A Happy Homeowner, Indeed

Everywhere you look these days there are articles about the Housing Market. Some say we're experiencing a housing bubble, some say we're not. One thing is clear: historical prices of real estate have indicated that there's a lot of money to be made by investing real estate.

I was advised for much of my 20s to buy a house as soon as possible so I could get in on the real estate market gains. It was only in my early 30s that I was able to afford a house in Seattle (a relatively expensive city, but still one where you can buy a house if you accumulate savings for several years).

At first I was very happy, thinking thoughts like "Just think about how much my house will appreciate over the next 5 years or so ... I'm gonna make a lot of money on this house".

But then I started thinking about this more carefully and came to an unexpected conclusion: If I want to live in Seattle for many years, my own house is a zero-sum game as far as being an investment.

Here's why:

As fast as my house is appreciating in value, the house that I will buy in 5 or 10 years is appreciating just as fast.

In other words, both the house I live in, as well as the house I will someday buy, are appreciating on the exact same curve ... so whatever money I make on this house will go towards buying my next house, once I sell this one. The result being that no matter what profit I make when I sell this house, I will need to spend that profit if I ever want to live in the city.

Not only that, the money that I might normally use to invest in say, an Index fund, is not available for investment, because it's tied up in mortgage payments (and home improvement costs), which means my house is costing a lot more than I thought it was (in missed [financial] opportunity costs).

The longer I stay in my current house, (a) the more the other houses in Seattle go up in value and (b) the more I lose out on the ability to invest in the stock market.

So what's a homeowner to do?

1. I could sell my house and move to a city where real estate is not valued as high as in Seattle. This would allow me to buy my 2nd house and keep the profit I made on the 1st house. Hello Boise!
2. I could sell my house and go back to renting, which would also allow me to save my housing profit. Then maybe I could live next to, or better yet underneath, a bunch of college kids. Goodbye Sleep on the Weekends!

And who's making money in real estate?

1. People who can afford multiple houses ... just buy your first to live in, and then buy (and soon flip) houses that you hold merely to make a profit on, but not to live in. You just need to find a house whose value will go up over time, which is like shooting fish in a barrel these days.
2. People who buy their house, fix it up, sell it for a profit, and then go back to the beginning. If you're willing to downgrade every 5 years or so, you can make a profit when you sell and keep it by buying an inexpensive house (which is becoming nearly impossible here in Seattle).

The point? Just because you buy a house doesn't mean you're going to make a lot of money. Not only that, when you do buy a house, get ready to lose out on other investments like mutual & index funds. Understanding this, plus my simple Pain vs Joy Equations:

...will keep you on the latter instead of the former. For the time being, I'm just going to enjoy the fact that I have a house at all (on a 30 year fixed mortgage at 5.5%), and watch the rest of the Housing Bubble Speculation Games from the sideline.