Sunday, April 08, 2007

Articles and Commentary

I thought I would share three excellent posts I found recently on other PF blogs.

First is the article titled The 10 Best Money Moves You Can Make on Free Money Finance. It's an old post, and there is nothing revolutionary about it, but it contains a lot of common sense advice. I must say that I disagree with Rule #5: Buy a House. it's not that I don't think people should buy houses, it's just that I don't think it is appropriate for every situation or for any state of the real estate market. It is certainly much shakier advice than "contribute to your 401K to get your employer's full match".

Yesterday My Money Blog had a post about Google's new real estate search tool. The article is aptly named: Google Now Lets You Search Real Estate Listings... I used this Google tool to search for houses within 20 miles of my Silicon Valley town. Nothing even remotely reasonable came in at under $850K, and these results strengthen my point with respect to the previous article: buying a home is not always the smart thing to do.

We pay a monthly rent of $2000 (i.e. $24,000 per year). If the house truly costs $850,000 our rent represents a return to the landlords of about 2.3% per year on the value of the house. This rate of return is approximately equal to the dividend yield on the S&P. Therefore, if the capital appreciation of the S&P is expected to be higher than the capital appreciation of the real estate market, it is better to invest your capital in the stock market rather than in real estate. I am aware that this argument is a gross over simplification, but I think it is in the right ball park. Until rents go up substantially, or real home values decline substantially, I don't think that it makes sense to buy - at least not in the Silicon Valley.

If this topic is of interest to you, you might also be interested in one of my previous posts on the topic: Your House Can be a Bad Investment.

Finally, Frugal Zeitgeist is on a roll. She has had a number of really good posts lately. I recommend checking out her blog. Her latest post the real cost of shopping at Wal-Mart, discusses the pros and cons of shopping at Wal-Mart. That company has received so much bad press in recent years, yet it is the world's largest retailer. I guess when you are that big (and pay your workers next to nothing and don't give them health insurance) you sort of carry a bulls eye on your back. In recent years, the company is definitely trying to change its image. Its push towards environmentally friendly stores and products is certainly welcome. In a few years it might even become a good corporate citizen. Who knows?


frugal zeitgeist said...

Thanks for the love! I'll respond to your response on my site when I get home tonight.

Adventures In Money Making said...

i agree with you. i live in san diego, and i sold my condo and i'm renting it back.

the new seller put 10% down and got an interest-only 3/1 arm is still negative a few hundred dollars a month.

Joel said...

BTW, one of the steps recommended in the "ten steps" is buying a house. I a market that is not going to spike (some say it will tank) renting is the sensible option. People often buy houses for emotional reasons but the low return on investment plus the associated costs make it downright stupid right now.

Please remember my landlord has to pay for:
Gardening / Insurance / Property taxes / Maintenance. I believe the return on investment here is closer to 1%......

Shadox said...

Joel - that is a very good point. True returns on the investment are much lower than the revenue stream generated by the rental property.