nrhorwitz said:
Not true. There are ways to divert the money generated by the real estate growth to other ways. I'd think you'd have to be living in california to be more creative with your funds. Living in other areas certainly offer you other options to invest your funds but it doesn't necessarily restrict us from being creative.
It is completely true. You have to have a place to live and if you choose to live in an inflated real estate market, you pay more for housing. There is no creative about it; the money is already spent. Now if you are talking about using equity to reinvest in other places on a margin, remember that anyone else in the country can invest on margin as well. Therefore, it is not gaining you anything.
Also, it is not just about how much one can make on investments in California. It is about how much more one can make on investments in California than anywhere else in the country. For example, my wife’s parents bought their house just north of Los Angeles for $25,000. They then made improvements costing $15,000 so the total cost of investment was $40,000. 25 years later they sold their house for $450,000 for a return of 10.2%. Sounds like a good investment right? Maybe, but the S&P 500 gained 18.4% during the same period. (That may seem high but we are talking apples and apples because the high inflation of the late 1970’s and early 1980’s affected the housing market and stock market the same. So the return on the real estate is inflated as well.) Likewise, my parents bought their house at about the same time for $40,000 and it was valued 25 years later at $160,000. Their return is 5.7%.
So lets assume that these trends continue for the next 25 years. If I buy a house in California for $500,000, in 25 years I will gain 10.2% for a total of about $5,700,000. However, if I buy the same house in another state it will only cost me $250,000. This leaves another $250,000 to be creative with. Therefore, I invest it in the S&P 500. In 25 years, the house gains 5.7% for a total of about $1,000,000 and the investment gains 18.4% for a total of about $17,000,000. So my total return is $15.4%
That leaves a 5.2% gain just by not living in California. That is over $12,000,000. I say again, "The weather is not that nice."