Why You Should Never Buy a Home Again
jamesaltucher.com
jamesaltucher.com
However, the title here on HN makes it sound like the author is suggesting nobody ever buy a home again — probably not his intent. Sure, there are numerous reasons for not buying a home just as there are numerous reasons for buying a home — it depends on your situation.
I can personally relate to some of the author's arguments. Having rented out the house I bought 5 years ago while I'm living abroad, I'm essentially paying a 2nd rent to make up the difference between what I'm getting from my renter and the sum of my mortgage, taxes and homeowner's insurance.
To me, there is a difference between saying: "From my personal experience, when my friends ask my advice, I present them these reasons for not buying a house," and: "Nobody should ever buy a house."
If nobody bought a house, who would we rent from?
Update: fixed spelling
James is saying: don't buy a home and make it your primary residence. He is fine with buying real estate (homes, condos, apartment buildings, REITs, etc) as investment properties.
An added interpretation of mine: he assumes that you would have a property management company take care of the landlord duties for you. In the case of REITs, it's really hands off.
Sources:
By the way, this is going to sound like a contradiction: but I think housing is a great investment right now. I think housing prices have gone down far enough and I can list the reasons why housing as an abstract investment concept is going to go higher from here.
- from the linked article
Rather than spend $100-200k+ on a down payment for a house (which is like throwing money away since it is completely illiquid as long as you own the house) you can put that money in a portfolio of diversified REITS (REZ is an ETF of residential REITs, for instance) if you truly believe in housing. You can do it with some leverage as well if you believe in the idea (like 90% of Americans do) that you should leverage up 200% the single largest investment in your portfolio (your house).
- from http://www.jamesaltucher.com/2010/02/never-own-a-home-again/
The first point I would make is that unless you're independently wealthy, you're either going to be renting housing or renting money. All else equal, thirty years later you'll own some money or you'll own some property, respectively. The trick is in the "all else equal" part, because given rent versus price ratios, interest rates, and inflation expectations one or the other may be a far better deal.
Secondly, in a lot of desirable areas renting an equivalent property is far cheaper than buying. A lot of that has to do with the fact that rentals aren't usually quite as nice in terms of location, condition, and accoutrements as owner occupied places, but the effect often remains after correcting for this.
Good reasons to own your house? If you have pets, finding a rental can be really hard. If you enjoy renovating and general handypersonship maintenance might be a feature as well as a bug. Finally, if market conditions make it a no-brainer.
Tl;dr don't pay more in mortgage than you'd be comfortable paying in rent, and don't feel like you need to own a place to be a grownup.
Also, fixed mortgages stay the same price, but rents rise.
In Australia, where 98% of people live on 2% of its land, buying can make sense because it is a hedge against travelling time. As population grows, competition becomes more intense for suburbs that are closer to the city, buying a plot means that you have got a shorter commute than future residents.
Ownership is also a hedge against rent rises. A retiree who is risk averse may find it better to own the property they live in rather than try to pay rent on a fixed pension.
If that was their plan (which I doubt), it wasn't very effective. Americans move much more frequently than people in most other countries.
The most recent housing market collapse has made America much slower at readjusting to restructuring of the economy--for example, workers in Florida can't easily sell off their homes to move to a different location with greater job density, for instance. I'd like to see more data supporting your assertion.
> Americans move much more frequently than people in most other countries.
That fact may be true, but my point is that it may hide the effects of uncontrolled-for variables
With that regard, one need some other forms of statistics to compare if there is no such housing prison (which exists all over the world) and how would this different from the current situation.
Buy a house because you want someplace to be your own, that you can customize, and really be part of a neighborhood, and not worry about asking a landlord for permission.
I bought a house because all the apartments I looked at for the price were dumps, and in a house at least I had incentive to fix the stuff that made it a dump.
I moved in 2001 from the DC suburbs (College Park, MD) to Cumberland MD. The duplex I rented was about a third what it would have cost in College Park. Later, I bought both sides of the duplex, for less than a sixth of what it would have cost in College Park.
From what the Places Rated Almanac said, that sort of variation is normal across most of the country. Note that in my case I even stayed within the same state, so I didn't benefit from the regulatory and tax changes that occur in some inter-state moves.
And? Most people decorate their homes, put up art, paint, or otherwise like to decorate and furnish their homes. It's what makes it feel like a home rather than a box you sleep in each night for, and I'm sticking my neck out here with a guess, a plurality of humankind.
I can't imagine that was cheap. Most of the article is inflected with desire to retain hoards of cash and sleep on top of a pile with many beautiful women (well, that's the undertone). Yet he's blowing what must be a huge wad on an apartment in NYC in an upscale area.
"A" buys a $100,000 house, "B" rents a $100,000 house. Both pay about $1,500 per month. At the end of 15 years, "A" owns an asset worth $100,000, "B" owns nothing. You decide.
My small 2 bedroom end of terrace costs me just more in mortgage payments than a 4 bed detached house in the same town. The reason? I bought at peak of market in 2007 whereas the people renting out the big houses bought 10+ years ago when such houses cost little more than my shoe box. Given the total lack of a job market, too, the rents have failed to increase.
Oh not to mention the value the property has already lost since purchase, and is still modestly loosing each and every month.
See here for an elementary explanation: http://www.khanacademy.org/video/renting-vs--buying-a-home?p...
Even factoring in taxes and maintenance costs, renting out that first house, even at the low end of what we could get for it, we'll handily subsidize our current residence as well as pay off the old house. Even if we were to sell it, the quality of work we put into it more than pays for the time and money we put into renovations.
To each their own I guess.
If you buy one house, one bad tennant could mean six months or more of no rent payments while you go through the eviction process and try to get someone else in there. One really bad tennant could cause tens of thousands of dollars of damages.
Because of this the costs of ownership once mortgage, taxes, utilities and maintenance are tallied up are often more than what a person was previously spending on rent.
Secondly, his major point is that home ownership involves a cash down payment. Its' not a case of person A/B spending 1500 per month, its a case of person A buying a 100k home and paying 20k in cash for the right to a loan. That 20k may have been better spent in more volatile and profitable investment than home ownership.
Third and lastly, a house can lose value. Did the major employer leave the area or downsize (e.g. Detroit most prominently, Ghost towns, and a scattering of towns all over US that relied on heavy industry)? If so, then your house value has fallen. Did the area fail to gentrify or did you buy in a bubble? If so, then your house value has fallen. Has there been a disaster that the economy hasn't recovered from (e.g. Katrina, coal slush floods in W. VA, BP oil spills effect on homefront properties)? If so, then .....
The argument that a house is an investment fails because it is the least liquid of investments, and thus harms the buyer the most when the prices fall. You can always sell your stock even in a strong downturn, but who is going to buy your drafty McMansion situated in an edge of town neighborhood in a down economy?
Most likely those people sold at .60 cents.
Most people who are losing money in real estate were also selling stocks at the bottom (2 years ago) and were buying tech stocks with two hands in 1999.
Many people are losing money simply by having the value of their houses fall. They don't want to sell, but their so called "investment" is worth half the price today on the open market than it was when they bought it. Realistically, they may never recover the value they spent in their lifetimes.
High & mid-rise buildings Downtown are being purchased (Dan Gilbert is one such buyer) for 6 figure sums.
http://detnews.com/article/20110127/BIZ/101270352/Quicken-Lo...
The only benefit of owning in such a market is that purchasing means you draw a line in the sand, "A" is now more in control if their monthly rent. But they're not in complete control, interest rates rise, the building needs to get repaired, there's those not insignificant legal and other costs associated with purchasing in the first place. That adds up to quite an expense. Meanwhile "B" doesn't have those concerns, and a great deal of flexibility and liquidity.
I'll personally stay "B", and my investment properties will be limited to those rare gems that are cash-flow positive within a year or two.
"Why I Am Never Going to Own a Home Again"
He mentioned he likes having a hassle free life. Once you have a lot of kids, not only do you have your own hassles, you get to be a part of everyone's hassles and there's no such thing as a hassle free life.
All I'm saying is, never lock yourself into any mindset as circumstances can change.
As long as our financial system works, cash is of course the best form of an asset.
All discussions about the merits of investing in houses must be compared to something else that is available at the moment.
Cash may be king now, but one needs to always be aware of inflation.
I am surprised though at his figures for housing:
> Housing returned 0.4% per year from from 1890 to 2004.
I wonder where he got that from.
There are times when you can buy for less than the cost of replacement, due to rising cost of building materials, labour et c.
To compare another investment, if you were to save $200/mo away into an investment account bearing 9.0% (like an S&P index fund), this would amount to $368,894 after 30 years. The whole time these funds are liquid and accessible to you, not subject to foreclosure, nor is this a required payment. $400/mo is $737,789.
Except that money can't go into an investment account because you still need it for rent. Actually, around here I'd be paying about 50% more than my current mortgage to rent the same sort of house, so month-to-month it is a greater expense. So the only difference is you still have the down payment.
And even then, for me, having that downpayment makes little difference financially over the course of 25 years. I seriously doubt it would stay in the bank over that time.
I had an argument with a friend a couple of years ago along these lines; he claimed that renting was much more financially stable, but now he seems no more or less stable than myself... There is a lot of FUD around the "buy a house", "don't buy a house" argument, it's best to treat it all with a pinch of salt and make your own decision.
A tax free gain for the sale of a primary residence (2 years + ownership) is one in particular. I am on my 2nd 'primary residence' in 3 years.
By the way, this is going to sound like a
contradiction: but I think housing is a great
investment right now.
I'll make some comments on his financial arguments:
A) If you pay off your home fast, you won't have anymore mortgage payments. And you actually own something that you might be able to sell later, getting some money back. If you rent, you won't see that money ever again. So technically your cash is good as gone if you rent. If you own, you can get something back at least.
This depends on the house you buy and the market. For example, I rented a lot until I found a good deal on a house. Now I pay less on my mortgage than on my apartment I rented.
The rent may increase every year too. At every place I stayed, they always raised the rent every year. At least with the home, you don't have to worry about that since you have the same mortgage payment every month.
B) Usually the seller pays the closing costs, especially at the current market. If not, negotiate so the seller pays. You don't usually have to worry about this if you're buying a home.
C) He's right on this one. The comfort of calling the maintenance person at my apt was one of the benefits over owning.
D) This is simliar to A). It depends on the market and the home you get. For me, the taxes + mortgage turned out to be simliar to what I paid in rent. Plus I now get a huge refund because of my deductions. So I paid around the same amount as my rent, and I got a bigger refund on my taxes.
E) I agree with the author. This is probably one of the disadvantages of owning a house.
F) I don't consider my home an investment. It's a place I bought to live in. I don't expect to make a profit from it. I have my stocks and mutual funds that I consider to be investments.
Now my comments on his personal reasons on not owning a home:
A) I agree with the author. This is same as E) above. I don't know why he put it twice.
B) I don't see how this is a reason not to own a home. The benefits of owning a home is that you can do whatever you want with it without worrying about the landlord looking over your shoulder.
C) I don't understand this argument as a reason for not buying a home.
D-F). Not everyone is same. Some people's hobbies are gardening and maintaining the home. They actually enjoy doing it. Some people like the sense of stability. But if you're like the author and like to change things up a lot and be mobile, a house is probably not good for you.
G) I got stressed when I rented because the landlord needed to raise the rent every year. Then I had to go through the stress of negotiating the rent increase. If I wasn't successful, I had the stress of budgeting for the higher rent or had the stress of packing all my junk up, finding a new place, and moving. So renting isn't always stress free.
H) This is true. But if you plan wisely, you should still have a lot of cash available for emergencies, even after buying your home.
It is not a bad idea to buy a modest size home that meets your family's needs for a reasonable price.
As you get older and have hopefully had a good career, try to own at least two modest homes and become a landlord.
There is a good chance that we will see a lot of inflation in the next 10 years or so. If this happens, owning rental property may help to protect your assets.
I've had my fill of all that. Owning a home is just as cheap as renting one in my area. The peace and quiet I have is priceless.