Not “why” but “how” you should buy a house

A couple popular bloggers have been making the case recently against the idea of buying a house. Sure, there’s overwhelming pressure in the US of A to settle down, buy as big as you can afford, live the American Dream—so some pushback seems reasonable. James Altucher and Jim Collins (the personal finance blogger, not the Good to Great author) have both written persuasive posts about “don’t get sucked in” to the real estate scam. Collins is blunt: “Why your house is a terrible investment.” It’s thorough and humorous, but I still think he’s wrong. But why?

To summarize his point of view, the main investment problem is that the house itself is so expensive. You can rarely buy more than one, so your diversification is low. To make it affordable you take out a mortgage. Now you’re leveraged and your risk is high. It’s expensive to buy due to the complexity of the transaction so you pay fees to seemingly everyone along with a 5% commission to the salespeople—both when buying and when selling (ouch!). It’s illiquid (it can take months to sell), it’s indivisible (you can’t sell your porch to raise some cash), it’s unproductive (unless there’s an orchard). It’s immobile so you’re exposed to location risk and you’re hoping there won’t be a dust bowl or dramatic regional economic shift. It’s fragile so you pay every year for insurance and maintenance. Oh yes, don’t forget, there’s annual property taxes too. For all this, your returns can be low or non-existent.

All of these points are at least partially true, but it’s also true that if you look at how stock market investors did from January 2000 to January 2010, their returns would have been -25% (that’s negative 25%). For any investment you must take a long term view. And don’t forget you can’t live inside your stock portfolio. In high school debate we called this the false comparison problem: broccoli and jelly beans are both low fat snacks, but that doesn’t make them both good for you. The comparison between stock investing and smart home buying falls apart in meaningful ways. Let’s see if we can find a better way.

The bloggers’ complaint also reminds me of the classic line from Churchill: “Democracy is the worst form of government, except for all the others.” The authors seem to forget that you still have to live somewhere. Are they suggesting that you live out of a van for the next 20 years? Or that you throw away thousands a month on rent? Michael Bluejay has a great calculator that compares the long term cost of renting versus owning. It’s an accurate and fair analysis, and it shows that in many scenarios buying is the smarter move. But I think we can do even better. I think with planning and insight we can turn a home purchase into a smart investment.

Here’s the snapshot of what I suggest you do. Find a house that is WELL BELOW your means, where the payment is less than 25% of your monthly income. Banks currently allow up to 42% of income to be used for debt service; that’s way too much. If you follow my suggestion it will likely mean the house is smaller than the “dream home” image you may have been carrying around. Think big picture regarding location so you’re more likely to be protected from climate shifts and economic dislocation. There are books to be written about this point, but even a casual analysis will suggest not buying a house near ocean or river floodplains and steering clear of already dry regions. And don’t forget being close to good schools and markets.

Choose an area with high walkability, which will help you save on automotive expenses and improve your health. Pick a place with high speed internet so you could work from home if you wanted. Look carefully at floor plans and look for an extra room to rent to a quiet nurse or on AirBnB.com. Evaluate the roof orientation to ensure that you can support solar panels and electricity generation. How about garden space? Home grown tomatoes are delicious. Suck it up and accept that property taxes are the price we all pay to live in a country with an educated populace.

Buying smart can easily generate long-term returns that will stay ahead of inflation, while providing a roof over your head and a high quality of life, and that’s a good investment.

This article first appeared in the Spring 2016 edition of the Natural Investment News

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Christopher Peck

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