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.

          

The bold new plan of building Amberglen neighborhood in Hillsboro

Last updated Aug 1, 2017.

Amberglen Community, Tanasbourne, Hillsboro, OR USA

If you were to believe the Hillsboro Planning Dept, the Amberglen Community in Tanasbourne will be Orenco Station 2.0 with big plans for development. Here is map of the area. A list of key projects below.

Key development items:

  • Amberglen Central Park, with nearly 15 acres of beautiful landscaping & water fountains, was recently purchased by Hillsboro Parks and Recreation
  • A new 5-story, 136 room world-class Aloft hotel is now open for service
  • 396 unit apartment complex, Amberglen West, recently completed & is now fully open
  • A retail plus residential property, Amberglen at the Park, with 277 apts, 338 car stalls & 252 bike spaces is slated to open by end of the year
  • A 203 unit Apt complex, 206 Apt, opened last year
  • A 237 room Oxford hotel is approved & will be coming up soon on Cornell & Aloclek
  • A new 140 room hotel by Kalyan Hospitality on Evergreen Pkwy, next to Kaiser Permanente is approved, which will be part of the 950 units increase to Hillsboro’s hotel inventory
  • The owners of Boom Fitness are building a new apartment complex next to the facility
  • If you read the full plans, there is even a Max rail planned for future
  • Want to know how it might look like, try these reports from University of Oregon & REIG

A bigger picture:

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.