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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: jt101 who wrote (6980)	11/20/2002 12:20:42 AM
From: GraceZ	Read Replies (2) \| Respond to of 306849

Basically, I was showing the situation where someone (using myself as an example in buying my first house in 1987) was buying a house in a market where housing was selling at a premium to the cost of renting a like property. If I did the same example using cash instead of a mortgage I'd have to use the opportunity cost of using that capital to pay for the house instead of putting it in an investment. I owned the house for 10 years between 1987 and 1997. I got zero appreciation on the house so essentially I'd have gotten zero return on the money....but I'd have a place to live. Which I've already figured out would have cost me $650/month as a rental. Now consider that's $78,000 worth of rent I got for original my investment so it looks like I almost broke even until you consider the cost of selling the place. But If I'd put the $79,900 cash (assuming I had that much cash back then which I didn't) into the S&P on the day I bought the house and simply rented the other house for $650/month, then on the day I sold the house I'd have $188,735 for my investment if I allowed it to accrue instead of use the income to pay the rent. That's a difference of $110,735 for renting and investing the cash elsewhere. But then you have to figure if you own outright then you don't have that monthly mortgage payment or rent payment so the diff could be invested as you go. Had you put that monthly amount away in the S&P you'd have a pile at the end but not quite as big a pile as you would investing the lump sum back in September 1987. What is funny is that I started investing in the stock market back then as well as buying a house. It was an inexpensive house so I was able to save quite a bit of money over the next ten years. I remember one ruined Thanksgiving in '87 where my sister and I got in a heated discussion about real estate vs. the stock market. She told me real estate was the place to put your money, it never declined and I was going to lose my money in the market because stocks were bad investments. I argued that real estate had gotten over leveraged and over blown and was ripe for a fall but stocks were a bargain. A few years later when she was telling me her tale of woe about how they couldn't sell their first house and nothing was moving, how they wanted to move but nobody could sell their house and especially now that she had a second on it, etc etc. She didn't even remember the argument. Obviously there will be different time periods and markets where this scenario wouldn't happen, that the house investment would come out way ahead. It's almost always true, in different time frames some types of investments do better than others. Very rarely do they all do poorly or all do well in a given 10 year period. Had I held that house just five more years I'd have had a better return and the S&P return would have languished (not before that nice blow off top in 2000 though -g-).