I get high.

I’ve been doing a lot of blogging lately about real estate and the stock market. The last twelve months have been insane for both markets. Epic and unsustainable are some of the adjectives that come to mind for the recent  gains.

The general consensus amongst PF nerds is that one should strive to buy low and sell high. Today, I’ll make the argument that one should Buy low AND Buy high.

One of the Seattle Real Estate blogs I read repeatedly says this is a terrible time to buy a house in Seattle because of the recent market appreciation. This bothers me for a few reasons: 

A house is a home first, an investment second.

I have to pay to live somewhere, right? Real estate is one of the only investments I can think of that satisfies a basic human need, shelter. Even if my house lost all of its monetary value, it still provides ME value. If your WaMu stock loses all of its monetary value, you have nothing.

We are looking at houses within our budget.

Just cause the market went up doesn’t mean our budget did. If we find a house that we like – in our price point – I’m not going to refrain from buying it just because it was $20,000 less last year. Milk was also cheaper in 1995, so should I not pick that up at the grocery store today? Which leads me to my next point…

Buying high is a good thing.

I mean, that’s they way the stock and real estate markets works right? They should both be setting new highs every day. Okay well maybe not every day, but over the long haul the trend is supposed to be (and always has been) up. Why do we act scared or surprised when the Dow sets a new record?

THAT’S WHAT IT IS SUPPOSED TO DO!!!!

I get that one might argue the importance of buying low and selling high when it comes to short-term investments. But who the crap buys a house with the intentions of selling it two years later? That’s stupid, or at least speculative at best. Two years from now the housing market may be down, but I bet you a billion dollars twenty years from now the market is up. I don’t really care if my house is worth $300,000 or $320,000 today, when it is going to be worth $700,000+ thirty years from now. Sure, it would be nice to time the market, unfortunately no one can do that without taking a gamble.

Moral of the story kids: The market being at all time highs should be reassuring that the market is performing as expected.

25 thoughts on “I get high.

  1. For most of us who buy a house with 10% or 20% down the cost of the home matters less than the interest rate you can lock your mortgage rate in to. High interest rates will cost you thousands in the long run.

    You are saving for an unusually large deposit so interest rates mean less and the cost of the home means more. If you are planning on staying in the home for 10 plus years then a bubble won’t affect you as much.

    You are happy renting and rent a beautiful place but I still see that money as money tossed away instead of building equity in your own home. I am a lower income person and will be living on the equity in my home when I am in my 70s and I am glad I am putting my money to home ownership instead of monthly rent.

    • Even here, though, I’m not sure you’re entirely correct on the interest rates thing.

      One, if rates fall, you can always refinance down the line (thereby lowering your interest rates if rates fall).

      Second, if interest rates rise, well, CONGRATS! You’re locked in (presuming you did a fixed rate mortgage) at paying the bank a lower rate than your money/their money could earn elsewhere. In the early 1980s, your bank SAVINGS account earned 19.1% (http://money.msn.com/saving-money-tips/post.aspx?post=6563607d-ca3b-4a7e-87bb-1dc72f4fc91f)….if we end up in hyperinflation (let’s hope it doesn’t happen) or even just experience inflation back to levels we were at in 2000 (when the Fed Funds Rate was near 6%), you could get to a situation where paying the absolute minimum on your current 4% fixed MAKES you money absolutely RISK FREE (i.e. you’d take anything extra that you’d put towards your 4% mortgage and instead leave it in a 6% or higher savings account, where it would return 2% more). Increasing interest rates HURT lenders and HELP debtors, so if you have a fixed rate mortgage (and plan on staying in your house), you should arguably ROOT for interest rates to climb.

    • Your argument about rent being tossed away would only be true if our rent payments were comparable to what our mortgage (PITI) payments would be. For us, that isn’t the case. Our rent is $1,100/month, but our mortgage payment would be $1,700 all in (since we would buy a three bedroom house).

      When you “own” you still throw most of your money away (just like renters do). Remember, mortgage interest, property taxes, maintenance, HOA dues, etc are NOT investments. They are expenses that you never recoup a return on. So yes, renters throw their money away, but so do owners. And that is why point #1 in my post is so important.

      • Technically you do not have to pay to live somewhere, that’s just your choice. There is a guy I see daily under a bridge downtown that went this route.

        Mortgage interest can be avoided with a down payment. One might argue that your returns on property taxes in king county are schools, parks, emergency medical services, fire services, etc… I happen to live in a subdivision that does not have an HOA, so that’s a choice, not a certainty. Maintenance can include improvements that make your asset worth more.

        Just throwing fuel on this fire…

        • Maintenance is different than “improvements” so I hope you don’t treat them the same. For instance, if a pipe bursts, you need to repair that. If your roof gets damaged and you need to replace it, it’s maintenance. This does not increase the value of your home, it simply brings it back to the value before the repair was made.

          Improvements, on the other hand, are extraneous, non-necessary upgrades you can make to your home for a variety of reasons: To improve the value (terrible reason, since there are almost no improvements where you recoup 100% of the costs), because they will bring you more pleasure out of your living space (like wanting a wet bar or an outdoor kitchen space), or because they will make your home easier to live in (replacing clapboard siding with vinyl, upgrading your kitchen, etc).

          I believe his costs from maintenance would go into the first bucket, not the second.

  2. I agree with you just about 90% of the way. A house covers a basic need, so it doesn’t really HAVE to be a good investment. But be careful about thinking that ALL houses go up in value, even over 20 years. I have seen beautiful housing developments lose value because HUD housing went in next door, or because the city created a landfill, or because the builder went bankrupt and the development became HUD housing. You’re right on the money with everything else, but there’s just no guarantee of the $700K value you mention, even in 30 years.

  3. Here in California values didn’t go down by $20,000 they went down by as much as $200,000. Takes a long time to recoup that equity. After 9 years we still are $75,000 less than the purchase price. Nothing is for sale around here because of that. This works out Ok for my family primarily because we put a lot of money down and we still fit. Nine years ago we were dual income no kids. Now we are single income, three kids. Point being sometimes it’s hard to foresee your future (and your family’s). I don’t know if it’s realistic to say that everyone can stay in one home for 30 years.

    • Well if you are looking at your home as an investment (which I’m hoping most people do since it is such a freakin huge financial decision) then the hope would be they are comfortable owning said property for a long time. Sellers fees are brutal and eat up 5-10% of the sales price. Owning for a long time helps mitigate that cost over the long haul, instead of over one or two years. The fewer real estate transactions one makes in their life, the better.

  4. I wonder what people who are still way under water would say about how “satisfying” their mortgage payment is. Wouldn’t you feel stuck? Maybe you couldn’t have moved from sd to the pnw.
    I personally do what I can to not pay more for something than I have to.

    The stock portion of this post is an sales pitch on dollar cost averaging.

    Isn’t today poll Thursday?

  5. I agree with your first two points but strongly disagree with the this point.
    The market isn’t always suppose to go up. That type of thinking is what caused the problems in 2007. If that we’re true then then what would be the harm if when the nanny in NYC who made 10k a year in NYC bought 2 apartments for 1.1 million ( 300k in income over 30 years, both mortgages defaulted) or Casey Serin the budding real estate tycoon borrowing 1.6 million to buy 8 houses with NINJA (no income, no job or assets) loans (all houses foreclosed on). If the market alway went up then all of these investment would have worked out.

    This does not only apply to houses. The NIKKEI index of japannese stock market was close to 40000 in the late 80 today it is under 13000. The only country that the markets have alway gone up in over the past decade has been Zimbabwe due to massive hyperinflation. I personally don’t want the markets to alway go up if it means that my 401k has gone from 20k to 200m in a year if the price of a beer goes from 1 dollar to 5 trillion over the same period.

    • I don’t get how you can disagree with point three. That over the long run, the stock market and real estate are expected to appreciate. That is the reason we have 401k’s, Roths, etc. Find me a 20 year period where the Dow’s trend hasn’t been upwards and I’ll concede.

      You used two housing examples to prove a point that I agree with. Buying real estate for a short term investment (2007 to Now) in hopes that it will definitely go up in value is foolish. But to say that you have no expectation that the housing market will increase in value over a 10+ year time frame is equally foolish, when looking at the market as a whole, that couldn’t be further from the truth.

      You really expect the Dow to be trading in the 15,000’s twenty years from now?

      • Ninja,

        I have always taken the disclaimer no all my financial prosecti to heart. ” Past performance is no guarantee of future returns”. This does not mean I think we will end up like Japan or Zimbabwe. This means that the any markets performace 2013 – 2040 cannot be discerned from the same markets historical performance 1950-2012. I don’t know what the stock or housing market will do over the next 20 or 30 years, but I still don’t agree with your statement that just because a market has generally gone up in the past it will contine to do so.

        • We have to use history because that is all we have. Do you not hold any real estate or stocks? The future will always be unknown, sure, but that shouldn’t be an excuse for doing nothing. Where do you suggest people invest?

  6. well, see, here’s the thing – we bought high and now 5 years later circumstances have changed for us and we’d LIKE to be able to sell. We’re not underwater in our mortgage but we’d sell for much lower than we paid for it (plus fees) so the true ‘cost’ of staying here for the last 5 years is pretty high. You can’t know what the future holds and we certainly didn’t but I would ‘undo’ this purchase in a hot second if I could.
    As it is, I think we’re going to have to stay put when we’d rather not. it’s hard to feel ‘homey’ about a house you don’t want to be living in anymore.

  7. Have to put my 2 cents in because you know me by now 🙂 I really find it difficult to believe in the value that people put in the stock market. I don’t like your faith in the stock market. I have no trust in these man-made values. In regards to homes, location is everything. However, I think even that is no guarantee anymore because a location’s environment is subject to change as well. Life really is a gamble when you look at it from afar. Just got to place your bets and hope for the best sometimes. You can only plan for and/or predict so much.

    In fact I’m going to place a bet today and try to buy a big house with a big mortgage 😛 wish me luck!

    • Good luck!!!!

      I still argue your gamble of betting against the stock market is far riskier than betting on the stock market. You got burned many years ago, but had you stayed the course, you’d be better off for it.

      • I of course have to agree with Ninja against Stacking. But I would phrase things slightly differently, so as to say, “the market is always supposed to go up, except when it’s supposed to go down.” That’s the definition of volatility, or stated otherwise why greater risk can equal greater reward. Stacking, however, is still young enough that he can turn things around if he so cares to.

        The biggest problem with market volatility will affect those retiring at the start of a bear market. If your portfolio has dropped 50% at retirement time, you still have to withdraw enough funds to meet your expenses, And so a withdrawal rate of 3-4% places greater stress on your portfolio than if you had retired at the start of a bull market. Which is also why you want to diversify into some fixed income by retirement time so you mitigate this problem, without pulling completely out of stocks that can continue to grow during the retirement period.

        As for real estate (other than owning shares in an REIT), I don’t think of it primarily as an investment, and I wouldn’t fret if my home were “underwater.” I contracted for a specific purchase price for a specific term at a specific mortgage interest rate. At this point, after 23 years in the same place, my payments are minimal since I have an adjustable mortgage and low interest rates have helped me enormously. I just pay my check and don’t give the matter a further thought. And besides my home is not just “shelter”; it’s an expression of my personal tastes and attitudes, and for all its quirks and limitations I couldn’t see myself feeling “at home” anywhere else.

      • Absolutely! Everyone who is in the market right now is doing fantastic! I’m getting burned NOT being in it 😛 We just don’t trust it.

        My house purchase has been delayed a bit. This housing market is really frustrating, similar to your situation, Ninja.

  8. Real estate is a fickle market everywhere. In the past it was usually a safe investment but anyone who has tried to buy or sell a home lately knows that the prices on property might change suddenly month to month. I have actually been finding great help at http://www.real-estate-yogi.com for all of my questions regarding real estate.

  9. I agree that buying a home is shelter first, and investment second. Half the time with the interest payments on your mortgage (not counting what gets deducted with tax credits), inflation, and closing costs (both when you buy and sell) you may not earn much of your money back in the long run either. By keeping the idea that you’re purchasing shelter, rather than an investment, you don’t worry as much about the buying or selling prices.

  10. Caveat-I would not buy a house if planning to sell in a couple of years or if it would make you house poor.

    Having said that and understanding that real estate markets differ greatly I do think buying a house makes a lot of sense in most cases.

    I live in a 2500 sq ft home with my family that I think makes a lot of financial sense.

    I bought it for 182 k with 15 year mortgage refinanced to 10 years when rates dropped.
    My payment is $1800 of which $900 is principal so really paying myself. Of the other $900 I pay (Insurance, Taxes and Interest) I save about 25% in taxes paid at the end of the year from this deduction so real monthly cost after tax savings of $675 a month. My house has averaged 2k appreciation a year not great but predictable in my area which offsets another $166 a month. In my area real estate doesn’t seem to ever shoot up or drop significantly.

    I feel like I live in my home for a true cost of $500 a month compared to about $1300 to $1400 to rent a comparable place to live.

  11. Awesome blog, I’m with you on believing that over the long term (30+ years) the price of a home will almost always increase. I just bought a house in cash in a really great location in the heart of northeast town. Very excited to have a house all to myself in a pretty exciting town, walking distance to work, while only paying insurance + taxes (about 500). I’m only 24, no debt, paid off loans, credit card paid off monthly. I need to start investing and saving for retirement I suppose, right now I’m trying to help my girlfriend pay off her student loans.

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