Pragmatic Capitalism

Capital for Living a More Practical Life

Re: Robert Shiller: Don’t Invest in Housing

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Unlike some others, I do not view owning a home as investment as much as I view owning a home as unquestionably the best hedge against rent inflation.

That is important to lower-income earners more interested in keeping a roof over their head than in obtaining an investment windfall.

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Posted by Terry Pratt
Posted on 05/11/2017 11:50 AM
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On average housing will tend to rise with the rate of inflation. That has been the historical norm. And when you consider after taxes and all other costs you’re very likely to be in the red on a house over its lifetime. Houses are really expensive assets to own. Among the most expensive.

So, as a general rule of thumb it’s better not to view a house as an “investment” because they don’t protect your purchasing power that well.

This does not mean renting is better. Not by a long shot. But most people tend to remember two numbers when they think about their house ROI – the purchase price and the sale price (or current value). And they don’t calculate all the hidden costs they incurred along the way. So there is a totally inflated perception of housing’s ROI.

But it also depends entirely on personal circumstances. Renting in Manhattan, for instance, is a no-brainer for most people. Renting in Timbuktu might not be so smart. I rented for years before and after the financial crisis because I thought housing was severely inflated. Then I bought when the circumstances changed. So, it’s never as simple as this or that. It totally depends on the circumstances!

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Cullen Roche Posted by Cullen Roche
Answered on 05/11/2017 12:05 PM
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    Hi Cullen,

    I’d be grateful if you could share what metrics you use to consider whether renting is better than buying, and especially why you think renting is a no brainer for Manhattan. Coincidentally I am infact considering buying in Manhattan, right now! 🙂 Thank you, as always.

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    Posted by G Marx
    Answered on 05/14/2017 11:22 PM
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      Some good advice from my father when I was in my teens was to point out that a house is a depreciating asset but the land it sits on may be an appreciating asset. This is not new or original as evidenced by the long standing real estate maxim that you want to buy a lower end house in a high priced neighborhood. Cullen is correct, a house is very expensive asset to own. This year, on my 13 yr old house, I will be in the $30K to $40K range on standard maintenance (water heater, furnace, roof, paint, toilets, patio door, window screens, tree service). Sure it all hit in a short period of time, but my home maintenance averages a bit more than 1% of market value (in a local region where median house prices are $500K).

      But living between Denver and Boulder, at the edge of the foothills, and close to the mountains, I figure the land has value. Not like the middle SF Peninsula where I grew up, but probably not a location where land values will see long term decline.

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      Posted by John Daschbach
      Answered on 05/17/2017 8:58 PM
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        In 2015, James Altucher made several convincing points not to own a house, or at least not to treat it as an investment vehicle. The numbers he quotes are sometimes suspect, but the gist of his points still ring true for me.


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        Posted by Han Kunyang
        Answered on 05/18/2017 11:56 AM
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          James Altucher is pretty cynical, but the most important thing he said was, “But I like my landlord and house and I don’t blow a good thing if I have it.” He is VERY lucky that he has a good landlord. Most landlords are terrible, and your home is never really your home.

          Houses should not be thought of as investments. However, when you buy a house, give only a passing glance at comparable sales. Yeah, I know every real estate says that house values are determined by comparable sales. This is simply not true. If you really want to understand the value of a house, analyze the numbers as an investor would. Do not offer a price more than what would allow the house to at least break even on cash flow IF it were a rental. Real estate agents, even buyer’s agents, hate homebuyers who buy with the investor mindset because it is too hard to talk them into paying too much.

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          Posted by Lucas
          Answered on 05/18/2017 10:03 PM
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