Chuck Ponzi February 15th, 2006

True to the Yahoo Effect I documented some time ago, it is a dumbed down version of the truth for something about the housing bubble to appear on Yahoo.com. Their recent story of stupidity is a little title of Why Homeowners Get Rich and Renters Stay Poor.

Its main premises are fivefold.

1. Owning is cheaper than renting

The argument compares 30 years of renting with 30 years of paying a fully-amortized mortgage, assuming you bought 30 years ago and the home is fully paid off now. His premise is the worst kind of monday-morning quarterbacking. If you could see 30 years into the future, I doubt that the best decision of that time would be the purchase of a home. In addition, he fails to mention the cost of maintenance, updating, taxes, and other expenses incurred when owning a home. The hard truth of homeownership is that it is far from cheaper than renting for at least several years. And, timing is everything; people rarely keep jobs more than a few years; and moving every several years has become a consistent reality over the past 15 years. Conventional wisdom used to be that you must own a home for at least 5 years to break even after selling; anything less than that would most assuredly be cheaper to rent.

Just as importantly, the fully-amortized loan is almost unheard of. In stretched affordability, any submission must be of the negative or zero-amortization art. As a famous proponent of the bubble once said; paying off a mortgage is unsophisticated.

2. Homeowners get Leverage

The point here is that you are using other people’s money to make your own; leverage gives you greater gains on the upside.

The unfortunate problem is that leverage also gives you greater losses on the downside. The stock market crash was largely precipitated by leverage of lower multiples than the current housing bubble. Good luck on the way down.

3. Homeowner’s get tax breaks, renters don’t

The article states the obvious:

The best way to stay poor is to pay more than you have to in taxes.

Well, if that’s not a truly strange argument. An absolute statement would be assured in the opposite; the best way to get rich is to less than you have to in taxes. (or paying what you have to in taxes). However, the problem with this statement is that hundreds of millions of people have paid what they owe in taxes and not gotten rich; and some have even gone to jail for paying less than you have to in taxes. Taxes have little to do with being rich; regardless of what Robert “Tax Evasion” Kiyosaki might tell you. I can bet you that the richest people pay far more taxes than the normal person does.

While tax breaks can be an important reason to buy a home, it makes little sense to pay $10 to save $9 in taxes. More importantly, in today’s housing insanity, you’d be paying $10 to save $3 in taxes.

4. Homeowners can Earn Tax-free profits

While this statement has many qualifications, it is nonetheless true. However, there is no deduction for losses on the way down. Sorry; if you lost, no tax savings for you.

And, just as importantly, which is it? Are you going to hold your house or take the tax free profits. While this diametrically opposes point #1, I doubt that anyone in the housing industry would tell you to sell your home; you’re sitting on a gold mine, after all. The truth is, tax free profits are just rolled into another house in most cases; defeating the purpose of all of those tax-free semolians.

5. Homeowners become savers

This is the dumbest of the five:

Each time you make a mortgage payment, you’re saving money. That’s because with each payment you’re reducing your loan balance a little — and that, in turn, is building your equity. (This assumes you don’t have an interest-only loan.) The longer you’re in your home, the more equity you build, the more you save — and the richer you get.

The problem with this one is that you’re not really saving. You can’t just take the money out of a house (yes, there are HELOC’s, but that’s a loan, not a withdrawal) Besides, noone gets a normal-amortizing loan anymore; they’re so 1960.

No, the sad reality is that homeownership might just do the opposite of making you rich; it’s common enough for it to have its own term; House Poor.

The difference between house rich and house poor is similar to becoming rich from investing; it is largely an issue of timing.

• Uncategorized