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The Fallacy of Homeownership – Why Do People Believe The Myth?
Submitted by liberta blog,
In our previous article we explained why buying a house is often a very silly financial decision, especially for people who are young, or those that have a low net worth.
In this article we're going to explain why we think people are so infatuated with the idea of buying and owning a house, even though, if you look a the facts, it goes against many of the investment principles they believe in and hold dear.
But first, I need to address one of the myths about buying residential property...
Myth #1: Buying a house is a way to beat inflation
The theory is:
It is worth borrowing a huge amount of money to purchase a house because, not only will your property appreciate in value over time, your loan amount will also decrease in value in record time, partly because you are paying off a bit of your loan every month and partly because inflation eats away at the value of the amount you still owe!
And it is true – borrowing R1,000,000 to buy a house may seem like a scary amount right now, but a few years later, R1,000,000 will be considered a small amount of money.
If you would like to see just how effectively inflation destroys the value of money over time, plug a few numbers into the inflation calculator and see for yourself.
I have to admit: this theory makes for a very convincing argument.
But it is not.
The elephant in the room
The hole in the buying-a-house-is-a-way-to-beat-inflation-theory is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.
If you take out a loan, you pay more in interest to the bank, than you gain through the devaluation of the amount outstanding on your loan due to the effects of inflation.
The only real winner in this equation is the bank who was kind enough to grant you a loan to buy your property.
And when I say winner, I really mean it, because not only is the bank earning an above inflation return on the money they lend to you, they also create the money they lend to you, right there on the spot, out of thin air.
If I had to behave like a bank and you were a customer to whom I was granting a home loan, it would be pretty much the same as if I had a printing press in my basement, where I would quickly print up R1,000,000 in counterfeit currency to lend to you, make you sign a contract with dire consequences to yourself should you ever miss a loan payment and then, to make sure I get the best deal possible, charge you an above inflation interest rate on the counterfeit money I lend to you.
If you or I behave like this, it is called a scam and, of course, it is illegal.
When banks behave like this, it is called fractional reserve lending and, whether you like it or not, it is perfectly legal.
The wonders of fractional reserve banking
I know what you’re thinking.
But this is no conspiracy.
The fact that commercial banks create money when they grant loans is not a secret.
Not at all.
In fact, commercial banks create over 90% of all the money that circulates in our economy. It is just the way the system works.
If anything is suspicious, it is the fact that everybody uses money, but almost no-one understands where the money they use comes from.
How to make money from a Residential Property Boom
Once you understand the way the system works, you’ll understand that one of the best ways to make money out of a residential property boom is not to invest in residential property, but to invest in commercial banks that grant loans to people who buy residential properties.
During a residential property boom, banks are creating massive amounts of money out of thin air and lending it out, with interest, to many many customers who are lining up to buy the rapidly appreciating residential property.
If you own a part of the banking action, you can make a lot of money while the boom lasts.
There is only one problem with this approach: like all good parties, it eventually comes to an end and, the next day, you wake up with a massive hangover.
Booms usually lead to bubbles, and bubbles eventually pop. When bubbles burst , the very same banks who were raking in record profits just a few months prior to the bubble bursting are all suddenly bankrupt. A good example is the 2008/2009 housing bubble collapse.
But have no fear.
There is an even better way to make money out of a residential property boom, with just about zero risk:
At the start of a housing boom, find a job with a commercial bank and negotiate your salary in such a way that your bonus is linked to the profits the bank makes on residential property loans.
Trust me. It’s a slam-dunk.
So, who is spreading the propaganda?
This is pure speculation, but since bankers are the main beneficiaries of the fractional reserve banking system, I won’t be at all surprised if they are also the main players responsible for spreading propaganda about the home ownership myth I have attempted to debunk with these articles.
And if you’re a banker, who better to get on your side than the government?
Much has been written about the way politics work (especially in America), how lobbying costs money and how big business is the main contributor to political campaigns, so I’m not going to add my own thoughts here.
What I will say is this: if these concepts are new to you, perhaps it’s worth re-reading this article one more time. Perhaps click on some of the links and watch the youtube videos to make sure you understand everything.
Then, if you just want to feel patriotic and inspired, take a look at the video below. I’m sure you’ll love it. It nearly drove me to tears. Heart wrenching stuff.
Over to you
When, after many years of being an investor, I finally figured out how the monetary and banking systems work, it massively changed my perspective on investing.
Since the money we use is something that affects everybody on a daily basis, I find it astounding that so very few people understand where money comes from. I encourage you to do your own research. Reach your own conclusions.
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Most people buy a home as a means of having a place to call their own. They can have a dog or dogs. They can decorate it the way they want. Even painting their walls red if they want. They can plant trees or a garden. They can have complete privacy. Do not like the kitchen you can change it and install another one you do like.
When you rent it is up to the Landlord if you can have a pet or paint a wall or plant a tree or garden. The Landlord can come in whenever they please with notice, so you have no privacy.
Plus, when you buy a home to live in you do have an implied rental value vs the mortgage payment. Rents increase and with a fixed mortage your payment basically stay the same.
It probably is more about freedom to do what you want with your own property and your lifestyle. Rather than looking at it as an investment.
Uhh, this crap again?
His first article was, "Hey everyone! Pay rent for 20 years while you save up to pay cash for a house! Yeah, who knows what the hell houses will cost. But maybe they will be like, really cheap! You'll only be 50 or 60 by then, so you'll still have plenty of time to left to live in it!"
Now his advice is, "Everybody! At the start of a housing boom, go find a job with a commercial bank and negotiate your salary in such a way that your bonus is linked to the profits the bank makes on residential property loans! Just tell them you want all the phat real estate monies! They will like totally give it to you!!"
Fucking brilliant.
Someone's gotta own property. Might as well be me.
The average rent on a home in the area I am looking in is $2200 per month. I can buy most of the homes for $1300 a month or less. Owning a home makes sense, other than the fact jobs don't last and you need to be able to move at the drop of a hat.
That is why rents are nearly double the mortgage. People are willing to overpay just so they can leave if they have to.
With that much different between renting and buying, you would have no trouble selling your home if you had to leave. And don't forget, for-sale-by-owner is an alternative that can save 6% to 10% in transaction costs. Works real well if you have friends or relatives who "will" be staying in the area and can watch over your property for a fee.
The idea that a home is an investment is what brought us the NAR and the boom bust property market.
A home is a place to live, not something to make money on.
An apartment is a place to hate living and a place to waste money on.
How does paying rent help you stay ahead of inflation?
You need to live someplace -
I would rather live around people that are homeowners -
Even if it cost a little more it would be worth it to own -
Not at current inflated asking prices of resale housing.
bought house in 1998 for 168k. Property taxes 6300 a year. From that the illegals get government school educations as my kids have been grown and gone now for 12 plus years. I also pay for the pensions of county sheriff, librarians, park police, city workers, firemen cops etc. House now worth 164K so near as I can tell I have been paying for a depreciating property for 16 years and the retirement pensions of all of the above workers. Oh, two pool liners, one roof, basement waterproofing, new three sided privacy fence etc, etc, paint, carpet windows doors. Illinois,, land of the slaves. Have a nice day.
Yeah, serfdoms have made a surprise comeback.
If you were renting, your landlord would be paying all that, right? And just where do you think he gets the money to be paying all that? From you, of course!
Wrong.
Landlord expenses are never automatic passthrough.
+ 90k property taxes
I'd rather live at the whim of a landlord, always raising my rent (which is twice what I could pay for a mortgage where I live), dragging his feet ot fix thibgs, etc. Yeah, buying a home might be a scam, but at least you are you the landlord.
Rental rates are falling my friend.
Like there's anywhere rational and safe to park your money these days.
I'm guessing people in Detroit who bought a house 30 years ago didnt do so well. Specific asset in one location bought with leverage exposed to one local economy. Its a big bet on a lot of factors going right. Inflation and tax breaks mean the boomer generation got lucky. The next generation will not be so lucky when deflation kicks in. Owning a home on a mortage which is the typical middle class thng to do will become a nigtmare and then default will be the only and most sensible option for most people.
I bought my first house (in the UK) just last year when I was 50 years old. My retirement home not an investment. I have no debts of any kind. I bought at a deep discount, in fact the same price as the previous owner paid 10 years ago. Not such a good investment for her. I break even compared to rent once I take into account my very low cash rate of return on bonds.
it's a stupid article. Home ownership makes sense for some people and not for others. We bought our home in 2001. Our mortgage payment is $550 a month. It would cost $750 a month to rent it today. Therefore, we're money just from that standpoint. Besides the fact that eventually we won't have mortgage payments anymore.
Does your mortgage include taxes?
Nice math.
Now include all the other expenses and you'll find renting is far less costly.
Owning a home really has to do with freedom to live the way you want and the freedom to do what you want.
We all like the freedom to customize the property to our liking. Put in a new kitchen with cabinets you like. Install carpet that you like. Paint walls with the color you like. Have a dog or a cat or both.
You do not have to ask permission from anyone to change your home or what you want to do with your home. Tear out a wall, add an addition. Ok, no problem.
With a Landlord your options to customize your home are limited. Plus, those pesky rent increases every year are worrysome. Then if your Landlord wants the property back or wants to sell it you have to leave. Even if you do not want to move.
If you want that kind of freedom, buy a rural (unincorporated) unimproved acreage with so many trees people can't even see you. You don't get that kind of freedom from buying in a subdivision any more than you do by renting. They call it deed restrictions and homeowners association busybodies.
Renting, assuming you don't have enough cash to buy a place outright, really has to do with the freedom to live the way you want and not be shackled to a bank, city, county, state nor take on any unnecessary large risks.
We all like the freedom to quickly change one's living quarters. Much better job offer in an entirely different location? Local gov't decides *you* are going to cough up the budget shortfall? Next parcel's neighbors going hogwildcrazy twice a week?
Quit your place with a month's notice, if you made it over the initial 12 months.
Plus, never pay for repairs on normal use.
Paying a grossly inflated price for what is always a depreciating asset, in this case a house, never results in "freedom". It leads to a lifetime of debt slavery.
Article author is retarded and probably poor. Buying is almost always more cost effective than renting. The people who bought their house 20 years ago are still paying $200/month for their mortgage. Idiots who chose to rent are paying $2000/month to live in a house of similar value.
The people saying you should rent houses are the same stupid people who lease cars.
You are right and the author is "uninformed", about leverage, compounding, taxes and higher concepts like inflation premium which all work well on the upside which is when you sell speculative Re and cash out. That's probably a new concept to this naif.
You forgot the sarc tag.
WRONG.
Rental rates are half the cost of buying at current grossly inflated asking prices.
A "home" is a place to live; those who believe homes are investments are kidding themselves...as many homeowners found out here recently.
That's true but as long as people DO profit then they will see it as an investment. There are people who have meddled with housing for decades and made insane money. Not saying its as it should be but the money was and is real.
A single family residence is never profitable.
The way I look at it you can either rent or lease, but you never really own your property.
Landlords are such nice people because they choose to rent the house out for less than the cost of ownership. We need more tax cuts for the 1% to make up for their gift to us.
Why do many people believe the myth?
"after many years of being an investor, I finally figured out how the monetary and banking systems work"
How many myths are there, which are continually propagandized into our heads?
Flawed article. The economics of owning a house involve many more quantitative variables (taxes and mortage deductions, for example), but even more lifestyle preferences. There are people that don't mind moving often, while others love to own the place where they live.
Hi rayban. Are you the rayban123 from #Activetrader? If so, it's me tulsa52. :)
I know people who have made a lot of money buying old homes to live in, fixing them up, and selling them for a profit and moving every few years.
The article is stupid.
Not at current grossly inflated asking prices of resale housing.
Check out The Hidden Secrets of Money, now that really tells you what's going on, especially episode 4.
Bankster fucks.
if you know how banking and finance work then you should have money in real estate with maxed out financing. the 4% rate i have on my mortgage is effectively less than inflation, especially after the mortgage interest tax break. this means every month i make money on my mortgage.
what people don't understand about real estate for investment is where and what to buy. that requires analysis not one in 100 can understand even though it is relatively simple. most of the problem is an inability to understand concepts derived from a set of objective variables and an inability to control emotions.
yes, on the whole almost all people should stay away from buying a home for an investment because they are not able to buy a home as an investment but they should buy a home for the financial stability it provides in terms of a relatively fixed cost over a long period of time in an inflationary monetary system.
Paying a grossly inflated price doesn't lead to "financial stability". It leads to instability. And when it's financed, it leads to a lifetime of losses.
Another money losing article from ZH. If you would like to increase your net worth, do the OPPOSITE of these ZH knowledge nuggets... forget the VIX, Bitcoins, shorting the market, dumping treasuries, over commitment to commodities, etc. SOME ownership of gold is the only exception to the constant barrage of goofball-ism that is ZH.
I wonder how much money has been collectively lost by the followers of Marc Faber, Mish Shedlock, Charles Hugh Smith, etc. Doomster porn will get you nowhere.
Thank you Hank Paulson
If I ever buy a house again, I will pay cash for it. I will buy a small fixer upper and make it my own and fuck the bank. Until then, I will let my landlord take al the risk.
If you have an expectation of rising home prices, you have to live in an area that has an expectation of rising wages and or rising populations. Then you have to ask yourself where are these rising populations coming from? Typically in the U.S. for the past 40-50 years population growth has come from Africa and more recently from Latin America and Mexico.
There are so many cities in the U.S. that have declining population and rising property taxes. doh
You forgot, buy the smallest house on the block and location, location, location.
"Location" is just another failed realtor marketing scam.
Not so, there are things to consider. Front door facing east, cul-de-sac or dead ends, privacy, security, views, schools, you now this, why would you say something so untrue?
Rubbish.
Location is a worn out realtor market term to get you to pay far more than the house is worth.
Remember.... houses are depreciating assets.
I am really surprised by how many comments are calling for inflation in housing. I am gunning for just the opposite. Im not buying again until I can get half a block for a hundred grand. If I am dead wrong then I guess I will be a perpetual renter.
If you get kicked out of rental houses often enough, because the flippers want to resell you current abode, then you'll know why people believe in owning their own home!!!
True. Which is why a camper and truck somewhere with palm trees as a home base is tempting. If there registered in the right states no property taxes. Ending up in a worthless house that has expensive maintenence, taxes etc is no fun either, especially if your income becomes unsteady at some point over thirty years, then it was all for naught anyway.
The state or city can boot you out of your "own" house just as fast using eminent domain to flip the property for their use. It's not "yours" if you have no way to stop this and you always pay rent (tax) on it (forever)
Jus sayin' that if you rent, you can get up and leave whenever you need to. In economic downturns it isn't a bad idea to travel light and not be tied down to paying a home loan in a down market. I paid cash for my house and even though I have made many renovations, comps are steadily selling at lower prices in my area.
-12% last year and already -6% this year.
Developers should be bankrupt if it wasn't for the FED mandate to maintain REITS and prevent commercial RE FAILS. You know developers are bullish and only look at lower left to upper right charts even though shit is collapsing all around them.
Owning is way better than renting in most situations.
Here's one more example of how this article is dead wrong: We bought our home for cash in June '06, at the peak of the bubble. It's a small home so we're only out around $50-60 grand, plus another $25 grand in property taxes ... and $10,000 in upkeep. However, if we had paid 1,400+ in rent for a similar house in this area we'd have paid out $135 grand in rent, which is now closer to $1,600/mo for a similar sq ft home, or $20,000/year. We could've taken a chance on some investment opportunity instead and made some dough or lost some dough but ya gotta live somewhere, as they say. And the place we're in is in nice shape, everything in order, unlike most of the sloppy-looking rentals around here.
Nonsense.
You bought a rapidly depreciating house at the peak of a bubble. You're screwed.
Maybe you live in a luxurious condo or townhouse that is on the high end of town, with a door man and come clout. But average people tend to want to put as much space between them and the people who live around them as possible. Add a high fence, and when you get home from the jungle, you can enjoy the privacy of your home and yard, knowing that nofuckingbody is going to be walking up the sidewalk for more than a question, "would you like to buy a box of Girl Scout cookies?" Going into the back yard and standing on a piece of land that I own, along with the trees and flowers and structure raises my self esteem, I relax and rest which is what is required in this jungle called a developed nation.
One of the few things Denninger got right was insisting that housing is a durable consumer good and not an investment.
When I pay off my home, it will cost 350.00 to live here (tax/insurance) in California. I have 90 grand to go and 30 years. I don't know why anyone would be mobile after age of 55. Moving is expensive and stressful. Staying in a community where one knows each other just makes sense. Buying a home and putting down roots has always been a goal for as long as I can remember. Moving every year is for college kids.
"I don't know why anyone would be mobile after age of 55."
Let's say you move into a nice conservative state like, say, Virginia - and 10 years on it turns into a neo-Soviet Republic.
THAT is why you want to be mobile. Because if you aren't, you're forced to take whatever shit they force-feed you.
I've owned homes for 40 years till last year. Now rent. I stripped the value out at almost every turn to raise a family for just as long. Damn kids never leave. As long as prices rise it works, but there are years and years you are underwater, thats the nature of home ownership, it's scary. Today homes are not nearly as affordable so obviously they cannot and will not enjoy the same increases of the past 40 years.
Prices are coming down again and so are rents. Stay strong through the tough years and it may work out, but this is a top and no one will convince me otherwise.
My new landlord keeps my place tip top or he knows I'm gone. Try that owning a home when the kids need braces and you have a leaky roof.
I pay less than 1/2 now of what my home used to cost up on the hill where the upper class live. My neighbors are cool and I save cash and buy GOLD Bitchez.
What about us that own our houses outright? You think we are still on the losing end? Even if I rented the cheapest place I could find I couldn't live for less per month than I pay for my taxes/insurance monthly.
Probably would depend on your priorities in life now. You've done well.
My uncle did well, no wife or kids, saved, lived cheap till he retired from an auto plant after 32 years then croaked with a pretty big stash a couple years into retirement.
Hit the bucket list while you can and count your blessing while giving thanks. You'll be fine :)
Nice math.
Now include depreciation and you'll find renting is a mere fraction of your carrying costs.
What's the life expectancy now of the crap they build today?
About the same as the crap they built yesterday.
While there are many myths,the way taxes, interest, rent, etc is structured, owning generally turns out better.
Take the interest, the loss/gain of value, the property taxes, the upkeep, and so on and divide it over the long time using it and it's generally going to come out cheaper than renting. You have to live somewhere.
Also remember rent goes up every year, interest costs go down on a fixed mortgage.
Even those of us who have gotten burned, it wouldn't have been cheaper renting the same amount of space. Easier maybe, but not cheaper.
Nonsense.
Rental rates are a mere fraction of the cost of buying at current grossly inflated asking prices of resale housing.
Not when taking into consideration the interest, tax, insurance write offs. Having a home provides privacy because a crazy landlord is equivalent to being stalked.
This economy is staged to do exactly what it is doing, squeezing every cent of equity out of the middle class, staged to by cyclical, crash, burn, buy, sell (the last sale will be to them).
The dogs...the hundreds and thousands of dogs which have been given up due to this Ponzi scheme called a housing industry is just heartbreaking. I am a rescuer of lost dogs and the SPCA is overflowing with high end dogs which are as nice as a dog you could hope your dog could be. The old ones are so depressed, they can hardly find the energy to hold up their ears. Broken spirited dogs is something new in my career as a dog rescuer.
You boys and girls who try to figure this out are wasting your time. Until you throw the bankers into a high security prison, along with some other white shirts in castles, the goal to gain control over the currency will continue. Getting their ducks in a row has required flexibility but the fact is, these people have devastated millions of good people, and their dogs, lives with no regard, starving babies don't move these pricks.
This is a heist, not a policy.
Remember that myth the guru's used to say, buy as much house as you can afford?
I just broke that myth, I can live with less bedrooms and a smaller pad. One less garage stall. Saves me bank.
sounds like a myth to me. To live where I do as an owner I'd need 4x to 10x my income. To live as a renter I don't.
It's that simple. It's cheaper.
"Also remember rent goes up every year, interest costs go down on a fixed mortgage."
Incorrect.
Interest can go the wrong way very fast and a fixed mortgage may run out just in time for you to be hit with a renewal or forced sale, and rent can be forced by law to stop rising or rise only at 2% or something, as it is where I live.
Remember..... Housing depreciates rapidly.
I watched the Bush youtube speech. Would it be any different if Bush was in front of a teleprompter and had darker skin and changed his name to Obama? There is absolutely no difference between the two parties.
.....
Accumulate 30k, have a rsp that gain 3 or maby 5% a year on it.
Buy a house, loan 240k. Inflation give you 4% on it value.
Think, you would have pay more or less the same for your rent.
Forget the bank and all...
Think again.
Answer: you would eat rock with your rsp even compond and adding each year but with a house you can borrow back on the value that worth triple from start. Or just sell it after 5 years and cash the difference.
So much drama around here...
Have a rsp...
getting the jump on the rv market.
fuck homeowning. I don't need much space. I can get up and go when I want.
well i have a home and i have rented and i think renting an apt is cheaper in the long run
in my area no heating bills or water bills for the renter...
rent can be any where from 500 to 2000 a month.
pisses me off that i got a 6000 dollar bill from the city dept because of a sidewalk and street improvements they made on my block.
Never wanted this project yet i have to pay.
they aren't getting my money\no fucking way !!!!!!!
will go back to renting
homeownership is overrated.... as far as i am concerned.
The author of this article is writing from South Africa and the amounts are in terms of South African Rand.
In Africa interest rates on loans for houses are above 15% on average, and inflation averages 11%.
The math that makes sense in SA will not make the same sense in the USA where interest rates have been under 8% and inflation under 5% for the past two decades.
That being said - in the USA I advised friends to simply save into silver instead of going into debt for a house. My friend started doing this in 2006. After the financial crash in 2008, his silver had doubled in value, and he was able to buy a distressed house and four acres in cash using only half of the silver he had saved.
So, if there are assets that hold value or appreciate, the best way is to rent, and save into that asset until the value of your asset is enough to buy real estate outright with cash.
Fractional reserve banking creates real estate bubbles that eventually pop. Granted, that may only happen once in a generation. So the effectiveness of various home ownership strategies depend heavily on where you begin in that 40 year cycle.
My parents made out pretty well from 1980 to 2008 taking 30 year mortgages on houses, and rolling them into a new house when they moved. But for anyone starting on that strategy after 2000 the result has been disaster as the housing bubble burst.
One way to guage how close a given economy is to a real estate crash is to look at the percentage of homes that are mortgaged, and look at the total percentage of homes that are owned by the occupant versus rented.
The higher the percentage of mortgaged homes, the more likely the market is overleveraged.
In 2008, when the bubble burst, a significant percentage of Americans had a second home mortgaged as an "investment". This was a flag for "irrational exuberance".
In the long run, the author of this article is right. Borrowing at interest is only profitable if the investment gives a cash flow return greater than the interest and expenses. Most businesses make a profit margin of 5-15%.
Once the American mortgage debt system has truly reset, the value of real estate will be substantially lower than it is now. Once that bottom has been reached, mortgage might be a reasonable investment again.
The sign that the bottom has been reached will be mortgages resetting to 3 or 7 year periods, and interest rates rising above 10%. Until that happens we are still in the middle of the great real estate ponzi scheme.
life's all about circumstances.
Timing.
Location.
Social ranking on the totem pole.
We're, unfortunately, under the fat woma. And she's about to blow.
what?
Inflation is over 8% and interest rates below 2%.
Check the actual numbers again, measured, not reported by the Fed or BLS.