• Sang Han

Why buying a home is still a really smart investment? (Zillow Talk #1)

Updated: Dec 19, 2021

Disclaimer: This is a very personal review of a real estate book that I've been very impressed with. Please be advised in advance that all data shared is from the book.

There are several sites that customers often use for a home search. Zillow, Redfin, and Realtor.com are examples. And among those real estate sites, Zillow.com would is the most frequently used home searching site.



Eventually, zillow.com has an incredible amount of real estate related big data. And, there is a good real estate book (which I would like to share with my clients from this blog post) called “Zillow Talk” written by Spencer Rascoff (founder zillow.com) and Stan Humphries (Zillow's economist). Due to my poor writing skills, I cannot publish a review of this book on one blog. Therefore, I will summarize each of the 26 chapters throughout a series.


I think the contents in this book have good inspirations because all are from Zillow.com’s big data analysis. I hope that my summary of this book would help my clients make better real estate decisions for their buying or selling homes. Of course, I hope it helps a lot to brokers who read my blog post as well.

Chapter 1. Warren Buffet is (Always) Right


Warren Buffet, how famous he is? The book shares Warren Buffet's interview to explain why real estate is a good investment.


The interview was with CNBC news in 2012. For reference, 2012 was a period when the aftermath of Subprime Mortgage continued. -----------------------

Becky Quick (host): "Do you still think that this is a great time to be buying stocks?”

Warren Buffet: "Yes”. “but, if I had a way of buying a couple hundred thousand single-family homes, I would load up on them”. .

Becky Quick (host): "Then would you advise young investors to put their money in stocks, or use their savings to buy a first home? “

Warren Buffet: "Buying a home with a thirty-year mortgage, at the historically low-interest rates of early 2012 is a TERRIFIC DEAL and AS ATTRACTIVE AN INVESTMENT AS YOU AN MAKE NOW."

--------------------------


In fact, Warren Buffet eventually founded a real estate company in 2013. Berkshire Hathaway Home Services, one of the most common real estate companies in the United States, is the one.


The book explains three reasons why real estate is an attractive investment compared to stocks through quantitative data.



1) Higher Return on Investment



Zillow's analysis from 1974 to 2014 found that the average annual ROI of the S&P 500 was 10.4%, while that of residential properties was 11.6%.


2) Low Volatility



Equity investment is likened to a roller coaster, saying that real estate is less volatile. As the volatility is low, real estate will be a more stable investment.

3) Leverage effect



As everyone knows, you can own a real estate property worth a lot more than the cash you own because you can buy a property only with a down-payment and closing cost. Therefore, once the property price increases at the same rate as equity investment, you will be able to get a greater profit from real estate. In other words, if you buy a $300K house and get 5% down, you can own $300K of real estate if you have $15K. On the other hand, in the case of stocks, if you have $15K, you will only be able to buy $15K worth of stocks.


(The book introduces that there is a method called Buying on Margin that allows you to take advantage of the leverage effect in stocks. However, it is explained that the procedure is complicated, and it is a rarely valid method for ordinary investors.)


Here, assuming that the real estate investment in $15K has increased by 10%, the return generated from real estate investment is $30K, whereas the return in the case of a 10% increase in the stock invested in $15K is only $1.5K.



In other words, it is explained that real estate is the one that can get a bigger profit even at the same rate of increase.


I wish you enjoyed this post. Stay tuned. I will come back with the next chapter soon.



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