Use it *AND* Lose it?
by Richard
An alert reader of this blog has just sent me a link to a very thoughtful and provocative article that debunks home ownership.
Be sure to check out the full length article, “5 Reasons Renting Still Beats Buying” by Jack Hough, posted March 6, 2009 in Yahoo Real Estate.
In response to his five major points…
1. Houses produce lousy returns, while stocks produce good ones.
He’s absolutely right…and he references Jeremy Siegel’s monumental study tracking 200 years of stock market history. No asset class produces a higher return over this longitudinal study than common stocks. It’s the only asset class that delivers a consistent seven percent annualized return net of inflation.
2. House prices have further to fall.
He’s right again. The consensus view is that prices will continue to fall in 2009, and not bottom out until 2010….if then.
3. Many houses for sale today seem designed to waste money.
Absolutely right on the money! I’ve long railed against the wasteful and gaudy McMansions that have spread like crabgrass. They are wasteful to the environment as well as the budget…and it’s a helpful sign that after decades of housing bloat, the average size is now scaling downwards.
4. Big houses are targets for future taxes.
No kidding. I loved his observation that the easiest tax targets are wealthy people with large, expensive, easy-to-find assets. This is a bad situation rapidly becoming worse.
5. Neighborhoods are changing in unpredictable ways.
A very astute observation…in particular his speculation that low density suburbs may trade places with inner city properties as “slums characterized by poverty, crime and decay”.
One day we may wake up as a nation, and ask ourselves how so many of us ended up an hour’s drive from the central business district…tempted by cheap gas and new housing developments. With long commutes and diminishing sources of energy, this will prove to be a bad bargain.
O.K. Since I agree with his five major premises…
How can I advocate home ownership, especially for first time buyers, subsidized by the stimulus tax rebate?
It has much to do with investor inertia and the nesting instinct.
The five points again…
1. Higher returns from stock prices will only benefit those who conscientiously dollar cost average incrementally into their retirement and investment accounts.
But human nature interferes, and we now see that participants have stopped funding their IRA and 401k accounts in response to dicey economic conditions.
Home ownership is not an optional investment. It works like a forced savings account. Therefore, the lower return investment that is reliably funded for thirty years will produce a greater overall return than the higher yielding asset class funded sporadically, if at all.
2. No one knows when we will reach exact bottom.
For those who don’t qualify for the stimulus, I would wait until next year. For those who do qualify, it’s close enough to a bottom to act now and claim the rebate.
3. Keep it simple. Don’t buy the mega-house that guzzles utility and maintenance expenses.
Start off with a modest cottage more appropriate to your needs and budget.
4. Taxes are proportionate to value.
Buying a modest home will yield a more modest tax bill.
5. Take great care in selecting your neighborhood
The quality of schools and public transportation are paramount considerations. Ask yourself if the “more house for the money” is worth the horrendously long commute and isolation.
Kudos to Mr. Hough for raising these important points. His summary succinctly explains why two out of five families are almost always better off renting than buying.
Something they should have known, or been told, before they signed off on that liar loan during the bubble years.
March 13th, 2009 at 2:07 pm
Neighborhoods are indeed changing.
But one should be careful about predictions regarding changes to the treasured post-WWII American Burb model… articles written in early 2008 about the downfall of the Burbs made at least two poor assumptions: that energy costs for commuting will rise to the point that commuting will be cost-prohibitive, and that commuting will be necessary. I believe both statements to be false.
* PHEV (plug-in hybrids) will become the norm in the not too distant future, esp. given the leverage the Obama government has over the auto manufacturers. Also, PHEVs can be recharged using solar panels, which are dropping very quickly in prices thanks to thin-film technologies. And battery recharge times are dropping as well. So commuting cost is unlikely to rise substantially in the long term. Oil cost will rise indeed (until oil is relegated to a second tier energy source), but that’s irrelevant if oil has a minor impact on energy production for commuting.
* Commuting will be less frequent to Burb residents as telecommuting (and telepresence) technologies get more widely adopted and the workplace culture changes. Incidentally, this ability to work remotely is pioneered both by IT firms as well as (oddly) by the push to outsource jobs overseas.
To complete the argument, one might say: if all that’s true, then why would people not be willing to live even further away from towns? Because Burb residents still want to go to their restaurants (not just Bob’s diner offering Spam, Spam, and Spam) and kids must have access to all sorts of after-school activities to pad their college applications. So there’s a maximal distance from a nearby urban center.
Now, what matters is time-to-get-there, not distance, so one might say that, in the future we’ll be able to cover longer distances as cars get faster. Maybe. But it’s not technology that limits car speed, it’s human reaction time. And high-speed trains are not used for commuting since they must make frequent stops, negating speed gains. So until there is a Star Trek teleporter in my bedroom or my kids are genetically engineered for fast response times, I doubt we can expect exceeding the practical limit of roughly 60mph. Assume at most a 1hr commute, and you get a 60 mile radius around a town for burbs.
March 17th, 2009 at 12:12 am
[…] Richard @ Blue Jeans Millionaire talks about owning a home versus renting in this economy. Some people scoffed at me when I wrote my post on why I was still in an apartment, and some of the […]
March 17th, 2009 at 4:37 am
When we were renting we used to say that the rent money is going down the drain, but I had a few surprises after I bought my first house 3 years ago.
My rent before buying was $900 and my mortgage is $1100, sounds like a good deal right….but what I neglected to calculate expenses like real estate taxes at $350/month, home association fee $125, sewer bill $100/month, electric utilities (heating & ac) $75-200 dependeing on the time of the year. This puts my house related expenses in the range of $1750 to $1900 per month. You don’t pay a lot of these fees when renting and electric bills are significantly more than your apartment because houses are bigger and costs more to keep them warm in winter.
So for me atleast the lesson was Do not buy a house untill you are willing to pay twice your rent for house related expenses.
March 13th, 2010 at 1:09 am
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May 25th, 2011 at 3:16 am
It does not take small tweaks that creates the foremost dramatic shift.