Home Ownership Is The West’s Biggest Economic-Policy Mistake

[PhillyRising]

Originally Posted by Investing In Chicago

I'm not sure anyone is advising that home ownership is ALWAYS better than renting as you claim, that's a pretty stupid comment, isn't it? Always and Never are two words that should not be used with investing and real estate as every situation is unique.

It sounds like you had a bad experience owning a home, which based on the little information you provided, is probably based on poor decision making on your part, rather than home ownership as a whole.
Generally speaking, buying more house than one can afford or buying a home that needs more work than you are willing to take on is usually not a good idea.

Also, your "advise" about 15 year mortgage and 30-40% down is somewhere between bad and terrible advise for most people, especially young/first time home buyers.
Have you seen interest rates lately, why on earth would you take a 15 year mortgage? It makes no sense; and 30-40% down? that typically won't buy your rate down, and that additional money is probably better used invested in something that will get you a 8% return or better.

Like any investment, it isn't wise to invest in something you don't understand. Perhaps a little more research would have been a good idea?

I'll say it again, for the vast majority of Americans, home ownership is the #1 wealth building vehicle out there.

I won't be condescending to you in my reply as you were to me. You have your opinion. That is what your reply is...,your opinion. The out of control condescending snark of people on this site is why I rarely visit it. You can't say anything without somebody who thinks they know it all jumping all over you and calling you stupid.

It is better to pay off your house as fast as you can. You mean you like paying highway robbery interest to a bank? A house isn't supposed to be an investment. It's your shelter. It can become an excellent asset ONCE YOU PAY IT OFF. I mean if you are lucky to live in an area where property is always going up, it's an nice investment while you pay a mortgage and you can sell and cash out like I did. However, When you pay a mortgage...YOU DON'T OWN THE HOUSE. The bank does. They can toss you out if you don't pay. You have to keep up the property too. A mortgage is a rent to own deal to me. It's not your house until you get the deed. So why would you want to prolong the agony of paying a mortgage past 15 years if you don't have to? Why would people want to put a little down and pay PMI? That's a waste of money to me.

You say putting 40% down and paying it off fast is bad for a first time homebuyer? How so? If they are 28 years old and have that money saved, they can have the house paid off by their early 40's...as they head into their prime earning years when you really can sock money away for investment. Who wouldn't want to own a home outright at that time. However, it is getting harder to do what I suggest and most people are going to be barely putting 20% down and taking 30 maybe even 40 year mortgages. Well good luck with that. If people do take out 30-40 year mortgages, then the best thing they could do is pay extra when they can afford it to cut down the years. The faster you own the home outright and paying less interest on the house...the better. The mortgage interest deduction is only a big benefit for the first 10-12 years...and then it's impact lessens fast.

And yes...I made mistakes. However I am not stupid.

[PhillyRising]

Originally Posted by Steely Dan

i would imagine that most people who own their own home also rented at one point or another when they were younger.

i lived in 4 different rentals in my 20s before biting the bullet on my first condo when i was 30.

i've been a home owner ever since, and can't foresee ever going back to renting.

different strokes for different folks.

Absolutely.

You might feel differently when you get near retirement age. That's the trend where I live. Almost all of the seniors in my building all sold big homes and are using that cash to live in these rentals. They didn't want to keep up a house in retirement. Of course they all sold expensive homes to do it.

If I had less years to pay on my mortgage and had more equity in the house, I might not have sold when I did. It would have made sense to pay it off and have the asset in full. I just was not in that position.

Plus, We didn't need all that space. We are two older gays with no kids. My partner didn't want any more steps to deal with in a house. Downsizing from a 1900 sq ft townhouse to an 1100 sq foot apartment was our first step. We will downsize again in the coming years. Who knows..maybe we buy a tiny house outright when I retire in 12 years.

[Investing In Chicago]

Originally Posted by PhillyRising

I won't be condescending to you in my reply as you were to me. You have your opinion. That is what your reply is...,your opinion. The out of control condescending snark of people on this site is why I rarely visit it. You can't say anything without somebody who thinks they know it all jumping all over you and calling you stupid.

It is better to pay off your house as fast as you can. You mean you like paying highway robbery interest to a bank? A house isn't supposed to be an investment. It's your shelter. It can become an excellent asset ONCE YOU PAY IT OFF. I mean if you are lucky to live in an area where property is always going up, it's an nice investment while you pay a mortgage and you can sell and cash out like I did. However, When you pay a mortgage...YOU DON'T OWN THE HOUSE. The bank does. They can toss you out if you don't pay. You have to keep up the property too. A mortgage is a rent to own deal to me. It's not your house until you get the deed. So why would you want to prolong the agony of paying a mortgage past 15 years if you don't have to? Why would people want to put a little down and pay PMI? That's a waste of money to me.

You say putting 40% down and paying it off fast is bad for a first time homebuyer? How so? If they are 28 years old and have that money saved, they can have the house paid off by their early 40's...as they head into their prime earning years when you really can sock money away for investment. Who wouldn't want to own a home outright at that time. However, it is getting harder to do what I suggest and most people are going to be barely putting 20% down and taking 30 maybe even 40 year mortgages. Well good luck with that. If people do take out 30-40 year mortgages, then the best thing they could do is pay extra when they can afford it to cut down the years. The faster you own the home outright and paying less interest on the house...the better. The mortgage interest deduction is only a big benefit for the first 10-12 years...and then it's impact lessens fast.

And yes...I made mistakes. However I am not stupid.

I'm not being condescending, your advise is just bad:

1. Take a 30 year mortgage, you can still pay more towards principle every month if you'd like, but you're not obligated to, the way you are with a 15 year mortgage.

2. When you pay off your house, you lose the leverage component, your money can make you money in other places rather than sitting in your home. in your example of 40% down, most buyers (especially young and/or first time) would be better off putting 20% down, and putting that other 20% to work for them in an index fund or investment/rental property.

3. Mortgage interest in tax deductible

Reality is very few people are grinding out 360 mortgage payments on a home, people sell homes prior to 30 years for a variety of reasons. Young(er) people are doing themselves a big disservice if they are not leveraging thier money and making passive income.

If you are older or retired, sure paying off your home is a better option, but for the vast majority of Americans, who are in their earning years, your advise is bad.

Obviously, each individuals circumstances are different, but generally speaking the above applies.

[lio45]

Originally Posted by PhillyRising

I won't be condescending to you in my reply as you were to me. You have your opinion. That is what your reply is...,your opinion.

No, it's not merely an opinion. It's a fact that residential interest rates are so low these days that any leverage that can be used SHOULD be used, since it's extremely easy to (basically impossible not to) earn more than your cost of capital.

It's in the same class of statement as "110F with 100% humidity is unpleasantly hot" or "-40F with high winds is unpleasantly cold". Sure, it depends on tastes and on what one is used to, but not that much.

[lio45]

Originally Posted by PhillyRising

You say putting 40% down and paying it off fast is bad for a first time homebuyer? How so?

Because, in your own example, and that's what we've been pointing out, had they instead only put 10% down, and invested the rest, then they would almost certainly have a ton more money available to them in their early 40s than what they'd still be owing on the house at that time.

And if they really want to be debt-free then for some reason (irrational, but okay), then can pay off their mortgage completely at that point in time and they'll STILL have quite a bit of money left over.

If they are 28 years old and have that money saved, they can have the house paid off by their early 40's...as they head into their prime earning years when you really can sock money away for investment. Who wouldn't want to own a home outright at that time.

The only "valid" reason to not use low-interest leverage is to claim and acknowledge an irrational aversion to debt. I know a few people like that (including in my family), and that's fair enough. I also know one person who "doesn't trust banks" and stashes their entire life savings (in the five figures) in cash in their house. Again, that's fine if that's what they prefer and it helps them sleep at night, let's just not pretend it's not a nonoptimal use of their financial resources.

[Steely Dan]

Originally Posted by PhillyRising

You might feel differently when you get near retirement age.

sure. life is always throwing curve balls.

but i imagine that my wife and i will likely go the route of my own parents and downsize into a full service condo tower instead of jumping back into the rental game in our golden years.

but who knows, difficult to see, always in motion is the future....

all i know right now is that i love the peace of mind of owning our home as we raise our young children in it over the next two decades.

[JManc]

Originally Posted by PhillyRising

Plus, We didn't need all that space. We are two older gays with no kids. My partner didn't want any more steps to deal with in a house. Downsizing from a 1900 sq ft townhouse to an 1100 sq foot apartment was our first step. We will downsize again in the coming years. Who knows..maybe we buy a tiny house outright when I retire in 12 years.

We are in our mid 40's with no kids in a big house and likely won't be here forever and when we do downsize, it will be something else we will own. Probably a townhouse. I rented for most of my adult life and only owned for the past 4 years and could not go back to renting. I like the piece of mind of owning my own place.

[mhays]

Paying down the mortgage faster (extra payments, or doing a 15-year) is a conservative choice.

Putting that extra money into other investments would likely pay off more, but it's riskier.

Stocks values might be a little high currently...a conservative approach is defensible. If the stock market tanked 20%, then I'd say pour money into it.

[PhillyRising]

Originally Posted by Investing In Chicago

I'm not being condescending, your advise is just bad:

1. Take a 30 year mortgage, you can still pay more towards principle every month if you'd like, but you're not obligated to, the way you are with a 15 year mortgage.

2. When you pay off your house, you lose the leverage component, your money can make you money in other places rather than sitting in your home. in your example of 40% down, most buyers (especially young and/or first time) would be better off putting 20% down, and putting that other 20% to work for them in an index fund or investment/rental property.

3. Mortgage interest in tax deductible

Reality is very few people are grinding out 360 mortgage payments on a home, people sell homes prior to 30 years for a variety of reasons. Young(er) people are doing themselves a big disservice if they are not leveraging thier money and making passive income.

If you are older or retired, sure paying off your home is a better option, but for the vast majority of Americans, who are in their earning years, your advise is bad.

Obviously, each individuals circumstances are different, but generally speaking the above applies.

I don't think my advice is bad. You just don't agree with it.

You are assuming everyone who takes out 30 year mortgages use their spare money to invest. A large chunk of people are pissing it away. They are taking on more debt, buying stuff they don't really need and taking vacations. That's all fine but that is why half of America lives paycheck to paycheck, including many people paying a mortgage. If you take the 15 year mortgage and pay off that house fast, that's a huge debt behind you and you own it outright. However, most people cannot do that. It's the best option financially but it's an option out of the reach of the majority. I never said everyone can do it. I would have done it if I could.

People do sell homes before 30 years. So they never owned the home. They paid "rent" to the bank and made some equity on their loan but then when you add in how much interest you paid you might not have come out ahead. The tax benefit is only good during the payments for the first 10 years that go to the bank's profit margin and not your equity. Sure, you'll get a few thousand bank in tax return but it's not paying back all the interest you handed a bank and your equity barely moved. One has to hope the property appreciated a good bit in those first 10-15 years to make selling viable for a good return.

Then selling a house these days is beyond aggravating. So many people want move in ready because they probably don't have money beyond the down payment to do anything. Then so many buyers ask for buyer's assistance where you just hand them more money at closing. I know so many people who had to put 20-30-40 grand into their house to get it ready for sale. That's a lot of money to come up with to sell.

I think we put down over 30 grand on our last house when we bought it in 2001 and after the closing costs and the agent commission was paid in 2014 when we sold, we had about 60 grand or so handed to us. So after 13 years of "owing" that house, we netted 30 grand. I think I could have done better saving another way but I never looked at either of my houses as a investment to make me wealthy. I thought I was buying the house I was going to live in for decades. Little did I know my attitude would change....

[PhillyRising]

Originally Posted by Steely Dan

sure. life is always throwing curve balls.

but i imagine that my wife and i will likely go the route of my own parents and downsize into a full service condo tower instead of jumping back into the rental game in our golden years.

but who knows, difficult to see, always in motion is the future....

all i know right now is that i love the peace of mind of owning our home as we raise our young children in it over the next two decades.

Very understandable!

[PhillyRising]

Originally Posted by lio45

No, it's not merely an opinion. It's a fact that residential interest rates are so low these days that any leverage that can be used SHOULD be used, since it's extremely easy to (basically impossible not to) earn more than your cost of capital.

It's in the same class of statement as "110F with 100% humidity is unpleasantly hot" or "-40F with high winds is unpleasantly cold". Sure, it depends on tastes and on what one is used to, but not that much.

You are assuming most people are savvy with their money.

[PhillyRising]

Originally Posted by JManc

We are in our mid 40's with no kids in a big house and likely won't be here forever and when we do downsize, it will be something else we will own. Probably a townhouse. I rented for most of my adult life and only owned for the past 4 years and could not go back to renting. I like the piece of mind of owning my own place.

See...I like the peace of mind that I don't have to worry about fixing anything. When something breaks, I just go onto our online portal and put in the ticket. The maintenance guy comes the next day. I don't even have to buy light bulbs for the light fixtures that came with the apartment. It's and LEED certified building so I am assuming they want to make sure the right bulbs are being used. I don't know. All I know is that is all part of my rent. This was a brand new unit when we moved in too as our building is only 5 years ago and we were the first one in this unit. The dishwasher was replaced. No paying 800 bucks for a new one. The caulk in the bathroom doesn't look good...come recaulk it. I don't have to do it and I don't have to take a day off of work and wait for the contractor to show up. That's my peace of mind. Not having to do it! All I used to do was worry what was going to break and how am I going to pay for it.

It does help to rent from a top landlord. The company who owns our building developed the whole planned community and their HQ is located here.

Picking a landlord is as critical as picking a builder when buying a brand new home IMO...

This is who I rent from......and it will be hard to leave here.
• Video Link

[Baronvonellis]

Originally Posted by PhillyRising

I don't think my advice is bad. You just don't agree with it.

You are assuming everyone who takes out 30 year mortgages use their spare money to invest. A large chunk of people are pissing it away. They are taking on more debt, buying stuff they don't really need and taking vacations. That's all fine but that is why half of America lives paycheck to paycheck, including many people paying a mortgage. If you take the 15 year mortgage and pay off that house fast, that's a huge debt behind you and you own it outright. However, most people cannot do that. It's the best option financially but it's an option out of the reach of the majority. I never said everyone can do it. I would have done it if I could.

People do sell homes before 30 years. So they never owned the home. They paid "rent" to the bank and made some equity on their loan but then when you add in how much interest you paid you might not have come out ahead. The tax benefit is only good during the payments for the first 10 years that go to the bank's profit margin and not your equity. Sure, you'll get a few thousand bank in tax return but it's not paying back all the interest you handed a bank and your equity barely moved. One has to hope the property appreciated a good bit in those first 10-15 years to make selling viable for a good return.

Then selling a house these days is beyond aggravating. So many people want move in ready because they probably don't have money beyond the down payment to do anything. Then so many buyers ask for buyer's assistance where you just hand them more money at closing. I know so many people who had to put 20-30-40 grand into their house to get it ready for sale. That's a lot of money to come up with to sell.

I think we put down over 30 grand on our last house when we bought it in 2001 and after the closing costs and the agent commission was paid in 2014 when we sold, we had about 60 grand or so handed to us. So after 13 years of "owing" that house, we netted 30 grand. I think I could have done better saving another way but I never looked at either of my houses as a investment to make me wealthy. I thought I was buying the house I was going to live in for decades. Little did I know my attitude would change....

Yea, that's the thing where is a source for unbiased information on what all the costs are to buy and sell a house? If you talk to a realtor they will tell you to buy buy buy now, cause that's their job. But is it really in your best interest to for, personal situations vary. I went to business school and they didn't teach a thing about buying a home. I'm still waiting for anyone to step by step explain the process and all the expenses. Closing costs, interest expenses, tax deductions ect. Sure, if you've bought and sold lots of property you pick this stuff up, but for someone that's never bought property its a lot to consider. For me I'm lucky to rent from my uncle who has kept my rent relatively stable, and I can do whatever I want to my unit. I'm handy, and enjoy fixing things around house. I'm paying money into my family instead of a random company, and since he has no kids I will probably inherit it back anyway.

I would agree that's its generally better to do a 20% downpayment and invest the rest of your money. Over time you would have alot more money if you invested it in mutual funds, and at a later date could pay off the mortgage while having more left over. The time value of money and compounding interest is very powerful over a 10-20 year period.

The guy who puts all his money in his mattress, I hope he at least bought a bunch of gold or silver with his cash. Gold has been going up for a while and is a asset that keeps up with inflation, a pile of cash will just decrease year after year with inflation.

[Investing In Chicago]

Originally Posted by Baronvonellis

Yea, that's the thing where is a source for unbiased information on what all the costs are to buy and sell a house? If you talk to a realtor they will tell you to buy buy buy now, cause that's their job. But is it really in your best interest to for, personal situations vary. I went to business school and they didn't teach a thing about buying a home. I'm still waiting for anyone to step by step explain the process and all the expenses. Closing costs, interest expenses, tax deductions ect. Sure, if you've bought and sold lots of property you pick this stuff up, but for someone that's never bought property its a lot to consider. For me I'm lucky to rent from my uncle who has kept my rent relatively stable, and I can do whatever I want to my unit. I'm handy, and enjoy fixing things around house. I'm paying money into my family instead of a random company, and since he has no kids I will probably inherit it back anyway.

.

Youtube is your friend - From a rental property perspective I recommend Bigger Pockets (Youtube, Podcast, their own website/forum) and for more Personal Finance / Investment / Real Estate I recommend Graham Stephan.

There are literally dozens of others to follow, but these are the ones I like the most.

[Acajack]

I still think a lot of the "rent + invest" chatter here is a bit blind to human nature.

I don't know about you guys but in my widest possible entourage (white collar, upper middle class) I have no idea where these people who've always rented and have nice and fat "paper" (ie financial) investment portfolios are hiding. Because I don't really know many people like that.

The people I know can generally be broken down into three groups:

1) own a (usually mortgaged) property or properties of some kind and most of their money is tied up in that, with maybe a little invested on "paper"

2) own a (usually mortgaged) property or properties of some kind, plus they also have quite a bit invested on "paper"

3) rent and have little invested on "paper" or anywhere else - at least no more than groups 1) or 2)

[chris08876]

A lot of people don't have the buffer to invest. The figures on folks living paycheck-to-paycheck are alarming. I'd bet a lot of us here are not in that club, so we talk about investing and multiple vacations like its nothing or cars, but for a lot Americans, even spending an extra $100 a month is a big commitment.

I'm not speaking bull shit either, its the truth. And in places where you wouldn't expect it either.

[McBane]

LOTS of great posts here and am enjoying this discussion. I'd like to think that real estate CAN BE (depending on circumstances) A (one of many) GOOD (unless your lucky to buy in an area before it takes off) investment.

As others have said, many people (especially families) buy for stability. The last thing parents want to do for their children is shuffle them constantly from neighborhood to neighborhood, school to school. If along the way, your home accumulates wealth, then so all the better. But I'm not sure the average Joe buys their primary home as an investment vehicle.

Originally Posted by PhillyRising

It is better to pay off your house as fast as you can. You mean you like paying highway robbery interest to a bank? A house isn't supposed to be an investment. It's your shelter. It can become an excellent asset ONCE YOU PAY IT OFF.

Regarding this, I understand the no debt mantra but this thinking is flawed and steeped in the emotion. The fact is, SOME DEBT IS GOOD! If you can get a 30 year home mortgage at 4% (far from "highway robbery") you're much better off investing any excess money than rushing to pay back the bank. This means no rounding up, no bi-monthly payments, no 15 year loans or down payments beyond the minimum threshold to avoid PMI. But this approach requires discipline and a change of mindset.

In fact, we just refinanced our home and took the cash out ($100k) after eight years of ownership and a major renovation. The total cost of the loan over the next 30 years will amount to $130k in closing costs and higher/additional payments. BUT over that same period of time, that $100k can turn into a $1 million (assuming 8% return rate). I maintain the stability of being a homeowner but with the liquidity of a renter. I'm surprised no one has mentioned this option before.

[Baronvonellis]

Originally Posted by Investing In Chicago

Youtube is your friend - From a rental property perspective I recommend Bigger Pockets (Youtube, Podcast, their own website/forum) and for more Personal Finance / Investment / Real Estate I recommend Graham Stephan.

There are literally dozens of others to follow, but these are the ones I like the most.

Thanks, the video from Graham Stephan on how to save for a downpayment is the best thing I've seen anywhere on the subject, where he actually breaks down the costs mathematically. So basically if you get a 4% home loan the effective rate you will have is 1% and you might as well get a 30 year loan in that case. I like his videos. Why don't all schools teach this stuff on personal finance and buying a home? It baffles me. No wonder people fall prey to payday loans and credit card debt.

[Investing In Chicago]

Originally Posted by McBane

In fact, we just refinanced our home and took the cash out ($100k) after eight years of ownership and a major renovation. The total cost of the loan over the next 30 years will amount to $130k in closing costs and higher/additional payments. BUT over that same period of time, that $100k can turn into a $1 million (assuming 8% return rate). I maintain the stability of being a homeowner but with the liquidity of a renter. I'm surprised no one has mentioned this option before.

I love the cash out ReFi option - i've done it on quite a few of my rental properties. The best strategy is something called the BRRR (Buy, Rehaby, Rent, ReFi) strategy, if somebody wants to scale a rental business quickly, this is the way to do it.
Word of caution: BRRR strategy only works if you are responsible with your money and can still cash flow after the cash out ReFi.

[Investing In Chicago]

Originally Posted by Baronvonellis

Thanks, the video from Graham Stephan on how to save for a downpayment is the best thing I've seen anywhere on the subject, where he actually breaks down the costs mathematically. So basically if you get a 4% home loan the effective rate you will have is 1% and you might as well get a 30 year loan in that case. I like his videos. Why don't all schools teach this stuff on personal finance and buying a home? It baffles me. No wonder people fall prey to payday loans and credit card debt.

Yeah, Graham produces great content.