Recently, a colleague directed me to an article published on Seeking Alpha titled "Why Buying a House is a Terrible Investment." Since the author of this article, Kyle Fishman, happens to be my son, I was flummoxed to discover that he had managed to 'un-learn' everything I had taught him about the merits of home ownership. So before he continues on his mission to spread wrong-headed thinking across the internet, I believe that a rebuttal is in order.
After carefully reviewing Kyle's arguments, I could find only one point in which renting offers a practical advantage over owning, and that is in mobility. If one feels that career opportunities or other issues may present a high probability of requiring a change of residence, then yes, renting would be the better choice.
Granted, a lack of money may leave renting as the only choice. But on the remainder of his points, readers should take caution to note that my son lives in a bachelor-centric fantasyland, blissfully unaware of the day-to-day struggles of working families.
Kyle needs to realize that most people cannot devote the greater portion of their free time to watching Suze Orman and Jim Cramer … and therein lies the reason for why all his other arguments fall apart. An overwhelming majority of the population does not have the financial discipline to invest in stocks as their principal method of saving.
Even when only considering basic index funds such as (NYSEARCA:DIA), (NYSEARCA:VTI), or (NYSEARCA:SPY), most people do not have a high tolerance for risk. How often do you hear a person say, "I like owing the government on April 15th. That way I can make money by investing my taxes for a year myself, instead of giving it to Uncle Sam and getting a refund later."
Most people, especially families, if able to come up with a down payment, would prefer to own rather than rent. If you've got kids or pets, that patch of green grass is very meaningful. So is that basketball hoop in the driveway. Will those stocks in your portfolio give you as warm a feeling as inviting friends over for a backyard barbecue? Kyle, haven't you seen the end of the Zillow ad where they say "It's not just a house. It's a place to make your life happen."?
No, I think Kyle would rather be awakened at four in the morning by a herd of elephants playing loud music through the paper-thin walls of his apartment. And he hopes that his landlord actually cares enough to send someone over to fix the broken toilet in less than two weeks. Oh, and not to mention how understanding his boss will be when he misses work because the parking lot wasn't plowed after a snowstorm.
Ok, back to finances. A mortgage is a steady 'forced' investment (and savings) which more people are able to handle as opposed to nervously watching the daily ups and downs in the market. My philosophy is to buy 'less' house than you can afford, not more. That way you're not house-poor. You can save for kids' college, for cars, for dining out, and maybe for a vacation here and there. I was laid off several times and we were able to avoid being foreclosed upon because our monthly payment was low.
I also recommend if at all possible, a 15 year mortgage over a 30 year … especially with today's still historically low interest rates. In the 1980's, mortgage rates were in the stratosphere-around 17 percent. When the government briefly offered a 10 percent rate, potential home buyers stormed those banks and camped out in tents for three days. Today's rates of 3 and 4 percent are a good bargain.
When you get to age 50 or 60, that's when things really get interesting. I'll just use some ballpark figures here for our area of the country. The homeowner with the paid-off mortgage is now paying about $500 a month for property tax and insurance and that's not likely to change much. The renter is paying about $1,000 a month. And the renter is hoping that he won't have a greedy landlord who gouges him with annual increases greater than the rate of inflation (because that's exactly what they often do). The renter is paying an extra $6,000 a year now more than the homeowner. What will it be if he lives to age 90 as so much of the population is doing?
At retirement, the homeowner has a valuable asset that can continue to be lived in or converted into some other financial vehicle that can supplement social security and pensions. A reverse mortgage is becoming a more popular way to draw out the value of your home while you still live in it during your 'golden years'. The only downside is that your children will inherit less of your money (as if that were actually a downside).
But, Kyle, you needn't worry about that. After reading your article, your mother and I have decided to rewrite our wills leaving our entire 'terrible investment' to your sister.
Disclosure: The author is long DIA, VTI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.