Guest Post: The Fallacy Of Homeownership

Tyler Durden's picture

Originally posted at Liberta blog,

Many people have a weird obsession with homeownership.

When it comes to buying a house, they are willing to overlook, or even completely throw out, a bunch of financial values and principles they claim to hold dear.

The unfortunate truth is, for many middle-class folks, buying a house is often a very silly financial decision, especially if they are young (in their 20s or early 30s), or have a low net worth.

A well diversified portfolio

The most mind-boggling thing I’ve come across is that most people who punt the importance and wisdom of home ownership, will also tell you they believe you should have a well diversified investment portfolio.

You know…

“Spread your investments over many asset classes.”

“Don’t put all your eggs in one basket.”

And so on.

Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket.

Not only is the the average middle-class-30-year-old-home-owner Joe way over-invested in exactly one asset class (residential property), he is also completely undiversified within that asset class, since he owns exactly one property, in exactly one area, based in exactly one town, located in exactly one country.

In short, it’s just about the most undiversified investment portfolio a person could dream up and manage to get himself into.


Leverage basically comes down to borrowing money to invest in something.

If you invest R1,000,000 in something, but you borrow R900,000 and only use R100,000 of your own money, then you have an investment in which you are leveraged 10:1.

That 10:1 is called the leverage ratio of your investment. And it is 10:1, since the thing you’re investing in is worth 10 times as much as the cash you put in.

Leverage is great if the thing you invested in grows a lot in value over a short period of time, because it allows you to make a lot of money by investing only a small portion of your own cash!

Unfortunately, the reverse is also true.

If the thing you invested in loses value, then it is very easy for you to lose a lot of money – even more than the initial amount you put in!

While Warren Buffet’s ethics may be a stinker, I do agree with his views on employing leverage:

If you’re smart, you don’t need leverage. If you’re dumb, you have no business using it.

Warren Buffet

Even though, over the long-term, returns made on equities outperformed returns made on property, by far, almost no sane person will leverage themselves 10:1 to invest in equities (i.e. shares).

For most people, this is way too nerve wrecking to even consider. If you suggest such a thing, you might be labelled a gambler, or worse, a madman.

And yet, everyday, average middle-class-30-year-old Joes all around me are buying properties in which they are leveraged 10:1 (and even more), without a second thought.

After spending many months thinking about this phenomenon I can only put it down to the fact that the truth doesn’t matter.

It’s just another asset class

In case you think I have a deluded and deep seated mistrust of property that most likely stems from a childhood nightmare of being swallowed by a house, let me just make my position official:

I have zero issues with investing in residential property.

Residential property is just another asset class.

I don’t currently, but I have in the past allocated a portion of my investment portfolio to residential property (both locally and abroad), by buying shares in publicly listed companies whose business it is to buy and rent out houses and flats.

I just don’t view residential property as a magic-unicorn-galloping-over-a-rainbow-of-profits type of investment with which “you can never go wrong”.

I’ve spent a significant portion of my adult life looking for investments like those, but unfortunately I haven’t found one yet.

Liability and Liquidity

If you are still adamant that you want to invest in residential property, then I have a great suggestion for you:

Why don’t you just buy some shares in publicly listed companies whose business it is to buy and rent out residential properties?

If you do some research and choose a good one, chances are that they are better than you at spotting and buying well-priced properties and collecting rent, because that is what the people who work for those companies do for a living.

There are also some other advantages about investing in residential property by buying shares in publicly listed companies.

You can have a more diversified investment portfolio: By only buying a few shares you are able to limit your exposure to residential property to a reasonable percentage of your net worth.


You have limited liability: If the company goes bust, you will not be liable for any losses. Comparatively, if you buy a property using debt and, for whatever reason, become bankrupt and can’t afford to make the bond payments, then you most likely have quite a few years of hell to look forward to.


Shares in publicly listed companies are liquid: If you ever need to do so in a hurry, it will only take you about 5 minutes and a few key-strokes to sell all the shares you hold in almost any publicly listed company. Selling a house, on the other hand, is a ludicrously expensive multi-month administrative nightmare.

Interest rates and timing your property purchase

Residential property is an asset class that is very directly influenced by the cost of borrowing money.

In our society, it is considered a perfectly normal and responsible thing for a person to finance the purchase of a house by getting a 20-year loan from a bank.

In fact, it is considered such a normal thing for the average middle-class-30-year-old Joe to be a debt slave for most of his life, that if you had to suggest to him that he should save up for a house and only purchase it once he had saved up enough money to buy it outright, using cash, he will probably think that you are crazy to even suggest such a thing.

But, I digress.

My point is, the vast majority of residential properties are paid for using borrowed money.

Because of this, when interest rates go up, so do monthly bond payments. When bond payments go up, some people can’t afford to make their bond payments and they are forced to sell their homes, or default on their bond. A few actually do default, resulting in a seizure and forced sale of their properties by the bank.

To summarize: When interest rates go up, property prices fall (or increase very slowly, usually at a rate lower than inflation), because the available supply of residential properties increases, while at the same time the demand for residential properties decreases. Conversely, when interest rates go down, residential property prices usually go up quickly, because more people can afford to take out bigger loans!

The first rule of business is: buy low, sell high.

This is such an obvious concept and yet, in practice, it is very difficult to do, because it usually means doing the exact opposite to what everyone around you is doing.

If you are going to buy a property, for whatever reason, then at least buy it at the best possible time.

And when would that be?

Well, of course, a few months after interest rates hit their peak after having risen quickly for two or three years in a row.

Take a look at the graph below, which shows the [10Y Treasury rate in the US] over the last few decades.

...with interest rates near record lows and just entering an upward cycle.

In my opinion, the present is just about the worst possible time for anyone to be invested in residential property.

You will know it is the right time to buy your dream home by looking for a few of these signs:

  • Interest rates are starting to stabilize at a high rate, after rising steadily for two or three years in a row.
  • Many people are trying to sell their properties, some in a real panic, because they are struggling to make their monthly bond payments.
  • You hear many tales of properties being foreclosed on, also in neighbourhoods where people are considered to be wealthy.
  • People around you are generally feeling quite negative about owning property.

When the blood is in the streets, my friends, that is the ideal time to buy your dream home.

Paying rent is simply throwing away money every month

I often hear people making this argument. I’m sorry, but that is just a silly thing to say.

Upon purchasing the average middle-class-suburbia home, you’re not only paying a massive amount of TAX to the government, you’re also forking over a significant amount in fees for bond registration, deeds and a bunch of other stupid banalities. Never mind the commission that goes to the estate agent.

Property tax, commission and other fees can easily add up to over 15% of the purchase price of a house. This makes residential property one of the most expensive asset classes to invest in, at least as far as up-front costs are concerned.

Then, once your bond is registered and you are the proud owner of your new home, you’ll be paying interest to a bank, every month, until your bond is paid off.

And don’t forget about maintenance! You know… paint starts peeling, roof start leaking, toilet stops flushing, that type of thing.

Lastly, you’ll also be forking out on a monthly basis for rates & taxes. Which, as property owners in Greece found out just recently, can easily go up by sevenfold in two years, if your government is anything like most governments are.

Safe-haven investment my ass.

Except for squatting on someone else’s land, there’s no such thing as living for free.

So are you saying no one should ever own a house?

No, of course not.

I’m saying people should save up for their family homes and buy them cash.

The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.

I know… in the world we live in I’m very much on my own in suggesting such a boring and outdated thing.

But I’ve looked at the facts, and even though I’m well aware that the truth doesn’t matter, I also know that nothing matters to anybody until it matters to everybody – and by then it’s too late.

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Duc888's picture




You never "own" your home.


Stop paying property taxes, then find out who the real owners are.

James_Cole's picture

Home ownership is one of the few 'no brainers' out there and shouldn't be thought of as an 'asset class.' Yes, buying at the top of any market isn't a great thing to do, but that's a totally separate point.

All that said,

icanhasbailout's picture

Try adjusting for real inflation, bud.

RafterManFMJ's picture

A house is NEVER an investment, it is a consumable good you get to live in.

You're buying hoping to flip to a greater fool in 2 years - well a fool and his money are something something.

My first home was a triplex - live in one and rent out 2. And now that building pays for itself as well as my current single family home.

Point: if you 'buy' make sure your home provides outsize returns in rental income, gas rights income, free gas, vegetable garden, distance from the Golden Horde, or some other benifit.

You'll never truly own a fucking thing in this Bankster Republic, so don't commit to a property unless it returns some unorthodox benifit.

eurogold's picture

If it can roll, fly, float or are better off renting it !

N2OJoe's picture

Anything that the avg Joe can borrow 97% LTV on, will bubble like a motherfucker.

The price of a home after the credit sys collapes will be the price of a "traditional" downpayment.

daveO's picture

Exactly. I read, a few years back, that houses will find their 'market price' at the time that 2/3rd's of houses are bought in cash. Now that Wall Street has stopped buying them, that mark should be hit within a few years. I've known people to borrow their down payment from family and then lie on the mortgage application!  

NihilistZero's picture

You're over simplifying a bit.  Assuming the country you reside in gives you decent property rights protection, a SFH is a great investment for the lower classes.  If you save alarge down payment and buy at or near the trough you will be saving $ each month vis a vis rent and get a tax deduction that could easily net you more per month than other conservative investments. These serial housing bubbles have obscured the advantages to property ownership, especially among the lower income brackets.  If you're thinking legacy it's also a death tax protected hand me down.  SIreland the typical home debtor doesn't do it the way I deceived but I know plenty of people with 50-75% equity that are doing better than their renter neighbors.  Surely they were lucky in timing, but they also weren't stupid with their equity either.



NidStyles's picture

You can't even legally own your car in this country. Think you own it? Try getting the allodial title rather than the certificate of creation for the title. 

babylon15's picture


house prices haven't really gone up in over 100 years after adjusting for inflation

James_Cole's picture

house prices haven't really gone up in over 100 years after adjusting for inflation

Let's say for sake of argument that's true, relative to income for the majority in reality everthing has gone up (particularly rent). If you bought a house 20 yrs ago and paid it off you wouldn't be buying a top or a bottom in the market, but consider your situation vs. paying to rent now even if the price has been flat. 

Show of hands, how many people out there saying thank gawd I didn't buy a home 20 yrs ago and stuck with renting?

I don't think the broad index is a very good indication anyway, but that's a separate argument. 

LetThemEatRand's picture

I think you're right if the premise is to buy and live in it for a very long time and feel comfortable that you will not need to sell.  In that case, you don't really care what prices do over the next 10 or 20 years.  That is not the story for the large majority of people these days who would be better off waiting for the bubble to pop before they buy.

James_Cole's picture

There's a number of factors to consider but past a certain age people don't tend to move around a whole lot. And yes, buying what is very likely a bubble doesn't make a lot of sense either. 

But overall aiming to home ownership is smart to my mind, again as distinguished from a speculative investment. Not to mention home equity is one of the few places people have managed to amass some savings (banks have clever schemes to steal that away too of course). 

Big Brother's picture

home equity is one of the few places people have managed to amass some savings

There's at least two good reasons for that:

  • A homeowner gets the tax preference that the interest paid each year is deducted from one's gross earning prior to taxes being calculated up to when AMT becomes a factor.  A renter losses the renter tax credit rather quickly (income > $57,000 = no tax credit in my state).
  • Generally, over the long-term, one pays less in mortgages, taxes, and repairs than one does in rent for a comprable domicile (e.g. where I live, houses sell for $70,000, but to rent the same house would cost $1500-$1750 per month).
safe as milk's picture

i don't think either of these points is correct

"A homeowner gets the tax preference" - this is a commonly held falacy in the u.s.. in order to get the interest deduction, you have to itemize. by itemizing, you can't take the standard deduction which is often in excess of $10k.

"Generally, over the long-term, one pays less in mortgages, taxes, and repairs than one does in rent for a comprable domicile" - that's really a function of location. where i live,manhattan, you would have to stay in an apartment for well over ten years before your overhead would be less than comparabe rent on the same space. the main reason people buy here is stability. at least when you buy, you can budget well into the future. since rents fluctuate so much, it forces renters to move more often. the other reason people buy here is to park foreign money but that's another topic.

Big Brother's picture

Real Estate is really local.  So a bubble may or may not exist depending on where you live.  In my cold area of the midwest, I've found it to be slightly over-valued.  In a former career I was a mortgage broker.  The metric I used determine whether a loan would be beneficial to the borrower:

Home_price(Ave) = 3*Ave_Per_Capita_Income

As has been quoted in this thread already, this is the approximate ratio (slope) over the long-term (linear-regression, best-fit to see for yourself).  In the past 35 years it's oscillated from Home_price(Ave) = 1*Ave_Per_Capita_Income to OMG*Ave_Per_Capita_Income (on the coasts and nevada).

Additionally, a conforming purchase would include 20% down such that if there was a forclosure, the bank could sell the house below market-value; the borrower would have skin in the game and be much less likely to walk away from the loan.  Coincidentally, I think it was 1983 that the first 30-yr mortgages came into use.  First time home buyer gimmicks arose around 1997 after it was permitted that the first $200,000 was tax free on a primary home sale after living there for 2-years. I suspect these two market driving forces were the greatest contributors to the bubble.

Ergo, for the housing bubble to burst, a return to the lending standards prior would need to be reinstituted.

For me there's not a enough utility in home ownership to take on which is essentially a guaranteed (large) loss (because as was first experimented exhaustively by Sir Francis Galton, all distributive phenomna regress to a mean overtime).



JeffB's picture

"For me there's not a enough utility in home ownership to take on which is essentially a guaranteed (large) loss (because as was first experimented exhaustively by Sir Francis Galton, all distributive phenomna regress to a mean overtime)."

You could very well be right, but there are other variables in play as well. For instance, we're playing on the shifting sands of a fiat monetary system, which makes it very hard to evaluate probable future outcomes.

Then there's also the very high probability that virtually all asset classes are now in bubble territory.

Housing might be relatively attractive compared to assets with respect to how they would act in a high inflation economic situation. Of course it could be adversely affected in multiple ways, but could easily beat out bonds or even stocks in many scenarios.

The bottom line, as has been stated here on more than one occasion is that no assets really look all that attractive at the moment as an investment buying opportunity.


cro_maat's picture

JeffB - Good point that there is "the very high probability that virtually all asset classes are now in bubble territory". Unfortunately we have been conditioned (dumb downed) by our education system, media, culture, corporate propaganda, etc. to not think critically or creatively in these situations. If you step back and look at what is being sold in the typical SFH real estate deal you realize that you are being sold a house that cost too much to build, has too much profit for the builder in it, was made with inferior materials, is not energy efficient and sits on 1/4 acre to 1/2 an acre which does not give you much to work with if you ever need to be self-sufficient for food. The "Own Your Own Home" dream is the same "Diamonds are a Girl's Best Friend" propaganda that is designed to enrich the Rentier Class and enslave the masses.

Here is an option that can optimize your investment (though it does require some work, planning and capital). Buy 20 acres of forest (nice tax shelter here). Make a deal with the local sawmill to cut 2 acres. Negotiate a certain amount of the cut trees as payment for the processing of the rest. Design a passive solar home. Build the home with family and friends  from the harvested lumber and recycled materials. If planned properly and executed well using some creativity you can have a home with 20 acres of land for under $100k or even $50k if you really put your mind to it.

Pay cash or in kind and Fuck Jamie Diamond!

JeffB's picture

Hey, we're thinking along the same lines, cro_maat.

I read a friend's book on passive solar homes some years back and have tried talking my wife into it for years now, but no go so far. Unfortunately family and friends all think it's a nutty idea too.

But some of the homes that have been built don't cost much more than a typical home of similar size and have virtually no heating or cooling costs even in very harsh environments.

But the home I'm thinking of would more likely be built of concrete or stone and be mostly underground other than a lot of south facing windows. Some of those homes varied no more than a degree or two from summer to winter and the temps could be adjusted gradually up or down by the owners to suit their needs.

The 20 acres or more would certainly be nice, but I've seen a number of people who think you could get by on significantly less with some of the new high efficiency methods, such as aquaponics.

Of course, if our economy crashes and burns, it would probably be good to be away from the crowds anyway, even if you had a decent self-sustaining food system going.


neidermeyer's picture

I agree with the numbers in the index ,, but it doesn't account for the better quality and larger size of todays median house. I see ownership as a way of tying a large portion of your future nest egg to inflation. I was a good idea for most of our history ,, but in the last 20 years or so (even if you ignore the bubble up and down) we've seen home prices NOT maintaining their historic parity with inflation... when you factor REAL inflation and not the reported numbers.. 

kareninca's picture

Better quality of today's median house???? Are you crazy?????  The only house I would buy would be one built pre-WW!!, when they weren't building with plastic foam and offgassing particleboard and Chinese drywall and other wierd toxic crud.  You can remove asbestos shingles and lead from an old place, but in modern houses, the nasty modern toxins are built in.  Even leavng aside the chemicals, I have heard and read innumerable stories re the terrible quality of modern building materials, and the terrible quality of modern craftsmanship.  An old house has stood the test of time.

daveO's picture

Yep, house quailty has been declining steadily since the 60's which coincides with the end of the Gold Standard. When I see a house with a simple brick facade on the front only, I picture the developer laughing all the way to the bank.

kaiserhoff's picture

I’m saying people should save up for their family homes and buy them cash.

The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.

In my area, a decent modern house will run 350-500,000.  Unless you work for the University or the Hospital, wages are in the 8-10.00/hour range, and often part time.  So in order for your savings...

Wait, savings???

Deathrips's picture

So with your magic crystal ball...will you please tell me what property taxes are going to be next year?

Then we can ask some Greeks if they agree with the inflation yield curve?


Unless you have allodial have nothing.



SilverRhino's picture

Allodial title : Does this actually exist ANYWHERE at this point?   

McMolotov's picture

I think allodial title was last seen in Kim Jong-un's unicorn lair.

Deathrips's picture

I hear this is possible in Nevada....I hear. So dont quote me.


Look into "allodial title via land patent"



post turtle saver's picture

nope... NV prohibited applications for allodial title after June 13 2005... it didn't matter anyway, it was limited title and still subject to eminent domain & police power (basically, 5th and 10th amendments)

johnQpublic's picture

alloidal title via .308


but you will be waiting a couple more years for that option to kick in

MeelionDollerBogus's picture

It does, just in Asia. The math is obvious: only a sucker rents while pretending it's ownership and if that's all there is in Murrika then only a sucker stays in Murrika.

August's picture

>>It does, just in Asia.

And a savvy land purchaser in Pakistan gets the bondservants thrown in for free.

Cacete de Ouro's picture

Home ownership can be a great and profitable thing. So I disagree with the article. If you get lucky and have the initial deposit in a low interest rate environment, and a booming market, you can make a packet. This is due to leverage. Then leverage it up again and buy some investment properties. I know people who became multimillionaires from nothing using this approach. Most of them bombed out admittedly but they were riding high for a while.

Anyway, a mortgage is an investment in your pension fund, or mid life crisis fund. Paying rent to a landlord is for numbskulls.

Lessons: don't get greedy, learn about the interest rate environment. Become friends with bank loan officers

i_call_you_my_base's picture

"If you get lucky"

Yes, sound investment strategy.

Stuck on Zero's picture

Here's a better investment.  A friend just bought a duplex with zero down and a 3.5% mortgage.  She rents out half and lives in the other half.  The rent pays the mortgage and property tax.  She has had to pay for some repairs but all-in-all she has a roof over her head for nearly free.  If the value of the property goes down she can walk away.  If it goes up she's a winner.


MeelionDollerBogus's picture

"Anyway, a mortgage is an investment in your pension fund, or mid life crisis fund. Paying rent to a landlord is for numbskulls"

No, you're the numb skull: a mortgage is a payment into JAMIE DIMON'S BONUS FUND, you'll never see that money ever again. That is why he's richer than you are.

daveO's picture

Many folks rent because they're slaves to the Corporations that employ them. I used to rent houses to them. One guy had to fly down to Mexico every month. Another had to drive 200 miles r/t every day. In most cases, getting a low paid 'local' job would be better. By the time they figure it out, they are up to their eyeballs in debt and can't afford to leave the 'Corporate' plantation. That's usually when divorce hits them. Thomas Jefferson warned Central Banking. Cheap debt=slavery.

chemystical's picture

Article begins with a flawed premise and the proceeds to build a case around it: the presumption is that Joe buys his home solely as an investment - as opposed to, oh, I don't in it?

"Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket."

Really?  What about Joe buying an automobile?  Why not diversify into a bike and a motorcycle and a horse?  What's Joe to do without a train or subway or bus? Take taxis everywhere?  Oh, I see.  The car has utilitarian value.  And wtf does the house do?

Joe needs to live somewhere.  Should he rent?  Different argument.

"Lastly, you’ll also be forking out on a monthly basis for rates & taxes. Which, as property owners in Greece found out just recently, can easily go up by sevenfold in two years, if your government is anything like most governments are."

And if those same property taxes rise, the author thinks the landlord will eat that and continue charging the same rent?  Another false implication, and if the author is aware of that then why mention it?  How to escape that?  Perhaps the author is suggesting that Joe move out of the tax jurisdiction????

The entire article is written from the false perspective thast Joe buys a house solely as an investment.  Heads up to the author: neither my salad nor my shoes were an investment.  Is that ok with you?

Who wrote this?  Someone with large holdings in rental property? 

P.S. Landlords only transfer costs to the renters; they have no interest in ROI.  MAJOR FUCKING SARCASM.

chemystical's picture

A better model would at least propose that Joe is renting from his self, and propose all of the implications that proceed from that.

Big Brother's picture


Regardless of a homeowner paying tribute to the king,

  • Your name is on the title, and can pretty much do as you please on your property so long as it doesn't have negative/detrimental affects on your neighbor.
  • A homeowner can't be evicted by a private party (you could be eminent domained, that's extremely unlikely)
  • A homeowner retains the principle paid for the house, which over the long-term keeps with inflation/only slightly losses.
  • Only the owner and whoever the owner permits may enter without warrant.
  • It's way harder to foreclose on an owner than it is to evict a tennant.

So to channel the author's and posters' views, a house is both an asset and a liability; but probably more a liability than an asset.


post turtle saver's picture

can't speak for other locations, but where I live owning a home means mortgage interest and property taxes can be deducted from federal income tax also (or possibly state income tax as well, if you're unfortunate to live somewhere that has such a thing, God Bless Texas for not being one of them and for having a homestead exemption)

if you buy a home to live in it, you do it if you're certain you're not going to be moving around a lot... put down a big chunk up front, constantly keep an eye on rates and terms to pick a time where refi is to your advantage, don't treat it like an ATM, and best of all pay off extra in principal every month... as things go, I can think of worse things than home ownership... if you play it right you can save a considerable chunk on taxes every year while using the cash you didn't put all-in to invest in other things that will (hopefully) outpace inflation _and_ taxes

it's all about living within your means, ultimately... paying cash up front is one approach, but why not take advantage of the leverage especially if you can afford to do so?

marathonman's picture

Besides the fixed rate mortgage is one of the best tools you have for playing the inflation game.  The value of your fixed payment goes down over time as the fiat erodes the value of the currency.  Think of it as your own personal hedge fund.

daveO's picture

Not since housing bubble popped. Houses were way too extended beyond market price. Until they find their cash price, they will not hedge inflation.

MeelionDollerBogus's picture

"A homeowner can't be evicted by a private party (you could be eminent domained, that's extremely unlikely)"


Ever heard of Linda Green? She can get the job done.


daveO's picture

Credit Bubble Inflating=No Brainer

Credit Bubble Deflating=Expense.

Same goes for all other 'Debt Priced' items, like cars and College Degrees.

prymythirdeye's picture

So true Duc.  Why do people have such a hard time understanding this?

waterhorse's picture

The same could be said for stop paying rent and see what happens.

prymythirdeye's picture

Apples to oranges knucklehead.  Try to keep up

James_Cole's picture

Yeah but the op point is inane, true 'ownership' doesn't exist. We're all temporary custodians at best and each of us will always be paying in some way to some thing for that privilege.