
The Economist Who Thinks Owning a Home Is a Terrible Investment - wyclif
http://www.theatlanticcities.com/housing/2013/10/economist-who-just-won-nobel-prize-thinks-housing-terrible-investment/7240/
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bradleyjg
Absent massive government intervention it wouldn't even be close. With the
fixed rate, 30 year mortgage with no prepayment penalty, low down payment and
massively subsidized rates; mortgage income deduction & the income exemption
for imputed rent; and other government programs it becomes something of a
closer call. Even so, it's still a highly leveraged asset that is as non-
diversified as an investment can be, with very high transaction costs,
significant carrying costs, and only moderately liquid markets at best.

The government policies to subsidize homeownership are unfortunate in that
they are very regressive and they are quite expensive for the meager positive
externalizes that _possibly_ flow from widespread ownership.

~~~
avn2109
Can anyone shed some light on why all this government intervention exists? In
other words, why so much propaganda/pressure from the man to buy houses?

~~~
don_draper
Some people think, rightly or wrongly, that home ownership:

* Results in citizens that care more about the neighborhood

* Nudges people into saving for retirement

* Allows the average Joe to take advantage of inflation (this is true IMO). House goes up in value, so does their net worth.

~~~
bradleyjg
On the second and third points, all other things being equal, (which they
aren't because of government intervention) people would be far better off with
a diversified portfolio of debt and equity than a house.

~~~
walshemj
And when Interest rates return to normal and they lose 30% or more in a bond
crash on their "safe" government bonds what then?

A diversified portfolio should also include property which is why I have
investments in REITS as well as shares.

~~~
bradleyjg
There are many REITs traded on stock markets and included in broad total
market funds including residential, commercial, retail, and industrial. E.g.
AVB, VNO, EQR, SPG and many others.

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jandrewrogers
At various times I've owned houses and rented. Currently, I rent. People tend
to seriously underestimate the costs associated with home ownership because
they are more diffuse than when you rent.

Unless you can afford to pay for most or all of the cost of the house upfront,
you will often find it easier to increase your net worth by renting after all
the opportunity costs and losses are added up.

This is how landlords make their money. If they own a house outright then
their cost basis is less than a homeowner with a mortgage and manageable
downpayment. In many cities, you are better off renting and saving until you
can make a big enough mortgage payment (or pay cash) where the purchase starts
to make sense relative to renting.

~~~
cpncrunch
I'm in the same position as you. Even though we got lucky and our house
appreciated 17% over 7 years, after fees it works out about a 2% return per
year (and that's not even taking into account property tax, insurance and
maintenance). Right now we rent and we've put our money into the stock market
- it generates a much better return with much less effort.

Even if you do have the capital to buy your house with cash, it's still not a
good investment. Basically you are tying up all that capital that could be
earning 4% per annum or more in an index fund over the long term.

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ljoshua
I've liked Shiller's opinions and seen them before, and agree with them. Just
because it makes a "terrible investment" however doesn't mean it's a terrible
thing to do. You look at your home as an essential element of life (shelter)
and do the math for rent vs. buy, but you don't worry about making a huge
return from it.

Use other investment vehicles for growing capital.

~~~
vidarh
Another point is that if you see it as an investment, you should see it as a
_hedge_ against runaway prices:

If you rent, and are unlucky, you might find yourself priced out of the market
for the type of properties you would like to live in, and at the same time
become priced out of purchasing.

Where I live, purchase prices and rents have increased 30% or so in the 8
years since I bought, while my repayments are the same. My repayment +
interest has been substantially below rental prices since a few months after I
bought.

If it had gone the other way, yes it would have been a bad investment, but it
would have been a cost I'd still be ok with because of the predictability it
gives (and if prices dropped, I'd use it as an opportunity to trade up, still
hedging against prices increasing again).

Essentially by purchasing I have locked in an upper limit on the vast majority
of my housing costs for the duration I stay in this house, and also reduced
the risk of a substantial jump if/when I move, as the value of my current
house is likely to move reasonably close to the overall market.

That hedge is worth a lot to me.

~~~
rgbrenner
You're completely ignoring the downside of your home. If the job market in the
area where you live declines, you'll find it more difficult to move to an area
where you're able to find work.. and if the decline in your area is severe
enough, you may also find yourself unable to sell your home and/or must sell
at a substantial loss.

Your potential downside is not the difference between a lower rent and the
cost of a home. Your potential downside is the entire cost of your home.

This is actually one of Shiller's points about rent vs ownership (mobility).

~~~
michaelochurch
The real evil is that it's impossible to be zero-beta to housing, because even
if you own your house (neutral position; renting non-owners are short) you are
still exposed if you need to move. Unfortunately, I can't see a real fix for
this except for more remote/mobile work.

One thing Europe has that is good is a _lot_ of public housing, even for
middle-class people (like typical renting programmers)-- not just US-style
"projects". This is great because it keeps the price down on the private
market as well. You still need to build enough to avoid scarcity, of course.
Otherwise, you end up with hellish queues.

~~~
toomuchtodo
Is this public housing in Europe anything like public housing in the US?

I'm a US citizen with ambitions to one day move to Europe (I'm a
DevOps/Sysadmin/Operations guy); how does public housing in Europe work?

~~~
walshemj
Depends on country in the UK a single person will _never_ get a council house
unless your a single mum.

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mixmax
_" It can't be true that homes rise 10 percent a year. If they did, in the
long run no one would be able to afford a house."_

This is such an obvious observation, but one most people miss completely. Math
doesn't lie.

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AndrewKemendo
I am firmly in the Schiller camp, however I did just buy a home. It was a
tough decision for me but I think it was rational. I say that because I am
fully aware of the statistics of home ownership as well as its historically
poor performance.

The prime reason that we purchased a home is because we could not renovate and
open our basement for business in a rental property. Overall our net costs of
home ownership now are eclipsed by the amount we are making from being able to
do the things only home owners can.

The other major reason is that for us, even when factoring in estimated
maintenance costs, we would pay less monthly on a mortgage than we would
renting. Even if we lose some home value over the period that we are planning
on living here (~6 years) we would see the return of some of it rather than
none in a rental scenario.

The bottom line is, this whole argument is much much more complex than what
the retail value of your home is between the time you buy and the time you
sell. As with pretty much everything, the economic costs are not captured in
the pricing data.

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rainsford
Owning a home is a terrible investment when compared to other investments, but
you really shouldn't compare it to other investments (at least with your
primary residence) because the choice isn't "spend money on a house" vs "spend
money buying stocks". You have to live somewhere, and the choice to not buy a
house (i.e. the choice to rent) brings with it a significant chunk of spending
on which you lose every cent you put into it.

~~~
techsupporter
> (i.e. the choice to rent) brings with it a significant chunk of spending on
> which you lose every cent you put into it.

I really dislike this line of thinking. Renting is not "throwing money away"
because you have to live somewhere. Buying gives you the opportunity to
capture any upward movement in the housing market and provides a stable
payment over the long run but it also exposes you to risk of downward pressure
and makes for a very illiquid asset. Renting gives you the ability to relocate
on very little notice (in most places, your maximum is a year, assuming you
get a better offer within a day of signing a new lease) and shelters you from
immediate maintenance costs.

The problem is that primary housing isn't an investment. It's just as much an
emotional and financial decision as buying a car (versus, say, going car-free
or leasing a car).

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nostromo
Someone smarter than me once told me, "never bet against the fed."

Being short on housing seems like doing just that. Not only have they been
keeping money dirt cheap, bailing out banks, taking over Fannie & Freddie, but
the Fed even went so far as to buy junk mortgages directly.

In a perfect laissez-faire fantasy world, this guy is probably right. In the
world we live in, where the US Government and Federal Reserve do everything
they can to keep the music playing, perhaps not.

~~~
dnautics
the reason why you never bet against the fed is more subtle. You should never
bet against the fed, not because it never causes downturns, but because by the
time it actually causes the downturn you've lost ground because of your short
position, and hard. Unless, you're really lucky.

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jack-r-abbit
After owning my first house for about 12 years I was able to refinance it and
pull out enough of my equity to cover the down payment of my second house. Now
I rent out my first house. The rent I get _almost_ covers the mortgage +
property taxes. So after 12 years, someone else is buying that house for me.
This might not be the greatest investment... but I wouldn't put that anywhere
close to "terrible." YMMV

~~~
userulluipeste
"The rent I get almost covers the mortgage + property taxes."

You are lucky to have bought a house that can benefit from high renting
prospective. This is not the case everywhere and whereas taxes might go up
(whenever the authorities will want more money), the rental profits simply
might not. It's not a scenario easy to accept - renters usually have the
flexibility to move to other cheaper places or to group together (shrinking
the rental market BTW), but the house-owning costs are there to stay. Also,
the worst case is when the entire area enters in decline, housing costs plunge
and render the entire multiple-house ownership a bad investment.

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jms
The question is, what's a better investment?

Investing in the home you live in gives you tax breaks (jurisdiction
dependent).

You will look after your own home, instead of having renters with no vested
interest.

You need access to a home anyway, why involve a 3rd party (landlord).

The leverage you can get is fantastic, and the interest payments are generally
similar to what you'd be paying in rent anyway.

This does no apply to Buy to Let however, the advantages above don't really
apply. A second property makes much less financial sense to me.

Having said that, I currently rent. I'm not settled down enough to tie myself
to a single location, Australian property is super expensive (I think
overpriced, but that's just a gut feel), and I'm keeping my non startup risk
profile low to try and balance the risk I take on as an entrepreneur.

~~~
comrade_ogilvy
>The leverage you can get is fantastic, and the interest payments are
generally similar to what you'd be paying in rent anyway.

Careful.

The interest payments are only one piece of the puzzle, albeit a big one. A
renter does not need to pay maintenance/upkeep, taxes, and (sometimes)
utilities.

For a single family home, these later items could be in the ballpark of $1000
per month (sometimes less, sometimes more).

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thehme
The key here is that "you shouldn't buy a house simply because you're hoping
to pump money out of it in the long run". I think that some people working on
their first startup or simply on a project for a great software idea will
agree that this is one of their core beliefs; that making money is not the
ultimate goal, but instead a side effect of a great product. When you have a
great idea, you put everything you have on it, and if it ultimately makes you
money, it will obviously be welcomed, but the goal is to just get started and
to have something to call your own, something to propel you. Maybe a house
stays at the same value over time, but in the end, this may be enough for some
home owners who simply want a place of their own.

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Falkon1313
Owning comes with two big benefits.

First, if you own your home, you can more easily withstand a financial crisis,
whether it be a lost job, medical bills, or a totaled car...at least you have
somewhere to live. If you can't pay rent and become homeless, it's a lot
harder to recover. Second, you can pass it on to your kids so at least they'll
have some security. If you rent, you can't give them that.

But both of those only apply once you've paid off the mortgage. With the
trends being cost of living increasing while pay rates stagnate or decrease,
and cost of real estate having skyrocketed in the last few decades, for a lot
of people, even middle class, it becomes an unrealistic dream to actually be
able to pay off a mortgage within a single lifetime.

~~~
ianferrel
That's not really a difference between owning and renting. It's a difference
between having assets and not having assets. If you remove the hidden
variable, it probably tilts in favor of the renter.

Someone who rents and has, say, $100k in the stock market or bonds is arguably
in a better position than someone with a $100k house. The renter can much more
easily move to a new location to get a better job. Plus, they can afford to
eat and pay other expenses while doing so. You can't eat a house.

~~~
walshemj
But almost all people wont be able to build up 100k whilst renting. The
difference between renting and mortgage if it existed woudl never allow you to
build up this nest egg and 90% of people dont have the discipline to invest in
this way they would spend it on day to day living.

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shearnie
I wish the same could be said about Australia.
[http://thingsboganslike.com/2010/02/15/85-residential-
proper...](http://thingsboganslike.com/2010/02/15/85-residential-property-
investment/)

There's a huge stigma against renters here.

~~~
jacalata
That might have to change - [http://theage.domain.com.au/real-estate-
news/with-more-peopl...](http://theage.domain.com.au/real-estate-news/with-
more-people-renting-than-30-years-ago-change-is-needed-to-protect-tenants-
rights-20131012-2vf3x.html)

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tunesmith
What about the old saw that population is increasing but square miles are not?

~~~
ohazi
developed square miles are certainly increasing, developed land remains less
than 1% of land that can be developed easily, and population is tapering.

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bane
I wonder if Shiller owns his home.

~~~
georgemcbay
It is irrelevant to his point whether he does or not. Lots of people who are
well off own $100k+ non-classic luxury cars or at higher levels yachts and
such, the difference between those and houses being that no sane person would
argue the cars or boats are a good financial investment. OTOH, with houses and
other forms of real estate the idea that they are universally a good
investment is widely seen as accepted wisdom to the point where it is almost a
religious belief.

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jeffehobbs
Other items that are terrible investments: BABIES

~~~
ianferrel
Yeah, but no one _thinks_ that babies are good investments. Lots of people
seem to think that houses are.

I've heard people describe renting as "throwing money away" more times than I
can count. I don't think I've ever heard anyone say that about not having
children...

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manicdee
Who do you rent from?

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hannibal5
Sounds very reasonable assumption.

House prices are fundamentally tied to the income of people living in the
area. There can be ups and downs but eventually it all comes back to
fundamentals. Labor's share of national income has been in steady decline in
all OECD countries since mid 70s. Smaller part of GDP will be available to be
spend to housing.

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tadfisher
Is a 0% return better than a -100% return for the equivalent rent?

~~~
fossuser
I would suspect the general counter would be that the capital required for
home ownership is substantially higher than that for rent.

If you're going to have this money there are many better ways you could invest
it than taking a 0% return from buying a home (and hopefully also overtake the
cost of rent).

~~~
chad_oliver
In my city (Christchurch, New Zealand), renting is more expensive than
mortgage repayments for an equivalent house. I don't see how renting could be
a good idea in this case.

That said, I recognize that different cities have different conditions, and
what makes sense in one city might not make sense in another.

~~~
Game_Ender
Rent is an all-inclusive expense usually, while a mortgage is not. Rent covers
maintenance, taxes, cost of future renovations, and you usually don't have
high transactions in getting or leaving an apartment. So you can't directly
compare mortgages and rent amounts.

~~~
pmorici
A good rent vs. own comparison like the one on the NYT website will take
expected maintenance costs into account

[http://www.nytimes.com/interactive/business/buy-rent-
calcula...](http://www.nytimes.com/interactive/business/buy-rent-
calculator.html?_r=0)

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vincie
The return he quotes is an average over an aggregate of course. But if you do
proper research, you can beat that average substantially, and many people do.

