My $900 Home

A headline attracted my attention: “Housing is a poor investment and is worse under tax plan.” This is the belief of Nir Kaissar, described as a Bloomberg gadfly columnist covering the markets. His specific statement reads: “Many think that a home is a good investment, but the numbers don’t support it.” He then refers to an S&P single family housing study, comparing its 3.7 percent annual index to the returns from traditional investments, summarizing the results: “The S&P 500 returned 9.9 percent annually over the same time … and the U.S. Aggregate Bond Index returned 6.3 percent. In fact, homes barely beat cash.”

It appears Kaissar’s conclusions are supported by a recent study conducted by Florida Atlantic University (FAU), Florida International University and the University of Wyoming. Ken Johnson of FAU’s College of Business concludes owning a home won’t help you make money, when he states: “On average, renting and reinvesting wins in terms of wealth creation, regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds.”

Although I realize any contrary opinions I may offer will contradict authoritative financial experts and a mass of highly credited statistical data, I can’t resist offering a testimonial challenging these assertions. You may give the following story whatever creditability you choose.

In July 1989 my wife and I moved into our recently completed home, a single story structure of about 3,000 square feet with an ocean view, in a most favorable area of Orange County, California. Comparable properties sold at the time in the $900,000 range. Let me explain how this all came about.

In October 1956 my ship returned after nine months in the Western Pacific. With an exchange rate of 360 Japanese yen to the dollar and weeks at a time at sea, a U.S. Navy ensign’s pay of $222.30 per month went a long way. An accumulated cache of over $1,000 presented a new experience and I sought advice from my mother regarding what to do with it. As a real estate broker, at the time marketing a small tract of two-bedroom houses in the city of Torrance, she suggested I purchase one. It didn’t seem unreasonable, so I took her up on it.

The terms: purchase price $10,395, $950 down, $7,000 from a savings & loan, with the builder carrying back a $2,445 second mortgage loan. Of my mother’s $100 commission, she shared $50 with me, making my entire cash requirement $900. With this, I saw my real estate involvement off and running – well, maybe shuffling, but you get the idea.

By 1964, now employed as a property manager with a firm in Northern California, my navy days lay behind me. During the ensuing eight years the Torrance property increased in value, so I chose to dispose of it. It sold for $16,000, netting $6,300 after expenses. With a portion set aside for taxes, I used the balance as a down payment on a $23,300 home in a nice tract in San Jose. A 5¼ percent FHA loan made the total monthly payments including taxes and insurance less than $200. So far, so good.

In 1968 we found ourselves again in Southern California. Equity from a $32,000 sale of the San Jose house enabled us to purchase a small home for $35,000 in a desirable part of West Los Angeles, make a 20 percent down payment, with $7,000 still left over. Though old and somewhat obsolescent, its charming English style and sound construction made it a fine residence.

Within a year after moving in, the cash left over from the prior sale allowed us to bring the house up to modern standards. We lived there for ten years, and with monthly payments far less than a rental, we saved enough to make a down payment in 1975 on an ocean view lot in Laguna Beach.

The year 1978 seemed right for a move to Orange County. In March of that year, without broker assistance, we found an all-cash buyer for our Los Angeles home at $129,000. Escrow closed in May and we left town with over $100,000 safely tucked into our bank account paying an adequate interest rate.

During the next eighteen months, we rented in Huntington Beach while building a 1,685 square foot home on our Laguna Beach lot. With a contract price of $102,000, our savings more than covered it. We moved in the day after Christmas, 1979, and within a year collected enough interest on our savings balance to pay off the land loan.

For the first time we owned a home free and clear – our monthly mortgage payments ended for good. My feeling at the time: Somebody up there must like us.

When you move from a 1,250 square foot residence into 1,685 square feet, you marvel at the newfound spaciousness. However, over the years it seems to get smaller – some sort of universal principle must apply. By the fall of 1987, savings accumulated from the absence of house payments and the perceived daily shrinkage of the Laguna Beach house, prompted our purchase of a lot in the City of Dana Point, about five miles farther south. It measured just under one-quarter acre, about three hundred yards from the ocean, with a somewhat less spectacular view than from the Laguna site. We negotiated a price of $225,000, began design at once and started construction by late 1988.

In February 1989, within 120 days of completion, the Laguna home went on the market. Once again we experienced favorable timing; the house sold quickly for $412,000 with escrow closing in May and a 60-day rent-back provision. By July 1989, with construction complete, we made the move with just seven days left to deliver occupancy.

Proceeds from the Laguna sale fully covered the land and building; once again we owned our residence free and clear. Though its total acquisition cost came to $565,000, rapid appreciation of ocean-view property during the two years following purchase jacked its market value to about $900,000 on the day we moved in.

During the past several decades we’ve lived comfortably in this Dana Point home. An appraisal I recently obtained reveals a current market value of $2,350,000.

If you followed each twist of the story, you’ll acknowledge superb results on an initial investment of $900. Admittedly, to regard this as a “$900 home” is more than contrived. Such a characterization ignores the vital components creating value. These include the expenditure of countless hours, cautious use of leverage, fortuitous timing, enlightened negotiation, favorable interest rates, much-maligned inflation, application of a third of a century of knowledge and experience and a generous helping of just plain good luck. It is these and other ingredients which make real estate a lucrative enterprise. Ordinary securities investment can’t match it.

I’ll summarize with a couple of observations. The first concerns the various stock indices regularly quoted. The claim, for example, that the S&P 500 returned 9.9 percent annually over the three decade period from February 1987 through August 2017 may be technically accurate, but is intentionally misleading.

If you’re a typical unsophisticated investor in the hands of a financial planner who’s dumped you into the usual mutual or exchange traded funds, you’re paying perpetual fees to both the planner and the funds. In addition, the capital gains taxes you incur annually due to periodic rebalancing also reduce your return. However, as the indices don’t incur these expenses, you cannot match their performance … but don’t expect your advisor to ever mention this detail.

A second advantage to home ownership over securities investment is availability of a mortgage loan. If a residence, purchased with a 20 percent down payment and an 80 percent mortgage loan, increases 3.7 percent per year, as Mr. Kaissar documents, then the 5 to 1 financing leverage translates – at least initially – to an 18.5 percent annual appreciation of your cash investment. This is not something fund investment offers.

A final consideration: From a purely psychological standpoint, home ownership carries with it a certain euphoric benefit. There‘s an intrinsic pleasure which comes with being King of the Castle. Somehow the status of lessee falls far short.

Al Jacobs, a professional investor for nearly a half-century, issues a monthly newsletter in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com.

al@beachomber.news