I have read many comments about how housing is a terrible investment, especially in HCOL place like Bay Area. But I think it is the other way around - buying a house in Silicon Valley is actually a very good return on investment because of 2 factors: 1) Rent equivalence: In my case, the monthly home payment is $8k, which is segmented as: $3k interest $2k property tax $3k principal repayment (which is a form of enforced savings since it builds equity by reducing loan balance). So, my non-equity building payment is $5k per month (on which I get a small income tax write off - $300-400 or so). Houses in my neighborhood are renting for $5k per month, so essentially the cost of ownership (I.e., interest and prop tax payments) are rent equivalent. 2) Power of leverage: I bought 5 years ago. In that time, the home has appreciated about 60%, but if I look at my own equity, it has gone up about 3x or 300%, because of power of leverage. This is after accounting for the $100k out of pocket I have spent in doing various upgrades and remodeling after purchase. Of course, with property values coming down, the power of leverage will work against me, but I doubt it will return to its purchase price from 5 years ago #mortgage #housing
Buying Bay Area housing is like buying a leveraged Nasdaq etf as all the high tech companies are deeply tied to the bay. If they do well, they’ll hire more and pay more, leading to higher home prices.
So, Bay Area housing is like TQQQ?
What is TQQQ? House is a house…..
Past performance is not an indication of the future 😅
Everyone’s a genius when prices are up 60% in 5 years
How is it a investment? Where can you go after selling this house / investment?
This ^^^ A house isn’t like Microsoft stock, where it goes from 1M->2M, and you can sell the position to pay for your kids college. You have to live _somewhere_. So… in order to realize the gain, you really have to leave the whole region, as neighborhoods move up in tandem within a region.
Home you are living is never an investment, if you sell in bull market, you are equally paying high for new home and vice versa in bear market.
Home is an investment because it builds wealth and gives you options as you progress in life. A fully paid off home in a HCOL region like Bay Area can secure a retiree to live there or sell and move to a MCOL region with additional cash in hand, which combined with other investments and savings can help fund a good standard of living.
Good luck moving to mcol after leaving 30 odd years in one place. You will have strong roots set in this place (emotional, physically and politically). You will get used to weather, people and food which u cannot get in any other place and when you are 60+ your ability to adjust will be very low. So I never buy the argument that we will sell the house in bay area and buy somewhere else. So primary house is never an investment for you but only for your kids.
@linkedin, you are correct. After many years in Silicon Valley, it will be hard to move anywhere else. All the more reason that primary house is an investment because if I did not own, I would be forced to move (or would have left by now). Because I bought my first home when I did, I have avoided being priced out of the Bay Area even though my TC is not very high.
You are saying home value went up by 60%. How about doing math on today's value and see if rent equivalent works out. You bought at a good time. Enjoy. Covid bulge is going to be erased pretty soon. Those who bought the peak will be holding bags a long time. For them housing will be a bad investment for a long time until they are above water in 5-10 year timeframe.
Rent equivalence barely works out for me who bought 5 years ago with a sizable down payment. Still I pay $3k more than rent but rationalize it by saying that $3k goes towards equity. Admittedly, rent equivalence does not work today and the case for buying a Silicon Valley home is more difficult.
On the other hand, if you keep renting, you lose financial and emotional security as you age
Always a good idea to buy a bay area real estate if you can afford and need a primary residence
Only if rate of appreciation is 5% . As downpayment and monthly payments in stock can grow by 8%
Point # 2 is the main reason