Articles like this drive me crazy..The most mind-boggling thing I’ve come across is that most people who punt the importance and wisdom of home ownership, will also tell you they believe you should have a well diversified investment portfolio.
You know…
“Spread your investments over many asset classes.”
“Don’t put all your eggs in one basket.”
And so on.
Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket.
Not only is the the average middle-class-30-year-old-home-owner Joe way over-invested in exactly one asset class (residential property), he is also completely undiversified within that asset class, since he owns exactly one property, in exactly one area, based in exactly one town, located in exactly one country.
In short, it’s just about the most undiversified investment portfolio a person could dream up and manage to get himself into.
Yes. But in a world were food, shelter and fuel are about to become the dominant factors in everyone's lives, all your eggs need to be in a basket at your feet with you standing over them with a rifle. If you can't protect it physically, its not yours. But lets pretend for now that isn't a valid concern..
To summarize: When interest rates go up, property prices fall (or increase very slowly, usually at a rate lower than inflation), because the available supply of residential properties increases, while at the same time the demand for residential properties decreases. Conversely, when interest rates go down, residential property prices usually go up quickly, because more people can afford to take out bigger loans!....
In my opinion, the present is just about the worst possible time for anyone to be invested in residential property.
You will know it is the right time to buy your dream home by looking for a few of these signs:
Interest rates are starting to stabilize at a high rate, after rising steadily for two or three years in a row.
Many people are trying to sell their properties, some in a real panic, because they are struggling to make their monthly bond payments.
You hear many tales of properties being foreclosed on, also in neighbourhoods where people are considered to be wealthy.
People around you are generally feeling quite negative about owning property....
So the chances that the Fed will actually let interest rates increase is incredibly remote, but lets play lets pretend for the sake of this guys argument...
Did he notice that foreclosure , panic selling, and wealthy neighborhood thing is happening NOW?
Why is it that these investor types aren't cluing into the fact the the rules are all wonky and the market indicators ( like U.S. Treasuries ) have nothing to do with conditions on the street? There is already blood in the streets. (Will there be more later? Yes, but then it probably won't be metaphorical - and see what that does to property values.. )
So are you saying no one should ever own a house?
No, of course not.
I’m saying people should save up for their family homes and buy them cash.
The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.
Yes, if you buy property now you probably will pay "more" in dollar terms than you probably would in the future and if you intend to buy a home with saved wealth then waiting MIGHT make sense.. but where are you keeping the money in the meantime ? A "Well-diversified Portfolio" (let me guess, this guy wants to manage it for you?) - so would that include gold and silver ( down over the last 5 years) or REITs ( also down) or Stocks ( up, but the casino does that to lure in suckers) , commodities ( up but volatile..and at risk of being Corzine'd) or you put in the bank so it can confiscated via inflation or devalued during a bank holiday....
The Powers that be have made saving virtually impossible.... much less saving and getting a return. So translation: Don't buy a house - invest your money with people like me ; I will keep it "safe" and you can rent one of my houses in the meantime.
There is no doubt owning a home is more expensive on a monthly basis than renting - but some portion of that outlay goes to equity.. which you may or may not get to keep in the end, and that makes all the difference. . . if you buy one on leverage-- if the interest rates DO go up and consequently the price of your property comes down.. your Mortgage payment stays the same. There is little effective difference between Rent and an Adjustable Rate Mortgage. Granted , you are on the hook for the ARM value no matter what the property is like, but with Rent the amount you pay is going to fluctuate (at intervals) with the market - and you have NO ASSET to show for it in the end. (An ARM is of course the worst of both worlds..)
This A-hole acts like there is an obvious right answer on principle in all situations here, and there isn't. Say your rent costs $800 a month for a two bedroom condo . The alternative is a $150K smaller two bedroom older tract house runs $1000 in expenses (30 yr mortgage at 4% and 10% down would be around $700 month + taxes and repairs) and there are a lot of situations in which the house will be a better deal. (and yes, those are typical prices for the market I am in and my market is considered expensive.. ..)
Over 10 Years,
if the $800 rent remains stable and you secured a 10 year lease... you pay 96K in rent alone. ( and I doubt rents will be going down, population is still growing and baby boomers may cash out and start renting too) However, If you buy the house you now have $44K in equity and have spent $120K in payments and upkeep. -- If you can sell at the same price ($150)(
no appreciation of the house over 10 years) you owe about $106K on the house and keep $44K - so subtract that for the $120 you spent and your housing cost for those 10 years was around $76K - not 96K.. so you could sell the house for $20K LESS than you bought it for before you hit the break even.. (+/- 5K for closing costs etc..)
Buying on leverage means you can predict your yearly housing outlay for the next 20-30 years - and just "normal rates" of inflation make that a good deal over that period if you can stay employed and your wages increase at inflation... and if something like the hyperinflation we fear sets in, its an even better deal... as your landlord just increases the rent till you can't pay it and you start squatting ( and if you do end up squatting on your mortgage anyway, its way easier to do that for a long time in a bank owned house..)
Housing is an expense. A House itself is an asset, the value of which can rise and fall. But since you must purchase Housing, the asset value of what you purchase is largely secondary. What matters is the total cost of Housing over that same period - and that can still be cheaper ( not to mention the better quality of life you have because you don't have a landlord and you can change things to suit you, and the better chances you will be in a better school district, have better neighbors, etc..) even if the house itself looses value. There are a lot of what-ifs in this as well - "What if Rent increases on Average 2% a year" - "What if the House lost $40k of its value instead of just $20?" If you buy a house and you break even with having rented, you did fine.
Yes, renting can be better in certain markets, and under certain conditions. It just pisses me off when people give such self-serving "advice" instead of teaching people how to do the real calculation that matters - and that calculation by the way, tends to favor buying the house..
