This post began with a snarky reply I sent to blog advertiser and mortgage lender Josh Mettle. He did a refinance for me a few years ago and I've been on his email and mailing list since. He sends out a nice newsletter every so often. My snarky reply was mostly just pointing out that everything he sends me is always unabashedly pro-home buying. It didn't help that his email showed up while I was still licking the wounds of losing money on the place I bought in 2006 and had sold a couple of weeks prior to getting the email. But it caused me to reflect a bit on The American Dream. Wikipedia says this about the topic:
The American Dream is a national ethos of the United States, the set of ideals (Democracy, Rights, Liberty, Opportunity, and Equality) in which freedom includes the opportunity for prosperity and success, and an upward social mobility for the family and children, achieved through hard work in a society with few barriers….The meaning of the “American Dream” has changed over the course of history, and includes both personal components (such as home ownership and upward mobility) and a global vision.
The American Dream
I got to wondering about how homeownership ever became connected to the American Dream, but at some point, it certainly did. In fact, some have argued that homeownership is what separates the poor from the middle class. Merrill Lynch says 84% of Americans agree homeownership is part of the American Dream. However, a more recent survey by the American Institute of CPAs says homeownership was the top indicator of financial success for only 11%. 28% felt enough money to retire was most important, and 23% said providing their children with debt-free college was most important. Home ownership is now at a 20 year low, while rental rates have risen to a 30 year high.
I'm 40 years and have been married for nearly 17 years. We have bought three homes and sold two in that time period. Using the retrospectoscope, only with this third one have we been better off owning instead of renting (and the jury is still out since we haven't yet sold it.) I'm having a hard time squaring this idea of homeownership being this awesome American Dream when it has treated us so poorly. I mean, take a look at this graphic Josh sent me in his newsletter:
The message is pretty clear- if you just owned your home you'd be rich and be spending way less of your income on housing. Of course, correlation is not causation. In reality, homeowners have more money and spend less of it on housing because they make and save more money, not because they own a home.
Better Off Owning Or Renting?
The real question, which neither this graphic nor any newsletter I've ever received from a lender or realtor has answered, is what percentage of home purchasers would have been better off if they had rented instead. A quick Google search finds this article, which states the percentage is 50%. That seems about right to me. I mean, think about all the people who would have been better off renting:
- People whose houses depreciated
- People whose houses didn't appreciate at a rate sufficient to overcome the transaction costs
- People who expect to move in less than 3-5 years or so
- People who end up moving unexpectedly in less than 3-5 years or so due to:
- Lost job
- Divorce
- Kids
- Ill parent
- Bad job
- People whose alternative investments would have made more money than their home equity did during the period of home ownership
- People who have a hard time selling their house (how many months of extra mortgage payments will it take to eat up all the benefits you saw in 5 years of homeownership?)
Unfortunately, there are several entire industries who continue to push the idea of homeownership- banks/lenders, title companies, realtors etc. I don't blame them; they're only pursuing their own self-interest like the rest of us. But there is no counterbalancing message out there. And most first-time (and second-time, and maybe even third-time) buyers are swallowing the message hook, line, and sinker. There's a lot of money behind the message. I mean, just consider the realtor industry. The average home buyer stays 13 years. The average home is about $280K. There are 123 Million households in the US and something like 62% of them own. The typical realtor commission is 6%. So, 123M*0.62*280000*.06/13= about $100 Billion dollars per year in realtor commissions. How much money is that? Well, it's about 1/6th of the national defense budget. It's about 7 times my state government's budget. And we're not even talking about the other industries promoting homeownership. Or the government. Homeownership might be good for society, but that doesn't necessarily mean it is good for your finances.
Brief Side Note
On a side note, if you want to make a lot of money, I suggest you get into an industry where you “handle the money.” Small percentages of huge amounts of money quickly add up to a pretty good income. That means fields like sales, asset management, lending, and real estate. And unlike some entrepreneurial pursuits where you have to come up with a new product and a method of marketing it, these industries are ready made for the entrepreneurial type. You don't have to have anything new to be a real estate investor; just do what other successful investors do. Part of the reason for this blog's financial success is it deals with subjects where there is a universal need and with industries that have a lot of money sloshing around in them. It's not that hard to add a little value and get your piece of the pie. Looked at my ads lately? There's a common theme. Financial advisors, insurance agents, real estate, mortgages etc. Now, back to the subject at hand.
Forced Savings Is A Weak Argument
Some home-buying advocates like to say that a house is a way to force people to save money. They point out that many people won't save any money they aren't forced to save so at the end of the day, at least homeowners will have something. They might have to reverse mortgage it in order to pay their retirement expenses, but at least there is something there. I find that argument just as weak with regards to home buying as when it is used to justify buying whole life insurance. 80% of whole life purchasers surrender their policies prior to death. And plenty of homeowners get foreclosed on, or suck all the home equity out to pay for toys, vacations, and living expenses. At any rate, it's a particularly weak argument for anyone reading this site. Hopefully, you all will retire with many multiples of the value of your home.
Cost of Housing Goes Down With Time?
One of the reasons I've always liked the idea of homeownership is that over time inflation rises (along with rents) but your mortgage payment stays the same. However, the more I think about that, the weaker I think it is. First, all of your costs except your mortgage (taxes, repairs, maintenance, insurance etc) rise over time right along with inflation. Second, there is an opportunity cost to having that money tied up in home equity. Imagine a paid off home. Let's say it is worth $600K and can be rented for $3000 per month. It has non-mortgage expenses of $1000 per month. So the real benefit of having your $600K tied up in that home is to save you $2000 a month, or $24K a year. What kind of a return do you need on that money to get $24K a year? About 4%. Reasonable, but certainly nothing special. Certainly the expected returns on riskier, long-term investments like stocks and real estate investments are higher than that. In reality, as the value of that home goes up, the cost of your housing doesn't go down. It keeps going up due to the opportunity cost.
Homeownership Still The Right Move Lots of the Time
Of course, homeownership is still the right move much of the time. The last thing I want to happen is for readers to think I always think homeownership is a bad idea. If you're in a stable job and a stable living situation, then buy a home and you'll likely come out ahead. There are also non-financial benefits. You can't be evicted by your landlord. You can paint the walls any color you like. You get the “pride of homeownership” and a piece of the “American Dream.” Your cash flow situation is better, at least once the mortgage is paid off, but probably even before. And, of course, real estate investors aren't losing money. If they are going to be successful, they have to charge more in rent than they are paying in expenses over the long term. But at least take a few minutes, run the numbers, and think long and hard before committing to such a huge purchase. The transaction costs are huge (round trip is ~15% of the value of the home, i.e. 75% of your 20% downpayment “investment.”) The opportunity costs of the home equity are also not insignificant. Finally, the risk that something happens in your life that will cause you to sell before you thought you would is almost surely higher than you think.
You can consider yourself financially successful even if you don't own your home. In fact, there are probably even times when you would be better off using your downpayment to buy an investment property instead of the home you're living in! Sometimes it is easier to hold an investment property for a longer-term than your residence. Plus, you're much more likely to look at it from an investment perspective when there isn't the emotional aspects of “home” tied up in the decision. There is also the natural tendency to buy more home than you would rent, simply because you envision it as being a much more permanent situation, even though many times, it isn't. The end result being that you consume more of your income with housing.
Business Ownership?
Maybe the American Dream should be owning a business. Why not? It's just as much a symbol of wealth and status as homeownership. I don't care if that business is shares of publicly traded businesses (i.e. stocks), a privately owned business, or even a real estate business. That's all your home really is anyway. You just get to be your own landlord. At least you know the tenants won't destroy the place.
If after all that, you decide that buying a home is right for you, check out these WCI partners:
What do you think? What percentage of homebuyers do you think would have been better off renting over the time period they own their home? How do you decide whether to buy or to rent at any given time? What do you think about homeownership being part of the “American Dream?” Comment below!
Marketing has without a doubt played a role in promoting not only home ownership, but the possession and consumption of goods in general as being key to the American Dream. Over the decades, our homes have gotten much bigger, our storage much fuller, but we’re not any happier.
The housing bubble wasn’t kind to us, and some people are still trying to get out from underwater because they took out home equity loans against their increasing home value right up until the bubble burst. I’m happy to be a homeowner, but I can understand why many people have cold feet. Renting is the right choice for many, as you explained.
The constant need for maintenance frequently makes me wish I did not own a house! I guess if I were a “handy” type and could fix the toilet in my powder room that is leaking as we speak I would feel differently.
Yes, the upkeep and maintenance is just horrible on homes. I’m able to do a decent number of things myself (many thanks to youtube – thanks people who post fix-it videos!). And I still just hate all the time and money it takes… the lawn, staining the deck, the plants, change the furnace filters, cleaning, etc. All of it sucks.
And I realize you can outsource a lot of those things… your money or your life…. but that makes the cost of homeownership even worse.
And I realize when you rent there are still things you have to do, clean vaccum, change a light bulb, etc.
Basically.. doing stuff sucks, yet there is rarely a way out without a ton of money
Im handy capable and it bothers me. In the last two weeks I’ve cut down a tree, had to fix a bunch of sprinklers and plants the fence guys put in, fence off the landscaping, mess with a path on the side, etc..etc…None of it is terribly hard to do, but it takes time and there is almost anything I’d rather be doing.
Having been in an apartment the last couple years before this very modest house, I’ve come to appreciate and question the true value of a home. Really the only thing I can think of is an asset for which you can borrow against at some special time, but that could be had elsewhere Im sure. I’ve also since read many articles like this, some of which went into painstaking detail showing it really doesnt save you much money and you’re probably better off investing it elsewhere.
Something to ponder for sure. Have been thinking about snapping up a cheap condo instead for living, and renting my place, but again, hassles…
If you look at wealth as primarily a generational issue, then home ownership is part of the American dream. Wealth is almost always as generational issue. I know there are exceptions. And I’m not saying becoming a physician is ‘easy’ for anyone – it is a ton of work. But most of us are generationally advantaged. Home ownership / Land ownership or lack thereof has always been one of the primary means of transmitting wealth or poverty to the next generation for most of civilization. While our economy has modernized significantly – we don’t live in our grandparents homes anymore, I would say that if your parents are not wealthy enough to own a home you are well on your way to poverty. If you can’t own a home, then ‘estate management’ is an oxymoron. Now the timing of purchasing, how much to purchase, etc, has to be done carefully to avoid ruin. But if intrinsic in the American Dream is the prospect that your children will be better off than you, then Homeownership is part of the American Dream. Cue Donald Trump.
The more you spend on a house, the less your net worth will be later.
I live in the center of Silicon Valley, where I own a house. I calculated that my costs in buying and owning the house since I bought this house in 2000 ( purchase price, plus interest, taxes, insurance, remodeling costs, but excluding utilities and cleaning ) have precisely equaled the return of the S&P 500 over the same period of time, calculated with a periodic S&P 500 calculator. Interestingly, the cost to rent, my “rental dividend” is about 1.5%, close to the S&P 500 dividend return.
In other words, someone who bought a house in Silicon Valley, where houses appreciate wildly, would have done just as well investing in the S&P 500. Now, my net worth is higher, but only because I don’t own a lower-performing house somewhere else, but all of that money in the house is not available to me to use for retirement, since selling it would cost too much in capital gains. Fortunately, I don’t need that money, but the point is that a house is a net drain on net worth. Own it because you want the space, privacy, and control, but not as an investment. It is an investment, but not a very good one.
Hit the nail on the head on this one. I have been saying this for years now. We liked cutting ties with the homes we owned and renting while we thought about future destinations to settle.
Having little children, I will even disagree with this perk of ownership: ” You just get to be your own landlord. At least you know the tenants won’t destroy the place.”
Had to read that last paragraph twice, and then started laughing. “not me” put another hole in the wall at our house. I wish I could catch him…
I have always said that buying a home and paying a mortgage is not an investment. It is a decent store of your wealth. But more than likely you will be far better off renting a smaller place and investing the rest. Maybe a slogan such as “rent smaller and invest the rest”
We bought a place much bigger than what we were renting and in need of some repair. The thinking was that this will be our “forever home.” Although we are ahead on this investment since we bought towards the recent bottom, we would have been far better off just continuing to rent the much smaller place and investing the rest.
On another note, when you are a busy hard working physician, the last thing you want to do is also have to think about making repairs on your home. Life was definitely easier when we were renting.
As a 20 year home owner, in my third and (hopefully) final home for the last 16 years, I have come to the conclusion that owning a home is about choosing a lifestyle. You buy a school district, some potential friends, and space to furnish, decorate, and remodel, mostly as you please.
Interestingly, I made money on my first two home purchases, the first I lived in for two-and-one half years and the second for six months (!), largely by being at the right place at the right time. On the penultimate home, where I currently reside and have been mortgage-free for six years, it would be a small net loss if I sold today.
Maybe that’s why it is hard for people to see that on average buying for 2-3 years isn’t a good idea- because it does work out okay for many, especially if they only compare the purchase and sales price!
I agree with your conclusion about owning a home as a lifestyle choice. But, for us anyway, it is worth it. We had a dream of how we wanted to live while we were mid career and raising kids. It did not preclude saving for retirement which we are not in a rush to reach. Renting in our area did not offer us that lifestyle. Owning does. Over saving to me is as concerning as under saving. Timing matters with kids. You get one opportunity to have that stage with each of them on your life. I think it is fine to spend money to make the lifestyle be what you want.
Absolutely. And buying that lifestyle costs something. This month, it costs $6K for two new garage doors. That’s two months rent for a place like this.
Oh fun. I’ll play. We’ve done garage doors on three different houses over the years. Never my fault unless you count the time I left my sister’s dalmations in the garage with the doggie door to the outside locked;) My point is that it is part of the expense of the lifestyle and should be planned for. My mom, a successful real estate agent, told me to plan on 1-2% of the house value annually for repairs and maintenance. It is advice that served me well and is taken into account in the house we decided if we could afford. We are in a small town and renting a house for our chosen lifestyle is not an option. When those expenses come up, we pay them and since they were projected for, we don’t beat ourselves up about them. Sometimes we even laugh about them. Life happens, especially if dalmatians are involved!
If I could figure out how to limit it to 1-2% a year, that would be great. Replacing all the windows and doors for instance, is something like 12%. That’s 6-12 years worth of improvements. A furnace is 1.5%. Garage doors are 2%. It seems unlikely to me that we’ll ever limit our repairs and improvements to 2% a year.
I completely agree. Sign me up for the 2% plan–I will pay it an advance. Sometimes, it seems like 2% per month!
Didn’t your inspections show those issues prior to buying? We planned our basic repairs and renovation, eventual replacement of HVAC’s, etc. prior to buying. We were sure we got the house at a price that incorporated those big ticket items. After you are in the house for a while and you let go of the idea that it is ever going to be perfect all at once or done, owning gets easier. I think of it like maintaining a chronic illness not curing an acute one. Over time, the years of 12% balance with years that are minimal.
I bought the house 5 1/2 years ago. The garage doors worked fine for 5 years (well, minor issues the last 1 or 2.) What kind of an inspector could have prophesied that?
We were lucky with my mom having our backs. The list of stuff she had us inspect was insane. But since she’s my mom and I don’t want to live with I told you so’s, we did. We had a general inspection, HVAC people, radon, septic people, builders to estimate our initial basic renovation, lead paint inspection, IDK what else. It was 2001 and no one was buying homes in our area so we had plenty of time. The seller negotiated down so far probably just because he got tired of seeing everything that was “wrong” with the house. We actually got to be pretty good friends with him after meeting him at the house for all those inspections. We didn’t give him a list of stuff to fix, though. We just negotiated on price. Our garage doors were so rotted it was easy to know they were on the replacement list. Maybe yours – not so much.
No, mine are metal, but despite multiple service calls from different companies, you now have to push the button 10 times to get them to go up and down and we’re getting sick of it. The total for replacing all the parts will be more than just getting new ones.
I agree with the others that home ownership may not be all that great.
It has worked out well for me. I live in a state where home values are very poorly protected from creditors, so most of my investing is in my 401k. I have been refinancing my home loan every 3-5 years and using the equity to fully fund my 401k, which I would not otherwise be able to afford. This also increases and maintains my leverage on home ownership–potentially making it a good investment (10x leverage turns a 7% return into a nearly 70% return). It also increases tax deduction for mortgage interest. While this also increases down side risks, I plan to stay where I am a long-time. There also aren’t margin calls if I am temporarily underwater.
10X leverage doesn’t turn 7% into 70% when you count the costs of the financing. Maybe 10-15%, but not 70%. Run the math, you’ll see what I mean. That leverage isn’t free.
Thanks for this, I’ll be sharing it. I work with military families all the time, and I am very much against buying a house on active duty. But there is the whole home-buying industry that has people fooled into believing that renting is “throwing money away”.
Many of the military families (who often move frequently) don’t realize:
– that they are not getting much of a tax break, if at all, since they are so lightly taxed in the first place
– that they’ll pay back that “tax break” and then some on depreciation recapture if they rent it out
– how little of their PITI is going towards building equity.
While I agree with you that few military folks should be buying and that the tax break is minimal if it exist at all for military folks, it’s important to realize that everyone’s situation is a little different. For example, a large percentage of my PITI goes toward building equity. I think I’m paying $600 a month in interest and $1900 a month toward principal right now. That’s 4 years into a 15 year 2.75% fixed mortgage, of course.
Yeah, that’s a lot different from where most new military homeowners are at (say E-5 or O-3). It’s more like 25% of PITI is “P” for the first 3 years (30y, 4%, $250k). Median BAH is about $1500.
Lowes’ “Never stop improving” really means never stop spending money. HGTV is the devil or as Ben Stein calls it “the gateway drug of the middle class”.
I agree wholeheartedly! I often joked that HGTV was the root cause of the financial crisis – bidding wars among couples that could barely afford the homes and then incessant improvements. I have been a slave to a home before but have learnt my lesson.
I like how the tax benefit of the mortgage and property taxes weren’t mentioned here. There are millions of people who get virtually no tax benefit for buying a home. If you’re married then you don’t really get any real benefit from interest and property taxes until the purchase price is higher than $300k, so all those people buying under this amount probably are not really benefiting at all from a home purchase, at least benefiting from a tax perspective.
can you explain? I thought anyone itemizing deductions could use this
You can itemize all you want, but there is no payoff unless the itemized deductions are greater than the standard deduction, $12,600. I’ve done the same math as Joshua; depending on where they live, a family might be better off with the standard deduction (not itemizing) if the house is less than about $300k. If so, there is no tax benefit to owning.
What he’s saying is that you get your standard deduction for free. In 2016 if you’re MFJ, that’s $12,600. So your first $12,600 in itemized deductions aren’t worth anything. So if you paid $5K in state taxes, $2K in charity, and $8K in property tax and mortgage interest, the real tax benefit of owning a home is only a $2400 deduction, not an $8K deduction.
Again, that just depends on the individual’s situation. If you’re paying $10-15K in charitable contributions or in state income taxes, then you’re getting a lot of tax benefit from owning. But you’re right that few people actually run the numbers to see just what their benefit is.
Best argument for home ownership is “forced savings” and it is admittedly a weak one and not for the average WCI reader-type, but for those who would otherwise save NOTHING into a 401k or any other vehicle, it has some merit.
Biggest argument against home ownership IMO, is the early career forgoing of savings, investing and paying off debt which can be crippling. Early on, it is also a somewhat irresponsible concentration of one’s net worth into a single investment. In some way not much different than putting 75% of one’s investments into Apple stock.
Exactly, now try running those numbers in one of the 7 states (I am in Florida) with no state income tax and you get no benefit at all. The general sales tax deduction is peanuts but it is better that actually paying state income taxes!
Here are examples of what I am talking about, we’ll assume $750 of charity donations, most people I do taxes for are not over this amount on a consistent basis, especially when it comes to cash contributions. $55,000 for husband and wife, married residents. Again this is in Florida
$200k mortgage at 4% = $8,000 interest
$3,000 property taxes
$750 Charity
$1,160 General sales tax deduction
=$12,910 of itemized deductions – $12,600 = $310 of surplus itemized deduction resulting in a grand tax savings of $77.50, yes seventy-seven dollars! I bet the realtor and mortgage broker probably told them about the great tax savings of home ownership.
New Florida couple making $200k per year
$400k mortgage at 4% = $16,000 interest
Property taxes = $6,000
$1,500 charity
$1,707 general sales tax
=$25,207 Itemized – $12,600 Standard = Surplus itemized of $12,607 or tax benefit of $3,500.
$3,500 isn’t bad but remember you paid $16,000 interest plus $6000 in property taxes to get that tax break. Again, the realtors and mortgage brokers probably would have this couple think they are going to save $10,000 or more in taxes.
I agree. I also think it is sad that someone with a high enough income to pay $22K in mortgage interest and property taxes can’t find a charity or charities they’re willing to support to the tune of more than $750 a year.
“we’ll assume $750 of charity donations, most people I do taxes for are not over this amount on a consistent basis, especially when it comes to cash contributions. ”
Woah. That is paltry. Like eye-popping skewed to nowhere near our reality.
Well, if you’re not tithing to a church them I find most people are under $1000 in charity deductions. A lot of my clients are just starting out of training so they do have quite a lot to accomplish financially.
I would bet that few who aren’t giving early in their career give at a significant rate prior to death.
i’ll let you know in 20-30 years
I think the argument is valid at smaller incomes. But it falls apart at larger incomes/mortgages.
EXAMPLE:
We just purchased our first home, after renting for 14 years (yes, 14 years and over $340,000 spent on rent). We live in a state with no income tax and high property tax, we paid just over $40,000 in mortgage interest and property taxes last year. That results in a considerable tax deduction.
Also, to rent the same caliber of home, we would have to pay at least $3500 per month, or $42,000 per year in rent. So lets compare:
Our current monthly mortgage, insurance, tax payment is $4450 per month, or $53,400 per year. Of that large number, a measly $11,256 is principle, the remaining is spent on m/i/t.
We live in an expensive area of the country (i.e: that’s why the mortgage is so large) and the real estate market is still going bonkers. This an indirect way saying that I consider that $11,256 spent on principle as equity/savings. (Yes, the housing market could crash, but that won’t happen will it? 😉 My wife and I saw the “Big Short” movie last week – recommended if you haven’t already seen it)
Annual Numbers:
$53,400 annual m/i/t payment – $11,256 in principle = $42,144 cost to live in the house ~ $42,000 for rent (aka: cost to live in the house).
BUT, I also get a $40,000 deduction which probably pays for all the maintenance and upkeep on the house/property plus any improvements.
For us it is a no brainer. Is owning a home our “American Dream” – not a chance, but it is way better than renting.
What’s my dream you ask? I don’t know for sure, but operating a blog that makes $450K a year while truly helping others isn’t out of the question is it?
I’m trying to figure out what state has no income tax but an expensive housing market. Seattle?
At any rate, don’t beat yourself up about paying $340K in rent. If you had owned a home like your current home for 14 years you would have paid $560K in interest, and that doesn’t count property taxes, upgrades, maintenance etc. There is an ongoing cost to having a roof over your head, and that doesn’t go away whether you rent or own. Rent payments are no more wasted than mortgage interest and property taxes and roof replacements.
“what state has no income tax but an expensive housing market. Seattle?”
Yes, the state of Seattle… https://www.youtube.com/watch?v=lj3iNxZ8Dww
What would I do without you?
There is no state income tax in Florida but the housing markets in Miami and parts of Tampa are pretty expensive if you want to live in a part of town with good public schools.
Honored to be your real estate whooping boy I am.
For the record, there is a whole chapter in my book titled The Rent vs. Buy Conundrum, where I point out that if you have a short runway, you are likely better off renting than buying. I totally agree with you, if you have a 3 to 4 year runway, you are LIKELY better off renting than buying.
The reason I am pro real estate, has more to do with the wealth I have seen it create, than anything else.
I have seen real estate investments fund retirements and become multi-generational wealth transfer vehicles for my great grandparents, my grandparents and my mother. I don’t have a rich family, my grandfather’s father died when he was 11, he was born in the heart of the depression and with nothing more than a high school degree and a lot of 12 days, ended up accumulating and passing on an 8 figure inheritance to his kids. How did he do this? He invested every penny he saved into real estate and eventually built a 90 unit apartment building.
So please be clear, I’m not a real estate evangelist because I want to earn an extra commission. I’m pro real estate because I’ve personally not seen anything as powerful in creating multi-generational wealth and income.
To me, the “American Dream” equals liberty. Liberty to me, is being able to do what you want, when you want, without asking mother may I. As long as I don’t hurt you, I can do whatever I deem reasonable or enjoyable to raise my family and live my life as I see fit. You lose some of that when you rent.
Personally, if I want to grow a vegetable garden, if I want to put in a pool, if I want to rip out the backyard and put in a fire pit with a built in BBQ because my son and I dream it up and we think it’s “cool”, I want that liberty, I don’t want to have to ask mother may I to any landlord.
So YES, owning a home is part of the American Dream to me. It’s a dream to live on my terms and as I see fit. Of course owning your own business is also a part of the American Dream, as I could see that creating a lot of liberty in your life, maybe more.
I know your 2006 investment left a very sour taste in your mouth. But you learned a lot. You learned not to buy in certain areas, you learned not to buy into euphoria, you painfully learned that long distance land-lording is not for you. I’m assuming that loss in 2015 was fairly well timed and helped out on the tax bill due in 45 days. Expensive yes, but you gained a wealth of knowledge from that loss, which could arguably save you a considerable amount down the road, as you are less likely to repeat any of those same mistakes. I know my best lessons have very high price tags and I’m grateful for all of them, and what they have taught me.
I can virtually guarantee a well-placed real estate investment in 2016 would turn out very different. Let me share a few reasons why.
1. Mortgage delinquencies are at decade low levels. Mortgage loans around the country are performing at an incredibly high level.
2. Mortgage loan quality has NEVER been so high. Getting a mortgage loan is much tougher today, much more documentation and less people being able to qualify, but those who do REALLY qualify and their loans are performing. They also have considerable skin in the game.
3. Household formations are trending higher than new construction is currently keeping up with.
4. Nationally there is only about a 4 month supply of homes, which is a significant shortage, equilibrium is around 6 months.
5. Rental rates are climbing at record rates and vacancies are incredibly low.
These 5 factors, along with pretty low unemployment and a relatively healthy US economy will fuel home appreciation between now and 2020.
Personally, I’m a buyer of real estate right now. My goal is to buy at least 10 units this year, I just closed on a nice duplex and am actively looking to add to my holdings this year.
Steve Harney and I just recorded an excellent podcast on where he feels the real estate market is headed, would invite any of your listeners whom are considering buying or real estate to listen to it here: https://itunes.apple.com/us/podcast/physician-financial-success/id840402872?mt=2
Thanks for allowing me to respectfully share my thoughts.
You’re always welcome to share your thoughts Josh, you know that. And don’t take any of this personally. I’m indicting your entire industry and several others. Whether those industries are “pushing” real estate to boost their income or because they are true believers (I assure you the whole life insurance industry is mostly composed of true believers) really doesn’t matter to those who make poor choices because of it.
I don’t know if you were sending out newsletters in 2005-2008, but it might be interesting to see what you were saying then if you still have them around somewhere.
Not personal at all, I’m passionate as are you and I respect you deeply for it. I know your interests are generally akin to those of your readers and you do a great job. Thanks for allowing me a platform to express my thoughts and beliefs. A little piece of liberty you’ve provided me with here.
I actually started writing articles and newsletters around the time the market crashed, I started urging people to buy in 2009/2010 as I recall. I might have been a bit early…
I don’t know, buying in 2010 worked out great for me! Selling in 2010 on the other hand….
Let’s not confuse “owning a home” (perpetual negative cashflow until sold) with real estate investing (wealth generating assets). Most people here probably understand the difference, but the vast majority of people arguing about whether it’s better to buy or rent absolutely do not.
A residential home is easily the oddest duck in the personal finance pond. It has negative cashflow, but can be readily financed on a thirty year note with 0-20% down. Any increase in value comes solely from appreciation, but the transaction costs of buying & selling are significant. Mortage interest and taxes might be deductible, but every penny spent on improvements is a sunk cost until the property is sold. Perhaps forever depending on the quality of your bookkeeping. On the fourth or fifth hand, most people won’t pay any taxes on the appreciation.
It’s not even clear whether it’s better to own a fully paid off home, low interest mortgage or never buy in the first place. Compare those features with buying a cashflow positive business (including rental real estate or commercial investment properties) and it really is a bizzarro financial product.
I stopped using math for “Should I buy a home?” years ago when talking with people. 😉
Here is an economist resource I have used in the past to help in decision making. He makes the point that this is purely money considerations and don’t account for the intangibles. Maybe this will help out others.
https://www.khanacademy.org/economics-finance-domain/core-finance/housing/renting-v-buying
It’s a good thing in general to constantly reevaluate dogma and conventional wisdom. The intense emphasis on homeownership that started in the 1980s and continued until 2008 was irrationally enthusiastic, and I think its great that new generations of people are looking harder at the facts and coming away with a more nuanced view. Its no coincidence that many of these questioning people are also non-Baby Boomers who suffered the most from the real estate bubble. Not to get too political, but I think the same dynamic explains why old and young voters seem to be coming from completely different places in the electorate – there was a pre-bust economy where an older generation did quite well and a post-bust economy where a younger generation is finding some headwind to emulating their parents, and the reevaluation of the economics of homeownership (and car ownership and vacationing and so on…) are part of that divide. For myself, I’ve thought about ways renting might make more sense in my future, such as transitioning to renting for an early retirement to avoid unexpected large expenses and not have to worry so much about the time and effort ownership requires.
This is one of my favorite posts from one of my favorite bloggers. There are a lot of factors to consider!
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
I am so happy you wrote this article! It gets rid of some of the ‘guilt’ I have been made to feel by others of not owning a home. I did own a home for six years which I sold three years ago and have decided that it was not worth it and I now really enjoy renting. I have seen friends who bought a home and had to leave after 2-3 years due to a change of jobs or circumstances. Some stay in a lousy job situation because they cannot sell. I feel so mobile now that I am renting because I may not want to stay in this town for more than five years – especially as my kids are growing up and my first is going off to college. I am certain they will not return to live in this area. While I rent, I am saving like crazy, investing in index funds on Vanguard and I am about to invest in an apartment complex (not my first rental property). When I do buy a home, it will be downsized as my kids are growing up and I could easily afford a significant down payment if not buy it cash. Home ownership is overrated and it ties up a lot of money that you could otherwise be investing. Life circumstances change and I know in a few years, I will not need or want a 600K or large house.
I think it’s important to find a balance. While there are clearly circumstances where buying does not make sense, there are also plenty of circumstances where it does. The problem is the industry makes it seem like it (almost?) always makes sense and you can’t get wealthy without buying. Obviously, your story shows that isn’t true.
I love this example by HDMD. Cool headed thinking – renting for self to meet own needs, and buying rentals if it makes sense for investment. First example of its kind.
I think this is largely regionally dependent. We live in a city with a huge fraction of obligatory renters – college students and low income families. The monthly rental rates are 50-100% higher than 30 year mortgage payments. Our home is about 25 years old, but we’ve had to put very little into maintenance or repairs so far. Wife’s company has a lender they work with which gives out 95% LTV w/ no PMI, so very little in terms of opportunity costs (which for us is higher interest rate student loan payments). It’s not exactly a hot market, so I don’t anticipate much increased value when we sell. Assuming we sell for the same price and 8% transaction costs on buying and selling side, we’re still only looking at ~$300 a month amortized over the amount of time we plan to stay here.
That said, if we could have rented for the same price as the mortage, I would have jumped on it;
Give me financial freedom or give me death.
I think the spirit of the American Dream is bigger than one object like a home. It is the sense that there is the freedom in America to choose your dream, work toward it, and with persistence it is at least possible. The image of America has been broadcast to the world and there have been many examples of people living their dreams and many after encouraged to do the same.
The possibility of home ownership is just one example for many people who traversed the ocean for something greater than their existence in their native land. The idea of buying a home or renting is the choice that we have but at least we have the choice. The strategy of which is better for accumulation of wealth is the subheading of this post. I agree that Home Ownership is not exactly the American Dream but it may be for some people and apparently stable at ~64%. It was less than 50% before 1900’s and even less during the late 1930’s crash. After WW2 when mortgage financing changed there was an increase in home ownership and since the 1960’s the rate has been steady at over 60%. I’m sure the question in those days was not whether buying or renting was a better option especially when they had limited access to the stock market. Today we have more options than ever to accumulate wealth and our talents and knowledge may dictate how effective we are at generating wealth than the vehicles themselves.
Or better for an individuals or family’s well being? Wealth is not the only criteria for owning your home or renting it.
I think this superior article falls under the category, “Some will, some won’t”. People with very limited incomes who may fall into calamity over a sink disposer going bad, should not buy a home. But then, they are financially precarious, anyway. I agree with the gentleman above who said he has seen MANY financial “kingdoms” built on real estate. My grandmother, who made 10 cents an hour as a seamstress in a factory, squirreled her money and died with a significant estate due to real estate. Other family members are likewise, early retired due to real estate. For myself, 4 yrs ago put attention on real estate and combined with a great appreciation, strong market and a real love of figuring it out, I increased my portfolio by millions. In 4 years. I could never have done that with the stock market.
Physicians are super busy people. That is one thing against real estate investment. And you are truly sitting ducks for every scam man. But one part of my retirement plan was to have a paid off, renovated home so I could minimize that 2% unexpected costs.
Financial security is one reason to own a home. In my area, the largest reason to buy is that rents have gone up 30% or so in a handful of years and are predicted to continue the rise. Affordable housing is a huge huge issue here. By freezing your house payment, you are insuring against that ( wonder how much that Silicon Valley rent has gone up?). However, MANY areas of the country are fairly stagnant for real estate. Buying in those areas is another animal.
Lastly, I think if a physician is not going to “live like a resident” for a few years (which I HEARTILY RECOMMEND), buying a VERY inexpensive condo and paying off in 2 years is another way to accomplish that mission. Then, find a great renter, move out and let the renter make your school loan payments. Just one way to solve the problem and would depend upon housing prices and rental prices in your area. Another way is to buy a duplex and rent one side. Rents will go up with inflation, but your payment will be frozen. It usually won’t make your entire house payment, but will offset it a lot, providing funds to pay down loans and fund retirement.
I also agree that the loss incurred on the sale of one of your 3 investment properties was just what I call a learning curve. I have run into no one in real estate who doesn’t have some sour or middling investments when first starting. But the rewards can be tremendous.
How is someone who makes $200-300K and owes $200-300K in student loans going to pay off a condo in 2 years without living like a resident?
Yes the dream is that in the US we have opportunity. Not a perfect one, not without bias but mostly better that other countries. It is not having a large and expensive house, a large and expensive car, or other material goods. After all many value their positive impact on society more than money and stuff.
Here’s a question for you all. Should I buy a home?
Situation: I am a MS3, and due to a windfall inheritance my wife and I will be able to leave medical school debt free (Thanks WCI for some solid advice as I was thinking about what to do with this windfall years ago.). We are a family of 4 + dog, and are currently living in a 2 BR duplex, renting at $1,300/month, which is a steal in this PNW city.
However, I’m looking at a 4-5 year residency (depending on whether or not I do a fellowship). My wife works at a nurse and currently makes $60k working part time. I suspect she will continue that gig through residency. Combined income should be about $120k. I estimate that we will leave medical school with roughly $55k, but only about $25 that isn’t in retirement accounts. I think it would take us 9-12 months to accrue a decent downpayment. Assuming I do a fellowship, that means we’ll be in the house for at least 4 years, but probably not longer.
I must admit, I’m not crazy about paying taxes on my home. My current rent is probably covering only about 1/2 of the taxes for this duplex. Hopefully the landlord has owned for a while. However, my family has expanded, and a 3 BR would be more ideal (not to mention more space, the 4 of us + dog live in 700 sq ft!). I think to rent a decent 3 BR in a decent neighborhood in most major cities west of the Rockies would make a mortgage payment look pretty attractive. (Not to mention, I think that we would be pretty happy to not be tenants anymore.)
So what say you, WCI folks? Should we save up for a house 9-12 months after we relocate to our residency/fellowship city, or should we take on a +$2.2k monthly rental and tell ourselves that we’ve got the better deal?
Thanks as always.
You won’t know if you got the better deal until it’s all over. My general rule is rent during residency, but that doesn’t mean no one ever came out ahead buying. I’m not hearing anything that makes you an exception to the general rule, but when you get numbers to compare, take a look at the NYT Buy vs Rent calculator.
Equating home ownership with “The American Dream” certainly got a big lift when Fannie Mae was established in 1938. Fannie Mae’s slogan for a time was “We’re building the American Dream.” I guess it makes sense they just found office space at 11600 American Dream Way, Reston, VA.
My other favorite financial etymology is the 1-3x month salary “rule” for buying an engagement ring. Hardly anyone gave diamond rings before De Beers starting promoting that message around the same time Fannie Mae was created. Killer marketing strategy for them.
Personal finance needs something as catchy as “A Diamond is Forever.”