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.

 

TAGS:

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 58

View All Comments »
  1. fred wollman says:

    i generally agree with much of what is said. i am 30 yrs in the financial services industry. i own (or should i say, the bank) owns my home. in fact the mortgage is equal to the home’s value. i feel the home is “paid for” in that i have sufficient assets to pay off the mortgage if i choose. however, i can make the payment every month, so the plan is to keep my money in investments of my choosing and continue to “rent” the bank’s money.
    my son and his wife are in the process of purchasing their first home. generally, speaking i attempted to talk them out of it. they are young, one of them is looking for first post-college job and i feel that making a committment to a home and mortgage will severly limit their options for the future. but what the heck, i didn’t listen to my dad either.

    Thumb up 2 Thumb down 0
  2. Mr. Sensitive says:

    There’s an equation you can either make up on your own or borrow a template that will tell you whether the financially rational decision is the Rent or Buy. Why not?

    Thumb up 0 Thumb down 0
  3. Ben says:

    I see a hole in the logic. Yes, an owner has all sorts of huge expenses. However, most rental properties turn a profit. This means, that if you are renting, you are not only paying for all the costs of ownership, but a premium as well.

    Renting makes economic sense under a limited range of circumstances:

    1) You believe the value of the property will decline.
    2) You’ve lucked out and found an owner willing to rent out his property for less than the market value of the rent.
    3) You do not expect to remain at the property long enough for the amortized value of one-time costs associated with buying to drop to the reach the cost reflected in the rent,

    or

    4) You personally value the intangibles associated with renting (easy mobility, lack of risk, etc) as higher than increased costs associated with rent.

    Thumb up 0 Thumb down 0
  4. Nat Reader says:

    Brandon talks about being free and clear in 15 years??? What? That is no longer true. We bought before the run up, put down 20%, got a great rate and now our house is underwater. If we could sell today (which we cannot without paying $80,000 to sell it) it would sell for $150,000 less than we bought it for and that does not include any home improvements.

    From estimates where I live it will take 15 more years for the house to get back to what it cost to build in 2003. I have already been in it for 8 years. That is 23 years to get back to what the house COST! As in no gain. I would sell and get back what I paid MINUS cost of realtors etc. So after 23 years I will have lost $$ living in this house.

    Home ownership is a pipe dream now. It is not what it used to be. It is a sink hole of cash that no longer gives any returns other than giving a place to live, which you can do by renting. In my city you can rent a house twice the size of what you live in for less $$.

    Thumb up 2 Thumb down 0
  5. Not Buying says:

    So some other things to consider … most people will say, well I have kids so I need to buy a home for the kids. Wrong. Your kids are temporary visitors, someday they will fly away leaving you with a big giant box to keep your stuff in. Kids are not good reasons to own a home.

    Here is another reason I hear.. well when I retire I will have a home paid off. This means my monthly expenses will go down. Yeah, for a short period of time until you get old enough that you can’t mow your lawn, remove snow, pull weeds, fix household stuff, etc. Then you get to put out a monthly fee for all these tasks. Plus you still have to pay out to fix everything that breaks, that you normally wouldn’t do as a renter.

    Here is why renting is a good idea, for me.. I am NEVER going to be in one place for the rest of my life. Life is full of changes. When im newly single and out of mom and dads house, I get the smallest cheapest dive I can rent. When I get married, I upgrade. I may shift around, going from one job to another. Then when we have kids, need more space. When the kids leave, downgrade I don’t need as much space. When I get too old to care for myself, I need more expensive place to live (assisted living, retirement community, etc.).

    Plus don’t kid yourself. You never really OWN your home. You basically pay for the house (through renting from the bank), and then you will forever pay taxes on your property. You are given permission from the government to live there as long as you pay your taxes on time. Don’t give me the BS about .. its a deductible. Because for most people that never really amounts to much of anything. Thats like saying, hey im going to spend $200,000 plus interest so I can get a $2,000 tax deductible every year that will give me back basically nothing. Whooppeee..

    Thumb up 2 Thumb down 0