Recently I came across this article spouting some reasons why buying a house is not a good long term investment. Let’s just say I strongly disagree his argument and in this article I will thoroughly dissect his reasons as to why he is wrong.
He bases his arguments through Shiller, the guy who won a Nobel Peace Prize Award last year along with another economist who argued completely against Shiller (go figures, right?). Granted, it was nice of him to create a index for pricing homes, but if we have learned anything in the last twenty years, it is that economists are always wrong. So basing a real estate investment thesis on an arm chair professor? I don’t think so. Let’s move on to the next part.
Shiller argued that housing is not a good provider of capital gains, but rather a good provider of housing services. Hm, I’d like to tell that to the IRS. I’m pretty sure a house back in 1950s does not cost the same amount as today. Despite Shiller charting home prices going back to 1890s to show that home values did not change much AFTER adjusting for inflation, home values do go up. What he forgot to mention is also that home prices seem to do surprisingly well during eras of inflation too.
Stocks Vs. Real Estate?
From this point on the author compared stocks as a better investment, as if the dozens of stock market crashes in the past 100 years do not indicate that the stock market is an extremely volatile investment. While you can say if you just invest in the index you may outperform home as an investment, 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 quoted Shiller is saying that owning a home is a good provider of housing services, is that inflation does cause the cost of housing services to go up. What you paid for rent in the 1890s is totally different from what you paid for rent in today’s world. As I chronicled in my recent trip to Argentina, I wonder how an Argentinean feels when he or she has to sign rental agreements that stipulates the 2nd year of rent has to go up 30%. Or I wonder how does even a San Franciscan feels about rent when he or she chose not to buy a house in the 1990s? Living expenses do go up. Rents go up.
But not if you owned a fixed rate mortgage. If you owned a fixed rate mortgage, your payment is always going to be the same. In an inflationary environment, you are getting a huge discount on your debt service. Even in 2014, I wondered what payments were like in 1984. Let’s just put a wild figure and say your monthly mortgage was maybe about $600. The cost of gas in 1984 is $1.21. That means 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, it means you only need 163 gallons of gas to pay your monthly mortgage. You needed way less gas to pay to live in your house. Meanwhile, I think rent probably went up along with the price of gas. And that is the power of owning debt in a state of inflation. So all I am saying is that I bet you are going to feel pretty smart by 2044 when you locked up a 30 year mortgage rate now.
So I think in this instance the author and Shiller both missed a huge point. Although housing prices may stay stable throughout the times once the prices are inflation adjusted, the cost of living in a house got totally taken out of the argument for their convenience sake. Millions of Americans have hedged against rising living costs by owning a home. You can’t do that with stocks.
Stocks go up. But so does your rent. Your principal and interest payment on your house? It is going to be same (don’t lock up anything adjustable, go with fixed!).