Wacky Wednesday--Home Ownership Is Smart

Note: Before reading the following arguments, please understand that they are not what I believe. On Wednesdays, I deliberately argue for wrong ideas, challenging my listeners to call and defend the obvious right answer, which is usually far harder than one would expect. This is a summary of what Wacky Andrew will be arguing, not a representation of what real Andrew believes.

You can’t go wrong in real estate. They aren’t making any more of it. o This is just false. o Oh, sure, the land itself isn’t expanding. o But the lion’s share of real estate value is precisely in the structure, not the land. o And this they most decidedly ARE making more of all the time. o In fact, the four main factors contributing to the recent real estate bubble were easy availability of money, speculation-driven frenzy in response to the rising price of real estate, fear-driven frenzy in response to the rising price of real estate, and construction frenzy in response to the rising price of real estate. o In other words, people seeing a profit to be made in building houses did so, vastly overhiring and overbuilding in the process, causing an overexpansion of supply which eventually was one major factor leading to the decimation of the market (in part). o If people just hadn’t built so much, the crash would not have been nearly so bad.

The IRS pays you to own a house because you get to deduct the mortgage interest. o So you’re going to pay $10,000 a year to the bank to get $2,000 a year from the government? o The sheer lunacy of this concept alone should worry you about your ability to discern a good from a bad investment. o Real estate is a terribly inflated market precisely because of all the distortions from the government and speculation.

When you rent, you might as well just throw money into the fire. o And just what do you think you’re doing with the non-principal portion of the mortgage payment? o Renting is a far more wise use of money precisely because you know exactly what you’re getting and whether it’s worth purchasing for its own sake. o Advantages of renting § Someone else does repairs. § How quickly can you move these days if you rent?

Real estate always goes up in value. o Do I really need to comment on this one? o Even if it seems to do so, why? § Increasing population § Constant belief in the increasing asset § Easy credit § What happens when boomers start selling their houses? Just like what happens when boomers start withdrawing money from their 401k AND when boomers aren’t paying into payroll taxes and Social Security anymore?

Banks invest in real estate, and they’re in the business of making money. o Banks invest in mortgages, which pay them a percentage, not in real estate. o The fact that it’s a mortgage only means the bank has an asset they can seize if you don’t pay. o Banks don’t invest in real estate. o Banks invest in mortgages backed by real estate. o It should be pretty clear to anyone that banks don’t want to own houses. o They want to own promises to pay interest on loans taken out to purchase houses. o WHO tells you that a home mortgage is a great investment!!!

You get to use someone else’s money to leverage your own investment o Leverage at such high rates 20:1 or 10:1 is a terrible reason to see the problems in this investment. o And you don’t get the returns you hope for PRECISELY because it’s so highly leveraged. o The hyper-leverage of it is a problem since there’s so little equity to protect you from a fall.

It must be a good investment if everyone else believes it is. o Der.

The interest rate is so low right now. o Yes, but how high is the interest rate compared with the savings yield, for instance. o And why is that?

Property taxes are so low right now. o And when the market comes back, what will they be?

The housing market is likely to come back significantly in the future. o Even if the market comes roaring back, how do you get ahead on the home you live in? o You’d have to downsize your home in order to capitalize on the investment, right?

A home is most American’s single largest investment o No doubt about that at all. o Does that make it good or really dangerous? o What about diversification? o The value of such a substantial investment is entirely subject to the vagaries of fluctuating markets. o What about don’t put all your eggs into one basement? o So a luxury item is now also an excellent source of revenue? o This would be one of the very few if only it were true.

It’s so easy to profit from real estate value growth. All you have to do is live in the asset. o Can’t fractionalize the asset by selling just some shares of it. o Because it’s an emotional and lifestyle investment, you’re primarily driven by these factors when it comes time to sell rather than the dispassionate analysis of it as a real investment asset. o And by living in the asset, don’t you mean paying all sorts of costs related to that?