Is Buying A Home A Sucker's Bet?

A well known pundit is not a big fan of buying a home, is he right?

Lance Roberts (via Zerohedge) had a wide ranging post that included a critical look at buying a home. He does not "necessarily agree" that owning a home equates to the American Dream. He says people know what they paid for a home and then what they sold it for and so know whether they made money or lost money. I would add in that many home owners know some sort of market value number for their current home. That market value that they get from some website might not be correct but they know it.

Roberts lists the costs that homeowners ignore but that do matter such as utilities, taxes, maintenance, repairs, insurance and inflation.The problem with citing these expenses as negatives is that there is a lot of overlap to these expenses with renting. The opposite of home ownership hopefully is not living in your parents' home for free. If you rent you will pay for utilities and probably some sort of insurance for your things even if that insurance might be less than a homeowner's policy. Arguably, when you rent you are more exposed to inflation as the rent increases. A 5% lift in the rent is likely more out of your pocket in nominal terms than a 10% lift in your utilities.

He also talks about being a slave to debt and this is something I agree with. Buying a home at the wrong price whether that is based on the value or its affordability for you matters a lot. Another crucial thing where the debt is concerned is to get a 15 year mortgage not a 30 year. According to the mortgage calculator in the Google search results, a $300,000 mortgage at 4.375% (per a Google Search) for 30 years results in a monthly payment of $1498 and a total cost of $539,228. For 15 years at 3.875% (per Google search) the monthly payment is $2200 with a total cost of $396,057. The extra 15 years result in the cost being more than 33% (not adjusted for inflation).

There are potentially tax deductions for home ownership but fewer people benefit from them with the latest tax legislation.

There is legitimate debate about whether buying a home is an investment or not. I tend to think that it is because the value (expenses paid along the way notwithstanding) often, but not always, goes up at a rate that is at least slightly ahead of inflation. Where that is never guaranteed then that means there is some measure of risk taken, making it...an investment? I have no pushback for anyone who says owning a home is not an investment, this is simply my opinion.

If you don't think it is an investment then you might think it is a form of forced savings. If you pay your mortgage down without using your equity as a cash register then at some point the home is owned free and clear. So what you have at that point is (my favorite word lately) optionality.

If you rented for all those years you could have put away the money not spent on owning a home, so there'd be optionality there some say in making the case against owning a home. I've never understood this argument. You are paying rent and have other costs. Starting today, let's say renting is $200 cheaper/mo. How many people are going to take that $200 and save it? I'd argue almost no one, they aren't necessarily aware they're "saving" $200 by renting. Over time, the mortgage stays the same as the rent goes up and if renting was ever more favorable as I say above, that doesn't last very long...provided you don't take HELOCs. If the saving money not spent on ownership argument resonates or can actually be applied in your case great but I don't see it as likely for hardly anyone.

Once your home is paid for, if you stay put you are living "rent free." If you don't have much of a retirement fund then you can use the optionality provided by your home equity to downsize into still living "rent free" and having a small retirement fund, small being better than nothing or very small. Compare that to being 65, still needing to pay rent forever and having no retirement fund or a very small one. It that scenario you have no optionality.

A better framing might be that no one should expect their home to make them rich, although that happens sometimes. I will pushback that owning a home without being in over your head (over indebted) and not taking your equity out every couple of years will create the optionality that I mention above which can make many aspects of your life easier.

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