Why I’d Rather Shoot Myself in the Head than Ever Own a Home Again

(Photo: iStockphoto)

This is a cross-post from James Altucher‘s blog Altucher Confidential. His previous appearances on the Freakonomics blog can be found here.

I had only one friend on MySpace when I joined in 2005, Tom. In fact, everyone who  joined MySpace was friends with Tom. He welcomed us all to our new cyber home and made us feel as comfortable as possible there. Tom is Tom Anderson, a co-founder of MySpace, and automatic friend to everyone who signed up.

So, through a strange set of circumstances and coincidences, Tom just emailed me. A great crime had been committed against me and Tom Anderson, my first friend on MySpace, wanted me to know about it.

Somebody had disagreed with me. Tom sent me a link to a site, realtytrac.com. He wrote me, “Btw, saw a rebuttal to your home-ownership article today that I thought you might be interested in:”

Someone named Rick Sharga wrote a column there arguing against my recent column: Why I Am Never Going to Own a Home Again. It took Rick only about four lines to insult me, which shows he doesn’t read my stuff very closely. He said I would probably recommend that people buy “stocks” or my “fund of funds.” In other words, he’s suggesting that the only reason I could have an opinion is out of complete self-interest. I guess in most cases that’s how the world works, which is a shame. I have no self-interest at all in this opinion. I want to help people.

My theory is that complete honesty frees me from the shackles of stress, anxiety, financial insecurity, spiritual insecurity, and so on. Most people who read my blog think that I’m almost sabotaging my self-interest by revealing all that I do. In fact, it’s the reverse. My self interest is freedom in my head.

For instance, in contrast to Mr. Sharga’s opinions on my self-interest, I recently wrote a column: 10 Reasons You Should Never Own Stocks Again. And, I also happen to think most hedge funds are scams and would never run a fund of hedge funds again. So, all self-interest is out.

I legitimately believe people would be happier if they didn’t mortgage their lives away, if they didn’t fall into the myth of the white picket fence leading to happiness, if they pulled themselves away from the American Dream and found their own path to follow.

So Mr. Sharga starts off already being completely wrong by misrepresenting me to his readers. But that’s fine. People do that all the time.

Next he makes his argument with another highly intelligent point:

The context that Mr. Altucher lays out is actually more hysterical than historical. The notion that homeownership was some sort of deep, dark conspiracy foisted on innocent rubes by diabolical business owners to keep them permanently grounded (and therefore, unable to escape their low wage, dead end jobs) is just pointy-headed nonsense.

First of all, I do not have a pointy head. Its more of a square. But, it’s a fact that many early factories would often provide housing for  employees and then charge them for the “rent,” deducting it from their salaries. This was a standard technique  100 years ago. Often employees would get in debt to the factories, keeping them, in fact, “grounded”.

But lets get even more hysterical. Lets look at the trillion dollar banking industry. This was the best business in the world, until it wasn’t (2008).

How do banks make money? Very simply. By borrowing from you at cheap interest rates and then lending to you at higher interest rates. What? How do they do that? Well, when they pay you 0.5% on your checking account it’s as if they are borrowing from you at a very cheap interest rate. When they then turn around and give you a 6% mortgage loan, they are lending to you. They make money on the difference between the 6% and the 0.5%. It’s a great business and I often advise people to become the bank when they have that opportunity.

It’s such a great business, in fact, that banks have spent 200 years drilling it into us with billions in advertising that the “American Dream” is to own the white picket fence, the paved driveway, maybe borrow more to make an extension to the house. Put in a swimming pool. Tear down some walls. Nobody can ever kick you out. You’re not flushing your rent down the toilet. You’re owning! You’re keeping up with the Joneses (the most successful, yet mysterious, family in American mythology, that we all have to keep up with. What happens behind closed doors when the beatings occur, when little Bobby Jones cries himself to sleep, the Joneses will never tell us.) But, at least in 30 years you will own that home. You’ve fixed in a mortgage rate so inflation won’t kill you. And having your own home means you now have “roots.”

As Mr. Sharga says:

Simply going back to the beginnings of the U.S., the concepts of “wealth” and “land ownership” went hand-in-hand.

I guess that’s true. I can’t find it in the Constitution anywhere but the man knows what he’s talking about.

He also states:

[G]oing back to medieval times, the feudal lords basically were land barons; the serfs, the working poor of the age, were allowed to live on the lands in exchange for paying exorbitant amounts of money to the lords. However, much the lords decided to collect. Or you could leave (on your own, or in pieces). Sounds like a renter’s lot in life to me.

I’m a serf and always will be. I’ll never be a “feudal lord.” Fortunately, because of innovation, entrepreneurship, and the rise of economic growth throughout most of the world, the life of a “serf” right now is probably one million times better than any feudal lord could’ve ever hoped for back then. Here are some benefits of being a serf right now:

  • More cash. Renting usually does not require a down payment that uses up most of the cash in your bank account. You’re never going to see that cash again if you use it as a down payment. It’s just gone into an illiquid investment and when you most need it, that’s when you are most likely not able to get at it.
  • Less debt. It’s true a mortgage locks in your payment. But you’re greatly in debt so you are paying interest straight to the bank that has nothing to do with increasing your ownership. In many cases it will take 20 to 30 years before you stop paying that extra interest to the bank.
  • Less inflation risk. Property taxes often go up faster than inflation, whereas rent usually does not (by definition, since government calculated inflation uses rents instead of home prices).
  • No maintenance. Homeowners have to take care of all maintenance. Some years that might be nothing (unlikely) and some years that may go up much faster than inflation.
  • Less overall costs. When property taxes and maintenance go up faster than inflation it means you are probably not covering the costs (plus the mortgage) via renting.
  • More flexibility. In a global economy, opportunities can be anywhere. I like having flexibility.

In other words, if you are a feudal lord today, you are laying out more cash than the renter/serf, and being caught in the spider web of escalating costs in every direction. Whereas the serf has only one payment, which is often contractually laid out for years. I have a contract that specifies my rent for the next ten years with my option to renew.

Which means that the serf can diversify his portfolio to a much greater extent than the feudal baron; plus, the serf can move more easily to take advantage of opportunities in other geographical areas, as opposed to the serfs of medieval times that Mr. Sharga compares us to.

That down payment that the feudal baron put out will go up in value only if housing does, and it’s completely illiquid and usually a major part of his portfolio (little diversification). And he’s flushing money down the toilet with interest (which usually doesn’t go up with inflation), property taxes (which often go up faster than inflation), and maintenance (which goes up with inflation).  The serf is flushing money with his rent payment. But he has more cash in the bank, a more diversified portfolio, and is generating liquid cash (hopefully) from other investments. He also has the cash to be an entrepreneur, move around to take advantage of other opportunities, etc. This (in my experience) more than makes up for the rent down the drain.

Some people, for their own personal reasons, like to own a home. I have nothing against that. Go for it. Just make sure it’s not because of the hypnosis provided by the American banking industry which props up the American Dream.

Mr. Sharga gives a parting shot at me:

For Mr. Altucher, the notion of homeownership seems downright scary. And he shouldn’t own a home. He probably shouldn’t own a car either — or a goldfish. He wants the combination of limited responsibility, someone else “taking care of things,” and the ability to move to Sri Lanka on a moment’s notice. And he wants his investments to all be liquid (so maybe I should re-think the goldfish part).

He’s  absolutely right about all of those things. I would never own a goldfish (disgusting) and I lease my car (well, my wife does. You need a license to own a car). And I love the fact that I can move to Sri Lanka at a moment’s notice, although I actually really like where I live right now. And owning a home is downright scary to me. Leveraging up 400% in an illiquid investment with no diversification is a scary concept to me and should be to any rational person.

I don’t like to quote people without their permission. But I’m grateful Tom Anderson pointed out that article to me because I think it misrepresents some of the things I said by implying I have self-interest attached to my opinion. Tom has already experienced great success as an entrepreneur and will continue to do so. As he states in his email to me:

The fact that I’m finding articles on realtytrac might give you some idea of what I’m up to.

Tom Anderson is going to succeed at whatever he sets his mind to. As for Mr. Sharga, I’m going to give him constructive criticism. He shouldn’t try to bring me down (“self interest”, “scared to own a goldfish”,  “hysterical”, etc) to make his point. That’s bad writing in general. He should read my 33 Unusual Tips to Being a Better Writer and the next time he lays out his argument I’m sure it will be better.

Will housing be a great investment? Who knows? There will be many great investments out there in the years to come. Innovation is not ending. A year ago nobody owned an iPad. Google is making cars that drive on highways without drivers, companies are curing cancer, and when I finish my teleportation machine, things are going to get a lot better around here.

 

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  1. Brandon says:

    What about the fact that eventually, you own a home? If I rent I rent forever. If I get a reasonable home with a reasonable interest rate and throw everything I have at the mortgage, I can be free and clear in under 15 years.

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    • Pj says:

      “If I get a reasonable home with a reasonable interest rate and throw everything I have at the mortgage, I can be free and clear in under 15 years.”

      Throwing “everything you have” at a mortgage doesn’t seem like much of a good way to live. And in that 15 years, how do you know what will change?

      I’m speaking as a homeowner, BTW, who realizes that like my student loans, I’ll probably be dead before either are paid off. Few people ever truly “own” their home. You overpay a variety of banks for the privilege of living on the land they own, and they can kick you off the moment you stop paying.

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      • JOHN B says:

        What is reasonable? Most people who bought between 2000-2007 are now underwater–with many having lost their entire downpayment.

        Home ownership has made many wealthy but a lot of luck is involved. Buying at the right time–if you happen to be the right age, with the ready cash, in the right locality etc.

        So while I don’t agree that homeownership never works–it certainly shouldn’t be a public policy forced upon us by the government, FNMA and lenders.

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      • Enter your name says:

        And that’s different from someone who invested in the stock market in 2000—how, exactly? I know of people who went bankrupt because they exercised their Silicon Valley stock options just before the bubble burst. Our newspaper profiled a poor guy who had a tax bill on a million dollars’ worth of options that were worth only pennies by the time he had to pay his income tax statements.

        At least he could live in his house while the bankruptcy proceedings were underway. The stocks gave him no such shelter.

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    • isaac says:

      Free and clear? Don’t forget that your going to be paying property taxes for the rest of your life. Remember that time changes things, and the area you live in now will not stay the same forever. Many old people find themselves unable to afford their taxes because the area they live in experiences growth and increases in home values.

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    • ECSL says:

      What about all the extra cash you accumulated by NOT paying a mortgage?

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      • john b says:

        i don’t know about other folks here. but my mortgage is hundreds of dollars less a month than my rent was for a better house in a similar location. Of course I have to pay for repairs and insurance. But even with that factored in, it’s pretty much even money and I get to do what I want with the place.

        Not to mention where I live there are far better options for buying than renting.

        Renting definitely makes sense in many circumstances. But for many, it doesn’t make sense.

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      • Paul S says:

        People who give this advice bought at the right time. The rest of us know that what goes up, can also go down. Sometimes way way down.

        We bought in 2007 so our situation is exactly the opposite. Similar houses in our neighborhood rent for up to $1000/month LESS. And that’s HOUSES. The picture really changes when you think about apartments.

        The bottom of the rental market is way deeper (and more acceptable) than the bottom of the ownership market. Simply put: you can get better housing for fewer dollars by renting.

        Example: in my town a down-on-their-luck family can still rent a safe & clean 2BR apartment in an acceptable neighborhood for $500/mo, with another $1000 in the bank for deposit & 1 month rent. What kind of house can you buy in ANY town with $1500 on hand? A really scary one, that’s what (if it’s even possible). With an even scarier mortgage. And that’s pretending this is a rising market (which would make that $1500 gamble on a crazy ARM a “smart investment”) … decidedly not the case.

        So, obviously: YMMV.

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      • scott garapolo says:

        what the… $500? seriously, bags are packed, i’m ready. where in the world do you live at that rate?

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    • Peter says:

      Even if you have paid off your house, there is the “cost of ownership” to consider. Say your home is worth $400,000 and the going interest rate you can get in a savings account is 5% (Here in Australia these are normal numbers – guessing not in the US).

      Sell the house and stick it in a savings account and you’d be looking at $20,000 extra per year in income.

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  2. Tank says:

    My respect for Freakonomics and everything I have ever been taught, ever, about smart money management are at odds. Leasing a car? My father would have a heart attack.

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  3. Nic says:

    Interesting post. I disagree on several of the points but interesting and thought provoking none the less.

    You mention several times about the serf hopefully having a diversified portfolio but mention at different times you don’t support investing in real estate, stocks, or hedge funds. In your opinion, what does the ideal serf portfolio look like?

    Thanks

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    • Steve O says:

      I am fairly certain Altucher is referring to “picking stocks”, which he (100% rightly) condemns as throwing away money. The average non-Goldman Sachs type investor should participate in the stock market via mutual funds, which are professionally managed or professionally designed. If you pick a simple target date fund with extremely low fees, you can sleep soundly knowing you’re putting your money into a better place than stocks or real estate. It might not be the best, but you’re managing your risk while still expecting a decent reward.

      Real estate, stocks, and hedge funds don’t really fit into the actual definition of ‘portfolio’ of Modern Portfolio Theory, although the word’s popular usage has changed. A well-diversified portfolio has several different asset classes, possibly including domestic and international stocks, stocks with different size companies (small/mid/large cap), commodities, and/or real estate (in the form of securities), in addition to different grades of corporate bonds, T-bills, and cash.

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  4. AaronS says:

    This is going to ramble, but several things came to me from this article….

    When I am introspective, I think that the REAL reason I am trying to buy my home…is for my son. I want him to have a “place” that can, perhaps, one day be his. It’s the old attempt to try to give your kids a boost. At the same time, if you can leave your children a wonderful, enriching childhood because you ARE NOT tied down, or a good wad of cash, that, too, is a wonderful legacy.

    I imagine that one cause for owning a home is that while us guys just need a bed (or maybe just a couch) to sleep on, our wives tend to require appropriate decorating, color schemes, and the such, which usually means you need to own the place.

    My ideal life, I suppose, would be to drive a pick-up truck across the country endlessly, having internet access at all times, able to sleep in the back of my truck or in a motel, as I see fit, and the such.

    Banks are in the business of BUYING AND SELLING MONEY. They “buy” your money for X percentage, then “sell” it to you for X+, taking the difference.

    Stores BUY your money–they pay for it with a new dress, a new car, a can of baked beans, or what have you. You think YOU’RE doing the buying, but they are, too.

    Corporations still seek to keep us in their “shanty towns,” still buying from the “company store.” How? They strive to pay you enough to keep you from leaving…and too little to let you quit. I can’t imagine a company giving its employees health insurance…unless they HAD TO in order to retain the employees’ services. Just as they can’t blithely charge more than their competitors, neither do they want to spend more.

    There is indeed a great freedom that comes with not holding on to things too tightly. You can truly follow your bliss to a great extent. But when you have to pay the house payment, car payment, and so forth, you are living on the manor and serving a feudal lord. They have made it very unseemly to live off the manor. Why, to do so is to be considered a drifter, a bum, a slacker, and so forth. But it’s called freedom, I think.

    I will give serious thought to what you have said. I mean that.

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    • Nicole says:

      “I imagine that one cause for owning a home is that while us guys just need a bed (or maybe just a couch) to sleep on, our wives tend to require appropriate decorating, color schemes, and the such, which usually means you need to own the place.”

      …you have got to be kidding me.

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    • Deanne says:

      Just a thought about “buying a house for your son.” My parents bought a lovely house in the suburbs where my brother and I grew up. Now it’s a big house, designed for four people that is lived in by two people who work 45 minutes to an hour away. They’re still paying down the mortgage so they can’t afford to move closer to their work, and while it was a nice place to grow up, neither my brother nor I have any interest in living in that house. While it’s a nice idea to have a house that you can pass down in the family, there’s a good chance your kid will want to grow up and have his own home and his own experiences (unless the home is a vacation home in which case everyone wants it!).

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  5. Mr. J says:

    And never never never buy a timeshare. Many of the same reasons apply. Many of the same hustlers will talk you into a home and/or a timeshare.

    Hey, Hilton has hotels for you to rent, anywhere you want to go. No muss, no fuss.

    And the rooms that rent for $3,000 a night come with some surprising extras!

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    • Dude says:

      I own 3 timeshares – use 1 at least once a year and rent the other 2 out to cover all of the maintenance/taxes. Deposit the week with a resort company and you can stay anywhere on the planet – It just makes sense for a family of 7 or more with friends in tow – you can’t stay in a 3 bedroom condo for 7 days for under $600 (approx fees per unit per year) with that many people. Cook your own meals – have privacy in each bedroom… endless possibilities AND they’re deeded property! My kids can have them when I’m too old to enjoy them anymore.

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  6. Imad Qureshi says:

    I decided long ago that I won’t buy a house until late in my forties for the following reason

    As you mentioned rent is cheaper (no property taxes, owners pay taxes on property they won’t own until 30 years, no maintenance expenses – landlord pays for all maintenance, I don’t have renters insurance either – If I am a home owner, I’ll have to pay insurance, and finally Mortgage is generally higher since I will hopefully buy my dream house, although I don’t rent my dream home).

    On the other hand I disagree with you on not investing in Stocks (without reading your article). Yes there is some risk, but if you invest prudently, chances are you’ll do good in the long. Save money for kids College and then buy a house with rest of savings.

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  7. Hauke says:

    Once your teleportation machine is ready, I will think of buying a house. Because then I can live whereever I want to live in the long run but don’t need to think of moving for a job or other committments that are bound to a location (like family, favourite sporting locations or such).

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  8. SomeCallMeTim says:

    I own a townhouse, so I have the best and worst of owning and renting.
    The Best:
    – Price for a 2,100+ SqFt house was 40-60% of a similar size single family home in my neighborhood
    – Because the price was so low, the portion of my assets frozen into the property is relatively low (it did not hurt that I stayed well below the amount the bank said I could “afford”)
    – Although I still owe on it (and will do so for another 14+ years), it is mine to do with as I wish. I have renovated the kitchen and much of the 2nd floor to match my desires and tastes. Renters frequently do not have that option.
    – For better or worse, tax laws still favor ownership over renting. Although my mortgage and association dues exceed what I was paying for an apartment half the size of my townhouse, tax deductions bring that cost to within 5 or 10%.

    The Worst:
    – Although the Association is responsible for maintaining the outside of my townhouse, I am still paying for it in the form of monthly dues. Granted, part of rent is money the landlord theoretically saves for maintenance, so dues are simply the equivalent of rent. However, my Association is underfunded and the property is in need of significant maintenance/renovations. Funds to improve the property need to come out of my and 100 other pockets. I am on the Board of Directors and see the need for the repairs and the funds, but cannot convince the required 63 other homeowners to agree to pay more. So, the repairs remain undone, and the related liability remains.
    – Whereas if I rented and my landlord refused to do repairs I could break my lease (or not renew it) and leave, turning over a townhouse is a lot harder, and sales in the community are sloooooooooow.

    There is another factor that makes owning desirable for me: I hate moving. Moving sucks. Because I am in a stable job/company/profession and will probably not need to move to another city for employment, planting roots in my owned (mortgaged) home just makes me feel better. As AaronS stated – it is my “place”.

    Funny thing is – if I did not own right now, I might not buy. The uncertainty in the economy makes renting a very, very logical choice, and Mr. Altucher’s arguments come much more into play. But as I own already, I will keep it. And whether I buy again depends on where I move to and why…. I would have no problems buying again in the right situation.

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    • lylebot says:

      I also own a townhouse—bought last month, in fact. My mortgage and property taxes are not much higher than what I’d be paying in rent for a similar-quality (but smaller) space. I have a 15-year mortgage and a low interest rate (under 4%), and I can easily pay it off early while still having more than enough left over for a diverse portfolio of investments. Maintenance will be an issue, of course, but it’s very hard to see it becoming enough of an issue for me to want to go back to renting. The only real question is what property values are going to do in my neighborhood, and I don’t really have a sense of that yet.

      I’m sure my circumstances are not common, but neither is a 10-year lease.

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