Chris Blattman

Search
Close this search box.

Four reasons why buying houses is overrated

Alex Tabarrok gives us two reasons

Housing is overrated as a financial investment. First, it’s not good to have a significant share of your wealth locked into a single asset. And to top that off, you’ll incur the maintenance charges (which can be negligible, for some of these reviews on House Method are the real deal). Diversification is better and it’s easier to diversify with stocks. Second, unless you are renting the basement, houses don’t pay dividends. Stocks do. You can hope that your house will accumulate in value but don’t count on it. Indeed, you should expect that as an investment your house will appreciate less than does the stock market.

…Another problem with houses is that home ownership locks people to location making it harder to move for jobs. The problem is especially severe because no one likes to sell at a “loss” even when it is rational to do so. So when jobs disappear and home prices fall instead of moving, people hold on for too long just hoping that things will get better.

I would add one more: People who own seem to spend a LOT of time on their weekends and holidays doing repairs and maintenance. If this is something you enjoy, great. If you would rather spend time with family, read, work, or Netflix binge, then it’s not so fantastic. Personally, my marginal value of leisure is high. I don’t even like thinking about my apartment or what needs to be done.

Alex highlights some of the benefits of housing. Some people like them a lot (or have been socialized to), and there are tax breaks. Plus so much of life in America is structured around home buying, such as public schooling.

I would add “forced savings”. If you are the kind of person who does not invest first spend later, then your mortgage forces you onto an intensive savings plan (in an albeit suboptimal investment).

So, basically, the best argument for houses is “distortions and weakness”.

I suspect some readers will still say things like “but housing is historically a great investment!”. I’m not sure they are thinking in real terms, and I do not think they are comparing it to historical stock market returns, or the capabilities of the best investment apps UK has to offer today. And I am guessing people selectively remember the houses that appreciated, not the ones that stayed mainly flat. It’s like making the case for stocks based on people who bought Apple in 1987.

Surely someone has done the numbers here. Any pointers?

28 Responses

  1. Owning a multi-family home where most of your tenants are fitting the bill….now that’s an investment. In 15 or 30 years you will be ready to sell your home and guess what? All of that money whether it is a profit or not was forced savings that mostly your tenants paid into. There is not a better investment in existence that is legal or less risky. Even if your home does’nt appreciate, it is cash in your bank once the home is sold. a no brainer.

  2. OMG!!! I never belive blank ATM card do exist until when i finaly came across Mr lion forster. My blank ATM card can withdraw €4,000 daily. I got it from Him last week Wednesday and now I have €14,000 for free. The card withdraws money from any ATM machines and there is no name on it, it is not traceable and now i have money for bussiness and enough money for me and my 4 kids. I am really happy i meet this parfect ATM hacker because i met two people before him and they took my money not knowing that they were scams. But am happy now. Mr lion sent the card through DHL and i got it in two days. Get one from him now. he is giving it out to help people even if it is illegal but it helps a lot and no one ever gets caught. The card works in all countries except Malaga, Mali and Nigeria. lion foster email address lionfosterblankatmcard996@gmail.com

  3. There is a psychic cost to dealing with landlords. For some like me, it’s considerable. There is more to life than money.

  4. For the 1, 3, and 5 year horizon ending 2015, U.S. REITs outperformed bonds at all horizons, and stocks at the 1 yr horizon and are roughly comparable (albeit slightly lower) at the 3 and 5 year horizon. Factor in tax advantages and imputed rent, and it is unclear why real estate is clearly inferior to stocks. A purchase of a single=family unit is, of course, a different matter, but the correct counterfactual in that case is the purchase of a single stock. Again, if one had to pick just one house or one equity listing. it is unclear why that equity one chooses will clearly outperform. In the much longer run, equities may outperform real estate, but then it depends on the horizon and entry point. If one entered the market in 2000, over the course of the past 15 years, the return on equities has been flat to negative. One can say something similar about entering the housing market in 2006, of course.

    Asset returns are routinely calculated and published by the major investment houses. They are also widely available online; see, for example, here: http://www.capitalspectator.com/major-asset-classes-december-2015-performance-review

  5. Unless I missed something, you forgot to factor in one major factor.

    At least in Portland, Oregon where I live, property tax increases have been regulated by law at the state level since the early 1990s. Rental prices, on the other hand, have been skyrocketing, and the need for regulation becoming a huge political issue throughout the Pacific Northwest.

    If your primary interest is housing, not investment, then it makes a hell of a lot more sense to lock in a known set of costs, regardless of the liquidity of the asset.

  6. If you have good credit, the monthly mortgage payment will be about half of what you’d spend on a comparable house/condo. At least this is the case in St. Louis, where I currently own. Factoring in down payment and maintenance, you’re still paying less than what you would for rent, granted it wouldn’t quite be half. Plus you OWN the place!

  7. All valid, especially the liquidity and mobility reasons. One argument in favor of owning that seems missing is that there is no principal agent problem. Landlords may or may not be great; likewise tenants. Rents would include premiums for bad or unpredictable tenants. Ownership, for all its drawbacks, aligns the interests and incentives of owner and occupier.

  8. One other reason to own a home is that it is one of the easiest ways for non-hedge fund / bankers to exploit the power of leverage. 5% house appreciation with 20% down turns into a return of 25%.

    Combine that with tax incentives, and it starts to look like a pretty good investment.

  9. Reason number one to buy housing rather than pay rent: when you are old and have hardly any income, at least you won’t have to pay rent. This will drastically reduce your chances of spending your old age in crushing poverty.

    Also, stocks are very volatile. The stock market could very easily crash just at the moment when you retire, wiping out your life savings. It’s much easier to buy a house that probably won’t lose value than to buy stocks that probably won’t lose value. And even if your house does lose value, it doesn’t matter as long as you continue living in it. The same can’t be said of stocks.

  10. On top of the tax benefits and potential gain in value of the house, you also have to factor in what you are paying for rent. You are basically paying, let’s say $2000 per month, into somebody else’s investment. And it doesn’t have to tie you to one place. I own a house on Bainbridge Island in Washington that I have only lived in for about 4 years of the 13 I have owned it. I’m currently living in Uganda and am happy to have an investment in the US.

Why We Fight - Book Cover
Subscribe to Blog