June 14, 2007

Warning: The NAR has not approved this message... Motley Fool: Homes - "The Worst Investment Ever"

Nice to see the MSM giving some space to the reality that renting is much more favorable than buying today, and that homes are not a great investment historically.

Sacrilege! Hersey!

Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.


Positive cash flow

If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.

Historically proven returns

The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time.

For any time period longer than the past few years, residential housing prices fall far behind these returns.

Final thoughts

Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value.

Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.

23 comments:

Anonymous said...

Keith,

What is the population difference in SAC between '94 and '07? You have to take that into account when comparing # of homes for sale between the two years. It wouldn't surprise me if the population for city/suburbs is 50% higher today.

Anonymous said...

Renting vs. Owning - you HAVE TO take into account fact that when you own a house/apartment you have much more freedom to as what you can do with/in that property. Also, at least in Chicago-area it seems to be hard to find NICE rental units - most of them sport decor, appliances and carpets/paint jobs that date back to the 70s.... With the cost being the same, owning is better IMHO...

Anonymous said...

I'll be up front. I've never exactly been a fan of The Fool. I'm willing to set all that aside for a minute and focus on housing for just a minute.

I'm willing to bet that as recently as mid/late 2005 their position on the bubble was "Bubble, Schmubble. Long term... tax advantages... inflation hedge... yada yada".

Sorry, but they didn't have a contrarian view until it became mainstream. I'm not saying they're not without their good points but I'd be careful about being too eager to let them on the bandwagon (it's getting crowded!)

DinOR

Anonymous said...

Renting is fine if you're prepared to live with the fact that you can be 'evicted' at any time. A landlord can throw you out pretty easily if he/she really wanted to - there's always a way to kick out a tenant.

As a home owner at least you know that your there as long as you like (if you can afford it!).

Stuck in So Pa said...

"Anonymous said...
Renting vs. Owning - you HAVE TO take into account fact that when you own a house/apartment you have much more freedom to as what you can do with/in that property. Also, at least in Chicago-area it seems to be hard to find NICE rental units - most of them sport decor, appliances and carpets/paint jobs that date back to the 70s.... With the cost being the same, owning is better IMHO...

June 14, 2007 12:25 PM"

Gotta agree there!Rent-to-Own calculations should always be local, just like real estate and bubble conditions.
Not much in the way of price for rentals in this area, but not much in the way of rentals either, just a few old farm houses here and there. Prices on existing "For Sale" homes are decent. This isn't a bubble area.

All things being the same, here,I would buy before I rented!

buyerwillepb said...

Much more important than the high level of inventory in the graph is the RATE of change in the inventory.

That's vertical baby!

in mathematics,

Vertical = Death

Anonymous said...

<"you HAVE TO take into account fact that when you own a house/apartment you have much more freedom to as what you can do with/in that property"b>

yes, that "freedom" cost you even more money and weekends and/or brain damage when your contractor over-charges you for shoddy work.

Instead rent a nice place and just enjoy life. My friends who are absorbed in this homosexual nesting form of consumerism think they've made so much money, but it all seems so shallow to me. Can't wait until the realize that it's *all* been a complete and utter waste of life.

Anonymous said...

If you own a home you attract the gals who have a nesting instinct. If you have an apartment, you just get the ones looking for a quick score and then out the door!

It's better to be single and in an apartment, find the right gal, and then build the nest egg together.

Pete said...

My opinion is that if you find a nice area, good schools for the kids etc etc etc, then owning is a good deal. Mortgages are expensive, but if you get a FIXED RATE (very important point here, boys and girls) then in the log run you can look forward to the day when all you pay is your taxes. Even in a high tax area like NY or CA, that can come out to $850/month for a 2,000 sq ft home. Rents on a 2,000 sq ft house right now are a lot higher than that in NY and CA.

Flipping can be good if you know what you're doing (many didn't). Once everyone gets in on the game--GET OUT!!! That goes for every bubble--stocks, art, real estate, whatever.

This is why I'm convinced China's stock markets are in for a rude awakening with so many people opening brokerage accounts and people picking stocks like they pick lucky lottery numbers. A recipe for disaster.

Anonymous said...

"Instead rent a nice place and just enjoy life. My friends who are absorbed in this homosexual nesting form of consumerism think they've made so much money, but it all seems so shallow to me. Can't wait until the realize that it's *all* been a complete and utter waste of life."

This sounds like so many people in my family. They "own" a house (really the bank owns it) and they slave away to keep it in perfect condition, because after all, there is nobody else to fix it. You have to do it.

Whereas I rent in one of the nicest areas in the country, and live worry free. The fallacy that some above said about getting "evicted" is just crap. When a landlord finds someone like my family that pays on time, and lives a normal life, they will do virtually anything to keep you, so don't believe the realtwhore garbage above.

Not to mention housing, even with the current bubble pricing, hasn't kept up with inflation throughout history, ever.

scooby said...

I've been selling real estate the past 7 years and have been quite successful, that is until last June. I primarily marketed a northern suburb of Minneapolis which has experienced tremendous growth in the past 10 years.

Frankly, it's over. The housing market has officially crashed. Here are some recent sold statistics for the area I market:
March thru June 15
(2004) Sold 172 units
(2005) Sold 216 units
(2006) Sold 168 units
(2007) Sold 53 units (350 active listings)

During this same timeframe only 17 new construction listings have been sold. Of these, 6 of them were bank owned. Currently, there are approx. 130 active new construction listings.

Ok, so the housing bubble has popped; what does that mean for the average person? First, we are losing the largest manufacturing industry in the U.S. You will begin to see unemployment tick up, but many of these jobs were under the table. Meaning, the skilled workers were being paid cash. These individuals will not be able to file for unemployment. The loss of these jobs will bubble up over the next 1-2 years and will surface on the bottom lines of retailers like Home Depot and Lowes.

Second, as prices fall, home equity loans will be a thing of the past. Falling home prices are the single leading factor in the bubble burst. Prices started falling well before foreclosures were an issue. My estimation is prices began to fall in early 2005. Homes prices have now retreated to 2003-04 levels. Meaning a home that sold in 2005 for $250,000 is now selling for $220,000 (as long as it’s in perfect condition). Homeowners’ getting over their heads financially is nothing new; however; the difference now is they can’t just sell their house, because they owe more than it’s worth. I turned away 20+ listings this year due to homeowners being upside down on their mortgages. As a result, they are walking away and letting the banks foreclose on them. As more and more foreclosures (up 90% from last year) hit the market home prices will continue to be pressured downward. Before it’s over (if things don’t spin totally out of control) we will see price levels equal to the year 2000…Approximately, a 20% decrease in prices.

Now, you may say, “great, I can’t sell my house for what I owe on it. I will just stay and wait for the market to turn. I have a good job and can get use to the idea of staying in my home a little longer. This problem doesn’t really affect me.” Wrong, as more and more homeowners are unable to tap into their homes equity they will no longer be buying cars, 4 wheelers, big screen t.v.’s, computers, lawn tractors, updating kitchens, roofs or siding etc. Millions and millions of homeowners will be putting off discretionary spending out of necessity. This will result in a tremendous fallout in the retail sector of our economy, which in turn, will have a direct effect on the transportation and manufacturing industries. Many jobs will be lost and many more homes foreclosed.

Finally, as the housing market crashes, so does the tax roll of state, county and local governments. These institutions have built their budgets on the back of the housing surge during the past ten years. It will not be unheard of to see local governments going bankrupt, schools shutting down, police departments with skeleton crews and social programs slashed. You will quite literally see ghost towns, large developments with empty Mcmansions, because it made more sense to walk away than pay the exorbitant property tax.

Sounds depressing doesn’t it. Well, history shows that it will be depressing. This is exactly what happened before the stock market crash that lead to the Great Depression.

Anonymous said...

When you put ugly decorations in your house it will cost you when you sell it. I've seen houses painted pink on the inside. Anyone looking to buy it will demand a paint allowance that will cost you thousands. That is no different form renting and painting your apartment or rental house. You will have to fix it when you move either way.

Anonymous said...

Renting is fine if you're prepared to live with the fact that you can be 'evicted' at any time.

I've never heard of landlords evicting tenants for no reason. That happens about as often as getting attacked by a swarm of bees. Anyone who buys for that reason is a moron(realtor/broker/flipper). Maybe you should also walk around in a bee suit just in case you get swarmed by killer bees.

Anonymous said...

If you think of housing as an investment, one should remember that property is an illiquid "asset" that, over the long run, doesn't appreciate that much more than other investments. You're probably better off to consider other, more liquid investments.

If you think of a house as a home, then your factors change. How much are you in debt for that house, and how enslaved financially are you by owning? How long are you planning to stay in that house? We own a home free and clear, have no other debts, are retired, want the freedom to decorate as we please and have our pets, so for us home ownership works. However, I would probably not be in the market to buy at this time, even if we were just looking for a home.

Anonymous said...

Foreclosure Rates Climb
In Weak Housing Market
By DAMIAN PALETTA
June 14, 2007 11:24 a.m.

WASHINGTON -- A record number of homeowners entered the foreclosure process during the first quarter, breaking a record set in late 2006 and reflecting further stress on the housing market, according to a Mortgage Bankers Association survey released Thursday.

Soft housing prices and a wave of resetting adjustable-rate mortgages were expected to show up in foreclosure and delinquency data, but it appears the stress wasn't confined to high-risk subprime loans as other mortgages showed signed of weakening.

Anonymous said...

Every renter here is kidding themselves. If the cost were the same you'd all own. All this talk of freedom is garbage.

What freedom do you have if you sign a 12 month lease and the day after signing want to move? Your freedom is you're stuck in your apartment/house for 364 days. Gee wiz some freedom.

You also have the freedom to live with white walls as well as your landlord's choice of flooring, bathroom fixtures, kitchen counters, paint colors, landscaping etc.

You have the freedom to have to ask permission to own a pet. And also of course the freedom to pay deposits (that nobody ever gets back) for the pet.

And how about the freedom knowing that you CAN be kicked out. I don't care how great a tenant you are, things happen. Your landlord dies. He decides on a whim to move to Florida and sells the house. He goes bankrupt. He gets divorced and has to sell. A million thing can happen that are not based on the quality of a tenant. At any given time as a tenant there is the very real possibility that you will have to move with 30 days notice. Some freedom.

And before calling me a troll realthwore save yourself the typing effort. I rent too, but I am realistic and don't live in this renter utopia so many of you seem to inhabit. I rent because financially speaking it makes more sense than owning right now. But that's it. As soon as the reverse is true I'm buying a home and will gladly give up all my supposed freedoms.

Anonymous said...

"And how about the freedom knowing that you CAN be kicked out. I don't care how great a tenant you are, things happen. Your landlord dies. He decides on a whim to move to Florida and sells the house. He goes bankrupt. He gets divorced and has to sell"

Once again, more assinine thinking. While you're at it, why not describe all the bad things that CAN happen when you own? Your house can burn down. Swallowed by an earthquake. Flood in your kitchen/bathroom.

Understand, realtwhore?

Anonymous said...

"If the costs were the same, you'd all own".

I don't think anyone said anything different.

The costs in some cities are "different" by a factor of 2-3. IE spend 3 times as much to "own". Doesn't make much sense when the house isn't appreciating. Makes less sense when the house is depreciating.

Anonymous said...

Anonymous said...
Every renter here is kidding themselves. If the cost were the same you'd all own. All this talk of freedom is garbage.

What freedom do you have if you sign a 12 month lease and the day after signing want to move? Your freedom is you're stuck in your apartment/house for 364 days. Gee wiz some freedom.

You also have the freedom to live with white walls as well as your landlord's choice of flooring, bathroom fixtures, kitchen counters, paint colors, landscaping etc.

You have the freedom to have to ask permission to own a pet. And also of course the freedom to pay deposits (that nobody ever gets back) for the pet.

And how about the freedom knowing that you CAN be kicked out. I don't care how great a tenant you are, things happen. Your landlord dies. He decides on a whim to move to Florida and sells the house. He goes bankrupt. He gets divorced and has to sell. A million thing can happen that are not based on the quality of a tenant. At any given time as a tenant there is the very real possibility that you will have to move with 30 days notice. Some freedom.

And before calling me a troll realthwore save yourself the typing effort. I rent too, but I am realistic and don't live in this renter utopia so many of you seem to inhabit. I rent because financially speaking it makes more sense than owning right now. But that's it. As soon as the reverse is true I'm buying a home and will gladly give up all my supposed freedoms.

June 14, 2007 6:25 PM
----------
All leases have an early termination clause. You pay a penalty of 1-2 months rent, give notice & move. If you own & have to sell, you're going to be shelling out thousands to prep the home, pay the agents, pay the transaction costs, pay for the buyer's closing costs, stress about selling in a timely manner etc., etc., etc.

Most LLs let you decorate to taste, but just return it to neutral when you're done; no different as when you prep a home for sale.

Any sale of realty that has leasehold is SUBJECT & valued based upon the presence of the leasehold. I.e. the new buyer will have to let you stay in it & just let you know they will not let you renew your lease upon its termination. The buyer & seller just adjust the price. Of course wonder of wonders some buyers purchase rented property to keep as a rental. Your bias shines through on this one.

FYI - you could get hit by a bus tomorrow so you might want to buy a house now and forgo renting. In case youdo not understand basically your comments have nothing to do with the price of tea in china, let alone any rational pro-con b/t renting vs owning, but if you rent you're estate will be more easy to liquidate, so go catch that bus now PLEASE!!

Anonymous said...

I sold and rent and love the fact that I do.This is the first time in life I have rented.I laugh at anybody who comes on here with reasons not to rent.The funniest part is when somebody says "yeah sure realtwhore,whatever you say",to the trapped homeowners rebuttals.HAHAAAA!!!Thats how I feel.Say whatever you want,you are and were wrong and will live with this fact while I can just turn off the computer and enjoy my life.Right now renting is wheres its at.

Anonymous said...

scooby -

Great description of a bad scenario.

I wish I could at least argue with any of the points that you make, just because when it goes the way you describe, it's going to be very bad.

belchorama said...

Every renter here is kidding themselves. If the cost were the same you'd all own. All this talk of freedom is garbage.

Holy crap, lady! Get a grip. To address each of your (insane) insecurities:

(1) For the true commitment-phobe, you can find all kinds of rentals where you can start off month to month. I have half a duplex with a yard and gardeners. I've been here almost two years but it's been month-to-month the whole time. Also, comparing a typical 6 or 12 month rental commitment to closing costs and the process of finding a buyer is a bit silly...picking up and moving would literally take me about a week including planning. A bit more complicated for the average homedebtor in the current housing market eh?

(2) I could really give a $hit less what color the floor and walls are. I hang up a few pics I like. My girlfriend hangs pot racks and such nonsense off the walls. No big deal. If this is a big deal for you, (a) find something more importan to do with your limited time here on Earth and (b) it is not a big deal for your typical landlord, and if it is a big deal for the one you've got, you could find a more accomodating one in about a day.

(3) Or, if you're a pet person you look for places that take pets while you're searching for a place to stay. We've got 3 cats, which have been garnered without asking while living at the last couple of places we've been at. I can't begin to tell you how not a problem this has been for us. Another excellent point you've made.

(4) Oh, dear. You're right! We could be evicted at any moment! Oh no. Ohhhhhh no. See the comment above about the bee suit (nice comment by the way LOL). Between undergrad, grad school, and 3 years in the big-people working-world I can count 8 rentals I've lived in, about half cookie-cutter apartments and half owned by small-timers. The total amount of times that I was evicted from those 8 places over the course of 12 years is zero. Wait, let me add that up again. Let's see, yeah, that comes to...zero. I don't regularly wear a bee suit. If I do get kicked out of my current duplex, I would cry approximately zero tears, and would look forward to a change in scenery for my daily run. I've got a couple of areas in mind already. In fact we may just pull up stakes and move to one of those places for the hell of it. It's not a big deal when you've got the freedom that comes with renting.

In conclusion, let me just say that you are not very smart and you make bad points. Your brand of obtuse dumbness could be used as reasonable justification for repealing the first amendment. You are like an oblate spheroid of dumbness. Just be quiet and go paint your walls if you have nothing worth saying. Criminy.

armed said...

Rent,rent,I think of the money I spent. I think I will buy before I die.The realtor said let me give you a hand for they are not making anymore land.After I take my 6 percent,you will wish you chose to rent. I think I will work untill I die.I should not have believed all the lies.Thank you for your order would you like some fries? It never goes down,certainly not the whole town.I knock on my neighbors door,inside lives my broker whore.Zero down use the banks money like a lever,boy this is the worst investment ever!