.

The thing is, this inversion made me realise that I do actually have a lot of money tied up in this appartment that I could have used differently.

[LittleFuzzy]

But are you throwing money away in rent? Didn't you pay for your house? How much would you have paid in rent for a similar house over the same amount of time. Is that really more than the pruchase price? Because that is the only way that renting could be more expensive than buying. The only 'equity built' is the increase in the value of your home. And most of that is only price-inflation anyway over a longer time-frame. You (and I ) could have rented, put an amount similar to the interest we paid on our mortgages in other investments and be better off.

Can you leverage that equity as easily as you can a property? I'm not talking about a higher lifestyle here, but capital investment.

[rumrunner]

It is for my landlord

[GGT]

Can you leverage that equity as easily as you can a property? I'm not talking about a higher lifestyle here, but capital investment.

This is what I meant (at the Other Place) about Debt = Asset being questionable.

Leverage and collateral are only needed to get more loans and more debt.

During times of crisis or recession, cash in hand and liquid assets are more valuable than more loans and debt. Homes (real estate in general) are NOT liquid, and then become a liability, depending on the monthly expenditures.

When RE bubbles burst, values plummet, loans can't be paid, and jobs are being eliminated, it's "safer" to own a home outright with no loan, or be a renter.

The only thing that's saved me during this mess, was planning on a fixed monthly mortgage payment that was LESS than renting equivalent shelter in this area. That, and having enough cash on hand to make it 12-18 months without any income or government subsidy.

It can be infuriating to know I planned based on worst case scenario, while many gorged on hyper-inflated optimism. Now they're getting bailed out while I get to watch my interest and dividend income shrink.

yay

[wiggin]

There are straightforward calculations to determine whether it is worth it to rent or buy in a given area. Assuming one chooses a neighborhood/city on some other basis (work, school system, whatever), it will generally be pretty straightforward to compare the two.

There is another consideration, though: eventually when one pays off a house, your expenses will invariably drop to far lower than renting a comparable home. Even a 30 year mortgage isn't too long if you buy at, say, 30. That leaves you at least 30 years of life, most of it on a fixed income, where you have pretty limited housing expenses. Now, all that one needs to do is compare the net present value of the money saved by renting compared to the income needs to support renting in retirement. Factor in intangibles - the hassle and periodic capital costs of upkeep for buying a home compared to the freedom of being able to modify an owned property at will (and not having to deal with landlords).

In reality, houses are a decent inflation hedge. Renting costs tend to increase every year, roughly in line with inflation (unless it's rent controlled). A mortgage is a constant price for housing over 30 years (though property insurance and taxes will generally index with the assessed value of the home, which will move with inflation and other factors). Unless you're really savvy and get in on the ground level of an expensive area, it's unlikely you'll get significant return compared to other equities - but of course you get utility and future rental savings to offset that.

Realistically, in the areas I'm likely to be settling down, the calculation will be weighted in favor of buying, though my current abode is more convenient for renting. I don't view it as an 'investment' in the sense that I expect a significant return for use in my golden years (though it's certainly possible I'll downsize somewhat after any children move out, freeing up some more cash), but it is a place I'll be stashing some equity. Easily 70-80% of my assets will be in various securities, though.

Ender

[GGT]

Hi wiggin, remind me again (if it's not too personal) if you're in the Chicago or Baltimore area?

And would your decisions still be the same if you were transplanting from the midwest to the west coast?

[wiggin]

Hi wiggin, remind me again (if it's not too personal) if you're in the Chicago or Baltimore area?

And would your decisions still be the same if you were transplanting from the midwest to the west coast?

I grew up on the North Side of Chicago and lived there through the end of undergrad. I'm currently living in Baltimore; my rental cost is quite low where I live, and I don't need much room - the only stuff you can buy in the neighborhood I have chosen to live in are full houses, not condos or whatever.

However, it is unlikely I will be in either city when I settle down after school. I don't know enough about the west coast property situation to really know, though my impression is that real estate is incredibly overpriced in many sections thereof. It all depends on prevailing prices and price trends.

Ender

[GGT]

I grew up on the North Side of Chicago and lived there through the end of undergrad. I'm currently living in Baltimore; my rental cost is quite low where I live, and I don't need much room - the only stuff you can buy in the neighborhood I have chosen to live in are full houses, not condos or whatever.

However, it is unlikely I will be in either city when I settle down after school. I don't know enough about the west coast property situation to really know, though my impression is that real estate is incredibly overpriced in many sections thereof. It all depends on prevailing prices and price trends.

Ender

Couple of things stand out in your post--place of birth and place of education. Then using both to find a place to "nest".

That denotes the mobility I mentioned earlier. I'd agree that the west coast real estate scene (plus cost of living and all sorts of other factors) is unsustainable and so confusing that it's more like gambling than making a wise choice.

I'm not too far from Baltimore, so I'm relatively familiar with the city, its demographics and politics. Also grew up in the outskirts of Chicago and still have family there. The tax structures and property choices are very diverse....both are urban enough to attract certain professions.

But if you're newly married and planning a family, wanting to establish community roots over 30 years or so, they are worlds apart. Chicago retains some of its midwestern flavor while Balto is becoming an exurb of Philly or even boros in NJ.

The US can be a VERY complicated landscape to maneuver. Mobility that we once took for granted has now changed. I've heard tales that even corporate giants that used to offer relocation costs as a perk (buying their home and paying their moving costs), are eliminating that service.

As an anecdote that makes me want to either puke or catches my breath, my Gramp's old house in Western Springs is on the market. For so much more than it's really "worth" that he might be turning in his grave. Whilst he exclaims how stupid people might even one day buy tap water if comes in bottles and shows up in stores.

[wiggin]

I ain't staying in either for long. Need to finish the PhD, then we'll probably move wherever the Mrs. decides to got for her MBA (Boston, Chicago, Cali, or maybe Philly or Tel Aviv). After that, we'll probably choose a location with good access to a variety of jobs in our field (so we can theoretically change employment without moving much), schools that meet our criteria, and a nice community/neighborhood. Likely this will be limited to a few regions in a few countries. On the basis of where we find employment, we'll make a housing decision.

Mobility is certainly decreasing, but it has been a hallmark of America's workforce for quite some time and is remarkably important for our economy.

Ender

[GGT]

I ain't staying in either for long. Need to finish the PhD, then we'll probably move wherever the Mrs. decides to got for her MBA (Boston, Chicago, Cali, or maybe Philly or Tel Aviv). After that, we'll probably choose a location with good access to a variety of jobs in our field (so we can theoretically change employment without moving much), schools that meet our criteria, and a nice community/neighborhood. Likely this will be limited to a few regions in a few countries. On the basis of where we find employment, we'll make a housing decision.

Mobility is certainly decreasing, but it has been a hallmark of America's workforce for quite some time and is remarkably important for our economy.

Ender

Yes, the choices get difficult. Some math quant has probably got that narrowed down, but I'd be reluctant to buy into their schpiel.

Career + kids + schools + community + culture / cost of living + tax structures - crime

Well you get the point. I can't put it into math terms. Let alone assign value to the Misses or her potential Mama visceral instinct. But then, I'm guessing you calculated her valuable input that way, before you got married.

[Hazir]

Can you leverage that equity as easily as you can a property? I'm not talking about a higher lifestyle here, but capital investment.

I'm not quite certain what you mean here. Why exactly would you want to do that? It smacks a bit of investing with borrowed money, which is the most stupid thing you can do because it's based on the assumption that you can do significantly better than the market in a sustainable way.

The question is, did Lolli and I do wise by sinking a lot of our capital in bricks or didn't we? Wiggin has sort of summed up my 'old' certainties. I however have started to think more and more on what return I actually get on this place for the money I put in. And that includes interest lost on a lot of money.