I noted in several articles that financial pundits in US mention return on home equity as percentage gained compared with down payment and then calculate returns.
For example on a 500K house, 10% down i.e. 50K. Now if the house appreciated to 600K in three years, the return is calculated as 200% in three years.....Why these morons fail to accommodate the monthly installment, property taxes and maintenance...for the home.
For sake let's assume payment on 450K balance...be $2700 including property taxes. Now 2700*36 = 97200....This amount the person has paid over 3 years thereby deminishing the returns.....I continue to fail to understand why all the articles never consider this.......Anyone with valid explanations?
Another point FP here never consider is that we are desis....we have to go to India every two years....(baring some who go once in five years...:emcry: )...and that is our commitment...besides that we take any additional vacations every year.........
Are there any more points that FP's screw up besides recommending funds that pocket more for them rather than for client.
P.S.
I was just checking and it voted.....for me and now would not allow me to remove the thread...Is there a way to remove the voting figures..?
Financial Planners / Advisors - Discussion and Recommendations
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LLLLWhenR2I
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Old-Spice2
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Financial Planners / Advisors - Discussion and Recommendations
>>>For example on a 500K house, 10% down i.e. 50K. Now if the house appreciated to 600K in three years, the return is calculated as 200% in three years.....Why these morons fail to accommodate the monthly installment, property taxes and maintenance...for the home.
If you dont own a home, you will be throwing away money on rent. You should calculate the diff between the rent and TCO of equivalent size home. Historically homes have appreciated at the rate of inflation whereas SP500 has appreciated at least twice the rate of inflation. For the long run, stocks beat home ownership. Why? becos SP500 companies have smart MBA who work hard to earn better return for their investors. For homes the economic activity of the region will determine the appreciation.
But for diversification and emotional purpose, home ownership is good.
>>For sake let's assume payment on 450K balance...be $2700 including property taxes. Now 2700*36 = 97200....This amount the person has paid over 3 years thereby deminishing the returns.....I continue to fail to understand why all the articles never consider this.......Anyone with valid explanations?
Everyone looks after their interest. RE agent and mortgage brokers make more money by selling the largest home with highest loan. Your interest is quite opposite, so you should keep your eyes wide open before signing the papers.
>>Another point FP here never consider is that we are desis....we have to go to India every two years....(baring some who go once in five years... )...and that is our commitment...besides that we take any additional vacations every year.........
Oh yes, agents dream about their Hawaii vacation once the deal is closed.
>>>Are there any more points that FP's screw up besides recommending funds that pocket more for them rather than for client.
Zero down loan, Options ARM, liar loans, refinance, refinance, and more refinance ...take ARM and then refinance to fixed rate. If you have fixed rate, refinance to ARM to lower payment. Keep on churning and earn fees and commissions.
If you dont own a home, you will be throwing away money on rent. You should calculate the diff between the rent and TCO of equivalent size home. Historically homes have appreciated at the rate of inflation whereas SP500 has appreciated at least twice the rate of inflation. For the long run, stocks beat home ownership. Why? becos SP500 companies have smart MBA who work hard to earn better return for their investors. For homes the economic activity of the region will determine the appreciation.
But for diversification and emotional purpose, home ownership is good.
>>For sake let's assume payment on 450K balance...be $2700 including property taxes. Now 2700*36 = 97200....This amount the person has paid over 3 years thereby deminishing the returns.....I continue to fail to understand why all the articles never consider this.......Anyone with valid explanations?
Everyone looks after their interest. RE agent and mortgage brokers make more money by selling the largest home with highest loan. Your interest is quite opposite, so you should keep your eyes wide open before signing the papers.
>>Another point FP here never consider is that we are desis....we have to go to India every two years....(baring some who go once in five years... )...and that is our commitment...besides that we take any additional vacations every year.........
Oh yes, agents dream about their Hawaii vacation once the deal is closed.
>>>Are there any more points that FP's screw up besides recommending funds that pocket more for them rather than for client.
Zero down loan, Options ARM, liar loans, refinance, refinance, and more refinance ...take ARM and then refinance to fixed rate. If you have fixed rate, refinance to ARM to lower payment. Keep on churning and earn fees and commissions.
Financial Planners / Advisors - Discussion and Recommendations
LLLLWhenR2I;23909Why these morons fail to accommodate the monthly installment, property taxes and maintenance...for the home.
Well, you are living in that home and paying for that. Note that no other investment goes up in value while you get to enjoy it (actually jewels to some extent).
LLLLWhenR2I;23909Another point FP here never consider is that we are desis....we have to go to India every two years....
Why wouldn't the FPs consider it if it is brought to their attention?
Financial Planners / Advisors - Discussion and Recommendations
For the long run, stocks beat home ownership. Why? becos SP500 companies have smart MBA who work hard to earn better return for their investors. For home you are the one who need to work hard.
The explanation given above seems facile.
Consider two assets - A and B - that are identical in all respects - just that A has hard working well motivated employees whereas B does not. It is not difficult to see that A will likely earn higher profits/cash flows than B. So A will trade at a higher price today than B. Given that A will trade at a higher price today, why should the returns (price appreciation) from investing in A be higher than that from investing in B?
The explanation given above seems facile.
Consider two assets - A and B - that are identical in all respects - just that A has hard working well motivated employees whereas B does not. It is not difficult to see that A will likely earn higher profits/cash flows than B. So A will trade at a higher price today than B. Given that A will trade at a higher price today, why should the returns (price appreciation) from investing in A be higher than that from investing in B?
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Old-Spice2
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Financial Planners / Advisors - Discussion and Recommendations
#4 -- Bobus
Are you comparing between two companies or between stocks and RE? I was not comparing returns between two companies. Here is one article with numbers & details:
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1
"Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004."
"The average real return for houses over long periods might surprise you: It's virtually zero. "
"Shares return 7% a year after inflation because that's how fast companies tend to increase their profits"
Are you comparing between two companies or between stocks and RE? I was not comparing returns between two companies. Here is one article with numbers & details:
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1
"Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004."
"The average real return for houses over long periods might surprise you: It's virtually zero. "
"Shares return 7% a year after inflation because that's how fast companies tend to increase their profits"
Financial Planners / Advisors - Discussion and Recommendations
#5:
My question was general and had to do with the implicit claim in your earlier post that an asset that has motivated hard working employees behind it will earn higher returns than one that does not.
Shares return 7% a year after inflation because that's how fast companies tend to increase their profits.
Seems like another facile explanation - this time by the author of the article you provided a link to. Assume it is common knowledge that a company's profits are expected to go up by 7% each year. This expectation will be reflected in the company's stock price today (for simplicity, assume the firm is not paying any dividends). Now explain to me why that shd translate to a 7% return on investment (price appreciation) from buying the company's stock today.
My question was general and had to do with the implicit claim in your earlier post that an asset that has motivated hard working employees behind it will earn higher returns than one that does not.
Shares return 7% a year after inflation because that's how fast companies tend to increase their profits.
Seems like another facile explanation - this time by the author of the article you provided a link to. Assume it is common knowledge that a company's profits are expected to go up by 7% each year. This expectation will be reflected in the company's stock price today (for simplicity, assume the firm is not paying any dividends). Now explain to me why that shd translate to a 7% return on investment (price appreciation) from buying the company's stock today.
Financial Planners / Advisors - Discussion and Recommendations
Bobus,
You seem to be applying the strongest form of the EMT (efficient market theory) without considering the rewards expected from bearing a market risk. What Old Spice2 was perhaps referring to is the expected return, not "guaranteed" in any way. Over the long term, 7% is the "expected annual return" with a significant standard deviation that impacts the actual return each year dependent on each company and of course, the broader market conditions. So your return is expected in exchange for bearing a market (in case of S&P 500 index) or company (to use OS-2's example) risks.
I don't know if a parallel exists in the housing market as there is no productive driver determined to generate a better return on investment as S&P500 companies are incentivized and structurally designed to deliver higher returns. While the house owner can influence the value to some extent, the ROI over the longer term has been just above inflation, not withstanding the past few abnormal years....this recency bias has clouded many a people's judgement on real estate IMO.
You seem to be applying the strongest form of the EMT (efficient market theory) without considering the rewards expected from bearing a market risk. What Old Spice2 was perhaps referring to is the expected return, not "guaranteed" in any way. Over the long term, 7% is the "expected annual return" with a significant standard deviation that impacts the actual return each year dependent on each company and of course, the broader market conditions. So your return is expected in exchange for bearing a market (in case of S&P 500 index) or company (to use OS-2's example) risks.
I don't know if a parallel exists in the housing market as there is no productive driver determined to generate a better return on investment as S&P500 companies are incentivized and structurally designed to deliver higher returns. While the house owner can influence the value to some extent, the ROI over the longer term has been just above inflation, not withstanding the past few abnormal years....this recency bias has clouded many a people's judgement on real estate IMO.
Financial Planners / Advisors - Discussion and Recommendations
KRV:
Strongest form of EMT assumes even private info is impounded in stock prices. I merely assumed (for the sake of facilitating an explanation) that expected profit growth is common knowledge and that this public info is built into current price.
The words "likely" and "expected" in my post suggest a world of uncertainty - not of guarantees.
I understand that expected returns will be commensurate with risk.
I don't know if a parallel exists in the housing market as there is no productive driver determined to generate a better return on investment as S&P500 companies are incentivized and structurally designed to deliver higher returns.
I understand that proper incentives lead (on average) to better profits. Given that the market knows this, the current price should reflect this expectation. However why shd the price appreciation be higher?
Strongest form of EMT assumes even private info is impounded in stock prices. I merely assumed (for the sake of facilitating an explanation) that expected profit growth is common knowledge and that this public info is built into current price.
The words "likely" and "expected" in my post suggest a world of uncertainty - not of guarantees.
I understand that expected returns will be commensurate with risk.
I don't know if a parallel exists in the housing market as there is no productive driver determined to generate a better return on investment as S&P500 companies are incentivized and structurally designed to deliver higher returns.
I understand that proper incentives lead (on average) to better profits. Given that the market knows this, the current price should reflect this expectation. However why shd the price appreciation be higher?
Financial Planners / Advisors - Discussion and Recommendations
Typically companies carry a higher risk then real estate. Real estate value will not go to zero. A company could go bankrupt or get competition.
It is for this reason (higher risk) that stocks trade at a "discount" if you will when compared to real estate and hence their return is higher.
If stocks also returned at about the same rate as inflation, then implicit in that is the return of the company. If a company is returning the same as inflation, no one would borrow money to start a business. Hence borrowing rates would automatically drop to make investing in stocks more lucrative. Lending has provided a real return (meaning net of inflation) and since stocks by this economic equilibrium have to provide more will provide a rate higher than inflation.
Real estate to a large extent is a commodity (albeit with a somewhat limited supply as opposed to copper, wheat and pork bellies) and commodities will maintain return rates in relationship to inflation / affordability.
It is for this reason (higher risk) that stocks trade at a "discount" if you will when compared to real estate and hence their return is higher.
If stocks also returned at about the same rate as inflation, then implicit in that is the return of the company. If a company is returning the same as inflation, no one would borrow money to start a business. Hence borrowing rates would automatically drop to make investing in stocks more lucrative. Lending has provided a real return (meaning net of inflation) and since stocks by this economic equilibrium have to provide more will provide a rate higher than inflation.
Real estate to a large extent is a commodity (albeit with a somewhat limited supply as opposed to copper, wheat and pork bellies) and commodities will maintain return rates in relationship to inflation / affordability.
Financial Planners / Advisors - Discussion and Recommendations
As usual, Desi beat me to it with an excellent explanation. I will just add that if we consider the entire economic activity of humans as a pyramid, I would put entrepreneurs (or) its equivalent corporate avatars (including S&P 500 companies) at the top generating (or aiming to) the highest returns with every level below on the pyramid supporting the level above. Entrepreneurs use lenders' money to earn a better return than what they pay, who in turn use consumers' money to lend to entrepreneurs, and consumers in turn obtain money from other lenders who are willing to use real commodities (in this case real estate) as collateral to advance the money. Clearly, as one moves up the pyramid, the potential returns and risk also increase.
While the market "knows" this in principle, it still does not know if the entity at the top of the pyramid can deliver or not. It thus discounts its prospects today. History shows whenever the market over-estimates the top of the pyramid's capabilities, there is never any appreciation (in fact, gut-wrenching depreciations occur). When it under-estimates the potential, the appreciation is far above 7%. So much for the market "knowing", maybe that's why they call it "market risk"?
While the market "knows" this in principle, it still does not know if the entity at the top of the pyramid can deliver or not. It thus discounts its prospects today. History shows whenever the market over-estimates the top of the pyramid's capabilities, there is never any appreciation (in fact, gut-wrenching depreciations occur). When it under-estimates the potential, the appreciation is far above 7%. So much for the market "knowing", maybe that's why they call it "market risk"?