tag:blogger.com,1999:blog-7199217912101324196.post8589756447041111622..comments2022-10-31T06:07:04.541-04:00Comments on xyquarx: Real Estate: Evils of the Owner-Occupied ParadigmBillhttp://www.blogger.com/profile/07798060265728448086noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7199217912101324196.post-40149658254441373552013-05-12T09:23:41.634-04:002013-05-12T09:23:41.634-04:00Hi Nick,
The absence of capital gains tax on a ho... Hi Nick,<br /><br />The absence of capital gains tax on a house should not be a big consideration. Capital gains on securities are taxed at a very low rate. The difference between "very low" and "nothing" should not be enough incentive to invest poorly.<br /><br />Your idea that you can get a house "below market value" is an illusion. If you buy a house for below the going rate, you have probably bought a house that everyone but you knows has something wrong with it.<br /> I could similarly argue that you can get stocks for less that their "market value" by timing your purchases to when the market is low. But that's an equally ridiculous argument. Less than 1% of the population, if anyone, can judge when the market is high or low, or how the market is going to play out short term.<br /><br />Your last point was that historically, real estate values have risen a rate of 3% above inflation. Inflation has been around 2%, so that's a 5% non-inflation-adjusted return. Stocks, historically if you include dividends as well as capital gains yield about 10%. Furthermore, the 10% yield of the stock market, unlike the 5% yield of real estate, is indefinitely sustainable.<br /><br />Let me explain that. Companies exist to make money for their shareholders. There is no reason to expect them to not continue to be able to do that at the same rate that we have seen historically (10%) indefinitely.<br /><br />At some point real estate, on the other hand, will reach a point where homeowners taking out interest-only mortgages (which are hardly different in terms of monthly payment from a 30-year mortgage) will be paying such a large share of their income on the mortgage that they just can't afford to pay any more. After that, real estate prices can only rise as fast as per-capita GDP in the neighborhood, which won't rise anywhere near 10% per annum.<br /><br />Your argument about a 30% return when ridiculously leveraged is a VERY poor argument. If you similarly borrowed 9 times your net worth and invested in it the stock market, along with your net worth, the 1000% concentration in your portfolio would have an expected return of 100% per annum. If you borrowed 99 times your net worth, you'd get a 1000% per annum return. It's just an absurd way to compare.<br /><br />As I made clear in the piece, it's REALLY unwise to make a highly leveraged investment in something, like real estate, that might tank.<br />Billhttps://www.blogger.com/profile/07798060265728448086noreply@blogger.comtag:blogger.com,1999:blog-7199217912101324196.post-23887090847448575972013-05-11T21:22:29.932-04:002013-05-11T21:22:29.932-04:00You have listed some of the cons of investing in t...You have listed some of the cons of investing in the house you live in, but not so many pros. Such as..<br /><br />Tax treatment for owner occupied dwellings beats all other investments. In particular, the 500k exclusion on capital gains and mortgage interest deduction. <br /><br />Inefficient market. Unlike stocks, where you can buy a company for what the market believes it to be worth, you can buy a house for less than what the market thinks. You just need to wait for the right deal and negotiate. <br /><br />Leverage is actually a good thing. Real estate prices can go down sometimes, but mostly they go up. Over a long term period they have been shown to beat inflation by a percentage point or 2. 3-4% per year with a down payment of 10% translates to 30-40% year return on capital. nickkzhttps://www.blogger.com/profile/08796598016024058189noreply@blogger.comtag:blogger.com,1999:blog-7199217912101324196.post-42394644684298547572013-05-03T22:22:24.447-04:002013-05-03T22:22:24.447-04:00This blog entry was written in February 2010. Tha...This blog entry was written in February 2010. That is currently over 3 years ago.<br /><br />I think my prediction is proving false. I expected that people would learn that real estate wasn't such a great way to invest, and choose (like myself) to rent while investing in other, more diversified, ways.<br /><br />Looking at what other people have been saying, I don't think the average Joe has learned a damn thing. To them, the mortgage meltdown was due to "greed" or "corruption on Wall Street". The people who bought houses they couldn't afford and got foreclosed upon are seen as innocent victims, not the irresponsible financial morons I see them as. According to the popular narrative, homeowners are responsible for nothing, Wall Street is responsible for everything. Most people have no idea what, exactly, Wall Street did wrong, but they're sure it was very immoral.<br /><br />Also, mortgage interest rates for people with good credit scores are unbelievably low. They can't get any lower. Someday they will rise, and when they do, real estate values will take a beating -- there is an inverse correlation between interest rates and real estate prices. So real estate is an especially bad investment when interest rates are low (meaning now).Billhttps://www.blogger.com/profile/07798060265728448086noreply@blogger.comtag:blogger.com,1999:blog-7199217912101324196.post-65928842752959609732010-03-08T21:51:36.061-05:002010-03-08T21:51:36.061-05:00Giddian, an interesting thing regarding regulation...Giddian, an interesting thing regarding regulation: I've been reading Adam Smith's "Wealth of Nations" (1200 pages) and he says an interesting thing about usury. Most of the time he is against government regulation, but they had usury laws at the time, and he felt they were a good thing. His rationale was that money loaned at lower interest rates is loaned to more responsible people, who make better employment of it. He would have been shocked to learn that today our credit cards routinely charge 29% interest.<br /><br />I disagree with Smith here. While laws capping interest rates would have made subprime loans illegal, the cap would have to have been so low that nearly all credit card interest rates would have been illegal, and I think our economy is better off for having credit cards.<br /><br />Also, the real estate bubble was not *ONLY* due to subprime loans. If it had not been for subprime loans, there still would have been a real estate bubble due to the fact that so many people were mesmerized by the conventional wisdom that real estate was a foolproof investment -- the bubble wouldn't have gotten as high without the subprime, but it would have been a bubble nonetheless.Billhttps://www.blogger.com/profile/07798060265728448086noreply@blogger.comtag:blogger.com,1999:blog-7199217912101324196.post-5746317488549857812010-03-04T21:24:56.978-05:002010-03-04T21:24:56.978-05:00I don't agree that credit default swaps are su...I don't agree that credit default swaps are such a shady thing. One way they can be used which is beneficial is to insure bonds against default. This is a perfectly sane use of them that banks, which buy a lot of bonds, should not be discouraged from employing.<br /><br />Regarding organizations that are "too big to fail", one response that I think would be appropriate that I haven't heard discussed in the press would be a tax on organizations that increases as the organization grows, such that at some point, before the organization becomes too big to fail, their after tax return on investment becomes so unfavorable that the organizations voluntarily choose to dismantle themselves into smaller units.Billhttps://www.blogger.com/profile/07798060265728448086noreply@blogger.comtag:blogger.com,1999:blog-7199217912101324196.post-41330000813924892222010-03-04T17:22:22.552-05:002010-03-04T17:22:22.552-05:00While I agree with most of your analysis, I think ...While I agree with most of your analysis, I think you missed the main cause of the economy’s meltdown: the absence of reasonable regulation.<br /> <br />1)The trigger was the collapse of the huge subprime mortgage market. That market should never have been allowed to flourish. A few years before the collapse, 52 state governments realized the danger and, collectively, petitioned the Bush administration to put the breaks on. They were refused.<br /><br />2) I would agree that it’s not the government’s responsibility to protect individuals from their own stupidity & greed. But, it is necessary for a government to protect the nation from destructive manipulation by clever & unscrupulous money managers (and any other group or individual whose operations threaten the nation, whether for politico/religious reasons -- e.g. jihad -- or just plain avarice).<br /><br />3)Institutions that invest in, buy & sell financial instruments of obscure or unfathomable value (e.g. hedge funds, credit default swaps) should be separated from those that provide the financial liquidity needed by business, industry & consumers. That way their failure hurts only their own investors and they need not be supported.<br /><br />4)Traditionally, home ownership has been promoted, not as a get-rich-quick investment, but for its security and its contribution to family and neighborhood stability. <br /><br />The current mess is a direct result of government not doing one of the jobs it should do: provide a stable secure financial environment for business. The mess is a direct result of Reaganonsense and its mantra, “government is the problem”.Giddianhttps://www.blogger.com/profile/01730239391177833655noreply@blogger.com