Can’t Lose on a house

For years, I have met with folks who are hyper-focused on purchasing a house as the major financial goal in their lives. They say things like, “renting is like throwing money out of the window”, “real estate is better than the stock market as an investment” and my favorite, “I know that I can’t lose on a house.” To all of these comments, I have been known to say a not-very mature response: “OH YEAH?”

I have always been a bit more agnostic about owning vs. renting. For some, renting is a perfect solution to providing shelter. In fact, my guess is that if many of the people who purchased over the past two years had just stayed put in their affordable rentals, the real estate market might not be in the pickle it is in. That being said, I know that it’s easy to get lured into becoming a buyer by that nagging voice, which goes something like this: “my principal, interest and homeowners insurance would be the same as my rent, so why not buy the house and start building equity?”

Because gentle reader, your payments will not stop with your principal, interest and homeowners insurance. Even if you put down 20% and finance your mortgage with a fixed rate, there are so many more costs associated with home ownership, that the comparison may not be quite as good as you think. In fact, if you invest what would have been your down payment, the whole “throwing money out of the window” argument goes…well, out the window.

As far as the “I can’t lose on a house” thesis, well it’s just not true. Currently, house prices are down by 0.5% to 10%, depending on the measure used and are expected to fall further before we are done with the process. Of course if you hold a house over the long term, it should beat the inflation rate, but so too should the stock market. Like the stock market, real estate can in fact go through corrective periods, but thankfully, most people are not tempted and/or forced to sell at these low points. Since World War II, housing prices have lagged the performance of the stock market, but it just does not seem that way, because few people adjust the value of their homes for inflation—instead they say: I bought this house in 1965 for $40,000 and today it’s worth $400,000!”

I know that the notion of home ownership is engrained in our society—so much so that Uncle Sam helps you out with a mortgage interest deduction. But to quote economist Robert Shiller: “maybe we’ve gone too far in that only so many people can comfortably own homes, and it became an excuse for extravagant lending…Most people think home prices can’t fall for very long. The fact they haven’t since the Great Depression in a massive way is proof to many people … that they can’t fall. And I think the people are lacking the historical perspective that big events might come 70 years apart. And there’s remarkably little interest in historical episodes.”