James Altucher's recent blog post "Why I Am Never Going to Own a
Home Again" is very much a personal account (note the "I" in the
title). And frankly, I agree with him on a few of his major points.
But I also think he manages to botch the investment thesis for
owning a home.
In the wake of
the housing meltdown
it's not all that surprising to hear talk about never wanting to
own a home -- or own one again, as with Altucher. With a front seat
in one of the country's ground zeroes in Las Vegas, I've seen more
than my fair share of real estate nightmares. However, I don't
think buying a home needs to be completely sworn off any more than
buying stocks needed to be completely sworn off in the wake of the
dot-com crash.
The "real" returns
In his post, Altucher highlights the fact that as an investment,
housing hasn't had a particularly impressive history of returns. He
points to data -- I'm assuming from
Robert Shiller
-- that shows that housing prices have risen, on average, 0.4%
between 1890 and 2004.
If we stretch that timeline out to 2010, it actually looks worse
-- more like 0.2%. But those are real returns, or the total nominal
return less inflation. Now I'm not looking to get into an
ideological debate over whether it makes more sense to talk about
real or nominal returns, but the fact is that when people talk
about investment returns they are almost always use nominal
returns.
The average annual nominal return on housing has been 3% between
1890 and 2010. That still isn't great, but using the real return
smacks a bit of an optical trick to prove a point.
What about returns
plus
leverage?
Altucher bemoans the fact that homeowners generally have to use a
lot of leverage to buy their home. There are two sides to that
coin, though. The fact is that there are few investment
opportunities out there where small-timers can use as much leverage
as they can with the purchase of a home. Granted, taking that to an
extreme during the early years of the millennium is what got us
into this mess, but there's a yawning gulf between a conventional
30-year, fixed-rate mortgage with 20% down and a five-year,
interest-only, negative-amortization loan.
And looking back to the first point, while a 3% annual return
may look meager, when you're leveraged 5-to-1, your returns are
significantly magnified.
The other returns
Among the financial considerations, Altucher also doesn't mention
the fact that a homeowner gets implied returns by nature of the
fact that they're not paying rent. It's as if you've bought a home
to rent out and you're the renter.
It's this point, though, that really gets to the crux of the
issue. Just like any other asset, a home isn't a good purchase no
matter what. Back in 2000, most investors threw valuations out the
window and were willing to pay whatever for stocks like
Cisco
(Nasdaq: CSCO) and
Microsoft
(Nasdaq: MSFT) . Today, that view has broken down to some extent
and investors are skeptical of stocks like Cisco and Microsoft
despite forward earnings multiples of 10.5 and 9.7,
respectively.
The financial case for buying a home has taken a beating because
the case has been simply hasn't been there for quite a while. In an
offline conversation, my fellow Fool Morgan Housel scoffed at the
idea of giving up his rental arrangement and buying a home largely
from a financial perspective. Of course, Morgan lives in Seattle,
where home-price-to-rental rates are among the highest in the
country, meaning that it's still financially advantageous to rent
rather than buy. In fact, despite the housing-price free fall, the
price-to-rent ratio for the 54 largest U.S. metro areas was still
well above its longer-term average as of 2010.
In other areas though -- bedraggled Las Vegas, for instance --
the math has changed considerably. Price-to-rent has fallen to
among the lowest in the country, and new homes from builders like
KB Home
(
KBH
) ,
Lennar
(
LEN
) , and
Beazer Homes
(
BZH
) are selling in the $100-per-square-foot range.
In short, it's not that buying a home is always a poor financial
decision, but rather that buying a home at an inflated price is a
poor financial decision.
I'm with ya, James
To be fair, Altucher notes at the very end of his post that he
thinks "housing is a great investment right now" but that he
doesn't like to talk about investing on the blog. But that's after
he's already spent much of the post dismissing the financial
considerations for buying a house.
I'm fully on board with Altucher on many of his non-financial
points, though. A house is a very illiquid investment and will kill
the diversification efforts for most individual investors. Owning a
home also makes you highly immobile, and while that may not have
been as big of a deal in the past, the nature of the 21st-century
job market makes it more difficult to fully commit yourself to a
geographical location. Not to mention the fact that many -- this
Fool included -- simply don't want to be locked down. And of course
there's always Altucher's
piece de resistance
:
I don't like [my cash] all tied up in one illiquid investment.
I want to fill a bathtub with all the dollar bills I would've
used as a downpayment on a house. I want to bathe in that
bathtub. I'm going to do that later today in fact.
And that is a
huge
consideration for any fan of Uncle Scrooge.
Wondering why the economy isn't recovering faster? Morgan
Housel wonders why anyone is still
turning to Alan Greenspan for answers
.
KB Home is a
Motley Fool Big Short
short-sale pick. Microsoft is a
Motley Fool Inside Value
selection. The Fool has created a bull call spread
position on Cisco Systems. Motley Fool Alpha LLC has written calls
on KB Home.
Motley Fool Options
has recommended a diagonal call position on Microsoft.
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