Worth of an investment – comparison of cash, housing & stocks

See today’s Chart of the day here.

Value of different Investing vehicles

Value of $100k invested in Jan 2010 in cash, housing, and S&P Index at the end of Jun 2017 (see more details of this chart at Chart of day, Aug 14, 2017)

In Dec 2013, we made an offer of $345k on a house in Washington County, Portland Oregon. The state of housing market was still in limbo & any desperation on the seller’s end would make the buyers run for the door. Haggling, intense negotiations & freebies were at buyer’s disposal and any seller making counter offers would end up paying many more months of mortgage on houses worth less than their loans. Such was the state of housing market that the deal fell through for a relatively small amount of $5k. In the end, the house was sold to someone else, at the same price we offered.

Today, after three-and-half years, Zillow shows the same house has appreciated to $460k. That’s an impressive gain of $115k, a 33% increase and about 1.75 times the median annual earning of a household in Portland Metro (link). Suffice to say, such opportunities in housing market are not seen in last few generations.

My interest here is to make an economic & personal assessment of this lost opportunity. And to find out if it was really a lost opportunity.

Other investment options

The S&P stock market index in mid-Dec ’13 was approximately at 1800, today the number is 2440, a 35% increase. Barely two years in the job, the down payment we could make was the standard 20% or about $70k.  Instead of buying the house in cash, if one had invested in an S&P index, the gains would have been about the same. If invested in the tech stocks through Nasdaq the gain would have been 50%. Nasdaq was at 4150 in Dec 2013 and now in Aug 2017 it is at 6250, a 50% increase.

So investing in Nasdaq or S&P would be a better deal? Not really. Our investment into these index funds would have been the 20% down payment, that’s $70k. So instead of earning $115k, the gain from stock market would be 35% of the down payment, approximately $25k. To simplify: the gain on the house would be for the entire asset of the house although you pay only 20% for now; however, the gain in stocks is from whatever you invested.

What if you decided to not pursue either of the options and just kept it under the carpet? Inflation, or the rate at which your money depreciates has varied between zero and 2.7% over these three and half years (link). The average rate calculated over this period is about 1.2%. Therefore, the purchasing power of the initial $70k will be about $67k today. If you were to put this money in the bank, the returns are few hundred pennies, small enough not to make any dent into what’s been eaten by the inflation. And you will need to pay some of these pennies to IRS while its worth is depreciating.

How about the cost of renting? For a two-bedroom, two-bath apartment in the same area, average rent has been approximately $1.4k or $17k per year–although it has risen substantially (link). This adds up to about $60k over three and half years. The monthly mortgage payment at 4% on a 30-year mortgage (link) in combination with property taxes, HOA and the tax breaks comes about the same as what we have paid so far in rent. So with the house, gains would be the equity buildup and the appreciation of $115k.

Doing precise calculations for rent vs buying is flabbergasting. There are just too many variables, and each house and every family will add their own. So an assessment by first principles that we see for this case shows rent vs monthly mortgage are about the same. However, the equity build up–although low in first few years–and price appreciation would be the biggest factor to support owning the house.

Personal side of buying a house

There is a personal side of this discussion that is often ignored, mainly because it is hard to quantify. In majority of cases, buying a house is a very personal decision and depends upon the family’s state of mind. This is for multiple reasons. If you have a family with kids, a house provides a very stable foundation to put your roots. It instills a certain sense of belonging from very early age. Just ask anyone who moved a lot in their childhood and they will tell you their loss of belonging. Living in a rented community does help build a sense of community, but hinders the children from taking creative steps they would be taking while growing up in their own home. The freedom to paint the walls, stick papers, hang paintings, and decorate the ceiling are priceless.

The other personal side of buying a house is not so rosy, as the house does put you in a bind. Unless you plan to stay around for long, going through all the paper work and the non-refundable fees and then giving away a part of your sold-dollars to the agents is certainly not worth the trouble. The extra space requires regular cleaning, maintaining, and a good budget to decorate & furnish. Putting the roots down will have added disadvantage of skipping that next big opportunity, somewhere outside the current job. In the long run, it will stunt your overall growth. Believe or not, employers know it. It is common to see managers openly discussing people who are flight risks. The first sign of someone being on that list is a long time renter. Anyone doing well but not buying a house will be lured with extra benefits to continue & contribute, signs of a promising career & better future.

Summary

In the end, there are two sides of this decision. The main motivation of building an asset through purchasing a house is getting harder and harder as prices keep rising. The once-in-a-lifetime opportunity to build solid gains with a house is behind us. Making the decision based on personal reasons will be more fulfilling. If you spend most of your time around kitchen & living room, buying a big mansion will make you unhappy in the long run. But if you plan to raise a family with memories of their own no price is high enough.

          

Summary of Portland housing growth – in 6 charts

Last updated Aug 3, 2017.

See today’s Chart of the day here.

Figure 1. Lot of upswing.  US home price change (in percent) for top 20 cities for 2011-2017 (Click to enlarge). Key summary: (1) After the worst year of 2011-2012, a huge upswing in 2012-2013 across the country; (2) Best gains are in South-West SF-LA-Phoenix-Vegas corridor; (3) While US National growth has stabilized at about 5%, Pacific NW regions of Seattle-Portland and Denver-Dallas are still growing at almost 10%. This data is compared for month of May for each year (all other data below are for month of June). The data is available from several sources including S&P US IndicesZillow, & Federal Housing Finance Agency.

Figure 2. Still got momentum. Home price change (in percent) by zip-code in Multnomah county of Portland Metro, OR-USA (Click to enlarge).  Key summary: (1) Almost no price drop in 2011-2012, similar to other metros; (2) however, highest growth was in 2015-2016 instead of the nationwide peak growth in 2012-2013; (3) not a very strong correlation between price change to actual price (x-axis is plotted to show current house prices in ascending order, from left to right); (4) the most expensive neighborhoods (on the right side) had already started to appreciate in 2011-2012 & are still growing; (5) mid-price range neighborhoods have almost peaked & growth is <5%; (6) As prices increase, people are forced to buy in low-cost neighborhoods (left side on x-axis), and therefore those are growing at almost 10%.  Data from Zillow (which unfortunately does not include all zip-codes), raw data here. To see the actual home prices by neighborhood, see Chart of the day, Aug 1, 2017.

 

Figure 3. Growing growing growing. Home price change for Washington county, Portland Metro (this region includes the high-tech corridor of “Silicon Forest” with Intel, Nike, and coveted neighborhoods of Bethany & Skyline, Click to enlarge). Key summary: (1) Not as explosive growth as Multnomah county, but consistently growing at 10-15%; (2) as seen for Multnomah county, not a very strong correlation of growth to actual prices (house prices increase on this chart from low to high on x-axis as we go from left to right); (3) again, the most expensive neighborhoods (on the right side) had already started to appreciate in 2011-2012 but still growing; (4) lower priced neighborhoods (left side) are still growing more than the expensive ones (right side); (5) the Cedar Mill area (that includes Bethany & part of Skyline) is anomalous: it includes some of the best schools in Oregon & is preferred by the immigrant population working in the high-tech corridor; prices didn’t drop in 2011-2012 but growth is low due to extensive construction & already high prices; (6) strong growth in the outskirts & previously untapped neighborhoods of Aloha, Forest Grove, Banks, North Plains & Hillsboro; you can drive over and see once-in-a-lifetime generational change & inequality in action: low income families being pushed out by new construction boom and young, highly educated families moving to newly developed communities; the State of Oregon is working hard to bring more business & majority of it is moving to Washington county. Original data from Zillow, and raw data here. To see the actual home prices by neighborhood, see Chart of the day, July 31, 2017.

 

Figure 4. See you on the other side. Home price change (in percent) by zip-code in Clark county, Washington state (part of the Portland Metro, on the north side of Columbia river. Click to enlarge). Key summary: (1) Much more affordable due to lower cost to buy, lower property taxes, lower closing costs, no income tax in Washington state & better schools than Oregon; (2) across all neighborhoods, a consistent 10% growth except 2011-2012; (3) only reasons holding back are heavy rush-hour traffic to cross the Columbia river & Oregon state tax for people working in Oregon; however, lot of new businesses have moved here recently, especially financial firms including Fisher Investments that has helped raise the median household income. Data from Zillow and raw data here. To see the actual home prices by neighborhood, see Chart of the day, Aug 2, 2017.

Figure 5. A study in contrast. Home prices change (in percent) by zip-code in Clackamas county, OR. This county includes the affluent neighborhoods of Lake Oswego, the beautiful Columbia River Gorge, the high-tech area of Wilsonwille, and part of Willamette valley (Click to enlarge). Key Summary: (1) This is one of the most economically diverse regions and affordable neighborhoods are still growing over 10%; (2) the sought-after area of Lake Oswego is comparable to downtown Portland & therefore growth has been comparable to Multnomah county; (3) the high-tech area of Willsonville has not seen growth comparable to Washington county therefore growth has been sluggish. Data from Zillow and raw data here.

 

Figure 6. In the middle of action. Home price change (in percent) by zip-code in Marion & Polk counties, OR. These include the state capitol & the agricultural communities of the beautiful Willamette Valley. (Click to enlarge). Key summary: (1) Very different growth trajectory than the Portland Metro area; the area was hard hit during 2011-2012 but has slowly recovered and is seeing the best growth right now; as Portland Metro grows out of reach, more people are moving to these affordable neighborhoods; (2) most of the region is over an hour drive away from Portland Metro, making the high-tech growth inaccessible; (3) most likely jobs are related to agriculture, administration, health & medicine & tourism, thus the different growth trajectory. Data from Zillow and raw data here.

 

What Portland is driving? – Part II (long read)

Here is a long read for those more involved. This post discusses the detailed analysis of data collected from about 4000 vehicles in Washington County, Portland, OR in mid-July 2017.

 

Figure 1. Slice of the Pie. Market share of top 25 companies in the Washington County based on this study. GM and Ford may be leading the most recent sales numbers but they are far behind in numbers of cars on the road. Did Toyota & Honda sold more in the past or they just last longer?

About a year ago, I spent $15,000 to buy the stocks of GM and Ford. My rational was that US automakers had historically lowest Price-to-Earning ratios (with Ford at 6 and GM at 7), and they had nowhere to go but up. 12 months later, and with S&P at 20% high, that optimism is all faded away. To understand why things are so bad, I didn’t have to look farther but to go out & see how things really looked in Portland. The auto market is booming, no doubt. But things are gloomy for the US automakers.

Short summary:

  • The data from this study show that every other vehicle on the road is Japanese! Every time you hear the sound of a car or truck, more than half the time it will be one of the Japanese brands (Toyota, Honda, Subaru, Nissan or Mazda). And in most likelihood it will be a Toyota or Honda (every 3rd one).
  • If you hear a truck/SUV/Van, it can be anyone of these with almost same probability: Toyota, Ford, Chrysler or GMC; but chances of a Toyota is still higher than anyone else.
  • A luxury car will most likely be a German brand; and most likely a BMW, double the chances of Mercedes or Audi. Sometimes it may be a Lexus or Acura but if you see a Tesla, take a good look as you won’t be seeing another one for a while (1 in 70 luxury cars, and 1 in 200 vehicles of any kind)
  • The market share for top three US automakers (GM, Ford, Chrysler) is only about a quarter (1 in 4 vehicles)
  • Although VW was the world’s biggest auto manufacturer in 2016, it’s share is negligibly small (less than 1 in 20 vehicles)
  • Subaru (a Pacific Northwest darling!) is about one in six vehicles, despite not appearing in the top 20 global manufacturers.

 

Figure 2. See no evil, just Kaizen. Total number of vehicles by top 25 brands separated by different types. Toyota leads in every category except EV where the Nissan Leaf has been selling more than any other EV. The US automakers are heavily reliant on their SUVs & Trucks. And as a foot note, Mitsubishi called it quits to focus somewhere else.

Figure 3. Upstairs downstairs. Same plot as Figure 2 separated by Luxury and non-luxury brands. BMW outsells everyone else but recent efforts by Mercedes has started to attract the younger crowd besides all those ML350s. Tesla is now more valuable than Ford and GM on wall street, but not to be seen on the roads yet.

Figure 4. Lineage. Data consolidated by parent company. Not much change here except the Hyundai-Kia combination does bump them above the lower volume players.

I hear that in Detroit they are trying to show they can match the might of Silicon Valley by appearing cool. But it’s a long road to see anything meaningful. For now, I will have to be content with the 5% dividend they offer.

About this study

The data were collected mid-July 2017 over a period of two days in Washington County, Oregon. Six different locations were selected in Hillsboro & Beaverton. This ‘Silicon Forest’ area has several high tech employers requiring a diverse set of skills and therefore a wide ranging earning power. Additionally, people drive from across the Portland Metro area to these companies and therefore should reflect the overall vehicle ownership pattern of the whole area. The data were collected from 9-5 pm during the workweek to avoid any aberrations related to traffic patterns, weekend driving patterns, re-counts due to driving in and out of the area or any potential influence of purchasing power from number of hours worked.

The raw data is attached.

Portland-auto-survey-raw-data (.xls)

Portland-auto-survey-raw-data (.csv)

 

What Portland is driving?

(last updated 19 July 2017)

Ever wondered who is really driving all those Teslas? Every time when you are on the road is there really a German luxury car in next lane or are you just dreaming? Are they really taking over the US market!? Are US automakers pretty much relegated to selling Trucks? And their measly stock prices are indeed justified by what people are buying? Then what are the most reliable brands that everyone is buying?

The chart below from my recent study of about 4000 vehicles in Portland, OR helps answer some of these questions.

Despite being the most valuable automaker, the number of Teslas in market is even lower than Minis & Scions. Tesla stands at number 24, out of 25 top brands. Although Toyota & Honda are clear leaders in total number of vehicles on road, the German luxury brands are slowly getting closer to eclipsing the US automakers. In fact, the biggest segment for US automakers is Trucks/SUVs/Vans & they trail far behind in sedans. If you were to blindly guess the vehicle type for a US brand, you will be wrong more than half the time when picked a sedan.

So what are the key takeaways? I will have to go into details in a separate post, but here is a short summary.

To truly stand out, buy a Tesla or a Cadillac. Tesla: because they are the new head turner, and very rare. Cadillac because they are almost dead and nowhere to be seen. The Pacific Northwest prides in their hippie Subarus but they are not as ubiquitous as they are claimed to be. GM, Chrysler, and to some extent Ford, are mainly left with selling trucks. Toyota is beating everyone by a long margin, in total vehicles, in sedans, in trucks, and in hybrids. Honda is close but there is a long gap after that. Nissan is a surprise with as many as Subarus and more than Chrysler but their Fiat brand is nowhere to be seen. When you say hybrid, you might as well say Prius because there isn’t anything else out there. EV is not as popular as everyone claims to be. And whatever is there, it’s almost all Nissan Leaf. Did you know how surprisingly cheap it is? Just lookup (spoiler alert: there is an almost 65% discount on on it after dealership rebates, tax breaks, employer discounts & new credits from the recently passed $5.2 billion Oregon infrastructure bill).

This is the key plot. Take a look & let me know your observations. I will follow with a longer post later this week.

 

The Joys & Sorrows of Work

I recently quit my job after 6 years.

It’s been one week now and time to reflect on the change after all the good-byes are said, farewell hangover has worn off and the honeymoon is almost over.

I got comments from lot of colleagues when I informed about my plans to leave. Almost all were positive, wishing me good luck and asking about next plans.

Here are few comments, from standard good bye to some very interesting ones.

  • Enjoy your freedom
  • Respect! I always wanted to do this, but could never take that first step
  • What kind of Portfolio do you have? It got to be a big jackpot, otherwise nobody can take this kind of step
  • I feel happy for you. I wish I could do that
  • It’s okay to take a break & re-think the priorities. You should be able to return back if you want to
  • So sad to see you go. Good luck
  • This was a surprise, at least to me. I hope all is well. You will be fine wherever you decide to go
  • What’s the plan? Where next?
  • It was fun working with you all these years. I wish you all the best
  • Too many good people are leaving. And I know why. Good luck and I hope our paths cross in future
  • We will miss you around here

I believe it is necessary to work. For paying the bills and for enjoying the basic luxuries of life. Work helps pay for what the government has promised the retirees. And to pay for the roads, the bridges, the telecommunication systems, for space exploration, for fighting the wars.  Every able-bodied person should work. But not for the sake of it. And one should never sell their soul for their work.

Quitting is hard. People spend more time at work than what they spend actively engaged with their families. So coworkers do feel like family, whether you like them or not. That’s when the joys and sorrows of work start to define our life.

During my  time at work, I have encountered three kinds of coworkers:

  • Highly motivated and fully engaged; they feel their work defines them and they define the company. They are management darlings and rise up until the Dilbert principle catches up with them (‘in a company you eventually end up in a role where you can do the least damage’). But their numbers are small
  • Worker bees; they are programmed to do their job without much fuss. They are reliable, easy to manage, and handle pretty much all the work on ground until they are given more responsibility; that’s when they leave or decide not to grow anymore; they are the punching bag for upper management & build the ladder for them to grow
  • Ride-it-out crowd; mostly those who have no choice but to stick around to pay the bills and build a good cushion to retire; pretty much everyone ends up in this camp later or sooner, until the the meaninglessness of the daily grind dawns on them

Most people will not be in any of these positions without rebelling, if given a choice. There are circumstances beyond anyone’s control that ‘motivate’ people to chug along. And these start very early in their life.

  • Structured Debt: it is surprising how much student loans an average new-hire has; and this cuts both ways: some  of it will be paid over next several years preventing them from saving; and some of it is paid by the parents draining their life long savings
  • Non-structured Debt: the quest to acquire the latest and greatest items out there. I found it impressive how many new-hires buy brand new cars (very often luxury brands) & how often they replace them. There is no parking available on Saturdays and Sundays in the mall next to my house. Portland is a great place for outdoors, but notice the gear people wear. Try next time on a hike: It’s branded, expensive & rarely old.
  • Next-generation’s Debt: most people have kids & they are expensive: (1) childcare costs are high; (2) families end up with only one income as one parent stays with kids; this erodes their current and future income; (3) you need to save a lot for their future. For summer camps, for large family vacations and for college tuition.
  • Mortgage Debt: a typical family pays double the amount what their house if worth, over 30 years. The great American dream of owning a home forces people to put down their roots and never re-locate. And the employer knows that, using it against them.
  • The Impending Health-crisis Debt: If there is one reason why people have to keep working, it’s health insurance. The US system of health insurance through employees forces people into jobs they don’t want to do. And as you grow older, the bills and premiums grow, making it even harder to leave.

I am not immune to any of these but have carefully avoided the ones I could. And that has helped me step out and say goodbye. What next? That still needs to be answered.