Should I buy a house?

 

Housing:

Why buying is not a good long term investment 

 

 

     If you are buying a house as an investment then you might want to reevaluate your choices in what you invest your money in. If you are buying your house so you can live in it and have a place to raise your family then you are making a great decision with your money.

     In the investment world a good long term investment is something that you can buy at a fair price and will eventually be worth much more than you bought it for when you sell it. In the investment world a bad long term investment is something you purchase that will eventually be worth around the same or less than as when you bought it. And you generally don't want to have to put any more money into your investment than what you already have when you first purchased it.

 

     The average sale price of a home in March of 2015 according the the U.S. Census Bureau was $343,300. And the average interest rate on a 30 year fixed rate mortgage in march 2015 was 3.77% according to Freddie Mac.  Based off of your purchasing price with a down payment of about 20% ($68,000 which is very unrealistic) your loan amount comes out to $275,300. If you paid off in full in 30 years the amount of money you would have paid into your mortage would be $460,108.80.

     The final price of $460,108.80 is what it would cost you to own a house in 30 years in a perfect world. However, there are many more expenses to owning a home such as property tax, home owners insurance, and home maintenance. If you based your tax rate off of my home towns of 2.76% (2014), the national average of $952 for home owners insurance, and the national average of home maintenance of 1% of value annually ($3433) it would cost you an extra $131,632.8. So now your house needs to be worth $591741.6 if you decide to sell it in 2045 to break even. You are paying $248,441.60 in order to own your house at the price of $343,300. Paying more than something is worth to own it is by definition a bad investment.

 

     What we have discussed so far goes against what a long term investment should be. As we stated it should be something that you can sell for considerably more than when you first bought it. A house purchased at $343,300 should be worth considerably more than that in 30 years for it to be a good long term investment. However appreciation of .2% annually would give your house a value of $364,506.64 netting a profit of $21,206.64. But that profit would be wiped out by all the interest due on your loan, the property taxes, home owner's insurance, and home maintenance.

     On the inverse let's look at what would happen if we took that $68,000 down payment and $1,643.72 monthly payment and invested it into a low cost index traded fund that mimmic'd the SP 500. From 1950-2009 the average annual return was 11% adjusted for inflation it was 7.2%, which is what we will use to find out what our new long term investment would yield over the same 30 year period. The principal amount that would be invested is $659,739.20 however the interest we would accumulate amounts to $1,893,866.82 for a combined value of $2,553,606.02. Even if you got taxed at a rate of 20% you would still come out ahead of your housing investment by a long shot with an after tax profit of $2,042,884.82.

     So what does this all mean to you? Well I am for one not telling you to never buy a house. It actually is a good idea to be a home owner but just not if the idea for owning a home is for investment purposes. There are a few things that aren't expressed in dollar signs when you buy and eventually own a home, specifically the pride of having your own piece of land and dwelling where you can have the freedom to do what you like within the confines of laws. It is also usually cheaper if you buy for the long term than rent for the long term, especially since you have an asset at the end of your 30 year mortgage  that can be sold or borrowed against.
     What I am telling you is to find "the perfect house" which is very cliche but it is quite true. An investment that isn't very good sure better make you happy in the long run otherwise you will be kicking yourself in 30 years. That perfect house also won't mean anything when you retire if you don't have any money to retire on, so make sure that you live within your means when purchasing a house otherwise you are going to have to sell that perfect house in the future because you need money to live off of. But with the right research in the area that you will be living you might be able to break even if you ever do decide to sell your house.

 



Listen But Don't Trust: Your Instincts

 

Listen But Don't Trust: Your Instincts

 

     Sometimes we make bad decisions and when we make those decision we are rarely thinking, rather we are using past experiences to determine a future outcome on the spot. Think back to when you were a child for the first time you saw people playing pokemon, you saw them laughing and smiling. You knew that from past experiences that kids laughing and smiling signified people having a good time. Automatically you wanted to spend the next 12 months of allowance from your parents on pokemon cards.

...Flashforward 20-30 years...



    

     "Dude, you have to get a pair of these shoes?!?" said one middle aged dad to another "I don't know man, they look pretty lame." said the other middle aged dad "Not the fanciest but they are like work slippers, I can do anything in them, every other guy I know has a pair." Said the other middle aged
dad that was wearing a pair of shoes called CROCS (NASDAQ: CROX).  The third middle aged dad was standing by eves dropping and heard the name "CROCS" and "everyone is getting them" his wife just so happened to tell him that we should start thinking about investing for retirement. He googled CROCS and found out he could purchase shares in their company in hopes to build a future for his family. With the popularity of CROCS the third dad thought he was making a great buy and snagged CROCS at $27.34 on April 27th of 2007 (a bit over a year after going public).
     Middle aged dad went with his instincts, he knew from past experiences that popular things usually do quite well (Pokemon). In a split second his instincts told him that Crocs would be a great investment. However what that middle aged man didn't know was that it wasn't, or there were just better options out there. What You See Is All There Is (WYSIATI), a term created by Nobel Laureate Daniel Kahneman to explain how the human mind makes decisions. We make decisions based off of only what we know from life all the way up to that point and rarely spend the time to gather further information, this is an Instinctual Decision (gut decision). While instinctual decisions have their place for circumstances like heavy traffic or wet floors (life or death situations), they have no place in investment decisions. Investment decisions have good or bad long term consequences, but to ensure that the majority of them become good consequences you must make an Informed Decision.
     Informed decisions are exactly what they sound like, they contain information, information that you do not yet know of but need to know in order to make the correct decision. To make these decisions you must go in search of the information that will help you come to a conclusion, and not necessarily the one that you want, more so the one that you need.

Sometimes fads aren't just fads

     While he made the right decision in putting money into the stock market he made the wrong decision in which stock he chose. He based his decision off of what he knew at the time, the shoes were comfortable and everyone was getting them, he also knew that popular things usually do well so he bought into the stock. But he didn't know alot of things about Crocs as a company and it's industry of fashion retail. He didn't know that it was a fad that was growing at amazing rates but would eventually fall very hard. With a little bit of digging he would have found that fashion retail is a very poor industry to invest in when compared to others, and that CROCS was a poor company to invest in when compaired to other fashion retail companies.
     The stock market is a good neighborhood to invest in, but CROCS is not a good house to entrust your future in, there are literally about 4000 other actively traded companies that you can choose from. While you should not ignore these instinctual decisions you rather should question them. Questioning them will bring about new factual evidence that will either refute or defend your first gut feeling. And if you end up being correct (and bought the stock) then you can rejoice in earnings and almost more importantly a correct decision. But whatever you do, do your own research before you decide, because what you see (or have seen) is sometimes not all there is.