“My Home Was The Best Investment I Ever Made”
Episode 442 of the Mullooly Asset podcast starts with: We’ve lost count of the times we have heard “my home was the best investment I ever made.”
But is it really?
It might be because your home may be the ONLY investment you have held for thirty years. When you go through the math, as Tim and Tom do in episode 342, you learn that people often overlook the cost of affording the home (mortgage costs – especially compound interest!), property taxes, the maintenance, any improvements. You get the idea.
And while you cannot “sleep in your S&P 500 index fund,” you also have very little in terms of additional costs in investments like exchange-traded funds once the initial investment is made.
In episode 442, Tom and Tim also talk about the projected 2024 increase in the cost-of-living adjustment for social security recipients.
Here’s a hint: it’s *projected* to be way less than 2023!
Timestamps for “My Home Was The Best Investment I Ever Made”
00:45 – Funny when we hear “My Home Was The Best Investment I Ever Made”
02:04 – Would you buy a stock on margin, and make payments over 30 years?
04:40 – Is it because you held this investment for thirty years?
06:15 – $1 million gain over 20 years is about 4.37% per year
08:10 – What happens in “year 19” of a 30 year mortgage?
09:40 – Bought for $720k. Paid $820k over 20 years. Still owe $300k. Ouch.
12:00 – How a $1 million gain becomes $250,000 loss
15:20 – But you cannot live inside your S&P 500 index fund
16:35 – What was the rate on your first mortgage?
Timestamps for Social Security discussion
17:55 – Projected COLA for 2024
19:51 – CPI (Consumer Price Index) and COLA (cost-of-living adjustment)
20:45 – Biggest component of CPI may not be relevant!
22:30 – The original intent behind social security
23:19 – Debt Ceiling and Social security discussions
25:10 – what could go wrong
Thanks for listening to this episode! You can catch all of the Mullooly Asset podcast episodes here.
Transcript for “My Home Was The Best Investment I Ever Made”
Welcome back to the Mullooly Asset Management podcast.
This is episode number 442. Thanks for tuning in!
This is Tim Mullooly – Tom is here with me today. How’s it going? Good – Happy to be here.
So we have two articles, two pieces of information that we want to go over today in today’s episode.
Tom, which one should we start with?
Both of these are topics that we cover a lot in conversations with clients. I think we should start with the one we’ve probably heard the most. That is the “best thing I ever did I was by a house in XYZ town, 30 years ago for $85,000. And now it’s worth a million dollars!
We hear that from a lot of people that their house was a great investment. Because all they do is take the price that they paid for it. And, look at what they could get for it now – or what they sold it for just now.
And they say that’s my that’s my return on investment. “Look at how much money I made!” and “I’m a genius!” You couldn’t do that in the stock market.
I think we’re going to tear that apart.
There was an article at a coastal capital advisors, where they were talking about if buying a house is a good financial decision. I think the better question is, is buying a house AS good of a financial decision, as some people make it out to be. But that’s more of a long-winded headline for them to write.
We’re going to dig into some of these numbers. We’ll link to the actual article in show notes. You can see for yourself – we don’t want to make this a math class.
So we’ll go through the terms and the points that the author brought up.
But before we get in to this…
Tim, would you ever buy a stock on margin – with the idea that I’m going to pay down my margin balance each month – a little bit at a time? And in 30 years I will own this stock outright?
When you put it like that? No I don’t think I would!
But yet this is what we do when we purchase a home.
I mean when you put it like that on paper that it doesn’t sound all that great. No.
I think an important distinction – and I’ll probably say it a few times throughout this discussion – is that this article in particular, and the conversation kind of circles in on the financial aspect of everything — the numbers and the math behind owning a home.
And there’s a complete other side of the home purchasing-versus-renting decision that factors in that. It isn’t necessarily discussed in this article, but it’s worth pointing out as well.
Let’s get into the numbers:
So, yeah people often say that buying a house was the best financial move they ever made. They actually, when we hear it “it’s the best thing we ever did… 30 years ago I bought this house!”
Or, “you’re flushing money down the toilet when you’re paying rent!”
Right. Yeah And from a from a base level that makes sense. Because you’re not building equity like you are in a house. You’re not working towards owning something years down the road, like you outlined before.
But there’s other things that go into the decision that could make it “NOT” flushing money down the toilet, in fact the author of the article showed using their math that in some cases, paying rent, and then investing the original down payment worked out better.
But there’s, and I think you were alluding to this earlier Tim, that there is just another kind of nonfinancial value that you should put on a home.
So I can’t remember if it was Morgan Housel or Jason Zweig, who raised the point that said a lot of people feel that their home is the best investment that they ever made because it may be the only investment that they held on to for 30 years.
Yeah that’s a good point. I feel like there’s not many positions in your portfolio that you’ve held onto for that long of a period of time.
And I guess, in a sense, it speaks to giving investments in general time to appreciate – time to compound over the years. Even something like a house can produce good enough gains, if you give it 30 years. Things tend to go up in price over that long of a timeframe.
So the numbers that these guys worked out – they were pretty smart in saying, having, a few disclaimers along the way, saying “Hey if you want to poke holes in this, you probably can.” I thought it was kind of funny how they did that. It’s like “we’re going to make a point here, but I want you to know ahead of time, that you’re going to be able to poke holes at numerous points along the way.”
I understand these guys are based in California, so they picked a local area where they live. And they said “hey you could find a different market, you can use a different timeframe, you can find different interest rates, different prices of housings houses, homes that were bought for less and sold for more, etc.
Every situation is going to be different! But the purpose of this discussion is really – we kind of want to “take the lampshade off the guy at the party” who says, “the best thing I ever did was buy that house 30 years ago!”
So they use an example of a house out in California in Santa Barbara that was bought in 2003 for $720,000. And they’re looking to sell it for $1,695,000.
Basically they bought for $700k and they want to sell it for $1.7 million.
So on paper it’s a gain of pretty much one million dollars, from 2003 to now 2023. That’s 20 years, a million dollars. The numbers that they worked out in the article comes out to about, 4.37%.
That’s the average return on investment, for 20 years.
And they they pointed out that gain, over the span of 20 years, would have actually underperformed both the S&P 500 and the aggregate bond index over those two decades.
But then they even took that million dollar gain, and kind of whittled it down even further. You have to factor into this is calculating your actual return comes in. When you’re trying to figure out how much money you made on your house because you bought it for “X” amount of dollars – in this case $720k. But if they bought it for $720k let’s assume they put 20% down because that’s traditionally, the most used number for a down payment. That’s about $144,000.
So that factors into what you’ve already paid. Into the house then they had to take a mortgage for the remainder. Which is “not nothing.”
And so, in the example they used a 6% interest rate, actually 5.9% over 30 years.
They looked at what the mortgage balance would be and, and they’ve paid how much they paid in interest, and how much they paid in principle. And the way mortgage schedules work — in the first two-thirds of the time, over a 30 year period, the first like 20 years or so you’re paying more interest per month than you are principal
It’s only towards the very back end of of the loan do you actually start really chipping away at the principle of your mortgage loan. So the interest costs just add up, astronomically. And the first handful of years that you’re paying down the mortgage.
Fun fact for our listeners, you don’t get to a point where you’re paying more in principal per month (than interest) until year 19 of your 30 year mortgage.
In the article the authors used 5.9% — and both Tim and I are nodding our heads in agreement. There’s a strong possibility that this mortgage was refinanced more than once over a 20 year period
But it makes the example easier if you just use one consistent interest rate just for the sake of demonstration. And I understand what they’re doing there, but when you start taking all of these monthly payments and putting them together, they paid $553,000 in interest. And $266,000 in principle.
Which means that they bought a house for $720,000.
After 20 years they’ve paid $820,000 in monthly payments.
And they still owe $300,000 grand on the mortgage.
The interest really comes in there and jacks up what you actually end up paying versus what the loan you took out is supposed to be for!
And then they factored in things like property taxes that doesn’t really go into the value of the house. Any sort of maintenance costs or remodeling you did. Anything to the house at all. That’s more money that you put in.
So, I mean, just thinking about my house that I own – in general since we bought it we’ve done things to the house – like put a new fence in the backyard, paved the driveway, replaced all the appliances, got central AC and heat, all those things.
Add that up and you have to kind of put that into your cost basis of what you put into the house.
When you’re taking money out, after you sell it, those things have to be netted out.
There’s a tax side of this where you’re adding to your cost basis with your improvement.
But then there’s also maintenance that comes along with this as well. They used, an average for maintenance of $1,000 per year or about $20 grand.
Plus as you mentioned a moment ago, they estimate $145,000 in property taxes. That seems low for Santa Barbara.
I am not an expert on Santa Barbara real estate. But that works out to be about $7,000 a year.
I live in Monmouth County, and that seems low for Monmouth County.
It could end up being even higher than what they’re illustrating in this example.
So let’s take all of that – the the mortgage costs, the maintenance, the property taxes.
And now we’re going to sell the house. And let’s just say they get $1.7 million.
You got you have closing costs, right?
Yeah they estimate the closing costs would be around $50,000 – which is again kind of on the low side – because that’s about 3% of the closing price. Seems a little bit low, it could end up being higher than that.
And then they also talked about the capital gains tax that they’re going to pay after they sell the house. So, if they’re a married couple they could exclude up to $500,000 of gains. But that still leaves some money leftover to be taxed.
All of these things factor in and they showed that, pretty quickly, that “gain of almost a million dollars” is pretty much gone. You ended up losing money when you factor in everything else that they were talking about in the article that we just went over.
And it wasn’t a small loss. It was about $250,000.
I think where I, not, disagree but, like the where my brain goes after they finished that example is, this is an exercise in cashflow and balance sheet in a sense. Because that money they paid 30 years ago, at the end of this example that money was gone 30 years ago.
When you sell your house, the one you bought in, if you sell it in 2023, you still get all of that money.
What I mean, it doesn’t get netted out versus all of the things that you factored in, to get the on-paper gain or loss.
I think it’s an exercise to show how expensive owning a home can be. And how it might not be as much of a game on paper as you think. But you still have the money that you get from selling the house – know what I mean? Sure You still get it.
So there’s a lot of moving parts to this. The point is if you put — and Tim and I see this all the time on social media — if “you put $10,000 into Amazon 20 years ago this is what it would be worth,” right?
Well if you put $720,000 into this house 20 years ago; it would be worth $1.7 million today.
However, You also had mortgage payments.
A lot of interest – a lot.
You had property taxes.
You’re not paying property taxes when you’re buying stocks or investments.
I mean you may have some ordinary income, some capital gain distributions, if you have a mutual fund that you’d have to pay. But the costs are really pretty minimal.
That’s why I started this topic with the question, “Would you buy, say $1.7 million worth of stock, on margin, and just make the payments over 30 years?”
You wouldn’t do it. If the stock went down, or the investment went down in value, you’d have a margin call.
This is an example of – if we’re just evaluating – the decision to buy and sell a home as strictly an investment.
Then it might not be as good as, as people think it would be, on paper. But the real life implications of what we’re talking about are completely different. There’s a whole other side to consider. It’s like if you want to – just from a strictly investment point of view – their point is correct.
It might not be as good of an idea as you would anticipate. But the other side of it is you can’t live inside of your S&P 500 fund. That’s right.
Over the span of 20 years you’re not going to meet your neighbors, or make friends in your community, if your money is tied up in an S&P 500 fund, right. There are many other factors that go into whether buying and selling a house is a good decision.
For me, the numbers on paper tend to take a serious backseat to everything else. Sure.
All the real life implications matter more to me personally.
Other people – if they are number crunchers and really care about maximizing their dollars – then maybe they’ll make a different decision.
Something else that comes up when we talk about homes as an investment, which always makes me cringe a bit, is we will hear people in my age demographic (and older) say, “Do you know what the rate was on my first mortgage? It was 16%.”
I know for a fact my brother’s first mortgage was 18.3%
I mean crazy crazy numbers, compared to what we’ve seen the last few years.
But a question… when you find your forever home…
Or even your first home… did you really care what the interest rate was on your mortgage?
Not really. I’m sure it factored in a little bit, but ultimately, if you want the house and it works then you’re going to do it.
Especially with something like interest rates you can like you said you can refinance along the way. Another point is like the interest rates might’ve been 16% – but how much did your house cost that you were buying? Because I’m sure it was a lot less than what houses cost right now.
All right. We want to talk about social security. And the projected cost of living adjustment for 2024.
Now we’re recording this in May 2023 — it’s a little early for knowing what the 2024 bump is going to be!
We both saw an article this morning and we wanted to bring it to people’s attention.
The article was talking about how it seems, at least at this point, that the cost of living adjustment for social security next year is going to be significantly lower than it was in 2023. The cost-of-living adjustment increase this year in 2023 was 8.7%.
Which was the highest that it’s been in four decades. And as of the writing of this article they projected it could be around 3.1% for 2024. That’s a pretty significant haircut in the cost of living adjustment. But when you think about it — what goes into these adjustments?
It makes sense I mean, there’s a logical connect-the-dots from A-to-B, in how they got to this this number. They don’t raise these adjustments just based on how they’re feeling that day!
There is some science behind it. And the 2023 adjustment coincided with an inflation rate that was the highest it’s been in four decades. It makes sense that last year’s adjustment was also the highest it’s been in four decades because think about what it’s a cost of living adjustment.
And the cost of living adjustment is based off of that consumer price index. Now we happen to be recording this podcast on the day that we received the April CPI, consumer price index report. And that number came in just below 5%. Right 4.9% for the month of April.
And that’s comparing April 2023 to April 2022. Almost a 5% increase. So the part that I have a problem with — I know that the cost of living adjustment is based on the consumer price index. I don’t know how they divvy that up. But the problem that I’ve got with this — is that when it comes to social security — these are for people who are either disabled or retired.
And a big component…. a big component… of the consumer price index is rent, or owner equivalent rent.
Translated: “Mortgage payment.”
More than two thirds of retirees, do NOT have a mortgage payment and they don’t pay rent. They own their home free and clear. I don’t really understand why they tie the cost of living adjustment for a retirees income, to the CPI. And a big, big chunk of that CPI is based on rent, or owner equivalent rent – mortgage payment.
Yeah I think it’s a good, a good point.
The article – and we’ll link to it in show notes – showed that the things that retirees really spend money on – which I honestly I didn’t even think about – were things like dental care.
Electricity. Repair and maintenance of cars.
And of course the cost of food.
Prescription drugs. They are probably using more more medicine than younger folks.
They also cited a rise in the cost of eggs!
You gotta get your protein!
That’s true I mean it’s pretty much everything EXCEPT rent and mortgages.
I think that they could probably improve a little bit on how they find these numbers. But at the same time they have to tie it to something. And I think we we did a whole podcast about social security a week or so ago. And one of the points was that social security – while it has now ballooned into being a huge source of income for a lot of retired people – that’s not what it was designed to do! There are people who are subsisting completely off of social security.
That’s not really what the program was designed for. They should have some other sort of income to work off of as well, but in a lot of people’s cases, it’s not how it ends up being, which is unfortunate.
I think that the cost of living adjustments are are what they are and you get what you get. I don’t know if there’s much room for complaint there.
So we are recording this, and Congress is still duking it out with the White House, in terms of this debt ceiling.
I know both of us have remarked how many times we’ve seen headlines. I saw something on the front page of the Wall Street Journal today, talking about “Will the debt limit showdown impact your social security payments?”
Publishers, if you’re listening, please stop printing things like this.
You’re inciting Panic. Fear. Doubt.
I think it’s going to mean, for them obviously, it gets eyeballs on their articles.
And they’re not wrong in that it could impact Social security and it could impact a lot of things up until it doesn’t.
Aand then they reach a deal, and it ends up being a big “nothing burger.”
Then everyone worried and freaked out for no reason.
And Congress will be giving each other high fives and slaps on the back because they got something done by Memorial Day.
I think if if we’re talking about fixing what they use for the cost of living adjustments, I’m sure that they’re not going to change it to something that is going to increase the amount of money that they’re going to have to give out!
Because the social security trust fund and social security in general – we constantly hear about how it’s going to run out of money. I don’t foresee them changing the rules for these adjustments to include a number that would give people more money.
Unfortunately for people on social security I wouldn’t bank on something like that happening. The way this article pointed out that there’s always a possibility that something could go wrong I think that is minute, remote, that this could happen.
The reason why they brought this up was that this debt limit showdown could delay or stop payments on treasury obligations, T-bills, notes, treasury bonds.
And social security trust fund is the largest holder of treasury securities in the world. The article cited an estimated $2.8 trillion in a treasury bills, notes and bonds are in the social security trust fund.
And that’s where people are getting a little bit of of their worry from, just my opinion.
Regardless of red or blue, Republican or Democrat, no party wants to tick off the people that are collecting social security. Because social security beneficiaries are both Republican and Democrat. No one really wants to get into a scenario where that ends up becoming real life. It might come down to an uncomfortable uncomfortably close call with the deadline. But if I had to guess I would say that they they’d get something done beforehand.
Because you’d have a lot of unhappy people If their payments got stopped even for short amount of time…
This is shaping up to be very similar to what we saw in 2011, when we had another standoff. It seems like these things have happened before. And then it usually goes to the same way: we’ll go back and forth, hard ball, hard ball on both sides.
And then eventually we get down to the last second and be like “okay, fine. Deal.”
We’ve seen, so far 89 standoffs on the debt ceiling.
And there have been 89 times where the debt ceiling has been adjusted up. Up. So we can continue to pay our bills…
So this will be number 90.
Or number one – if they decide not to raise the debt ceiling.
But this reminds me of 2011 in the sense that, they worked out a buzzer-beater deal. Something got done in the 11th hour and everybody was very relieved to see that happen. And it was done on a Friday. Or actually a Thursday night.
And the market rebounded very nicely on a Friday afternoon in the summer.
And then, around 5:15pm on a Friday afternoon, the headline came across the tape that Moody’s was downgrading the debt of the United States, because of these debt ceiling issues. And this drama started all over again the following Monday
So, let’s keep our fingers crossed they work out some kind of suitable deal. That would be nice. And it’d be nice if they don’t come down to a buzzer-beater. But we’re probably not optimistic about that.
All right, that’s going to wrap up episode 442 of the Mullooly Asset podcast.
Thanks for tuning in and we’ll catch you on the next episode.