Wednesday, August 23, 2006
Is My House A Bad Investment?
Strictly speaking, houses always are. However, despite not making as much money as other investments can make you, you shouldn't convince yourself not to buy a house. Houses certainly provide lots of non-monetary perks. Owning a house can provide feelings of self-worth, accomplishment, or even prestige. Working on projects around your house can provide anything from a time consuming hobby to great stress relief. I could probably go on and on with the pros of home ownership that do not directly translate into $$$, but I'll avoid that for now. The point is, owning a home is considered to be a type of investment that does not return as much as certain other investment types, however, it should return more than you put in to it.
I bought my new Ryan Home in Brunswick Hills to meet a few needs. For one, I felt it was time to stop setting my money aflame by renting. Secondly, I did not want a place that would require many hours of "fix up time". Lastly, a definite consideration was "Will this be a good investment"? I actually specifically avoided certain neighborhoods because the neighborhoods were "well established" or "aging". That usually means that home prices are not increasing as fast as some other area. It was for that reason that we settled in Brunswick Hills...one of the fastest growing cities in northern Ohio. We also bought with the future in mind to some degree. We knew that 4 bedroom houses sell for much more than 3 bedroom houses (so we got the 4th bedroom).
I read this news report and it is making me question the timing of my investment: Existing Home Sales Low. According to the Realtors data, the national median existing home price for all housing types was $230,000 in July, up 0.9 percent from July 2005, the smallest year-on-year price gain since May 1995. The number of homes for sale is increasing by quite a lot. The price of homes is barely increasing, which is not good for existing home owners, but great for those that are looking to buy soon.
The historic home-price gains are 1.5 percentage points above the rate of inflation. Most people ballpark the average rate of inflation to be about 3%, but over the past 20 years it's been a lot closer to 2.6%. Based on those "loose numbers" that puts the average home-price gains at 4.1% per year. The thing to go for would be to get a house that can earn greater than 4.1% per year (obviously). Well established areas (I'll pick Cleveland and Berea as examples) will probably find less than 4.1% on average, while certain other areas will probably see something at or above 4.1%.
Now, if you put two and two together you will notice that the historical average of a 4.1% home-value increase did not match from July 2005 to July 2006 (it only had a 0.9% increase).
So, maybe I won't end up with the "profitable increase" I was planning on... ¶ 1:49 PM
I bought my new Ryan Home in Brunswick Hills to meet a few needs. For one, I felt it was time to stop setting my money aflame by renting. Secondly, I did not want a place that would require many hours of "fix up time". Lastly, a definite consideration was "Will this be a good investment"? I actually specifically avoided certain neighborhoods because the neighborhoods were "well established" or "aging". That usually means that home prices are not increasing as fast as some other area. It was for that reason that we settled in Brunswick Hills...one of the fastest growing cities in northern Ohio. We also bought with the future in mind to some degree. We knew that 4 bedroom houses sell for much more than 3 bedroom houses (so we got the 4th bedroom).
I read this news report and it is making me question the timing of my investment: Existing Home Sales Low. According to the Realtors data, the national median existing home price for all housing types was $230,000 in July, up 0.9 percent from July 2005, the smallest year-on-year price gain since May 1995. The number of homes for sale is increasing by quite a lot. The price of homes is barely increasing, which is not good for existing home owners, but great for those that are looking to buy soon.
The historic home-price gains are 1.5 percentage points above the rate of inflation. Most people ballpark the average rate of inflation to be about 3%, but over the past 20 years it's been a lot closer to 2.6%. Based on those "loose numbers" that puts the average home-price gains at 4.1% per year. The thing to go for would be to get a house that can earn greater than 4.1% per year (obviously). Well established areas (I'll pick Cleveland and Berea as examples) will probably find less than 4.1% on average, while certain other areas will probably see something at or above 4.1%.
Now, if you put two and two together you will notice that the historical average of a 4.1% home-value increase did not match from July 2005 to July 2006 (it only had a 0.9% increase).
So, maybe I won't end up with the "profitable increase" I was planning on... ¶ 1:49 PM
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To put things in a different perspective, if I would have invested my money for an extra year before buying my house I could have gotten the same house for the same price (the prices have not changed more than about 0.5%), yet made well over the rate of inflation (2.6%). Meaning I would have been able to buy a house for "cheaper" a year later. Also, the value of my house has gone down since I bought it since it is appreciating slower than inflation.
Of course things should "even out" if I'm here for another 5-7 years, but in the short term things are worse than expected.
Of course things should "even out" if I'm here for another 5-7 years, but in the short term things are worse than expected.
Where would you have invested that money? In a mutual fund? That would have been a poor investment choice given your time horizon was less than 5 years.
We need to work on filling those rooms, honey. You may lose your bathroom privileges again if I'm not carrying cargo really soon.
# posted by 
: August 24, 2006 11:19 AM
: August 24, 2006 11:19 AM
You'd better save all of your "reserves" for the work toilet buddy. You're pooping in the bushes with the squirrels for the next few months
# posted by : August 24, 2006 12:20 PM
: August 24, 2006 12:20 PM
Why do you think houses have appreciated so little lately? Is it a correction for over-appreciation before that? Is it because of some forces that are outside of the housing market? Obviously it's not gonna be a single thing, but what are the major contributors?
#1) Interest rates. Listen to Trump. He says Bernanke is a tool if he continues to raise rates.
#2) Correction to over-appreciation. Despite a yearly historical appreciation rate of 4.1% nationwide (you were right on with that one), the rate in the Chagrin Falls area has been approximately 7% a year (I've been watching home prices since around 2000 and calculating average returns from the mid-90s on in our efforts to buy a house).
My sister bought her first house in Solon in 1995 for 65,000 and sold it 5 years later for $132,000. That's absurd. It 'made' them for life. I had it much harder than my siblings who were at a point in their lives that they could afford to buy a house, fix it up, and sell and buy a bigger house. I could barely afford ANY house in the area. So yes, it's definitely a correction, and it's something I too was worried about before we purchased, but there was nothing we could do about it.
#2) Correction to over-appreciation. Despite a yearly historical appreciation rate of 4.1% nationwide (you were right on with that one), the rate in the Chagrin Falls area has been approximately 7% a year (I've been watching home prices since around 2000 and calculating average returns from the mid-90s on in our efforts to buy a house).
My sister bought her first house in Solon in 1995 for 65,000 and sold it 5 years later for $132,000. That's absurd. It 'made' them for life. I had it much harder than my siblings who were at a point in their lives that they could afford to buy a house, fix it up, and sell and buy a bigger house. I could barely afford ANY house in the area. So yes, it's definitely a correction, and it's something I too was worried about before we purchased, but there was nothing we could do about it.
Like the new blog look :)
I've heard that typically to earn a good "return" for your investment in real estate - you should plan to own it for at least 5 years + And I know that when we built - the price of building went up by 15% just over the following 6 months that we were in...so I know the market does flex a bit.
I've heard that typically to earn a good "return" for your investment in real estate - you should plan to own it for at least 5 years + And I know that when we built - the price of building went up by 15% just over the following 6 months that we were in...so I know the market does flex a bit.
The interesting thing about new homes is I believe they CAN and DO depreciate and take a dip early on but rebound and level over time.
This is especially prevalent now as home building prices have reached astronomical levels (whereas it used to cost roughly $100/sf here 1 and 2 years ago it now costs between $140-$150sf to build here).
I've known many people who would have been inclined to build but had to turn to existing homes due to the current construction price anomoly.
This is especially prevalent now as home building prices have reached astronomical levels (whereas it used to cost roughly $100/sf here 1 and 2 years ago it now costs between $140-$150sf to build here).
I've known many people who would have been inclined to build but had to turn to existing homes due to the current construction price anomoly.
Sorry, I guess I wouldn't consider a 'planned community' and was referring to buying land and building 'freely', with only your local and county authorities (and the bank) to satisfy. I just don't like those grubby developers getting their hands on a ton of extra money.
And I do think 'existing' is better suited to homes than 'used'. A used car is a used car. An existing home lives, and changes. It lasts. It appreciates. It's an entirely different animal.
There's also something to be said for 'inheriting' someone else's years of hard working planting and maintaining shade trees, a lawn, flowers, berries, and various other features.
And I do think 'existing' is better suited to homes than 'used'. A used car is a used car. An existing home lives, and changes. It lasts. It appreciates. It's an entirely different animal.
There's also something to be said for 'inheriting' someone else's years of hard working planting and maintaining shade trees, a lawn, flowers, berries, and various other features.
Hahah, Bode, I noticed the disagreement as well.
It's that prior owner abuse that scares me away from used cars unless they're absolutely low value used cars.
The opposite is true in housing however. My family is pretty handy, so we tend to look for value buys, or diamonds in the rough. Nothing went untouched on our current home. Everybody that comes through says "Wow, this is practically a new home!"... and it's true.
Fortunately, it still has more character than the majority of new homes.
It's that prior owner abuse that scares me away from used cars unless they're absolutely low value used cars.
The opposite is true in housing however. My family is pretty handy, so we tend to look for value buys, or diamonds in the rough. Nothing went untouched on our current home. Everybody that comes through says "Wow, this is practically a new home!"... and it's true.
Fortunately, it still has more character than the majority of new homes.
1. Great new look. I love this blog!
2. regarding the housing market: I agree with all that has been said so far in respect to A. renting "costing" as much yearly, but not paying back, B. housing prices will eventually go up again, C. One year's assessment is not a valid assessment of a 4-7 year spread, and D. There are many non-monetary benefits.
However, here is what it comes down to: People are getting stupider day-by-day. So, they will buy your house, if it looks good, even if it is about to explode. Don't fret, your back pockets will be fat as J-lo's (although the stuffing may be made of different products).
2. regarding the housing market: I agree with all that has been said so far in respect to A. renting "costing" as much yearly, but not paying back, B. housing prices will eventually go up again, C. One year's assessment is not a valid assessment of a 4-7 year spread, and D. There are many non-monetary benefits.
However, here is what it comes down to: People are getting stupider day-by-day. So, they will buy your house, if it looks good, even if it is about to explode. Don't fret, your back pockets will be fat as J-lo's (although the stuffing may be made of different products).
so, new look...like it...does this mean you'll be blogging more:)
# posted by : August 28, 2006 5:14 PM
: August 28, 2006 5:14 PM
I was hanging out around Chagrin Blvd today. It was really far away so I decided to come home from work early.
Jess starts her new job on Chagrin Blvd monday. Well, she started it this past monday, but she's up in Michigan for training.
First new Cleveland-based bank in 15 years.
First new Cleveland-based bank in 15 years.
I always laugh when I hear someone say they "OWN" a house. Unless you paid CASH then the BANK owns it and you are RENTING the money from the BANK and paying INTEREST on it.
Guess how much interest you pay over 30 years to buy a $200,000 house at 5% interest??
You pay 208,808.08 in INTEREST ONLY. This is in addition to the PRICE you pay for the house. SO you had to pay DOUBLE to buy this house so you better get $400K+ when you sell it or your loosing money.
This is NOT including Maintenance, Taxes, and Insurance over 30 Years.
You would have to make ALL those expenses back when you sell to make even ONE DIME of PROFIT...
Think about that.
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Guess how much interest you pay over 30 years to buy a $200,000 house at 5% interest??
You pay 208,808.08 in INTEREST ONLY. This is in addition to the PRICE you pay for the house. SO you had to pay DOUBLE to buy this house so you better get $400K+ when you sell it or your loosing money.
This is NOT including Maintenance, Taxes, and Insurance over 30 Years.
You would have to make ALL those expenses back when you sell to make even ONE DIME of PROFIT...
Think about that.
# posted by : October 13, 2009 4:44 PM
: October 13, 2009 4:44 PMSubscribe to Post Comments [Atom]
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