Is owning a house a risky investment? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Owning a home is often seen as the American Dream, but it’s also a significant financial decision—arguably one of the largest an individual or family will make. Besides being the places that offer shelter to owners and their families, and the places where daily life unfolds, houses are also investment assets.
A house over its lifetime goes across multiple owners; a study over 2019-2021 calculated that the median time while a homeowner holds onto the same house is 13 years. Given that the median home put up for sale in the U.S., as of 2019, was built in 1978, we can see that homes change hands multiple times over their useful life. At the time of resale, homeowners realize price gains (capital gains), or losses. These price gains have been positive and large on average across the United States over the last two decades. The S&P Case Shiller Index, which tracks the price growth of resold homes, showed an average annual growth rate of 4.8% from 2000 to 2022, culminating in an impressive 280% increase over the entire period.
However, this growth is accompanied by substantial volatility. Timing of purchase and sale, as well as location, can dramatically affect the return on this investment. For instance, between 2006 and 2012, annual price appreciation rate for the US index was -3.2%. Disparities in growth rates are even more pronounced when comparing different metropolitan areas and neighborhoods. As an example, within the Los Angeles metro area over 2000-2022, house prices have grown by more than 7% annually in Culver City, but only by 5.6% in Montebello. Overall Los Angeles housing prices grew by 6% annually and in comparison, Detroit housing prices grew by 2.3% annually between 2000-2022.
Beyond these time and location components, there is a significant element of “idiosyncratic housing risk.” This is the variance in price gains that cannot be attributed to market-wide fluctuations (even when considering very narrow local markets, such as zip codes), but is rather specific to the individual sale of a house.
Work in this area has shown that idiosyncratic risk might be the most important driver of housing risk. In my own research, when I decompose the total risk for a house into local market risk (zip code-level fluctuations) and idiosyncratic risk, I find that idiosyncratic risk outweighs local market risk, especially for shorter holding periods. I show evidence that idiosyncratic risk is tied to the uniqueness of each home and transaction, and influenced by factors such as buyer interest and market liquidity at the time of sale. The diversity in buyer valuations and the limited pool of potential buyers at any given time can result in significantly different sale prices for the same property. For example, John who likes spending time outdoors with his dog may value a swimming pool and a garden at the property, and not care about a smaller living room, kitchen and dining area. Another potential buyer may have opposite preferences. Whether a house listing with a swimming pool ends up being visited by John, or not, may drive substantial differences in the sales price. This buyer “matching risk’’ component is a key driver of idiosyncratic risk.
I also find that the importance of idiosyncratic risk diminishes when the house is held for a longer holding period. This is because idiosyncratic risk is specifically driven by the matching risk effect that takes place at the time of sale. Thus, the longer the time span between resales, the lower the average impact of this risk per year of holding period. The figure below illustrates this point in depth:
The left panel of the figure plots the median, top quartile, and bottom quartile of the share of idiosyncratic risk across California zip codes, for house holding periods between 2 and 15 years. First, idiosyncratic risk determines the larger share of risk for most holding periods. Second, the share is decreasing with the holding period, across all zip codes. For the median zip code, the idiosyncratic share is close to 70% if a house is held for 2 years, and less than 50% if a house is held more than 15 years.
As mentioned above, this is because of some peculiar properties of idiosyncratic risk, as opposed to local market risk. Over the holding period (time between resales) of a house, the amount of risk (or variation) per year of the local market component is roughly the same, no matter the length of the holding period. However, the amount of idiosyncratic risk per year is decreasing.
The right panel of the figure then depicts the median of total annual risk for a house, across holding periods. The solid line shows estimates from the data. Since idiosyncratic risk is a large fraction of total risk, total risk per year is also decreasing with the holding period. It is 15% for a 2-year holding period, and roughly 11.5% for a 15-year holding period. The dotted line in the same panel shows the values of total housing risk if the idiosyncratic component was “forced’’ to be the same across holding periods. We can see that this would underestimate total risk at short holding periods, and overestimate at long holding periods.
The numerical estimates in the figure can be interpreted by making some simplifying statistical assumptions. Say that for the median zip code, average annual price growth over a certain holding period has been 5%. If the holding period is 2 years, 7 out of 10 homes in the zip code will earn capital gains between -10% and 20%. If the holding period is 15 years, 7 out of 10 homes will earn capital gains between -6.5% and 16.5%. Thus, price gains’ risk is quite large, once we account for the idiosyncratic component. However, homeowners can reduce the annual risk of their investment by holding onto their houses for longer.
- Data on the characteristics of houses in the US is available trough the American Housing Survey.
- Data on homeowners tenure (holding periods).
- S&P Case Shiller Indices from Federal Reserve Bank of St. Louis.
- Zip code-level indices from Zillow.
- Giacoletti, Marco, 2021, “Idiosyncratic Risk in Housing Markets”, Review of Financial Studies, 2021, Volume 34(8), pages 3695-3741.
- Landvoigt, Tim, Monika Piazzesi and Martin Schneider 2015. “The Housing Market(s) of San Diego.” American Economic Review 105(4), 1371-1407.
- Piazzesi, Monika, Martin Schneider and Selale Tuzel 2007. “Housing, Consumption and Asset Pricing.” Journal of Financial Economics 83, 531-569.
- Sagi, Jacob, 2021, “Asset-Level Risk and Return in Real Estate Investments”, Review of Financial Studies, vol. 34(8), pp 3647-3694.
Among the financial titans cleared to sell “exchange traded funds” that invest directly in bitcoin are Boston’s Fidelity Investments, along with other heavies such as BlackRock and VanEck. On Fidelity’s investment platform, one of the largest in the world, you can now buy these ETFs right alongside regular stocks and bonds.
Franklin Templeton, another investment giant, on Thursday posted a picture of its Ben Franklin avatar featuring the ‘laser eyes’ meme, usually used by crypto superfans on social media to embellish their profile pictures with a tongue-in-cheek, futuristic vibe.
“It’s a very big deal but possibly not for some of the reasons people have been excited on X, and all the memes and jokes of the last few hours,” said Christian Catalini, founder of the MIT Cryptoeconomics Lab. “It’s a very important step toward bitcoin establishing itself as an important, new asset class that traditional finance institutions can directly engage with.”
(Catalini is also cofounder of the bitcoin payments company Lightspark.)
If you have not been paying attention to crypto following the market crushing implosion of the FTX exchange fourteen months ago, this might surprise you: Despite mounting regulatory and economic setbacks, crypto was a top market performer in 2023.
Bitcoin, the largest and most valuable cryptocurrency, surged 154 percent last year. Meanwhile, the Standard & Poor’s 500 index gained 24 percent, and Nasdaq rose some 44 percent.
All this was happening as one-time FTX chief executive Sam Bankman-Fried went on trial — and was convicted — for the fraud associated with his firm’s collapse.
“It’s been a wild ride to see the belief system of this industry come to fruition,” said Dave Balter, chief executive at FlipSide Crypto, a Cambridge firm that specializes in crypto data analysis. “The ‘big deal’ on a personal level’s a spiritual one, where disbelievers and contrarians now recognize why our conviction has never wavered.”
But even as some big names have come along to the crypto world, there are some high-profile holdouts — and they’re airing some of the same critiques that have faced crypto for years. Namely, bitcoin and other cryptocurrencies have always been among the riskiest, most volatile investments — prone to wild swings in value that are difficult to predict.
Vanguard, the bastion of plain-vanilla index funds, said it was not planning to offer bitcoin ETFs through its brokerage even as its competitors rushed to do so.
“Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio,” the company said in a statement to The Wall Street Journal.
And lest anyone think crypto had lost its ability to unpleasantly surprise investors, the market took another big hit just days after the ETF approval many boosters had been eagerly awaiting. By Sunday, bitcoin had seen its price drop by upward of 10 percent from its midweek high as investors sought to take profits following the recent runup.
It was just the first week of growing pains in the relationship between bitcoin and the big-time traditional investment firms.
“It’s like communing with the enemy,” said Ryan Shea, a London-based crypto economist at the financial technology firm Trakx. “But for moms and pops to get comfortable in this world, to gain legitimacy, it’s important to get to the next level.”
Traditionally, buying bitcoin or other cryptocurrencies has looked a lot different than trading more familiar investments. Investors often must create accounts with crypto exchanges such as Coinbase (though a handful of stock brokerages offer some crypto services). And for those who want maximum control of their assets’ security, there are a handful of independent “crypto wallets” to use for storage.
Compare that process to the relative ease of investing in one of these new bitcoin ETFs, which you can buy and sell in the same way you’d trade shares in Microsoft or Nvidia. While ETFs for stock and other investments have long been available to brokerage customers, this is the first time one of these funds can actually hold bitcoin.
Already, the 11 funds approved by the SEC are battling it out over the new money in the market, and that could mean lower costs for consumers in the short term. They are competing on fees, which tend to be below 0.5 percent of assets, and some, such as ARK Investment Management, have temporarily waived fees altogether.
Bitcoin-linked products that were on the market before, including derivatives-based funds and trusts, charge as much as 2 to 3 percent.
“It’s a land grab,” said Paul Karger, cohead of Boston’s Twin Focus, a wealth adviser. “A handful of big winners will own most of the Main Street in-flows.”
Given the lower fees, these new funds may hew to the price action of bitcoin more closely. That is something their predecessors, which were largely based on futures contracts and have been around for two years and change, have not done. This discrepancy, called ‘tracking error’ in trade lingo, occurs when an ETF’s value diverges from its underlying assets.
Matthew Walsh, of Boston blockchain investor Castle Island Ventures, said that bitcoin futures ETFs have a “tracking error,” that can reach 5 to 10 percent, while he predicts the spot ETFs will have a one-to-one correlation to the underlying price of bitcoin. “It’s a huge win for the retail investor,” Walsh said.
Eric Biegeleisen, partner and deputy investment chief at ETF investor 3Edge, said with this move, bitcoin is a step closer to becoming a “legitimate” asset. While he likes having 11 funds to choose from, now comes the work to figure out which one he likes best. “Certainly, there are concerns right out of the gate,” he added. Chief among them are fraud and asset security.
It is going to take a huge amount of education to get investors comfortable, said Ophelia Snyder, cofounder and president of 21Shares, a financial firm that worked with ARK to create one of the new bitcoin ETFs. But the early signals show there’s a lot of potential.
“Crypto’s never seen money like this. A billion dollars is a lot of money in one day, but we saw that within the first two hours. This isn’t the same ballgame anymore.”
Suchita Nayar can be reached at email@example.com.
When you lease a vehicle, you never really own it — the dealer does. So you might think that you have no equity in the vehicle.
But you’d be wrong.
In fact, if you are currently leasing a car, even if you are just a year in and have several years to go, you might be able to get out of the lease and walk away with several thousand dollars.
So how is this possible?
An auto shortage means higher prices for used cars
The fallout from COVID-19 continues to cause supply chain shortages in multiple industries. With steel and computer chip shortages, the automotive industry has not been immune.
That means fewer new cars rolling off assembly lines and thus a larger demand for used cars. The problem? Dealerships cannot keep up with this demand.
Megan Stewart of Cincinnati recently purchased a new Toyota RAV4, but the dealer was so desperate for used cars, there was an unusual stipulation to the deal.
“When I went to buy a new RAV4, the dealership would only make a deal if I agreed to trade in my 2015 Honda Civic,” Stewart says. “They said they couldn’t handle the loss of a single vehicle on their lot, given the major shortages going on.”
And that’s no isolated incident. In January 2019, there were just under 3 million used cars available in the U.S. And earlier this fall? It was down to 2.3 million for a loss of nearly 33 percent.
To put it bluntly, “dealers are hurting for inventory,” says Kyle Johnson, senior editor for The News Wheel.
To make up for the massive deficit of used cars, dealerships have resorted to emailing lessees with whom they are currently under contract, offering to end the lease early and pay a pretty sum for a buyout. San Francisco’s ABC 7 told a story of a woman offered $6,000 to end her lease early.
How to make money off your leased car
The amount of money you pay for a leased vehicle over the duration of the contract is typically the difference between the car’s initial value and the estimated residual value at the end of the lease term. In that sense, you are merely renting a vehicle from a dealership, and at the end of the contract, the dealership intends to sell the vehicle as a used model.
But what’s happening right now is that leased vehicles are worth considerably more than they were originally estimated to be at the end of their terms. As a lessee, even though you don’t own the vehicle, you hold all the power because that increased equity belongs to you … if you handle the end of the lease strategically.
According to Cars Direct, the top five selling cars of 2018 are being sold used for 40 percent more than what would have been expected pre-pandemic. For example, a 2018 Nissan Altima has a nearly 50 percent market value increase, which translates to a more than $6,000 jump. Think about that if you are turning in a 2018 Altima this year.
The No. 1 advice we can give: If you are currently leasing a car, do not just turn it in at the end of a lease as originally planned.
You will be leaving money on the table if you do. Instead, explore one of these options for making money off your leased car:
1. Sell the lease to a third party
An option that lessees have long exercised during their leases has been selling their leases to a third party, like Carvana, Vroom or CarMax. For example, you could take your leased 2020 Honda Pilot and sell the vehicle — lease agreement and all — to CarMax. You’d immediately stop making payments, and you’d have a nice check if the vehicle was able to fetch enough money to cover the rest of your payments and then some.
And because of the huge demand for used cars, your lease vehicle should easily be able to command a large amount of that “and then some” cash when you sell it to a third party.
However, directly in response to the used car shortage, many lenders (branches of the automakers themselves) have begun to put a stop to this, legally prohibiting lessees from selling their contracts to third parties. Instead, they either have to return the vehicle to the dealership or buy it from the dealership at the end of the lease.
As of right now, Leasehackr is reporting that the following lenders are prohibiting third-party lease sales:
- Acura Financial Services
- BMW Financial Services
- Ford Credit
- GM Financial
- Honda Financial Services
- INFINITI Financial Services
- Lincoln Automotive Financial Services
- Mercedes-Benz Financial Services
- MINI Financial Services
- Nissan Motor Acceptance CompNY
- Southeast Toyota Finance
- Volvo Car Financial Services
- Tesla Finance
We expect this list to grow as the used car shortage continues.
2. Buy the car and sell it
Don’t let automakers have the final say. An easy enough way around the prohibited third-party lease sales is to simply buy the car from the dealership at the end of your lease and then turn around and sell it to whomever you want.
In fact, this gives you more earning potential. Once you own the car, you can see what CarMax or Carvana will pay for it, but you can also try to sell it privately for even more money.
To determine how much your vehicle is worth, try out Kelley Blue Book, which can estimate the value of your car based on model, year, features and condition. You can also check out dealer websites to see how much similar vehicles are selling for.
The beauty of buying the leased vehicle from the dealer at the end of your lease is that they can’t jack up the price. Check your lease agreement for the lease buyout wording; in it, the dealership should have spelled out exactly what you will pay to buy the car from them. This is called the guaranteed purchase option price.
A word of caution: You will need to pay sales tax and title fees when purchasing the leased vehicle, and if you can’t immediately sell the car, you need to be okay with the money you spent to buy out the lease being unavailable until the vehicle sells.
A second word of caution: This strategy applies to a lease buyout at the end of a lease contract. Early buyouts typically do not have guaranteed purchase option prices, meaning the dealer can charge you more for the vehicle. There may also be an early buyout fee.
3. Sell the lease back to the dealer
If you’re fortunate, you may not have to do much work at all. Don’t scoff when your dealer calls asking to buy you out of a lease early. Take a look at the offer, calculate what you think you could make trying to sell the vehicle on your own and determine if just simply selling the lease to the dealer is the right move.
Chances are good you may leave a little money on the table this way, but it’s certainly much less of a hassle to just sell to the dealer than buying the vehicle and selling privately.
Alternatively, you could try other nearby dealerships that sell vehicles of the same make. They may offer you more than the dealer from which you leased the vehicle. That’s the beauty of driving a leased vehicle in this shortage; you have the power to start a potential bidding war.
“Prices are way up,” confirms Johnson. “That car you leased a while back could actually net you a nice profit if you find a dealership that wants to come to the table and strike a deal with you.”
What to consider before selling your leased car
Now is a great opportunity to make some quick and serious cash by selling your lease. But before you sign on the dotted line, consider a couple of caveats:
You may be without a car
If you are not part of a multicar family and do not have access to affordable and efficient public transportation, getting rid of your vehicle may not be the right move.
New and used vehicle prices are at record highs
If you do sell and need to replace the vehicle with something new, be ready to pay those premium prices that you were charging when selling your lease. What goes around comes around.
In fact, some experts say that taking advantage of dealership incentives for ending leases is a bad idea for this very reason. “My recommendation would be: don’t do it,” says Kyle MacDonald, Director of Operations at Force by Mojio. “No matter how much you can earn in the moment, with the state of the market right now, there’s no guarantee you’d be able to find a replacement easily.”
MacDonald does offer one exception: “If you’ve already locked down a new car to purchase, in that case, ending a lease a month or two early may be worth the cash incentive.”
You leased that car because you liked it
Finally, consider if you’re ready to part with the car. At the end of the day, you work hard for a paycheck that affords you nice things. If a car to you is just a way to get from point A to point B and you couldn’t care less what make and model you’re sitting in, sure, end the lease.
Timothy Moore covers bank accounts for The Penny Hoarder from his home base in Cincinnati.