6 Reasons Why You Should Never Ever Buy A House

[crunchtastic]

Sounds like wsj indirectly boils it down to this...

Do yall really think if it wasn't for that then most people would choose to rent instead?

I don't. I believe that the American Dream of Home Ownership is a marketing machine that would survive just fine if the mortgage deduction were taken away. The banking, realtor and home building interests would make sure of that, despite the fact they spend huge dollars to convince us that taking away the deduction is tantamount to the full scale destruction of the middle class. After all, they were able to lure buyers into mold pits in half-built swampy fields at prices jacked to 40 and 50% in certain parts of the country at the height of the bubble. The LIAR loans may be gone for now but a new version of creative financing will surface again, it always does. To use another analogy, if a bankrupt car company can convince people to take a 7 year note on a mostly crappy $35,000 ride that depreciates 20% in value the minute after you buy it, I'm quite confident in America's propensity to get suckered into real estate that is not in their best interests to buy. Present company excluded, of course.

People don't want to believe they have to move around in order to provide for their families. "putting down roots" even though it may not be an economic reality is a powerful hook. Getting a mortgage puts one above the migrants and wage slaves. Those realtor ads about 'there's never been a better time to own a home' rely on a very specific subtext that hasn't changed in decades, because it doesn't need to. In marketing we use the word 'aspirational' though, because it's not as distasteful as acknowledging that we're a largely class-based, rent vs own society.

So, I guess that wraps up my nightly dose of bummer, huh? The downside of my business is knowing how the marketing sausage is made. 80% of the people out there buying things are influenced more by advertising (and in the case of anything requiring financing, its dark cousin lobbying) than rational decision making.

[RedScare]

I don't. I believe that the American Dream of Home Ownership is a marketing machine that would survive just fine if the mortgage deduction were taken away.

All one need do to convince oneself of the truth of this statement is to look up the historical definition of the "American Dream".

Hint: It never had a thing to do with home ownership.

[crunchtastic]

I'm fighting my mortgage company on insurance. They want insurance for the full $200k amount of the mortgage, while the insurers say it would cost no more than $150k to replace a 60 year old Timbergrove ranch. I've had to go to the Texas Fair Plan to comply with the mortgage companies demands, which means I get crappy coverage on everything except a total loss. The insurance companies say they will pay to replace the house, even if it's more than the stated value. They use a cost calculator like Marshall Swift Boeckh to come up with the amounts.

By the way, don't blame the insurance agent, he just uses the numbers the companies require.

Actually, some agents do have discretion, as do a number of different people in sales, operations or underwriting who have authority on policy issue. The cost calculators are used as guides for but are definitely not the final say; in all insurance, there's some room to maneuver in underwriting. Agents either don't know or don't tell you that because it slows down the sales process. And in homeowner's especially commission rates are low, so speed to close is their goal. I feel your pain though--the mortgage co vs. the insurance co, grrr. Did that dance with my hurricane claims.

[crunchtastic]

All one need do to convince oneself of the truth of this statement is to look up the historical definition of the "American Dream".

Hint: It never had a thing to do with home ownership.

hmm, I didn't look it up, but I suppose you mean the whole liberty and pursuit of prosperity thing?

God, I love advertising!

[dbigtex56]

On a side note, a rental home enjoys a large number of tax breaks...you can deduct all expenses, including insurance, all repairs, as well as depreciate the house as an asset....while it appreciates (usually)

An absurd idea - what if I bought your house, and rented it to you; and you bought my house and rented it to me, Would we enjoy a tax advantage?

[kylejack]

“But its an investment,” you might say to me. Historically this isn’t true. Housing returned 0.4% per year from from 1890 to 2004. And that’s just housing prices.

Er, the alternative is a total loss in rent monies paid. .4% return compared with a total loss seems pretty good to me.

[samagon]

Er, the alternative is a total loss in rent monies paid. .4% return compared with a total loss seems pretty good to me.

right, even the *chance* of a return is greater than a guaranteed no return.

[TheNiche]

Er, the alternative is a total loss in rent monies paid. .4% return compared with a total loss seems pretty good to me.

A 0.4% return for whom? People that judged themselves as being in a position where homeownership was the preferred option?

[RedScare]

Anytime "never" or "always" is used in a statement, you should look very closely. Certainly, a large percentage of homeowners "lose" money buying a house. In much of the country, homes have lost more value than is owed on the mortgage. In normal times, a large percentage of homeowners spend more money on mortgage, insurance, taxes, maintenance and repairs than they would have in rent. However, that does not apply to everyone. Just as an example, I cleared $70,000 in only 5 years on my first condo purchase, because of the time that I bought in, and the location. The maintenance fees were largely offset by the tax savings. The size of my mortgage was slightly higher than comparable rent, but not enough to eat up the $70,000. This $70,000 was earned on an $11,000 down payment.

However, this is just one example. There is also the myth that the money saved on a down payment could be invested at X%, and be worth far more than the equity in your home. That is cold comfort to those 99.8% of us who would never save up a down payment and invest it for 30 years while renting. It simply does not happen (except for the one internet bragger who will post after me that HE did it!) in the real world. In a market that is not plummeting, a down payment is forced savings. So are monthly mortgage payments. At the end of the mortgage, one has an illiquid asset worth a pile of money. Yes, it may not be worth as much as investing in the stock market, but it is worth a hell of a lot more than most of us without discipline would have. Just look at your 401k for assurance.

Net result? It works for some, not for others. I would imagine it works less for those buying in popular new subdivisions than old gentrifying neighborhoods. It works less for those who chase trends, as seen on HGTV than those who buy value. It works less if you sell too soon or too often. And, of course, the original point is true...you are tied to a purchased home, whereas you can move around as a renter. Some of us do it in spite of that, for better or worse.

[innerloop]

I think one important element not being discussed is time. All of the points on both sides are more focused on the short term situation of rent vs buying. But what if you're happy in your town and plan to live there the rest of your life? At some point a mortgage is going to be paid for, but rent is forever. Sure, even a paid off house still requires maintenance, taxes and insurance, but that's going to be a lot less than rent for a comparable house.

Personally, Houston is the global headquarters of my industry and I can't justify the cost of living in the other places I'd like to live. So I bought with the plan to stay in the house 20 to 25 years which is much longer than my mortgage.

As a native Houstonian, I know nobody plans to move here long term, but ask an honest transplant sometime how long they planned to "move to Houston and make some money and then leave" and I'll bet they've already been here that long plus a few years with no short term plan to leave.

[Marksmu]

An absurd idea - what if I bought your house, and rented it to you; and you bought my house and rented it to me, Would we enjoy a tax advantage?

I suppose we would, but I can foresee quite a few scenarios where that goes badly for one of us.

Rental homes do enjoy a tremendous number of tax advantages...also, if you have a sizable portfolio, the insurance companies will insure to what you want, regardless of the value. My rental property, the house is only appraised for something like $40,000, but the insurance on it (cost to rebuild) is $135,000.

I had the option to set the insurance coverage at close to anything I wanted....I chose $135,000 because it realistically protected my investment...80-90% of the value is in the lot (or was before the new historic ordinance!?) Since the property I have is in the Heights, outside of the flood plains, and not in a "coastal county" insurance is dirt cheap. That house costs less than $600/year to insure...I just cant imagine an insurance company accepting liability for anything less than that.

[kylejack]

There are certainly places in the country where buying rarely makes sense. I just don't think Houston is one of those places.

[marmer]

I think one important element not being discussed is time. All of the points on both sides are more focused on the short term situation of rent vs buying. But what if you're happy in your town and plan to live there the rest of your life? At some point a mortgage is going to be paid for, but rent is forever. Sure, even a paid off house still requires maintenance, taxes and insurance, but that's going to be a lot less than rent for a comparable house.

This. Our house is nearly paid for, we're comparatively happy with it, and we like the area. There are a few things we'd do differently if we could afford to build a new house from scratch, but that's probably not ever going to be affordable for us. In January my mother will celebrate sixty years in the tract house I grew up in.

[kylejack]

Ha, this guy is a hedge fund manager who advocates legalizing insider trading.

[dbigtex56]

I suppose we would, but I can foresee quite a few scenarios where that goes badly for one of us.

As can I - although, seems like I've heard of an in-law who did such a thing. Whether it's legal or moral is another matter.

Also, I should mention that this was an offer only to be made through a final prospectus.

[TheNiche]

Just as an example, I cleared $70,000 in only 5 years on my first condo purchase, because of the time that I bought in, and the location. The maintenance fees were largely offset by the tax savings. The size of my mortgage was slightly higher than comparable rent, but not enough to eat up the $70,000. This $70,000 was earned on an $11,000 down payment.

However, this is just one example.

Wasn't your "example" subsequently condemned by the City? Nothing demonstrates your point better.

[RedScare]

Wasn't your "example" subsequently condemned by the City? Nothing demonstrates your point better.

Heh. Why, yes it was. However, I read on Swamplot that the condemnation was found to be illegal and was struck down. Whether anyone was still paying their mortgage and moved back in, I don't know.

[TheNiche]

Heh. Why, yes it was. However, I read on Swamplot that the condemnation was found to be illegal and was struck down. Whether anyone was still paying their mortgage and moved back in, I don't know.

But...I thought that homeownership meant that you wouldn't have to worry about moving a lot or about being jacked around by a third party. And condo fees meant that you didn't have to worry about maintenance. And there was never supposed to be any concern about a total loss, even if you financed your "investment" at 100% LTV and the value went down, even just by a dollar. And all of the schools were fantastic or improving, and would always be fantastic or improving. And if you did't have kids, then schools weren't supposed to matter and you didn't need to consider them because nobody else does. And one day, your neighbors were going to be nothing but white people and hot asian chicks, but no asian guys, because they're never depicted in the marketing materials. And gold diggers were supposed to throw themselves at you (which you were supposed to appreciate). And you were supposed to be happy.

But most importantly, homeownership validates you as a smart person. My Realtor® implied as much. And if I want to be a smart person, I'll buy a house too.

[brian0123]

If renting makes more financial sense then owning, then why is it there are property management companies (Camden, Post, etc.) that rake in the $$ by owning properties and convincing people to pay them money to live there? Just like Realtors convince you home ownership is the way to go... there is also an entire industry built around convincing people to rent instead of own.

I hated renting, and love being able to do what I want to on my place. I like doing maintenance. I have no yard to cut. My mortgage w/ taxes and insurance is cheaper than if I were to rent a comparable property. I don't have to move my stuff from place to place anymore. When I'm older, I won't have a mortgage or rent to worry about either. Seems like a pretty good deal to me.

[TheNiche]

If renting makes more financial sense then owning, then why is it there are property management companies (Camden, Post, etc.) that rake in the $$ by owning properties and convincing people to pay them money to live there?

Camden and Post would be in a crappy line of business if it didn't make sense for any of their tenants to be tenants.

The fact is, every property is owned by somebody, and their return on investment depends on more factors than just occupancy. There is a natural equilibrium between the rental and the for-sale housing market; what you see in the United States ain't it.

there is also an entire industry built around convincing people to rent instead of own.

Show me where on http://www.postproperties.com/ or http://www.camdenliving.com/. Big, publicly-traded companies that often rent to people that drank the homeownership Kool-Aid and are just saving up for a down payment would be kinda stupid.

Granted, the National Multi Housing Council has been trying for years to provide an effective counter to the homeownership lobby, but they're playing very defensively and getting very little press.

[kylejack]

Both renting and owning have their benefits and disadvantages and the best option will depend on a person's particular situation.

[livincinco]

I think that the article dismisses the value of an initial investment into a home way too easily. I'd also like to hear where the number of .4% annual return in housing value came from. The closest thing that I found was Robert Schiller's analysis of housing prices from 1890 - 2006 which showed a 99% increase in housing prices during that time period after adjusting for inflation. That's more than 0.4%/year. Additionally, I don't believe that figure considers that the investment is the cost of the down ($100,000 in the example) and that the return is based on the value of the asset ($400,000 in the example), essentially quadrupling (or more) the rate of return in the example.

It's easy to say that you're never going to see that money again, but that's making an assumption that you don't leverage your existing investment to purchase a more valuable property or "downsize" at some point and recoup at least a degree of your initial investment. You could make that same argument about any asset purchase.

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

[LTAWACS]

Ha, this guy is a hedge fund manager who advocates legalizing insider trading.

That's why he's my stockbroker.

[TheNiche]

I think that the article dismisses the value of an initial investment into a home way too easily. I'd also like to hear where the number of .4% annual return in housing value came from. The closest thing that I found was Robert Schiller's analysis of housing prices from 1890 - 2006 which showed a 99% increase in housing prices during that time period after adjusting for inflation. That's more than 0.4%/year.

You are correct.

Changes in average home prices fail to reflect all the remodeling, repairs, and upkeep that are typically completed during the course of occupancy and in preparation for sale. The fact is that structures are a depreciating asset (like a car). The land may or may not appreciate in value. (There are exceptions, however those are typically in parts of the country where increasing replacement costs reflect an increasingly burdensome regulatory environment.)

Also, changes in average home prices do not take into account the steady increase in the size of a typical home or qualitative enhancements typical of more recent construction.

[WAZ]

This seems like the sort of thing that should promote rational, well-thought-out discussion on HAIF. Or not.

Why I Am Never Going to Own a Home Again

The article makes it sound like you're better off buying lottery tickets than a house.

Ultimately, the choice to buy versus rent is a personal one - and personal preference is really all the reason you need.

That said, each of the Altucher's points can (and should) be rebutted.

A) Cash Gone - True you have to pay interest and other fees on a mortgage, and that cash is gone. But it's even worse for renting. Before I bought my home, I rented various apartments for 14 years. Over those 14 years, I paid a total of $100,000 in rent. If those had been mortgage payments, instead of rent checks, I might have build a few thousand dollars in equity. But they were rent checks, and all of that money's gone.

Closing costs - This is the one area where the Altucher has a good point. Closing costs can be onerous - which is why many people advise that if you'll be in a house for less than 5 years, you should rent. (The closing costs are more than the equity you would build over 5 years.)

C) Maintenance - OK, it sounds nice to live in an apartment or condo, where theoretically everything's taken care of. But you can't always trust a landlord to fix things right and in a timely fashion. The bathroom vent fan stops working - you call the office - they come by and remove the vent, leaving a gaping hole in your bathroom. Weeks, then months go by, and despite your phone calls, the hole is still there. This happened to me in one of the apartments I rented. It's the old mantra "if you want something done right, do it yourself."

D) Taxes - You CAN, in fact, deduct mortgage interest from your federal income taxes. It's not a myth. I do it every year. Furthermore, landlords pay local property taxes, and they pass those taxes on to tenants as part of their rent.

E) You're Trapped - You can't just up and decide to leave one day, because you have to sell the house. Renting isn't the panacea Altucher would have you believe - if you break your lease to leave early, it can be costly. But the real question is: is it really that bad to be locked into a house? If the neighborhood is stable and safe, and you have friends there, why are you so eager to leave? Do you really want to uproot your children and put them in a new school every few years?

(And I wonder if Altucher actually studied history before he gave his rant about how big corporations fomented the "myth of homeownership" as a way to keep workers from moving. The 19th century industrial town was built around renting. Factory owners built houses, and rented those houses out to workers as a way to take back their wages.)

F) Ugly - As in, ugly investment. Maybe houses are really ugly investments. But a house is much more than just an investment. It's a home. It is a reflection your personality and lifestyle choices. It's yours to personalize. Whether that means painting it your favorite color, or covering it in beer cans - you can't do that to a rental.

As I said before, the decision to buy versus rent is a matter of personal choice. I think Altucher got caught up in the financial aspects of it (he is a financial expert after all) - but there's a lot more to the decision.

[RedScare]

What the whole argument boils down to is that, in most cases, homes should not be purchased as investments. They should be purchased as shelter. And, really, whose fault is it that home ownership became the big investment thing in the last decade? Well, in large part, it was the Wall Street investment firms, as in hedge funds, like this guy. I suppose that now that he is no longer investing in home mortgages, he is touting the lousy investment housing has become. But, for hundreds of years, housing was never an investment at all. It was shelter. And, for the overwhelming majority, it is still that. Even those that realize a profit from their homes generally only use that profit as a means to move into better homes.

[barracuda]

C) Maintenance - OK, it sounds nice to live in an apartment or condo, where theoretically everything's taken care of. But you can't always trust a landlord to fix things right and in a timely fashion. The bathroom vent fan stops working - you call the office - they come by and remove the vent, leaving a gaping hole in your bathroom. Weeks, then months go by, and despite your phone calls, the hole is still there. This happened to me in one of the apartments I rented. It's the old mantra "if you want something done right, do it yourself."

Yes, and in my experience, most apartment landlords are only interested in the minimum of repairs and maintenance. Being a bit of a control freak myself, I actually enjoy repairing and improving my dwelling to my own tastes rather than relying on someone else to make very minimal effort. And with a house, I can perform my own low-cost customizations without getting charged by a landlord upon move-out.

E) You're Trapped - You can't just up and decide to leave one day, because you have to sell the house. Renting isn't the panacea Altucher would have you believe - if you break your lease to leave early, it can be costly. But the real question is: is it really that bad to be locked into a house? If the neighborhood is stable and safe, and you have friends there, why are you so eager to leave? Do you really want to uproot your children and put them in a new school every few years?

(And I wonder if Altucher actually studied history before he gave his rant about how big corporations fomented the "myth of homeownership" as a way to keep workers from moving. The 19th century industrial town was built around renting. Factory owners built houses, and rented those houses out to workers as a way to take back their wages.)

Being trapped in a house is mostly an issue in a down market or if you overpaid for your property and jobs in your area are scarce. But I can attest that it does limit the desire to move - I have had job opportunities in other cities, but have no desire to sell because of the amount of work I've put into my place and due to market conditions.

What the whole argument boils down to is that, in most cases, homes should not be purchased as investments. They should be purchased as shelter. And, really, whose fault is it that home ownership became the big investment thing in the last decade? Well, in large part, it was the Wall Street investment firms, as in hedge funds, like this guy. I suppose that now that he is no longer investing in home mortgages, he is touting the lousy investment housing has become. But, for hundreds of years, housing was never an investment at all. It was shelter. And, for the overwhelming majority, it is still that. Even those that realize a profit from their homes generally only use that profit as a means to move into better homes.

Bingo. Speculation and investment in certain housing markets helped create the artificial demand that crashed with the mortgage crisis. I only really feel bad for the home buyers who actually intended to move into developments that are mostly abandoned and in decline following the crisis.

[samagon]

The title of the article should be "why you should never ever buy a house as an investment"

[TheNiche]

The title of the article should be "why you should never ever buy a house as an investment"

But that's not a very good point, either. There are people who buy junk vehicles, repair them, and then resell them for a profit. That business model works for housing, too. Likewise, there are companies that own and lease vehicles...and companies that own and lease housing. Nothing wrong with that.

There are no automatic yes/no rules to abide by. That's how ignorant investors create commodity price bubbles in the first place. If I might propose a title for the article, it would be, "All investors should be competent, diligent, and cautious." Nobody would read that article; it would be too accurate, precise, and useful. People don't want that.

[livincinco]

What the whole argument boils down to is that, in most cases, homes should not be purchased as investments. They should be purchased as shelter.

I think that houses can be a very good investment. The problem is that home values have up/down swings like any other speculative asset and most people can't control the point that they have to sell. If you're in a position where you can hold onto your house through a downturn and wait for market conditions to swing back, then you have a big advantage over the average homeowner. If you can't do that, then I would agree that renting is probably a good plan.