Why You *Maybe* Should Buy A House
This is based on some comments I recently made on an article by the esteemed Morgan Housel, who I have been saying for years is the heir to Jason Zweig. Somebody asked me why I think now might be a decent time to consider buying a house. First of all, take anything I’m saying with a major grain of salt and do your own diligence, I’m just some dude with no formal financial training. That said, here’s why you should have considered buying a house starting in 2009, and why it may not be too late.
1) The investment arguments against home-ownership, I think, assume you pay all cash. This relates to the oft-repeated statement that the US housing market over time basically matches inflation and is not as good as the stock market. But nobody pays all cash, outside of investors who are planning to flip short-term, or Chinese guys looking to park money in a place where they will not be thrown in jail when the political tides turn. If you put 20% down, that is a leveraged investment in the property on which the house sits, coupled with ownership of a depreciating asset (the house itself). Because it is leveraged, the housing market as a whole does not have to significantly beat the market in order for one to come out ahead. Let’s say you buy a $100K house and you put $20K down. Let’s say the value of it only goes up 2% per year, matching inflation. In thirty years, your house is worth $181,136.16. But the return on your original $20K (ROIC) is not 2% per year. The return on that is closer to 5% annualized. Not bad, huh?
Moreover, because 30-year fixed loans (which I’m assuming, because I am assuming my readers are not morons) are so heavily amortized, for years and years you are paying mostly interest. Congratulations, you get a massive portion of that back in a tax deduction! Think of it as a massive rent subsidy from the government that only goes to those who don’t need it.
Yes, you pay down your loan over the thirty years, and you get a lower ROIC on these later dollars, but the vast majority of it you pay down in dollars that have been drastically devalued by between 15 and 30 years of 2-3% inflation, assuming inflation does not jump (in which case they are devalued more).
You also have to deduct maintenance and repair costs, but a lot of that can be done oneself. In the past three years since I bought my home in mid-2010, I have repainted two rooms, put on gutter covers, fixed rails on my porch that were dry-rotted, etc. These costs are also much lower if you buy a newly built home.
Whether this is a good idea is heavily dependent upon where you live. The famous average home value appreciation figures look at the whole country. That means they are averaging in Detroit over the last 40 years, along with Los Angeles and Dallas over the last 40 years. That seems nuts to me. Real estate is local — sometimes cliches are true. The “investment” portion of your home purchase is really the land, as stated above. It is the land, by-and-large, that appreciates in value, and it does so when macroeconomic and regulatory pressures in a particular region or city cause it to do so. Buying a house in rural Kentucky is probably not as good an idea, generally, as buying one in Raleigh, in other words. There is little demand in rural Kentucky, and little economic growth, and there is tons of space, and there are no NIMBY neighbors putting up all kinds of zoning ordinances that restrict building and prop up their property values (whether intentionally or not) because everybody in rural Kentucky hates the gub’ment, even though they are largely supported by the government. It’s a wonderful world we live in.
2) Interest rates are low. Currently, fixed rate 30-year loans are a terrible deal for the lenders unless we get outright deflation. (I refinanced mine in 2012 at 3.75% — that is INSANE my friend — a 30-year fixed loan, you have to be kidding me.) We have a new Fed Chairman who is just as strong as Bernanke was in resisting the calls of creditors to allow deflation (whether they know they are advocating that or not, and some do not, they are actually deluded). It is very possible, or at least a good bet, that the Fed’s actions have provided the “bridge over troubled waters” that they were designed to provide.
3) Hatred of home-ownership. Home-ownership rates are at a 19-year low. Articles appear constantly about what a terrible investment they are. The rental economy is the fad du jour. Pay attention to this.
4) I live in California. So in addition to the above, I get Proposition 13, which means my property taxes can never go up more than 2% per year no matter how much my property appreciates. That removes a lot of uncertainty. The equation is different in states like New York where do-gooder policy-makers are constantly allowed to raise taxes willynilly on property owners whenever they want to fund a new pet project.
5) Antideficiency legislation. Also, like many, many states, California is a non-recourse state, which means if I ever default, my lender can’t go after my personal property or savings to recover any deficiency. So in addition to getting a great rate on my loan, I have a built in default option that can never, ever cost me more than what I paid in. (Which, incidentally, is why the people who “bought” homes in California and similar states with interest-only loans or low-payment ARM loans in 2006 and then got foreclosed on a couple of years later — after basically paying just a low rental rate — and then screamed bloody murder about it, are either ignorant, or are moochers.)
6) Pay attention to thy psychology. While an investment in a property/home may not beat the market, MOST INVESTORS DON’T BEAT THE MARKET and virtually nobody just owns the market as a single basket anyway. Statistically, investors are likely to trade in at horrible times, and sell at horrible times. It’s so easy to trade. It makes you feel so smart. With a house, you can’t just freak out and sell because of a “flash crash” or because the Eurozone looks like it is falling to pieces. The very idea of that is insane. So pay attention to the psychological aspect. Ask yourself how many people who invest in the market actually beat the market over 30 years anyway. Ask yourself if you have the psychological fortitude and skill to do so. As Munger says, life is all about incentives. Having a brokerage account with sub-$10 commissions creates an incentive to trade too much. Have a home that would be a massive PITA to sell and where you would have to move your whole family creates a massive disincentive to “trade” too much.
Buying a house is not right for everyone, and I may be wrong. And it depends upon where one is buying. One has to make a sanity-check effort to compare it to the cost of renting (when monthly loan/tax costs in an area are historically high compared to rents in that area, that is a problem). But it is not always the investment sinkhole it is now portrayed to be. Literally tens of millions of people in this country have major assets only because they bought a home in an area where there was economic growth and immigration decades ago, and held onto it.
My ultimate point is, you can’t rely on blunt instruments like the relative appreciating value of all property in all of America versus the stock market when considering a home purchase, any more than you can merely rely on PE or CAPE or Tobin Q or what you like to buy in stores, or a broker, when investing in the stock market. All of life must be addressed holistically.
Any investment decision must begin with: 1) a diligent and objective effort to seek out all of the factors that might impact it, whether financial, regulatory, macroeconomic, psychological, or whatever; and 2) a diligent and objective effort to evaluate as best as one can the likely impact of each of those factors as applied to one’s own particular situation, in one’s own spot in life (and, in real estate, in one’s own city, in one’s own state, in one’s own country, according to one’s own finances, prospects and proclivities). There are no shortcuts. There are no easy answers. There is no golden ticket. There is no unifying theory. There is no Platonic ideal. The is only the relentless seeking out of all possible relevant facts, including trying to determine, as a starting point, who one is as a person, as to which one must apply the coldest, most objective eye of all.