Is Real Estate Actually a Good Investment on Average?
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
Renting is not universaly better or worse than owning. It depends on your personal situation (plans, desires, financial abilities...)
Right, that was the entire point of the post. Because offline there was a strong argument that buying was basically a guaranteed windfall and that only crazy situations could not make you lots of money and that any statistics should show that you just get crazy rich by owning property. But reality is anything but that. On average, over all time, owning property is a struggle to be profitable.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Pretending that the minority choice is "almost" the majority choice is crazy.
You have no proof that it was minority choice, as I explained in my previous post.
Actually, I claim that majority in 19th century would choose to own -
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Pretending that the minority choice is "almost" the majority choice is crazy.
You have no proof that it was minority choice, as I explained in my previous post.
Actually, I claim that majority in 19th century would choose to ownChose is a financial term and you can determine it by what was done. Unless it was illegal to buy, then it was a choice. That people couldn't afford it, or didn't want to do it, isn't relevant to the conversation. But in financial terms, being unable to afford something is a form of not wanting. That's how that term is used financially.
And using "impossible" just because you perceive it doesn't make that even remotely true. It could be, but it's unlikely. Just because renting gave more options doesn't make owning impossible. We can guess that renting was financially more accessible. But that is the entire point. Affordability or being within reach financially is what made it more attractive as a choice.
You are stating it more as a proxy for being rich. People wish that they could buy houses, lots of them, because that would make them rich. It's being rich that they want to be, not home owners. Yes, people with that they were richer than they were (are.) That's a totally different concept and not relevant here.
We also know from historical accounts that the uber rich would commonly rent not buy because it gave them flexibility. So we know this isn't a poor / out of reach thing at least exclusively.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Right, that was the entire point of the post. Because offline there was a strong argument that buying was basically a guaranteed windfall and that only crazy situations could not make you lots of money and that any statistics should show that you just get crazy rich by owning property. But reality is anything but that. On average, over all time, owning property is a struggle to be profitable.
I agree with you a lot here.
You just need to have in mind that keeping the value against inflation is not so small thing.
Cash have a HUGE weakness here. -
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Right, that was the entire point of the post. Because offline there was a strong argument that buying was basically a guaranteed windfall and that only crazy situations could not make you lots of money and that any statistics should show that you just get crazy rich by owning property. But reality is anything but that. On average, over all time, owning property is a struggle to be profitable.
I agree with you a lot here.
You just need to have in mind that keeping the value against inflation is not so small thing.
Cash have a HUGE weakness here.Yes, but in America especially, we don't really compare in terms of cash when discussing. Of course, that's one factor. But cash is a baseline.
What we'd really talk about is value versus the market. And that's what makes home ownership really bad. Given the chart, basically it just held against inflation and nothing more. That implies that it lost against an Index by 5-10% which means compared to the reasonable market baseline, the real estate game loses a lot.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
But in financial terms, being unable to afford something is a form of not wanting. That's how that term is used financially.
Sorry, Scott, but this is "crazy to say" if I say in your terms.
I need to go to work now... -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
That implies that it lost against an Index by 5-10% which means compared to the reasonable market baseline, the real estate game loses a lot.
Scott, you write lot of things and then it is hard for me to answer to all.
But just this one more now:
Can you answer to what market are you comparing real estate market?Beacuse bonds and shares are completely different things with very different risks (if you are comparing to that)
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
But in financial terms, being unable to afford something is a form of not wanting. That's how that term is used financially.
Sorry, Scott, but this is "crazy to say" if I say in your terms.
I need to go to work now...Not at all. We use it this way every day.
Can I afford a Ferrari? No, I can't afford that. Of course if that's truly what I wanted, I can find a way to afford it. It's just ridiculously expensive and would otherwise cripple me.
That's how houses are for a lot of people and presumably a hundred years ago in America too.
Houses were never impossibly unaffordable, not at all. They were impractically unaffordable. People have always chosen not to put everything penny that they could earn into something that would likely lose value. Sure, there have been some small number of people who truly could not possibly afford any house, but good luck actually identifying such a person. Unless home ownership is actually illegal, it's always a "want" vs "don't want" issue.
You can always work harder, save more, work longer, settle for a lesser house... that's the thing about buying things. Yes, in theory, there are products truly impossible to afford and no amount of true wanting can make someone able to buy them. But that's in zero way the case here. Here it's completely a question of how much financial burden vs. quality of home is someone willing to spend their money on. It's "want" in every possible sense of the word.
And since we see this playing out in this discussion, we know it is true. Houses according to the stats are impractically affordable today, to the greatest extent in recorded history. We already know that compared to inflation home ownership is harder today, hardest today, not easier. Your theory that Americans were poor and couldn't buy houses isn't reality. It has always been a question of wanting or not wanting based on the value of what you get.
Just like every time you go to Mcdonalds. How expensive is a Big Mac vs how much do you want to eat one. Yes, a Big Mac is ridiculously expensive for what you get and 99% of the meals out there, people chose not to buy it even thought they could. But 1% of the time, people make the decision to buy it for that meal.
Not sure what "want" means to you. But this is want in every sense.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
But just this one more now:
Can you answer to what market are you comparing real estate market?
Beacuse bonds and shares are completely different things with very different risks (if you are comparing to that)IN the financial world, all of these are financial vehicles. They are specifically always compared to each other because it is the sole comparisons to make.
Bonds are the highest risk. Real estate the middle. Stocks the lowest. Stocks are the only major investment vehicle to routinely outpace inflation and make money through the vehicle alone. Real estate and bonds are "losing" investments that you can only make money (on average) through trading against the deltas rather than the value of the assets. So with stocks, you can make money by investing. With real estate or bonds you assume you can only make money through trading.
The poor, especially in America, are always taught the opposite because it heavily helps investors control the profitability of the markets. They want the poor classes to hold bonds and real estate so that highly profitable and safer stock assets are available for the rich to trade. In the investment world, that real estate and bonds are super high risk that can't beat inflation is common knowledge, But if you learn investing in high school they will always claim stocks are risky. But stocks on average are the safest asset to hold by no small margin.
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So here is a way to see the current market in America.
Because real estate is high, it's the riskiest place to invest today. Bonds are actually safer. That's rare. Bonds are crazy dangerous. Investing in bonds is "betting against the market". The kind of thing you do only during a market collapse (expected.)
So someone considering home ownership vs. renting today's top consideration would be how could a house beat the stock market. And the answer is, there's no reasonable way for it to come close. That means that using your nest egg to invest, and paying rent, will dramatically outperform home ownership to many, many percentages greater than the home value vs. inflation number would show.
Because stocks are so predictable over time, they are the baseline used for holding assets. If your investment (home, bonds, gold, peanuts) can't meet or beat that baseline, it's a bad idea. You use that baseline in every aspect of financial planning. It's how you gauge all loans, for example. When you do that, it shows that home ownership is expected to "lose" money, because your assets are tied up and there is the "cost of lost opportunity."
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Everyone will say "but stocks are risky, they are a gamble." That's true, EVERYTHING is risky, everything is a gamble. Stocks are, by orders of magnitude, the lowest risk option, however. Stocks are lower risk (for their entire history) than holding any other kind of asset... real estate, gold, cash, oil, bank accounts, CDs, money markets, bonds... they all have higher risk than stocks.
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So like anything real estate can make money. So can the lotto. Real estate is much safer than the lotto. But it's all a sliding scale. Stocks are the farthest to the conservative side. Bonds are closer to the casinos.
But as crazy as bonds are, in 1929 it was for one brief moment, the bond holders alone who made bank as everything else collapsed. But they only made that bank if they were confident enough to dump the bonds immediately and get back to stocks. Because if they waited as little as five years, their entire bond windfall was wiped out. Even at its all time historical best, bonds had a "safe to hold" time frame of less than 60 months.
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@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
Can I afford a Ferrari? No, I can't afford that.
Comparing luxury cars to basic housing is not appropriate here.
In 19th century, lot of people migrated to USA to earn for basic living.
In 1st half of 20th century, lot of people from my country (Croatia) migrated to USA (and Latin America) to earn for basic living.
They did not "choose" not to buy homes, they just did not have a chance to buy it (not even with bank loans)
Comparing that with Ferraris is ... (I want to stay polite) -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
But just this one more now:
Can you answer to what market are you comparing real estate market?
Beacuse bonds and shares are completely different things with very different risks (if you are comparing to that)IN the financial world, all of these are financial vehicles. They are specifically always compared to each other because it is the sole comparisons to make.
Bonds are the highest risk. Real estate the middle. Stocks the lowest. Stocks are the only major investment vehicle to routinely outpace inflation and make money through the vehicle alone. Real estate and bonds are "losing" investments that you can only make money (on average) through trading against the deltas rather than the value of the assets. So with stocks, you can make money by investing. With real estate or bonds you assume you can only make money through trading.
The poor, especially in America, are always taught the opposite because it heavily helps investors control the profitability of the markets. They want the poor classes to hold bonds and real estate so that highly profitable and safer stock assets are available for the rich to trade. In the investment world, that real estate and bonds are super high risk that can't beat inflation is common knowledge, But if you learn investing in high school they will always claim stocks are risky. But stocks on average are the safest asset to hold by no small margin.
I am financial expert (not IT expert), I don't need basic financial explanation.
You say real esatate "lost against an index by 5-10%"
I ask "to what market are you comparing real estate market"
You do not answer to my question directly - instead you send me "walls of text"
It seems like you do not want discussion? -
@scottalanmiller said in Is Real Estate Actually a Good Investment on Average?:
So like anything real estate can make money. So can the lotto. Real estate is much safer than the lotto. But it's all a sliding scale. Stocks are the farthest to the conservative side. Bonds are closer to the casinos.
Scott, I agree with lots of prejudices about real estate you are talking about.
But also, you write a lot of purely wrong statements here. Stocks are not conservative, and bonds are not casinos - on contrary:1. Bonds are lesk risky investment then stocks (that's why stocks offer chance for bigger profits, that is why owners capital is more expensive than financing with bonds)
2. Real estate is less risky then stocks (on average). That is why income on real estate is so low.
Another ilustration - you will always get better mortgage loan ratio for average real estate (long term loan/value), then you can get margin loans for stock trading (long term loan/value)If you claim different please make your arguments clear.
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As my more general contribution to this topic:
If someone is not financial expert, he may prefer to invest in his own home because:
- It has real value for him (that's why it is called real estate) - he can live in it.
- He understand what he is buying (non-financial people may not understand what they are buying when they buy Tesla stocks or bonds at a certain price)
It is wise that people invest in things they understand, not in things they do not understand.
Even Warren Buffet once said that he did not wanted to invest in IT companies because he did not understood that business.I think these two points above are also big reason why lot of folks like to invest in ownership of home. (also some others, like to be certain you can stay at a certain place for long time...)
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
It is wise that people invest in things they understand, not in things they do not understand.
As a Wall St. guy, I don't think I'd agree here. That's a way to limit people to a very small scope. Things that people understand don't tend to make them money.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
It has real value for him (that's why it is called real estate) - he can live in it.
I'm not sure that that is why it is called that. In the colonies, a "real" asset literally means that it was authorized by the crown. I have "real" estate, the paper that says I own it is called a real and it comes from the Real "royalty", the Spanish crown approved it. I'm not sure if that is the source of the word, but given that real estate was handled under a real meaning royal, I don't think it means real in the English sense as all assets have real value but not royal value.
That he CAN live in it is misleading. He can equally live in a rental. The only value to him comes from the investment value. That humans tend to be emotional about their homes causes bad financial decisions and is actually often said to an important reason to rent not buy, buying only has a good chance of being healthy for you and not crippling your life if you can be unemotional and remember that it is just an investment option and you have to be flexible with it to not get burned.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
I think these two points above are also big reason why lot of folks like to invest in ownership of home. (also some others, like to be certain you can stay at a certain place for long time...)
Those are big emotional reasons why people foolishly invest without evaluating logically, yes. Absolutely.
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@Mario-Jakovina said in Is Real Estate Actually a Good Investment on Average?:
Even Warren Buffet once said that he did not wanted to invest in IT companies because he did not understood that business.
That's hilarious because IT is just "business". To say he doesn't understand IT means the same as saying he doesn't understand business. IT involves tech, but IT itself is purely a business aspect and a part of every business. Whether his companies are IT themselves or just have IT as part of them, every investment involves IT and IT is a part of all aspects of business.
