Ok, I suppose one should never say “never.” But it’s extremely unlikely that I’ll ever own a house, assuming current economic conditions and realities persist. Admittedly, in a free market economy devoid of government intrusion, my position might change. Instead, I’ve formulated the following reasoning for how to view a potential house purchase based on the current climate and persistent intrusion by the government into the economy and specifically, the housing market.
So here are the 4 reasons why I’ll never purchase a house:
1) The Federal government is intent on keeping housing prices high.
Government policies (and specifically monetary policies) have consistently supported high housing prices, in order to prop up the market and support the notion that Americans can build (and retain) wealth through home ownership. In turn, they can convert that ownership into an instant credit source, by withdrawing funds through home equity loans. The government has supported and even encouraged this sort of activity especially in the run-up to the housing collapse, leaving numerous homeowners financially overextended and far less wealthy than they originally presumed on their balance sheets.
Over the last two years, we have seen a litany of policies that support placing a floor under house prices, which must mean only one thing when you boil it down: the government wants houses to remain expensive, to reward those individuals who’ve already purchased one. By inverse reasoning, people like myself who have not already purchased one are simply left with higher prices to pay in order to get one. This proposition may be appealing to some, but it isn’t to me. I think houses should be much cheaper, and I won’t purchase one until that happens -- which will pretty much be never at the rate that we’re going.
2) Cost-to-income ratio is far too skewed from a risk-reward perspective.
Housing costs, when compared to median income in the US, are heavily skewed, and thus have created an imbalance from a risk-to-reward standpoint. What I mean by this is, when you initiate a house purchase, you arguably take on a significant risk in the sense that you’re assuming the largest debt load you’ll probably ever carry in your life. For that risk, you have a reasonable expectation that the value of the house will appreciate over the 30 years or so that you pay for it.
The problem comes in when you take on a loan that dwarfs your income so considerably that you have a slim margin between being able to afford the debt payments and not being able to do so. Obviously, tens of thousands of homeowners came to this same realization when it was too late over the last few years since the housing market imploded. There simply was no margin for error for people to pay their mortgages when the monthly payment rose, or even in those cases where payments remained the same but economic softening affected other expenses and/or household income.
To underscore this point, consider the following metrics. The median income in the US in 1988 was in the neighborhood of $47,000 a year. In 2006, it was around $44,000. In 1988, the median home price was $119,000, or approximately three times as much as median income. In 2006, the median home price was $244,900, or six times as much as median income. Another way of looking at it is to say that, while median income actually declined over these 18 years, the cost of a house more than doubled.
3) Down payment alone is a limiting factor.
If you live in a metro area, such as I do, where a decent house will cost you around a half million, and a decent condo would run around $300,000 minimum, then you’re looking at serious cash required for a down payment. Even if I did have $60,000 or $100,000 laying around for a house, I’d probably not be inclined to spend it on that due to the economic climate I believe we’re in (and the worse one we’re headed for).
Rather, I can think of several other things I’d like to do with a hundred grand. I could invest in high dividend paying stocks in emerging Asian markets. I could buy options for my black swan protection protocols for months on end. Or I could use it for a number of other investments I might have in mind that I’d have significantly more confidence in compared to a house.
4) I’d really despise the maintenance -- and more importantly, its effect on cashflow.
Ok, so I don’t want to mow the lawn or try to fix the plumbing, but what I’d really dislike is the effect of all that maintenance on my cashflow. The way I see it, an apartment has one cost – rent – and it’s a known quantity from year to year with annual increases identified prior to having to actually pay them. Conversely, a house can theoretically incur an infinite number of costs, whether it’s structural issues, heating, cooling, plumbing, and so forth. In many respects, the unlimited downside cost to a house violates the notion of being as robust as possible against black swan events. If you don’t know what kinds of costs you might incur, or how much those costs might be, you cannot consider yourself protected against a black swan event with respect to your overall balance sheet.
As a sidenote, I also subscribe to Robert Kiyosaki’s philosophy that while most individuals automatically consider a house an asset, it can just as easily be viewed as a liability when you calculate the potential for costs to accumulate in the maintenance and sustainment of the home. Unforeseen costs can quickly cut into your cashflow and deteriorate your overall financial situation. Fans of Kiyosaki will recognize this line of thought from his famous book Rich Dad, Poor Dad.
I expect that many if not most readers will disagree with the above analysis contained in these 4 reasons, given the conditioning we’ve undergone in terms of believing a house is the tangible representation of the American dream. There are several good arguments for owning a home from a strictly financial and long-term investment perspective, but where I diverge with this logic is in the fact that those good arguments are founded in a reality that does not exist in the US. What I mean by this is what I said at the beginning of the article – a house is a great investment if you buy it within the framework of a free market economy. Since we only have some of the elements of that kind of economy, and we have irrefutable evidence that the government supports an artificial market for housing, then we cannot lean on the same theoretical arguments about why a house is a good investment.
That said, I invite and look forward to a dialogue on this with you, so please feel free to leave a comment on the blog or send one to me using the Contact form.
So here are the 4 reasons why I’ll never purchase a house:
1) The Federal government is intent on keeping housing prices high.
Government policies (and specifically monetary policies) have consistently supported high housing prices, in order to prop up the market and support the notion that Americans can build (and retain) wealth through home ownership. In turn, they can convert that ownership into an instant credit source, by withdrawing funds through home equity loans. The government has supported and even encouraged this sort of activity especially in the run-up to the housing collapse, leaving numerous homeowners financially overextended and far less wealthy than they originally presumed on their balance sheets.
Over the last two years, we have seen a litany of policies that support placing a floor under house prices, which must mean only one thing when you boil it down: the government wants houses to remain expensive, to reward those individuals who’ve already purchased one. By inverse reasoning, people like myself who have not already purchased one are simply left with higher prices to pay in order to get one. This proposition may be appealing to some, but it isn’t to me. I think houses should be much cheaper, and I won’t purchase one until that happens -- which will pretty much be never at the rate that we’re going.
2) Cost-to-income ratio is far too skewed from a risk-reward perspective.
Housing costs, when compared to median income in the US, are heavily skewed, and thus have created an imbalance from a risk-to-reward standpoint. What I mean by this is, when you initiate a house purchase, you arguably take on a significant risk in the sense that you’re assuming the largest debt load you’ll probably ever carry in your life. For that risk, you have a reasonable expectation that the value of the house will appreciate over the 30 years or so that you pay for it.
The problem comes in when you take on a loan that dwarfs your income so considerably that you have a slim margin between being able to afford the debt payments and not being able to do so. Obviously, tens of thousands of homeowners came to this same realization when it was too late over the last few years since the housing market imploded. There simply was no margin for error for people to pay their mortgages when the monthly payment rose, or even in those cases where payments remained the same but economic softening affected other expenses and/or household income.
To underscore this point, consider the following metrics. The median income in the US in 1988 was in the neighborhood of $47,000 a year. In 2006, it was around $44,000. In 1988, the median home price was $119,000, or approximately three times as much as median income. In 2006, the median home price was $244,900, or six times as much as median income. Another way of looking at it is to say that, while median income actually declined over these 18 years, the cost of a house more than doubled.
3) Down payment alone is a limiting factor.
If you live in a metro area, such as I do, where a decent house will cost you around a half million, and a decent condo would run around $300,000 minimum, then you’re looking at serious cash required for a down payment. Even if I did have $60,000 or $100,000 laying around for a house, I’d probably not be inclined to spend it on that due to the economic climate I believe we’re in (and the worse one we’re headed for).
Rather, I can think of several other things I’d like to do with a hundred grand. I could invest in high dividend paying stocks in emerging Asian markets. I could buy options for my black swan protection protocols for months on end. Or I could use it for a number of other investments I might have in mind that I’d have significantly more confidence in compared to a house.
4) I’d really despise the maintenance -- and more importantly, its effect on cashflow.
Ok, so I don’t want to mow the lawn or try to fix the plumbing, but what I’d really dislike is the effect of all that maintenance on my cashflow. The way I see it, an apartment has one cost – rent – and it’s a known quantity from year to year with annual increases identified prior to having to actually pay them. Conversely, a house can theoretically incur an infinite number of costs, whether it’s structural issues, heating, cooling, plumbing, and so forth. In many respects, the unlimited downside cost to a house violates the notion of being as robust as possible against black swan events. If you don’t know what kinds of costs you might incur, or how much those costs might be, you cannot consider yourself protected against a black swan event with respect to your overall balance sheet.
As a sidenote, I also subscribe to Robert Kiyosaki’s philosophy that while most individuals automatically consider a house an asset, it can just as easily be viewed as a liability when you calculate the potential for costs to accumulate in the maintenance and sustainment of the home. Unforeseen costs can quickly cut into your cashflow and deteriorate your overall financial situation. Fans of Kiyosaki will recognize this line of thought from his famous book Rich Dad, Poor Dad.
I expect that many if not most readers will disagree with the above analysis contained in these 4 reasons, given the conditioning we’ve undergone in terms of believing a house is the tangible representation of the American dream. There are several good arguments for owning a home from a strictly financial and long-term investment perspective, but where I diverge with this logic is in the fact that those good arguments are founded in a reality that does not exist in the US. What I mean by this is what I said at the beginning of the article – a house is a great investment if you buy it within the framework of a free market economy. Since we only have some of the elements of that kind of economy, and we have irrefutable evidence that the government supports an artificial market for housing, then we cannot lean on the same theoretical arguments about why a house is a good investment.
That said, I invite and look forward to a dialogue on this with you, so please feel free to leave a comment on the blog or send one to me using the Contact form.
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