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. Sam Collett says:

    As a large portfolio landlord I guess that means I’m a Feudal Baron with Serfs paying their rent and while they may have diversified interests and be able to move to Sri Lanka at a moment’s notice, there will also be another serf waiting to take their place. The reason – regardless of whether you have a mortgage to pay, or rent to pay, housing costs money and it is the actual cost of that housing which grounds you, which roots you, which forces you to go to work.

    Whether you buy into the ideal of white picket fence (although those don’t really exist in the UK) most sensible people want a safe and clean place to lay their head at night after a hard day’s work. Whether you have a mortgage or a landlord, either way you owe money for it every month. The ideal is to not have either – that way you really are free. No debt and no landlord – that’s what dreams are made of IMHO!!

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  2. Tristan says:

    A good article and I like the thinking.

    A hypothetical. Imagine your article was so perfectly written that it convinced everyone in the world of its principles. Imagine then that no-one owned houses and everyone rented.

    How does that work? Who would own and maintain the houses for the renters to rent in that world?

    I mean to convey this in a neutral tone. I have no desire to convince anyone of anything. I simply find the thought interesting.

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  3. Joe says:

    “You need a license to own a car”

    One does not need a license to own a car.

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  4. Dave says:

    Brandon as long as you have to pay property tax, you never own the home.

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    • Enter your name says:

      Nonsense. You have to pay tax on your car every year; do you think it’s somehow not your car?

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    • James says:

      Also, property taxes are (at least around here) considerably less than rent would be. (Obviously, since landlords have to pay the same property tax on their rental properties.) Mine run around $100/month, and I don’t think you’ll find a place to live (except maybe a cardboard box in an alley somewhere) that costs less.

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  5. mfw13 says:

    I think you miss the point of home-ownership if you only view it through a financial lens. Part of the joy of owning a home is that it is yours (assuming you make all your mortgage payments), that you can do whatever you want to it, and that nobody can tell you otherwise or kick you out. Yes, maintaining your home takes work, but many people find that aspect of homeownership to be quite enjoyable…after a day sitting behind a desk in a suit and tie, nothing beats changing into an old pair of jeans and getting your hands dirty.

    With renting, on the other hand, you are always subject to the whims and rules of your landlord, completely dependent on them to fix problems for you, and never knowing if a raise in your rent or an eviction notice might be just around the corner. Renting is full of uncertainty and instability, whereas home ownership brings an element of stability that is often otherwise lacking in many peoples lives.

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  6. Kristjan Korjus says:

    What about this logic: “Markets are efficient, therefore renting or owning property are equally good.” ?

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  7. Dave C says:

    Where I live in the US, most rentals are apartments in densely populated areas, and owning usually means a single-family home in a less densely populated area, so for this area, renting vs owning is, aside from the financial aspects, an apples vs oranges comparison.

    Renting usually means living in a building where:
    1) Landlord can terminate lease at least once a year
    2) Neighbors can have loud parties (which may be a positive externality for someone who is 22, but it is a negative one for many others). This is not Switzerland.
    3) Pets can be regulated. You can be evicted for having an unapproved pet
    4) Often, the best schools are in communities which have very little supply/choice of rental properties.
    There are exceptions – occasional houses in the suburbs for rent, often in less desirable locations (on noisy streets).

    With all renting you are subject to the personality of your landlord. While my state has good legal protections for tenants, as a “peasant” (aka not rich, not a lawyer), the bar for any redress is fairly high.

    Fundamentally, renting puts you far more at the mercy of others, subject to much greater uncontrolled externalities.

    As an economic comparison, a valid comparison of rent vs buy would need to price these externalities into the model.

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  8. Howie says:

    You wrote:

    “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.”

    Hang on. A renter can’t “move more easily” unless he can get out of his rental agreement. That contract is usually renewed every 6/months to a year, which means rent goes up every year in a competitive environment like NYC or DC which also means his payments are no more predictable than any other costs such as home maintenance. I guess you could sign on for a 10 year lease with an option to renew like you said you did but I’ve never heard of such a thing and the terms of your lease are not made clear in your post. If, in fact, those terms give you the absolute freedom to up and leave on a moments notice, well, good on you I guess. But is such a deal offered as a matter of normal practice in every location? My (granted, limited) experience says no.

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