Quote:
Originally Posted by west-town-brad
sorry, no. the leveraged return on a personal residence is not nominal
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I'm not sure you understand the word nominal, nominal in economics refers to any gain or statistic that is NOT adjusted for inflation. All returns are "nominal" until you go through the trouble of backing out inflation. For example:
Arthur buys a house in 2010 for $100,000 in 2020 he sells it for $150,000. His gain is $50,000, his nominal gain is $50,000 because that's how many dollars he literally made. However, those dollars are not worth the same in 2020 as they were in 2010. So his "REAL" gain is not $50k or 50%, his real gain needs to be calculated by adjusting for inflation. If inflation was 50% between 2010 and 2020 (it was nowhere near that of course) then his real gain is actually zero because a can of Coke was $1 in 2010 and is now $1.50.
And of course, leverage massively amplifies gains (tell me about it, I turned $5k into several million of RE equity since 2010 by making smart leveraged plays off of properties I got for rediculously low basis), but statistically the gains are so low in the SFH sector that it doesn't really matter. Odds are you will never achieve the 6-8% returns of the S+P even with high leverage. There are times during which you could have greatly exceeded these gains and been the exception to the rule (5-10 years ago being one of them), but most of the time SFHs return the rate of inflation or less meaning they break even or lose money on a real basis.
For example, if you bought the average American house in 1977, it would have gained literally nothing if you sold 20 years later in the late 1990s. Yes, the nominal value would be higher, but the nominal value of a can of Coke or a big mac was equally higher. In fact, from the end of WWII until the mid 1970s, the real value of housing in the US drifted lower. If you bought a house in 1950 and sold in 1970, you would have lost a significant amount of money after adjusting for inflation, tell me how leverage can make negative returns positive again?
The blue line looks great, too bad the orange line is the only one that matters.