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

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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. cooljames says:

    I agree with everything that the author says, but disagree with his overall “never own” theory for two reasons:

    1) Permanent proximity
    My house is right next to the nicest park in Seattle. I have access to a huge number of facilities, including sport fields, beaches, swimming pools, etc. This location is such an asset, I would rather build a bigger house on my current plot of land, which leads to my 2nd point…

    2) Ability to customize
    Our home is nice, but not ideal. There’s a lot I’d like to change, and I have the funding. So, rather than move and move and move until I find the perfect home/landlord balance, I’m just going to remodel my house to be exactly where I want to live forever.

    What it boils back to for me, and I doubt I’m alone in thinking this: money isn’t everything. I’d far rather enjoy my life and maintain a stable and desirable property than live with the uncertainty of renting. If I never move again, and I live in the perfect home, that’s perfect for me even if I don’t have as much of a nest egg to retire with.

    Stability first, comfort second, money third.

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  2. L says:

    One note I’d make is that higher than expected inflation is good for home owners with a fixed mortgage rate as it lowers the real cost of the loan.

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  3. Allan says:

    James:

    You are right to suggest that renting has advantages for some persons such as yourself. Do you agree that owning also has adavantages for some persons? For example, in the same way that you derive pleasure from helping people, I derive pleasure from owning my home.

    Cheers.

    Allan

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  4. James says:

    I have to disagree. Not just the intangibles, though they’re important – for me a house, and especially a garden, is not a cause of stress, but an antidote to stress – but the financial wisdom.

    Maybe we should start elsewhere, with the car leasing. I’m not an expert on this, but AFAIK it’s pretty difficult to lease anything other than a brand-new car. Which I think means that your lease payments are going to cost about as much as buying that car outright, on a loan, no?

    Just to put some real numbers in here, I see that I could lease a new Honda Civic for three years at $2600 down plus $189/month. After three years, I’ll have spent a total of $9404, and will have to shell out about the same again for another lease. Alternatively, I could do as I did, and pay $8500 (cash) for a used Honda in 2003, and still be driving the same car today (with reasonable expectation of doing so for at least several more years), with my only cost being the interest/income from not investing that $8500. Seems pretty obvious leasing is the worse option, doesn’t it?

    Much the same applies to the house. If one takes care not to over-buy, or to buy at the peak of a real estate bubble, then it seems that the costs of ownership can easily be less than renting. Last I looked, a house similar to mine (but on a much smaller suburban lot) would rent for around $1000-$1500/month around here. I pay just over $1000 for mortgage, insurance, and property taxes. Currently about $350 of that is going to principal, plus I save maybe a couple of hundred on income tax, which is not all that bad a return on a downpayment of about $30K. And in another 15 years or so, I’ll be able to live here for no more than the cost of property tax & insurance.

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  5. Novemberrose says:

    I was a renter for 10 years. I was certain that I would always be a renter for all the reasons cited in the article…until… neighbors brought bugs into the building and the landlord was slow, v e r y s l o w to react. I’d had enough!

    I purchased a small home and though at first it was scary and overwhelming, I now understand why people love homeownership so much. First of all if there is something wrong I am the landlord so I can make sure any issues are addressed promptly and effectively (without raising my blood pressure). That alone is a wonderful feeling.

    Also after only three years my mortgage is less than rent on my apartment would be (that’s nice too). The only thing I really dislike (aside from shoveling, but hey at least that gets done now) is knowing that if I want to relocate that I’ll have to go through the arduous and slow process of selling. Prior to homeownership I was a bit of a vagabond, but still it seems a small price to pay to be free of lazy landlords and sharing a roof with irresponsible (and occasionally theft-prone) neigbors.

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  6. Mike B says:

    You seem to be making the HUGE assumption that anyone not foaming at the mouth will ever give you a long term lease. As you put it a long term lease allows the renter to have substantial advantages over the landlord…but basic economics tells us that this sort of free lunch cannot be expected to last as landlords will find ways to ensure that their rising costs are passed onto the renter. No market participant is going to rent you a house if it means losing money and if they do be prepared for the house to get foreclosed on.

    You might think the informal market might pick up the slack for the diligent (ie renting from friends, family or folks with special circumstances), but these people don’t tend to be up on the whole landlord as a job thing and such arrangements can end up in court very fast. In fact most online resources actively dissuade people from trying to casually rent their properties as they say it is usually much more work and risk than it is worth. So there you have it, your whole strategy revolves around finding someone who is too stupid or too naive to get the proper value out of their properties.

    Here is a more realistic assessment. Renting means generally short term leases that will last 5 years if you are lucky with 1-2 being standard. Even if your lease is long term there will be wide latitude for the rent to be increased, possibly as a mechanism for the landlord to get you out of the property. I live in a non-rent controlled city and I have never see any firm leases beyond two years. The market is robust so without a significant premium the landlords know there will always be someone to fill whatever units they have available.

    So not only will short term leases complete negate all of your cost control benefits, it also means that you face the risk of having to get up and move every year as well as find a new place to live. Also forget about any sort of upside gain. If a new park opens or a mass transit line is put in you’ll either get a huge rent increase or the place will get sold.

    Long story short if one does their research into locations with lots of potential and makes sure not to buy into a bubble you have a very high likelihood of having your housing investment pay off, not to mention the potential for sweat equity if other investments or jobs aren’t paying off.

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    • profguy says:

      That was my question — the author has a TEN YEAR lease deal??!?? Where do you find those?

      I rent a house myself, and feel OK about that. There are somethings I’d customize if I could, and that’s a but frustrating, but then I add up things like not being the guy responsible for doing emergency repairs on the gutters during an ice storm, or not having to replace the furnace, and I can live with not having exactly the cabinets I’d want.

      The downside is the 1 year term. I’ve been in my house 5 years, and twice the landlord has thought about putting the place up for sale rather than renewing. While the guy seems to get now that the market is down and staying that way for a while and so isn’t inclined to sell anytime soon, the possibility is still annoying. As the previous poster noted though, finding anyone willing to do anything more than 1 year deals is essentially impossible.

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  7. David Henderson says:

    Nice points, but I must take issue with your usage of serf. A serf for all intents and purposes was a slave except that the medieval Roman Church forbade Christians to own other Christians and so the concept of serf came into being. A slave is bound to a person whereas a serf is bound hereditarily to the land. The concept you want in place of serf is peasant. Peasants were tenants and could move as freely as they could afford whereas serfs could not leave without the landowners permission.

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  8. Enter your name says:

    I’ve been disappointed that these posts and discussions fail to account for, or even mention, imputed rent. It works like this:

    * In 2004, I bought a townhome for — with a 10% downpayment, and including all the fees and interest over the entire life of the mortgage, accounting for income tax deductions — about half a million dollars.
    * In 2034, assuming very moderate inflation in housing costs, I’ll be able to sell it for — about the same half a million dollars that it cost me. I will (eventually) get those half-million dollars back, tax free.
    * I will have paid an average (in current dollars) of $4000 a year in fees and property taxes, and about $4000 a year in insurance and maintenance expenses. (The homeowners’ association does nearly all the work for me, so maintenance expenses are high.)
    * This means that my actual net housing expense for 30 years (the part I don’t get back when I sell the house) was the $8000 a year I spent on taxes, insurance and maintenance.

    The alternative (based on local rents for comparable properties) is this:

    * Every year, I pay (in current dollars) $17,000 in rent — almost exactly what I’m currently paying for principal + interest + taxes + insurance right now. Over the course of 30 years, this is — about the same half a million dollars that I am using to buy the place.
    * I could have invested the downpayment at some medium-risk level, in which case (in current dollars/accounting for inflation) I’d have earned about $33,000 before income/capital gains taxes.
    * At the end of 30 years, I can sell my “rentership” for nothing. Those half-million dollars are permanently gone.
    * In year 31, I’m still paying $16,000 in rent—double what I would pay that year if I had spent those half-million dollars buying the place. It takes less than five years to wipe out the $33K I earned by investing the downpayment.

    I grant that housing is illiquid, and that the people who think they’re going to be millionaires by buying a home are generally greedy idiots, but you can’t live in an index fund. Your monthly rent is one of the costs of your investments.

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