Your Home is not an Investment or Retirement Asset Pt 2

Continuing from part 1 of our analysis of a home as an investment, let’s now compare Warren Buffett with 4 middle class homeowners in Southern California.

  • My home gives me the best returns over any other types of investments. This is true in certain cases and depends on a lot of factors.  Timing, location, leverage, cost, maintenance and SALE of the property will control the returns.  If you continue to live in the house, the returns are not calculable until after you have died.

If you were lucky and were one of the boomers who bought in the 60s and 70s in the right area, your house is now a great investment for those who cash it in after you’re dead.   Keep in mind though that location is still the #1 creator of value.

Corona Del Mar

I have friends who bought homes by the water in Corona Del Mar, CA in the late 60s when they were in their 30s.  At the time, the houses were $30,000-$40,000.  Now, they are worth $7 Million – $8 Million because of the exact location.   Other couples who bought similar homes by the water for the same price but in a different city got a different result.  The Palos Verdes home is $1,000,000 now and the San Pedro home is $450,000.

Warren Buffett bought his Emerald Bay home in 1971 for $150,000 (more than the cost of the Bay Island home in Corona Del Mar).  The latest sale in his neighborhood of a much larger home is $4.425 Million.

Location Purchase Yr Purchase price Current Value
Bay Island 1969 $36,000 $8,200,000
Emerald Bay  Warren Buffett 1971 $150,000 $4,000,000
Palos Verdes 1969 $40,000 $1,000,000
San Pedro 1970 $38,000 $450,000

Not every house had the same increase in value or outcome.   The houses above are all ocean view directly near the water (except for Buffett’s house – I’m not sure he has ocean view based on the location).   The person who lived in San Pedro had a .25% return per year on their home over the past 40 years.

You cannot make the assumption that a house is going to automatically increase in value.

We’ve talked about location.  Now let’s look at timing.

My family and I sold everything in the late 80s.  At the time, the recession had not yet hit California.   Houses in Irvine were going for $600-700,000.   The real estate market crashed in 89.   We eventually purchased a house again in 1993 because the emotional desire to have a place of our own was extremely strong.

We bought the home for $300,000 (it was $700,000 in 89 before crash).   In the next 18 months, our home steadily went down in value to a low of $198,000 (that was what the neighbor next door paid in 1995).   That was a loss of 33% and wiped out every bit of equity we had invested.

The bottom of the California real estate market was 1998.   We transferred to a new home in 2003 and sold our house for $400,000.   We netted $80,000 after direct closing costs.  We next had to factored in the $25,000 we had to spend to fix the home after we moved in and the $15,000 in replacements in order to sell the home.   Then there were the $20,000 in extra repairs for earthquake damage on our solar panels and pool.  Subtracting all this out now brought our net to $20,000 (best case scenario) for a 10 year return on a $100,000 down payment.  Our rate of return on our house was .02% per year.  This doesn’t factor in the fact that we paid off our mortgage during that time so when you add in the extra $200,000 of principal, we had a negative return.

I checked this week and the average price for my old home is now at $425,000.

If we had had to sell anytime between 1994 and 2001, we would have lost every penny that we invested in the original down payment and more.

There has been research for 20 years showing that over a rolling 10 year period, residential real estate on the average gives a return far below any other asset class.  However, the myth that people get rich on the equity in their home persists.

The belief in that myth has caused people to buy houses regardless of what common sense tells them.   Consider all the millions of Americans who have lost everything over the past three real estate crashes starting in the late 70s.   Even today, there is a lot of pressure to buy now or you will lose the opportunity to buy cheap.

The reality is “no one really knows when the bottom of the market is until after it happens”.   It’s all an educated guess based on inventory, economy, cycle and a bunch of other factors including luck.

Just for fun, here is one article that broke out the various rates of returns for different areas of the country over the past 20 years.   In fact the numbers for the 2000 decades is overstated because he stopped calculating in 2007.

Here is the tables for the 1990s:

1990 Real Estate courtesy of Markham Lee

Here is the tables for 2000-2007:

2000-2007 real estate - Markham Lee

The conclusion about the data is up to you.

Three Arch Bay

Bottomline, no stories or data is going to affect you when it comes to a large emotional decision as a house.  It’s very tough to think clearly when the experience of touring a house hits all your emotional buttons.  The key is to understand and recognize that so that you can make decisions based on facts and common sense instead of on assumptions.

Readers:   What has been your experience with your home value?

To be continued…..

Your Home is not an Investment or Retirement Asset Part 1

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