See today’s Chart of the day here.
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.
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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.
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.
Good stuff Jhun