Recently I came across this article which listed some of the reasons why buying a home is not a good long term investment. Admit that I strongly disagree with his argument and in this article I will thoroughly analyze his reasons why he is wrong.
He bases his arguments through Shiller, the man who won the Nobel Peace Prize last year, as well as another economist who argued against Shiller thoroughly (go figure, okay?). Granted, it was good of them to create an index for pricing homes, but if we’ve learned anything over the past twenty years, it’s that economists are always wrong. So basing a real estate investment thesis on an armchair professor? I do not think so. Let’s move on to the next part.
Shiller argued that housing is not a good provider of capital gains, but a good provider of housing services. Hmm, I’d like to point this out to the IRS. I’m pretty sure a house in the 1950s wouldn’t have cost as much as it does today. Despite Shiller charting home prices going back to the 1890s to show that home values didn’t change much after adjusting for inflation, home values have increased. What he forgot to mention is that even in times of inflation, home prices seem to be doing amazingly well.
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Stock Vs. real estate?
From this point the author compared stocks as a better investment, as the dozens of stock market crashes over the past 100 years do not indicate that the stock market is an extremely volatile investment. While you may say that you may outperform a home as an investment if you just invest in the index, but let’s delve a little deeper to see the benefits of owning a home.
What the author forgets in his thesis, despite the fact that he quotes Schiller as saying that owning a house is a good provider of housing services, is that inflation causes the cost of housing services to rise. What you paid for rent in the 1890s is very different from what you would pay in today’s world. As I write in my recent trip to Argentina, I wonder how an Argentinean feels when he has to sign rental agreements that increase the rent the second year by 30%. Or I wonder how a San Franciscan even feels about renting when he chose not to buy a home in the 1990s? The cost of living increases. Rents go up.
But not if you have a fixed rate mortgage. If you have a fixed rate mortgage, your payment will always be the same. In an inflationary environment, you are getting a huge discount on your loan repayment. Even in 2014, I’m wondering what the payments were like in 1984. Let’s put up a wild figure and say your monthly mortgage was around $600. The cost of gas in 1984 was $1.21. This means that in 1984 you needed 495 gallons of gas to pay your monthly mortgage. If your payment today is still $600, but gas is $3.68, that means you only need 163 gallons of gas to pay off your monthly mortgage. You needed very little gas to pay for the living in your home. In the meantime, I think the fare probably went up with the cost of gas. And that is the power to take loan in case of inflation. So all I’m saying is I bet you’re going to feel pretty smart by 2044 when you just locked down the 30 year mortgage rate.
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conclusion
So I think in this instance both the author and Schiller missed a big point. Although housing prices may have remained stable throughout time after price adjustments, the cost of living in a home was completely pushed out of the argument for their convenience. Millions of Americans have hedged against the rising cost of living by owning a home. You can’t do that with stocks.
Stocks go up. But so is your fare. Your principal and interest payments on your home? It’s going to be the same (don’t lock anything adjustable, go with fixed!)
Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
