The cost of housing going up causes people not to be able to afford housing? No?!?! You’re kidding!?!
Really though.. investments need to rise faster than inflation right? Houses are investments right? Wages usually go up by less than (or equal to at best) inflation right? Therefor the entire situation is such that it is expected that people will be priced out of houses on a long enough timeline.
Houses might be a source of income if rented, but they are poor investments as a primary residence. On average, the cost of housing tracks with inflation. While it is typical to sell a house for more than the purchase price, the value is diluted by inflation (even worse with a mortgage).
I don't think that's right - at least, not with a fixed-rate mortgage.
When we bought our first house, our mortgage was more than rent. But within two years, it was less - rent kept going up, and our mortgage didn't.
Um, I guess I should back up a step. I'm assuming that you have to live somewhere. So the choice (for most of us) is between buying and renting, not between dropping $500,000 on a house and investing $500,000 in the stock market. Our choice is actually whether to drop, say, $50,000 on a down payment and take on a mortgage, or drop $50,000 in the stock market and keep on renting.
So to me, buying a house that I live in is a way of buying back the rent money. Yes, I pay interest on it. Yes, I also have to do maintenance and pay property tax. But when I rent, that money is gone. Whereas if I buy, that money is still gone as far as my budget is concerned, but after 30 years I own the house.
Now inflation enters the picture. I payed $50,000 down for a house that was worth $500,000, instead of dropping it in the stock market. Now, say, 10% of inflation happens. In the stock market, I would now own stocks worth $60,000. But instead, I own a house worth $600,000 (with a $450,000 mortgage). So the mortgage let me reap the gains of inflation on money that I borrowed.
> I'm assuming that you have to live somewhere. Our choice is actually whether to drop, say, $50,000 on a down payment and take on a mortgage, or drop $50,000 in the stock market and keep on renting.
I agree. This is an important clarification not usually considered when making a comparison.
> In the stock market, I would now own stocks worth $60,000.
I assume you implied buying on margin since 2 x $50,000 x 0.10 = $10,000, but since stocks historically outpace inflation I'd expect a higher real return.
A $50,000 investment growing at 7% annually would be worth approximately $200k after 20 years. In comparison, a $500k house would be worth about $750k with a balance of $240k remaining, assuming 2% inflation and a 7% interest rate on a 30-year note.
It might be interesting for someone to create a calculator to crunch the numbers and include details such as how much rent would rise over 20 years, the cost of selling a home (about 8%), home maintenance (about 1% annually), etc.
Oops. No, no margin was intended in the stock market - that's a way to get badly burned. But I made the same mistake on the house price increase, so it works out. Just replace "10%" with "20%" and the rest should be right.
> A $50,000 investment growing at 7% annually would be worth approximately $200k after 20 years. In comparison, a $500k house would be worth about $750k with a balance of $240k remaining, assuming 2% inflation and a 7% interest rate on a 30-year note.
But why do you assume that stocks are going up 7% and housing is only going up 2%? (I assumed that houses went up the same amount as stocks, which may not be historically accurate. But only going up a third as much as stocks seems quite low.)
> But why do you assume that stocks are going up 7% and housing is only going up 2%?
I figure a conservative estimate of housing over time is to match the fed target for inflation.
Your initial statement leverages a $50k down payment to make a $500k investment. Stocks can't reasonably do that: a $50k investment is all you have. However, at some point the higher rate of return from stocks will eclipse the value of the house, which was my initial assumption. How long that takes depends on so many unpredictable factors. A 10-year or 50-year mortgage greatly affects the math.
It would be interesting to analyze the data and calculate a rent/buy/invest chart for different geographical areas and various types of investments.
The cost of housing going up causes people not to be able to afford housing? No?!?! You’re kidding!?!
Really though.. investments need to rise faster than inflation right? Houses are investments right? Wages usually go up by less than (or equal to at best) inflation right? Therefor the entire situation is such that it is expected that people will be priced out of houses on a long enough timeline.
Houses might be a source of income if rented, but they are poor investments as a primary residence. On average, the cost of housing tracks with inflation. While it is typical to sell a house for more than the purchase price, the value is diluted by inflation (even worse with a mortgage).
I don't think that's right - at least, not with a fixed-rate mortgage.
When we bought our first house, our mortgage was more than rent. But within two years, it was less - rent kept going up, and our mortgage didn't.
Um, I guess I should back up a step. I'm assuming that you have to live somewhere. So the choice (for most of us) is between buying and renting, not between dropping $500,000 on a house and investing $500,000 in the stock market. Our choice is actually whether to drop, say, $50,000 on a down payment and take on a mortgage, or drop $50,000 in the stock market and keep on renting.
So to me, buying a house that I live in is a way of buying back the rent money. Yes, I pay interest on it. Yes, I also have to do maintenance and pay property tax. But when I rent, that money is gone. Whereas if I buy, that money is still gone as far as my budget is concerned, but after 30 years I own the house.
Now inflation enters the picture. I payed $50,000 down for a house that was worth $500,000, instead of dropping it in the stock market. Now, say, 10% of inflation happens. In the stock market, I would now own stocks worth $60,000. But instead, I own a house worth $600,000 (with a $450,000 mortgage). So the mortgage let me reap the gains of inflation on money that I borrowed.
> I'm assuming that you have to live somewhere. Our choice is actually whether to drop, say, $50,000 on a down payment and take on a mortgage, or drop $50,000 in the stock market and keep on renting.
I agree. This is an important clarification not usually considered when making a comparison.
> In the stock market, I would now own stocks worth $60,000.
I assume you implied buying on margin since 2 x $50,000 x 0.10 = $10,000, but since stocks historically outpace inflation I'd expect a higher real return.
A $50,000 investment growing at 7% annually would be worth approximately $200k after 20 years. In comparison, a $500k house would be worth about $750k with a balance of $240k remaining, assuming 2% inflation and a 7% interest rate on a 30-year note.
It might be interesting for someone to create a calculator to crunch the numbers and include details such as how much rent would rise over 20 years, the cost of selling a home (about 8%), home maintenance (about 1% annually), etc.
Oops. No, no margin was intended in the stock market - that's a way to get badly burned. But I made the same mistake on the house price increase, so it works out. Just replace "10%" with "20%" and the rest should be right.
> A $50,000 investment growing at 7% annually would be worth approximately $200k after 20 years. In comparison, a $500k house would be worth about $750k with a balance of $240k remaining, assuming 2% inflation and a 7% interest rate on a 30-year note.
But why do you assume that stocks are going up 7% and housing is only going up 2%? (I assumed that houses went up the same amount as stocks, which may not be historically accurate. But only going up a third as much as stocks seems quite low.)
> But why do you assume that stocks are going up 7% and housing is only going up 2%?
I figure a conservative estimate of housing over time is to match the fed target for inflation.
Your initial statement leverages a $50k down payment to make a $500k investment. Stocks can't reasonably do that: a $50k investment is all you have. However, at some point the higher rate of return from stocks will eclipse the value of the house, which was my initial assumption. How long that takes depends on so many unpredictable factors. A 10-year or 50-year mortgage greatly affects the math.
It would be interesting to analyze the data and calculate a rent/buy/invest chart for different geographical areas and various types of investments.