Thursday, October 25, 2007

Housing and Leverage

As they try to sell houses in a poor market, some real estate brokers are advising that housing is a good investment because on a leveraged basis, its return is higher than the stock market. This is true, but it is also true that when levered, housing is more risky than the stock market.

If someone takes a long position in a Vanguard Blue-chip fund, the chance of losing his entire investment is remote. Of he buys a house with just ten percent down, however, and house prices fall ten percent, he loses his entire investment.

I would still not discourage someone from buying a house if they know they will live in the same place for more than five years. There is a cash-flow benefit to owning (the fact that you don't pay rent) and there is a real benefit to having control over one's living environment. But if I were to move right now, the chances would be pretty good that I would rent out the house I now own (I wouldn't want to give up my very low-interest rate mortgage) and then rent for awhile in the place I am going.


Anonymous said...

Good grief, yes. Especially in the more over inflated areas where we've already surpassed 10% (and on our way to 50%+????)

We have a staggering supply of foreclosed and short sale homes on the market and (anecdotal) the lienholders are not releasing the lion's share of them to market in an attempt to stave off a long term housing depression -- as opposed to a housing recession. Not to mention the seemingly accelerating supply that is now entering foreclosure or will be soon. Stock market has mechanisms to freeze activity. Housing certainly is a different animal, but maybe there's a way to slow the freefall? If we have far more housing than people that can afford it at current perceived values, how in the world will they be able to buy when justifiably tighter lending guidelines has almost instantly precluded them?

Many questions. Any good answers?

Burning question: Are foreclosures really accelerating, or is it more of a constant downhill slide?

workhard said...

Agree with you...

Idaho Real Estate

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