From: gpalo@digi.lonestar.org (Gerry Palo)
Newsgroups: misc.invest
Subject: Re: Cost-Benefit analysis of Renting VS. Buying
Date: 17 Oct 92 01:11:01 GMT
Organization: DSC Communications, Plano Tx.

Just what is an investment? -

>In article <1bhn1cINNfj6@early-bird.think.com> mincy@think.com (Jeffrey Mincy) writ
es:
>    >Of course a house is an investment.  After 30 years of renting you have
>    >nothing.  After 30 years of paying a mortgage you own a tangible asset,
>    >that has value and that can be converted to cash.
>
>Of course you're right that you own a tangible asset after all those years.
>My quarrel is with the use of the word "investment" when applied to something
>that may have a value of greater, less, or even much less than you paid for
>it over those years.  Sounds like "speculation" to me.
>
>The argument here (that I borrowed from others) is that renting and
>investing the down-payment + monthly difference between rent and mortgage
>payment will leave you with a large amount of money that has increased
>in value over the years due to interest etc.  Your tangible asset is
>in the bank rather than sitting on a lot somewhere.
>


He's right, it is an investment.  Investments can make or lose money.
Whether an investment is a speculation is a matter of opinion that
may change with time and hindsight.  We have been so hyped to the idea of 
ever increasing values in everything that the word investment has come to
mean something that always makes lots of money. Especially real estate.  
Now, real estate values appear to be dropping, i.e. your investment in 
your house is losing money.  This is a perfectly normal thing for 
investments to do.  The problem with your house as an investment is that
you usually have too much personal attachment to it to treat it objectively
as an investment.  But what can you do? You want a house for very personal
reasons. It is a consumer good.  But you can only have it if you make this
investment/speculation.

And you do it in ways you would probably never do in the stock market - you
borrow the money.  In a declining market A house is a doubly bad investment 
because you most likely bought it on margin, i.e. a mortgage, and still owe
a bundle that is larger than any other assets, liquid or otherwise, that you
could cover it with.

The difference between a mortgage and a stock margin purchase is that
with the stock margin you have no externally imposed discipline to make 
interest payments whereas with the mortgage you have no externally imposed
discipline to sell when the value declines.  The broker will give you a
margin call when your stock declines in value.  The banker will give you
a forclosure call if you miss payments. The latter is bad in a declining
real estate market because most people don't have the discipline to sell
at a lesser rather than a greater loss.  What happens is that they hang
on until they can't any more and then lose a huge bundle when they have
to sell, and maybe even go bankrupt.  Or they remain slaves to their
house and whopping mortgage payment until they can (hopefully) finally
pay it off enough to get out.

Capital Gains - who says they only affect the rich? -

The politicians haven't made it any easier to get out of your house, since
they tax the inflationary gain in value (capital gain) as income. If you
bought a house and moved and rolled the gain over or refinanced, you have 
probably already spent some of the gain and could have a tax bill even 
though you lose money on the sale.  

Suppose you bought for $50,000.  Over the years the house's market
value went up to $100,000. You refinanced and now owe $90,00 in order to
send your kids to college.  Then the house declines to $80,000.  You are 50 
years old, too young to take the one time tax free capital gain.  You sell
at a $10,000 loss but you still owe 28% income tax on $30,000, i.e.
the difference between what you paid for the house and what you sold it
for.  You have already spent your capital gain.  This works the same way
if you just moved to another house of the same value when the price was
$100,000.  This (taxing inflation based capital gain) is what they call
soaking the rich. (At least I think this is how it works.  Can anyone say 
yea or nay?)  

On the other hand, suppose the politicians do decide to go back to the
good old inflationary days and real estate values and rents skyrocket.
Now if you are renting you lose, maybe, unless they decide to drop the
tax deduction for mortgage interest or somethinge else like that.

Well, I own a house with a mortgage.  I'm not in the hole yet, and I have
no desire to go back to being a renter.  At least my house is mine as long
as I can hold on to it.  But if I were starting out I would think twice
before buying a house.  I hope I don't live to regret not selling now.

Bottom line:  Yes, buying a house is a speculative investment. But I
suppose going to work in the morning is a a speculative investment too.

Regards,
g.p.
Newsgroups: misc.invest