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Guest Post: The Fallacy Of Homeownership
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
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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glorified rent
Buy a home when rates are high?
I remember paying 10% and it was painful.
After "owning" (renting from the Bank and State) three homes I think it's a rotten deal.
An already paid for 800 sq. ft. trailer on a couple acres with a fence and some dogs would be ideal.
With my luck the municipality would come along and Eminent Domain my ass outta' there to build a WalMart.
A trailer home on two acres is ideal? Damn.
It can be damned nice. Frowned upon by some, sure, but very nice. I sold my last suburban place for $350K at the height of the market collapse. It was worth maybe $500K at the top. I bought a shack on 10 acres for $40K. Yeah, I dumped another $15K in the shack to make it liveable, but still $55K as compared to $350K. I prefer the shack in the sticks, honestly. It's a completely different world and a completely difference existence. But it's real, it's life, it's living. To each his own.
Yes, not too much to maintain, enough to do some gardening and canning, and a line of sight to shoot anyone invading the homestead.
I don't need much, "live simply so others may simply live". I certainly don't want some fucking McMansion sucking energy and feeding banks, nor do I want some giant farm with the E.P.A. breathing down my neck and drones flying over.
wrong. if you buy a modest home when your young and never move. you win. in the old days. i'm old.
That has worked pretty well in some locations, but unless you are a gubbermint parasite, how could you know you would have a steady income in that location for 20-30 years? The job market has not changed. It's dead.
skilled work comes to mind. the trades.
You know it's funny. I read this thread and all your bitching and I wonder...
How do you expect to have cops that ticket you and beat your kids and kill your dogs if you won't pay for them?
How do you expect to have 300 million dollar school buildings with 100K per year teachers slaving away 8 months per year to make your kids dumb informing cannon fodder for the State?
I'm disgusted about this 'tax' complaint, income or property. Only your money, IE lives and labor properly expropriated can keep you safe.
Too few people crunch the numbers (play Excel games) to figure out the TRUE cost of HO (Home Ownership), i.e. the TOTAL COST of OWNERSHIP (TCO).
Be sure to include:
- Closing & Title Costs
- Mortgage Insurance
- Climate Insurance (Flood, Hurricane or Tornadoes)
- Larger utility bills (for more square footage)
- Home Maintenance & Repairs
- Yard maintenance
- Pool maintenance
Depending on where you live, your TCO can DOUBLE your monthly payments, i.e. 2x of PITI (Principal, Interest, Taxes, Insurance). As we found out when we lived in a nice part of Florida.
Disqualification for Gov Assistance for Health Care or Elder Care, as long as you have "Home Equity". Because you worked and saved, you get penalized/denied, but those who did not, do not get penalized/denied. You 'chew' on that one for a while.
Why do you think they put FATCA in place? Just to catch "tax dodgers"? Hell, no! Guys like Doug Casey or Simon Black will go on about this, but even they not realize the deeper and darker reason for FATCA: It's to get your World Assets logged into your Income Tax. That way, when you apply for Assistance for Elder Care, they can deny you said assistance until you've first been "bled dry" of every asset, everywhere. Reverse Mortgage, bitchez! Robert Wagner and Henry Winkler (Fonzie) are your Reverse-Mortgage "friends" -- as seen on TV. You 'chew' on that one also for a while.
USA, USA, USA!
You know how much the scheister Title Company charged me for two pieces of paper on a house I never missed one payment on in 14 years when I sold it? $1,500!
I was like..."What?!?! You called the County Assessors office, who faxed you clear title, and you stamped a page and signed it!!!" AAAARGH!!!
My house payment with taxes and insurance is still $300/mo. cheaper than what it would cost to rent a similar place.
which makes perfect sense if you're knocking out a huge portion of the actual owed money, net of interest tacked on, but if you're not even denting the interest you're actually still just renting and in the end you'll pay a lot more because you can't just sell when you want, you have to go market rate, whereas a renter can just stop & go with no collateral to lose.
It's not my place to ask you, if you did the math you know how your numbers add up. Just some food for thought.
The liquidity issue is a much bigger risk factor than it used to be five years ago, particularly for the up and coming. If you’re lucky enough to have the kind of job that affords you the salary to buy and own a home, chances are it’s also the kind of job that’s going to require you to move to a different city every three to four years. Unfortunately, whereas the process of selling your home and buying a new one once took 3-6 months, it can now take 2-3 years to get the job done. That’s assuming your existing home isn’t under water or you have the extra cash to cash out after another market downturn. I know people who now own two and three homes, just because they couldn’t sell the ones they didn’t need without dumping them on the market and taking a huge bath. In any case, if you’re moving every 3-4 years and still want to own, you’re probably going to be selling and shopping for homes more days than you’re comfortably settled into one.
His advice is to pay rent while saving up to pay cash for a house? What the hell kind of advice is that?!
I figure it's better to buy what you think you can afford and enjoy *living* in it right now. Maybe you'll end up holding the deed one day. But if you do catch some bad luck, you can always try selling, ditching, stalling, renting, or burning it down.
Now if the author had suggested we stay in our parents guest houses while saving to pay cash for our first place, well that makes way more sence. I just wish I had convinced my parents to build a guest house 20 years ago.
Even when you "own" a property the government dictates how tall the plants on your front yard are allowed to grow, and forces you to shovel snow from your perimeter.
No thanks. I'd sooner be homeless or live in the 3rd world or out in the bush somewhere than be a "homeowner".
I really have to disagree to a point on this one. There are a lot of reallly nice and affordable homes available out there. For those in their 20's who have student loans it would be unwise. Take your time and work your ass off to clear that debt. The brass ring keeps getting further and further away if you jump too early. Save some money and do not be foolish investing, if you read ZH you know what I mean. For those 30 somethings who somehow managed to put themselves through college by hard work and aren't trust fund children, there are some nice opportunities out there. For those who discuss property taxes, I would say that it is important that is taken into consideration, but some landlords can be very problematic, or, very nice because you are their source of income or maybe a very large hedge fund.
Think about that for a moment. Most of the upper crust democrats own and rent post offices, low income housing etc.. Look around, Southern NY is a place you do not want to go among others and I thought Massachusetts was bad from a property tax perspective!
A place of your own is your castle, there are externalities as maintenence such as heating systems, chimneys, electrical, roof, driveway, schools, water, sewer, zoning, deed restrictions etc.. need to be taken into consideration. I advise a careful and I mean cautious (educated) look at a reasonably priced home, in an acceptable location, with a good down payment and terms, may be a very rewarding lifetime experience. I am not in the real estate business but have a land surveying background from years ago. Just don't watch the CHIPS guy flipping this shit on TV, that will bite you in the ass.
My best wishes to you.
Edit: Some places I would look into are Maine, North Carolina, Minnesota, and Upstate NY. I am certain there are others but that would be my suggestion. If you are creative, opportunity knocks.
In my area rents are about 25% higher than the same payment required to own the home. Makes it extremely hard to save to buy a home in cash. So most people will never own a home. If I instead buy a home and make the payments, in 30 years I will own the home. I also doubt in 30 years that it will be worth less than my total payments. Regardless it will still be worth something. if I rent and can save enough I am left with nothing.
Home ownership is a smart move for most people. If we could only get the middlemen out of the biz we would be able to build a healthy and sustainable housing market.
I've added it up and I do better owning. My mortgage payment minus principal ... the "rent" part if you will ... is only a little over half what I'd pay to rent a house this size in this area from someone else. It is more than enough to make up the other differences. And I've owned it only 4 years so the economics will get better over time (more P, less I). Those who don't own their personal infrastructure get nickeled and dimed from those who do. As for prices, yes they fluctuate, but that didn't stop me from buyimg stocks, or a college education, or gold.
That having been said, when I was in my 20s and moving from job to uni to next job, it wouldn't have worked.
Refreshing to hear from a guy who understands amortization rather than the demonization of everything for the sake of sounding like a rebel. Home ownership in my lifetime, now that I have it fully paid for, has been great. The wife and I get tons of daily utility from the house and land, and the taxes (while admittadly reprehensible) are a small price to pay for the wonderful lifestyle we are blessed to enjoy.
so provided your rates don't go sky high and the taxes don't either, you're good to go.
Good thing you have full control over that and if you were concerned you could get gone with all your property to a better locale before everyone else.
Oh wait... no you have no fucking control over that and you definitely won't be first for the exits if your area magically turns into another Detroit in a month.
So... SMRT?
A house is not a home and vise versa---only a woman would think that a house is a home and that's who pushes for house ownership-- aka debt till you die--
All a guy needs is a piece of undeveloped --a trailer with a big porch and a big garage--and only so he can save and store tools and other goods and maybe some PM--maybe a fruit tree or some chickens and a dog --a shotgun and a hunting rifle --you know important stuff. Go to town in his 20 yr old pickup to get laid and hang at the watering hole for a beer and to shoot some pool every so often-- maybe take a job once in a while and save your benny bucks for a windmill or solar hot water---grow some corn--make some whiskey -- just saying.
The asset class is real estate, debt, leveraged, undiversified, illiquid.
But of a $4,000/month payment, maybe half of that is the investment proper, the other half is fixed living costs you have to pay to someone anyway. Thus your real cost to invest in a $1,000,000 property is actually cut in half, plus you get the benefit of living in it - though at some increased variable costs as well, including nasty property taxes under variable costs.
If anything I've been guilty of being too conservative and "rational" about (not) diving into the real estate market, but my analysis after the fact is usually that it comes out pretty close after all. So, really, not a lot of people are making that big a mistake, if it's a mistake at all. That is if they can actually make the payments.
At any rational valuation of land, labor, and materials, how in the cornbread hell could a house cost 1 million?
In Los Angeles and other major cities, a million bucks is a 1500 square foot condo in a nice neighborhood, or an 1800 square foot house built in 1947 in an overcrowded but mostly safe secondary neighborhood or a 2400 square foot house built in 1960 thirty miles of bad road from work.
Thank you Bernanke, Chinese money, and Berkshire Hathaway.
And nice weather.
now they tell me. strange how just the opposite was shoved down all our throats as my generation was coming of age in their 20's & 30's ....... the propoganda then was that we all had to buy houses & make families ! how i wish i'd been smarter back then, i just blindly followed the crowd, pouring a fortune into "home & family life." if i had back all the money i spent on "home & hearth" & had just bought gold with that money, i'd be one of the wealthiest people ever. now, i'm sitting here with a run down house, grown up ingrate kids who hate me & a huge property tax bill. WHAT A WASTE OF A LIFE! SHOULDA WOULDA COULDA JUST BOUGHT GOLD.
I feel your pain lynnybee. The missus and I spent our inheritance on a "green" home in a market that never caught the vision (we built in 2001), so much for being a visionary. Add to that the 2008 crash and I'm now (with the addition of O-care...Thanks Obimbo!) guaranteed to have to work 'til I drop. Best I may hope for is to change markets, northeast to flyover, and hope my grandkids will stop by on the way to their life.
Oh, and lest I forgrt, FUK U ben!
Homeownership up here <coastal maine> is much more than just a building. It is the cornerstone in a full range of production activites. We produce our own water, our own fuel <wood>, and our own food. Large gardens and greenhouse are almost constantly in produuction even in this climate.
The building we live in was ownerbuilt 35 years ago and has never had a mortgage on it. Small solar saltbox that burns 4 cords of hardwood in even the worst winter Maine can throw at us. We control our own fuel supply. Taxes are $750 this year.
This all alows us to pick and choose what we want to do in our relations with the external economy.
I wonder what 100 million EBT card zombies with a bottle of mustard and a 12 pack of Bid Light in the refrigerator would say to this.
The ability to take a piss anywhere around your property is a very nice benefit of living in the country. Right behind that is the ability to shoot a gun and burn a fire. Been doing that for the past 10yrs without one complaint. Unless you count the wife telling me I am such a redneck.
The bankers have too much power to inflate and deflate the value of your property. Your dwelling should NOT be used as a casino chip. It's a shame that Thomas Jefferson didn't follow Locke fully. Life, Liberty and ESTATE.
I'm more familiar with the life, liberty, and property, long popular in Virginia writings.
On weekends I pursue pussy. My estate is probably what they are pursuing.;)
Who really cares what whomever wrote this article thinks? What a waste of time reading just part of it.
Really. Stupidist. Blogpost. Ever.
In the immortal words of Mr. Hankey (the Christmas Poo), if you don't lke it you can suck my tiny little balls.
Damn I like the fight club and the freedom to quote Mr. Hankey!
Spoken like a true homeowner. Man this story really brought out the sacred cow among ZH readers!
"MOVE IN OR MISS OUT"
-Says Lennar home builders.
http://www.lennar.com/New-Homes/Maryland/Baltimore/Promo/MDHLEN_Move_In_...
You have unitl March 30th to make a life altering decision. Don't miss out, lol.
I beat the system. My wife and I are full time mobile. Have a nice fifth-wheel with a full office in the back, pulled by a luxury Dodge Ram 3500 one ton dualie. We moved out of California and made Nevada our domicile state. Registered there with the DMV using a trailer park as our address. Have a PO Box that forwards our mail to us whenever we need/want it. Dissolved our Calif corps and created new Nevada corps (no more state income tax for us). No longer locked into one geographical position.
We can be anywhere we need to be for business opportunities. My wife visits her clients regularly (which they love) I go to whatever area is hot real estate wise (I'm a real estate investor). We visit with friends and family often. We go to lots of seminars and workshops all over the country. We take our breaks by staying at National Forests and State Parks all over the country. Or we just pull up to a friend or family member's house and hook up and stay for as long as we want. On traveling to long distance destinations we just pull over at a Flying J or a Walmart or whatever and shut down for a good night sleep, wake up, have a nice breakfast, and we're on our way.
ALL of our expenses (and I mean ALL) are paid by our businesses and are all deductible (trailer, tow vehicle, fuel, maintenance, towing, food, trailer parks, tolls, restaurants, motels/hotels, etc. etc.)
No money thrown away on down payment on a home (riskiest money investment there is); or commissions and escrow costs; no property tax; no home maintenance and repair costs; no time spent on upkeep; no reason to spend money on all the "stuff" you think you need when you live in a house; etc. etc.
This is the good life. The simple life. The streamlined life. Not tied down by lots of possessions. Have everything we need. Lots of fun. Business profits double and triple due to being 100% mobile and flexible. And, nobody knows where you are unless you want them to know.
"Have a nice fifth-wheel with a full office in the back, pulled by a luxury Dodge Ram 3500 one ton dualie."
Sounds like a plan for sometime after I retire. We also have a fifth wheel camper (2005 Terry Quantum 285 RLS) and while not a dually, our 2500 Ram SLT Cummins/6 speed manual has no problems hauling the camper. We also have four other vehicles (all paid for, including MY 2500 Dodge SLT/Laramie). Oh, we also are "burdened" by 45 acres, home, barns, outbuildings, etc - but all paid for. Yeah, I guess that you could say we are tied down by lots of (paid off) possessions.
I'd love to buy a new Ram Longhorn Edition - but they are wayyyyy past what a sane person would spend on a truck to haul cattle, hay, tractors or the camper. Besides, them rascals are making them only for girls now - can't get a manual transmission if you wanted too!
nomads don't need fixed home sites, those who raise kids very well might want a fixed home site. keeping up with mcmansions and vacation time shares/homes, not for most. buy a modest good bones home, improve it as needs/comfort demand. pay it off, and expenses drop over time to well below rental rates. you then have options such as equity loans, and reverse mort. had the advantages of your own property vs rentals with it's limits to lifestyle. could be a good investment, or a better lifestyle than rentals..if single or no children couples the benefits are less to home ownership, and for nomads there are none to home ownership. A home is a place to live..buying a home as an investment is secondary for most.
If you dont "buy" a home, how do you ever get to realize the thrill of a reverse mortgage later in life? ;)
Umm, landlords suck.
so smart & so right i can't believe it's on zh
Woa now buddy hold up there; I disagree.
See here is how you do it. You get a mortgage to buy a house. Then you take out a second mortgage on that house and buy stocks to diversify. But wait, there is more; you use the guaranteed returns from the market to pay back principal plus interest on your mortgages and then you buy a boat.
Its free money AND a free house.
For best results I suggest buying futures, spoos are making a strong bottom in the latest dip, perfect time to get in and that way you get the most bang for your borrowed buck.
Don't just take my word for it, here is an article telling you why this is a genius plan that has basically zero risk.
http://www.benzinga.com/trading-ideas/long-ideas/14/03/4386875/3-reasons...
Now I know what you are thinking. "But that is terribly irrisponsible and dangerously reckless of you to lever up so much other peoples money!"
That may be true however here in 'merrica we reward those who are irresponsible, not those that live responsibly and within their means. Those nerds are punished with crippling taxes, fees and regulation. If the whole housing scheme doesn't work out you can just walk away from it, uncle sam has your back on the debt and the worst that can happen is you come out where you are now with no house plus a terrible credit score but add in a nice new obamaphone, free healthcare and EBT card I think it is pretty much a wash.
I'll buy that for a dollar!!
But what about if you buy homes to let them out? Which is really popular here in the UK amongst the baby boom generation who already have their own freehold properties.
People renting are essentially paying someone elses mortgage.
As Kyosaki has pointed out you need to find the renters so if you buy in an area that will soon be too poor for jobs & wages you'll be the sucker as landlord while the renters will already be in & what they touch they control no matter the name attached. Until you can get them out & get someone else in who can pay, or guard the property from being stripped like it was just down the road/dune from Batertown.
You take on huge risk with huge costs so if you're not clever those risks will bite your balls off.
this must be high school week at zh. interest rates go up because inflation goes up because the economy is growing(in a traditional decentralized economy). property values go up when inflation goes up. rising interest rates does not mean home values fall. in an environment where the threat of inflation is real the owner of a house has some rent control in his favor in the form of a set monthly payment for the life of a loan while a renter will see significant increases in monthly payments reflecting inflation. the renter's payments after 30 years reflect present value. after the mortgage is paid the homeowner's nut is only taxes and insurance.
from a risk view, using the parameters in the article, the best time take such a risk is when you are young. it is much easier to recover from a bankruptcy at 30 than at 60. it has also been said that the first 100 grand is the hardest to get. with a bit of savvy, balls and sweat it is not hard to find a home with a lot of untapped equity that can be exploited with some sweat equity that can be parlayed into another opportunity which eventually can be parlayed into a wealth machine.
Well, after they stopped sending me my stock certificates, I was at a loss. I was going to use the newest pile of them to build me an addition to my "portfolio house". You know, since the "stawk market" has outperfromed every other "asset class"...
What a loaded article. Full of misconceptions.
I bought a place I could pay off early - way early. Yes, I pay property taxes, but since I chose a modest dwelling, keep all but 2 acres of my 45 under agricultural production, and chose a reasonable county is a reasonable state (Texas), I pay less than $975 in TOTAL property taxes.
So, if I choose to sell in 10 or 15 years, I will be able to "make money" from the sale. By paying off early (less than 5 years for everything), and counting all I have paid into it for taxes, etc. - I guarantee you that I will have more money in my pocket than those of you who espouse renting a shelter that you can be tossed out of if someone offers the landlord more money for.
Lesson is: buy within your means. Pay off early if you cannot pay cash. Live totally debt free after that.
I guess since you have to pay income taxes, you should stop working too?
Stop reporting, anyhow, as in barter. You pay what you can't avoid paying but the rest you produce non-cash receive non-cash & report nothing.
because mortgage interest is deducted as the cost of doing business for leveraged purchasing of housing ( whether it's your personal housing loan interest, or the loan interest on billions of dollars of leveraged housing portfolios ) ------
the expense of interest is deducted either against yoru personal income, or business income.
furthermore your property taxes offset your personal income tax.
but you rent isn't deductible all.
the system is ALL about taxtation. stack the incentives in favor of certain outcomes by shifting the tax burden to one group--and the other shall thrive. or to put another way, if you get to deduct the cost of X against your taxes , you are recieving a tax subsidy for X.
what is X?
the most stacked deck is in favor of people borrowing money. if you borrow the govenment is actually subsidizing your borrowing at the expense of those who don't like using borrowed money.
if you own your own home with borrowed money you are recieving the most aid.
if you own your own home free and clear and you are not using a home equity loan to leverage yourself up , you are getting the short end of the stick.
if you rent you are being punished the most out of anyone as you pay highest relative tax.
the price structure is set up that the rent you pay ensures the relative cost for someone to drive up the price of your house using DEBT, not outright cash transactions------is worthwhile.
this is how a society becomes deeply deeply indebted, while bankers continue to issue buckets of debt that get socialized onto the public through GSE's and govenrment guarantees and insurance.
the FIRE economy, Finance Insurance, Real Estate-----is a stacked deck of tax burden shifting and laws that were changed to encourage the issuance and taking on of debt ---for the banks benefit, and by the public.
the entire pricing system is a result of these stacked incentives operating year after year for decades.
renting is NOT a good idea. it is like fighting the fed. you are swimming against the tax incentive structure. then again, the article brings up the obvious points being that the stacked deck isn't really stacked in the favor of you owning a home so much as punishing people for not borrowing money to buy homes.
that whole 7000 dollar first time home owners tax credit in 08-09 ----did you forget that?
sort of unreal when you look back at the obama give aways. this all started with Lyndon B Johnson before it got to Reagan. and now? the FIRE economy is about to set the peasanty on fire like in Greece and Spain.
Again---don't fight the flow.
in Canada rent is definitely deductible.
Rent or own? Well, are you a Mr/Ms fix it? Do you want to put time in or not. It's a life style choice.
While I agree with the overall premise. The fact is, there is large government support for the ownership of homes and as the saying goes "once a economic statistic is considered valubable it becomes managed". The price of the median home is a statistic which the government attempts to manage and inflate. Getting access to levered returns of a managed statistic can produce value for holders of those assets. I do not disagree with your premise that property taxes can be adjusted to reduce the quality of an investment asset but I think your case study of Greece is a little off as in Greece its pretty much a national past time to avoid paying taxes and the way they can ensure tax collection is to collect on where people live. I think in the US that the tax man has a wide enough reach to avoid having to rape the home owners ( but that is conjecture and could change). I simply think that with the advanatages homes provide that it is worth owning one, even if it is as a rental rather than one which is to be lived in. I think there is value in renting a home given the need of flexibility into todays labor markets to be able to move to a location with a better paying job but I do not think leveraged owning of homes is the end of the world. Especially given the fact that in many markets homes can be purchased at below replacement costs. I do not think buying <any> home is necessarily a good investment but I think there are viable homes to be purchased. It is a real asset which provides some protection against inflation and several tax benefits as well. There are homes in certain areas withoutt potentially catastrophic natural disasters to worryabout which can provide solid cash on cash yields even if you are paying a note on the property.
Like Tyler said, "the things you own end up owning you." But if you still want in, stay away until the real bottom is hit.
Let me see if I got this straight. You sit down at the closing table and pay three times the presumed value of a house, by signing a promissory note, which the bankster deposits as a negotiable instrument in your name, creates the funds out of thin air, and you also agree to pay AGAIN for the next thirty years to some bankster’s servicing company while the banksters sell the cash flows to investors and separates the Deed from the Note, clouding the title which you will never see or ever get, even if you pay it off.
Also, you agree to mow the lawn, fix the toilets, reroof and paint the place, and pay taxes to the county because you decided to give the property to them by recording the deed in the county records, and twenty years down the road you hope that some stupider sucker comes down the pike and does the same thing and pays you full value for your possessionary rights?
Oh ok, makes perfect sense.
When you ask if housing has bottomed out and moving up, my answer would have to be, I don't know, and either do they. However I can state several things without reservation. Calling the home buying we have seen in both the new and existing markets "pent up demand" may be a stretch.
Many houses still remain empty or under leased, this means the occupants are not fulfilling their obligations. With population growth slowing, values changing, and slightly more occupants per home, less houses will be needed. Some of what we are currently witnessing is a repositioning and refinancing at historically low rates. More on why you should not rush to buy in the article below.
http://brucewilds.blogspot.com/2013/01/has-housing-bottomed.html
Unless I missed it, you forgot one huge nasty fact. To illustrate, let's assume you made what most people would call a BRILLIANT purchase.
year 00: You buy a home.
year 30: You pay off your home.
year 40: You sell your home [and retire].
Let's say you are one of the "real-estate geniuses" and thus purchased your home for $100,000 and sold it 30 years later for $300,000. Brilliant! Right?
Not so much.
In those 30 years, the value of a dollar is probably 1/3 or 1/4 or less compared to when you purchased the home. Therefore, the $300,000 you receive for the home is LESS VALUE than you paid for the home. Your investment LOST value.
But wait. We're not finished yet. Or to be more precise, the predators are not finished with you yet. Even though the value of the dollar fell to 1/3 or 1/4 the original value, the predators-DBA-governments claim you realized $200,000 profit on the home when you sold it. And so, you must pay them something like $50,000 in taxes (not counting real-estate agents [on both ends], real-estate taxes, HOA fees for 30 years, maintenance and so forth).
Therefore, you not only LOST on the investment, you got raped several times by the various predators and predators-that-be (RE agents, banksters (doc/closing/other fees, etc). And not in trivial amounts, either!
I will allow home advocates to claw back a bit from my calculations. They would have paid something to rent during the years they lived in the home, so go ahead and account for that.
Oh, but if you demand fairness, remember to be fully fair. When you buy a $100,000 home on a conventional 30 year mortgage (at historically average mortgage rates), you pay TRIPLE the selling cost. So that $100,000 home you ACTUALLY paid $300,000 for... which means you didn't even earn a profit in NOMINAL dollars, yet you still got raped for gains.
-----
But the most ENORMOUS loss is utterly hidden. What is this hidden loss? The very fact of setting up these fiat, fake, fraud, fiction, fantasy, fractional-reserve debt-scams that make it possible for everyone to "buy" a home for 0% to 20% down, MASSIVELY increases the selling prices of homes.
When people can buy products that they can't even come CLOSE to affording, the sellers can set prices insanely high --- and still sell those products. They can, because most people are morons, and are easily manipulated by advertising and endless "certified professionals" telling them "this is how it should be" and "they're fools not to buy into their schemes".
As a consequence, most people pay 8 to 12 times as much for a home than they would if there was NO fiat and NO funky [industry or government] schemes implemented to manipulate the market. If homes were purchased when homes could be afforded, homes would cost 8 to 12 times LESS.
This probably sounds crazy to most people, but it is not, and is easily demonstrated. I will just point out a couple aspects of the situation to show these [8x to 12x] estimates are reasonable and accurate. To begin with there is a factor of 3x just for mortgage interest (at historically average rates). Then there is roughly a 2x factor for excess markup that exists strictly because people are willing to pay just about any price for a home they can get a loan to buy. Together, that's 6x already! The rest of the reasons make up the difference.
Which should make any honest individual think a bit. Hmmm. If I could buy an average home for 10x less, what would life look like? Here are some examples.
First, if you pay for 30 years, but you pay 10x more, that means you could buy a home with cash in 3 years. Yeah, you must wait those 3 years, be frugal, and save. However, so much changes when prices are 10x cheaper! For example, parents (of husband and wife) would likely buy a house for their kids when they go married. They could afford to do that - because the home would amount to 1.5 years savings for each --- within plausibility.
And how about life in such a world? Let's see now. NO mortgage payments! Hmmm. Since they are the largest outflow of cash every month, how would life be if ALL that money was freed up --- for 30+ years --- for other purchases? Answer: everyone would live a MUCH richer life, and the economy would BOOM (because a HUGE quantity of money that was sucked up by mortgage payments is now available to purchase ALL OTHER PRODUCTS).
One huge problem today is this. The world that WOULD exist without blatant manipulation via fiat debt systems and predators-DBA-government is so far removed from the everyday world people live in... that they don't even imagine how huge the difference would be.
I'll gladly -1 your posts.
Unless you're sensible & honest.
+1
You can't write about the personal finance aspects of home ownership without writing about the biggest advantage - you pay off a fixed rate loan with depreciating dollars that depreciate faster as inflation increases. It's how people made money with their homes in the 70s. By failing to mention this, the author shows himself to have an agenda, to be uninformed, to be deliberately obfuscatory, or all three.
That's assuming inflation continues which is not a foregone conclusion. Debt really sucks during deflation, which is why you should also hedge against deflation and not be too leveraged (diversify).
That's assuming inflation continues which is not a foregone conclusion. Debt really sucks during deflation, which is why you should also hedge against deflation and not be too leveraged (diversify).
The author is a moron and should clearly be ignored.
A. what makes the housing market unstable is central banks and nothing else. They screw it up for everyone except thei owners.
B. Why pay rent to someone else when you can pay it to yourself? Rent is a guaranteed negative investment. It disappears every month never to return.
C. If over the course of the mortgage you can get a guaranteed return greater than the rate of mortgage interest you are paying on the house then the tax benefit does not outweigh return on the money you could get elsewhere... but in a free market, this has typically not been the case.
D. On the average housing prices keep up with inflation. Many other investments do not.
Clearly the idiot author is trying to discourage one of the best investment people can make. Why? Is it because the author understand that the Fed through its policies have made home ownership risky or is it more likely that the author wants to encourage renting for the benefit of Blackrock and other hedge funds.
It's like you didn't even see what happened to home "investing" in the last 10 years. So, how did you lose your eyesight, construction accident? Do you use text-to-speech apps to read zerohedge?
"Rent is a guaranteed negative investment."
Strange, when I pay my rent I've never considered it to be an 'investment'. I consider it to be a 'cost of living'.
Homeowners giving all the low ratings...
I live in the UK and we have an obsession with property ownership that apart from London and certain slect areas is unravelling very quickly.
Back in the 1970s, you used to be able to claim tax releif on your mortgage interest (MIRAS) and then in the mid 1980s and for the next 20 years the amount you could borrow was gradually increased from 3 x the main earners salary to 6 x joint salaries for a typical family. When they removed MIRAS and the property market crashed in 1992. It took years for people to escpae negative equity. Then in the 200s we had anothe rproperty bubble deliberatley pumped up by the Brown/Blair governemnts and the Bank of England (the former BoE Governor Eddie George admitted they did it deliberatley just before he died).
Then we had the Financial Crisis and hosue price sbegan falling. Then we had QE and that pumped them up again in London because that is where hot global money went and where financial services salaries continued rising. Prices of houses continued falling in teh rest of the UK.
I lived through all this and did exactly as the author of this article says. Invested in a diversified portfolio of stocks in an PEP/ISA account ( tax free wrapper like a 401k) and rented for 30 years right from student days.
I moved often for work and avoided paying Stamp Duty (tax on purchase price) and insurance and maintenence for all those years. My friends all bought houses younger but like the author says all forget the years of paying interest and other costs. I bought at a good price last year using a discounted cashflow model takig account of rent offset against costs of ownership and future inflation. I bought to protect myself aganst inflation in a part of my portfolio for when I can no longer work. I bought as a pure financial decision. I dont expect to make a great deal our of my house as an investment return. It is a hedge, low risk, and unleveraged as I bought with cash.
Truth is baby boomer generation 'got lucky' buying houses on massive leverage and they expect a younger generation to fund their retirement and pay for their healthcare and still buy their houses off them at top of market prices so they can down size and go on holidays, Well good luck with that one!
Young people would be idiots to buy houses now. Especially in London. Not that they can actually afford to do so given the income multiples. Only oligarchs and hot money buys houses in London now and even that is comoing to an end.
Baby boomers were possibly tools used to induce us into the concept of 'good debt' ( what else are you going to sell a mob who are sick of war - prosperous debt! Its wierd how the entire developed worlds H/H debt started simultaneously increasing in the early 90's or thereabouts.
One could argue for hours but I suspect the "got lucky" generation was by design and for the profit of a few - all these over priced homes and debts... pop!! With little backing for greater pops and misdirected blame, as global legislation keeps challenging our banks accounts (bail-ins), pursuing global taxes (the hunt for anything not nailed down inc the IMF focus on immovable property tax hikes and 10% new wealth tax), the constant balloons floating the super/retirement fund theft into PPP infrastructure...etc.
Then we hit the increasing likelihood of the USD loss of global currency status which will not be pretty for national and personal debt obligations nor "asset" valuations on a national nor personal level on every front.
You can't lose buying properdeeeee!
Cash payment for a house is a bit unrealistic, but I don't see the problem with 20-30% down on a 15 year mortgage. Convincing anyone to go beyond that requires a federal reserve and Presidents on pulpits speaking of home ownership.
People used to view housing as an expense. People that bought houses paid them off quickly, at the latest before they retired. The reason was to have low cost housing during their retirement years. Smart. Sensible.
Today people are urged to lever up on housing because "it's an investment you can live in", "housing only goes up in price", "it's your safest investment", "people will always need a place to live", "buy now - prices are rising fast", "everyone at my income level has a big house", yadda yadda yadda.
Good luck with that. At least Lawrence Yun will be happy.
Thirty Years a Slave
End the Fed
I've rented a long time.
I'm paying on a house.
Much prefer the house.
Can't listen to my music at volume or hobby on the drums in an aparment. Lawn mowing, fents building, and concrete work are great exercise.
As Francois said in his follow up -
http://liberta.co.za/blog/the-fallacy-of-homeownership-part-2/
it has to be good to own a house -- Pres Bush said so and even gave govt encouragement so everyone, especially the low income group, can own the American Dream!
http://www.youtube.com/watch?v=kNqQx7sjoS8
Ouch!