James Altucher basically lays out the most logical argument countering the stupidity perpetrated throughout the housing bubble. For what it’s worth, I don’t believe we’ll be at the bottom until this is a widely held belief. Houses are risky investments that only pay off in a declining-rate and/or improving demographic environment. It is very unlikely that we will have either in the next 20 years with the Boomer cohort leaving peak earning/spending years, and rates at historical lows. We could see housing declining against inflation for a generation to come. It all depends on how fast we clear out the dead wood of overvaluation based on historical appreciation rates.
From Yahoo:
The past few years have certainly challenged the idea that real estate prices only go in one direction. But the downside of the “American Dream” is even more pronounced, says James Altucher of Formula Capital.
Owning a home has “never been a great investment,” Altucher says, noting housing went up a dismal 0.4% annually vs. 8% for the stock market from 1890 to 2004, according to the Social Security Advisory Board.
Moreover, Altucher says the notion buying a home is a ticket to financial security is a “scam” perpetrated on the American people by corporations seeking to keep us in debt, less mobile and with the storage to purchase all sorts of needless consumer goods.
That’s a provocative statement, hard to prove, and certainly subject to debate. Such a view also leaves out the intangibles of home ownership, such as the stability and other benefits raising a family in a community can bring.
Still, it’s hard to argue with Altucher’s main point, as detailed in a recent Daily News article: from a purely economic basis, there’s a lot of downsides and hidden costs to home ownership that get lost in the “American Dream” discussion:
* Insurance premium.
* Property taxes (which usually offset any tax deduction you get from your mortgage interest).
* Maintenance (pipes break, electricity problems, etc.).
* Remodeling costs.
* Utilities (utilities and maintenance for renters is often reflected in the rental price, but it’s not reflected in a mortgage when you own).
* Yard work, pest control, etc. (again, rents usually have this built into the price, but mortgages don’t).
* A down payment of at least 15%, which is $90,000 on a $600,000 home.
Closing costs, usually 5% of loan amount, or another $25,000.Rather than concentrating so much of your wealth in a potentially illiquid asset, Altucher says most of us would be better of renting. If you want to bet on a housing recovery – and he does believe housing is a good short-term bet here – Altucher recommends buying a REIT like the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).
So if buying a house is a bad investment, should the more than 20% of American mortgage holders currently under water just walk away, as some advocate? Check the accompanying video to hear Altucher’s take on this highly controversial topic.
It’s a scam for some, but it’s also a nightmare for many. Speaking of debt, over 40% of every tax dollar that the federal government receives pays just the interest on our national debt. This is insane! Our society has been conditioned to expect somthing for nothing. That’s over.
Work the numbers out for yourself. If renting costs more than buying, then buying is profitable.