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.
To expand on the retirement bit - a purchased home is a huge portion of most people's retirement savings, from a net worth perspective. Not having to pay rent makes it much easier for many people to get by on just savings/pension/a social security check every month. Assuming, that is, they've been able to pay off their mortgage by then.
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.
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.
Home ownership is seen as a remarkable mechanism of social pacification; the political theory is that people owning homes are less prone to take actions ( protest, crime or giving up work ) that threaten their means of retaining their home.
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.
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.
Most landlords I know prefer to keep as little cash as possible in equity. If they can invest 10% and have the bank finance the remaining 90% while still collecting 100% of the rent their returns look a whole lot better. Cash flow is better too.
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.
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.
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).
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.
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.
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.
> (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).
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.
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.
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
"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.
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.
>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).
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.
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.
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.
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.
Unfortunately you are incorrect on your first point as you are ignoring property taxes.
Taxes are relatively low where I live (Boulder, CO) and on my property I still have to pay $500 a month in taxes. If I lose my job and my ability to pay, it doesn't matter if I fully own my house as the government can just take it from me if I am delinquent for too long.
I am totally against house ownership unless you have enough money to put up a large down payment and enough to also withstand fluctuations in your ability to pay -- otherwise it really seems like a sucker's bet to me.
When you are a house owner, pay the property tax and have a house to let, you do not really dictate the renting price. You may try, but in the end you can only have the highest bid. Won't you rent just to alleviate the ownership costs? When so many got in the house-ownership game it become pretty much the renter's market. The renter can be choosy, you - can not.
All things progressing about equally, we run out of affordable food and water for people long before we run out of space to house them. It is a lot easier to zone and build vertically for housing than it is for farming operations.
Land never spoils, but houses sure do. Land value will always increase as the population increases, but the house sitting on top of it starts rotting the day after you finish construction. Homeowners have to spend a lot of time and effort to prolong the life and value of a house.
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.
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...
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.
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).
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.
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.
Hah! I live in Christchurch too, and yes, rents have gone up, and yes, like everyone I've been thinking about buying.
However! I'm also from Ireland where a _lot_ of my friends bought houses in the celtic tiger era and are now, on average, about 100K euro down on their "investments"
My gut feeling is that Christchurch too is a bubble. Sure it's a bubble fuelled by a nasty earthquake reducing the supply... BUT supply will come back up again (and it'll be new housing with things like insulation!)
Tricky things really. Currently my rent is cheaper than a mortgage for an equivalent - but only just. That said, I don' t have to pay rates, fees, hiked insurance etc.
The other option of course is to leave for a while - easy enough to do as a decent developer.
I've actually never got one myself, because I'm still at university. However, banks seem to be willing to lend up to 80% of the value of a house, for someone with an average income.
I suspect the biggest problem is simply that houses are very expensive compared to most of the USA. I'm flatting in a really crummy house (as in, cracks in the wall) on a quarter-acre section, yet the property is valued at $500,000.
Not with the current interest rates renting is not cheaper than mortgage.
Hi thesis also probably ignores the the fact that a mortgage is one of the few ways a normal person can use leverage and I most countrys property is a tax efficient way of handing capital to your descendants.
Where I live, there are lots of multi-family buildings, either "traditional" apartment complexes, urban apartment buildings, and a plethora of 2- and 4-unit buildings built on previously single-family residential lots. Almost all of these are solely for rent, not to purchase. That has kept rents somewhat stable but the price of buying actual land (that is, a single-family home or even a townhouse where the purchaser owns the dirt underneath the structure) has skyrocketed as people move in.
Therefore, renting is cheaper than a mortgage for most properties in my area.
> 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).
Exactly. The reason homeownership can be a good investment is not because it appreciates in value, it's because:
1) For a given residential property in a high-demand market, you can reliably extract annual rent equal to 4-5% of the value of the property in a high-demand market.
2) If you just live in the property, your expenditures are reduced by a slightly higher amount because you avoid the inefficiencies of the rental market. Also, income is taxed, but reduced expenditures are not.
3) Homeowner's insurance is usually a much better deal than renter's insurance. This of course varies based on where you live, but on average (in the U.S. anyway) you'll get better rates for equal coverage if you own your home.
It has nothing to do with some insane notion that property values always go up.
You know, when you pay rent you generally receive a place to sleep and keep your things. Just because you aren't making money on it as investment doesn't mean it's a loss.
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.
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.