This article by David Bach, purporting to explain why homeowners get rich and renters stay poor, really annoyed me. Let's pick this thing apart piece by piece.
From 2001 to 2005, the average homeowner saw the value of his or her house jump by more than 50 percent. Many homeowners doubled, tripled, and in some cases even quadrupled their wealth in just five years because of exploding real estate values.
Imagine that. Buy a home, live in it, build your wealth, get great tax deductions -- and then retire rich. It may sound too good to be true.
Did this guy write the same book about stocks in 2000? Sorry, low blow. Here's what's annoying about this, first he's picking the best possible years as his example. This sets unrealistic expectations. Secondly, 50% over 5 years isn't that great, less than 9% a year. I'll happily take 9% a year but it doesn't sound nearly as good as 50% in 5 years, does it?
How about those that doubled, tripled or quadrupled!!!! Read carefully. They quadrupled their wealth, not the value of their home. Is that what you read?
Sound too good to be true? Is there some saying about that?
I won't even comment on whether there's a bubble or not. I don't know. You don't know and for damn sure David Bach doesn't know.
Well, U.S. real estate values have been going up steadily for nearly four decades -- an average of 6.3 percent a year since 1968, which is when the National Association of Realtors first started keeping track. According to Freddie Mac (a.k.a., the Federal Home Loan Mortgage Corporation), since 1950 U.S. house prices have never experienced a year-to-year decline nationally. Compare that to the S&P 500, a major stock-market indicator that has had no less than a dozen down years in the same period -- or the market for U.S. Treasury bonds, which has fallen in 17 of the last 55 years.
Hey wait a second, 6.3%? Including the 50% of the last 5 years? What about inflation? Bach has that selective memory thing going again. And notice that word "nationally". What good is that unless you're buying some kind of national housing index? How many people have ever lost money on a house? I know the answer is not zero. How many people have lost money buying a Treasury Bond and holding it to maturity?
ZERO (excluding inflation of course).
Of course, just because home prices have been rising for the last half-century doesn't mean they're going to continue doing so.
Hey! That's a change! Although if he doesn't say something like that, he probably gets his ass sued off.
Now let's look at those 5 other reasons to own a house.
1. Owning is cheaper than renting.
I'm not going to copy that entire block. Let me sum up for Bach. I'll make some assumptions based on no facts to come up with a gigantic number. I'll imply that renting is an insult. I'll ignore the fact that you could invest the money you won't be spending on a down payment. I'll ignore real estate taxes, home owner's insurance and upkeep. Look you're a millionaire instead of a schmuck!
Here's the same argument in reverse. Say in Spring of 2005 you decide to buy a house. You can't afford much (you're just a poor renter after all). You want something in a fairly warm area, close to the coast, you choose a place in the Lower 9th Ward in New Orleans and pay $80,000 cash, every penny you have plus money borrowed from elderly, infirmed parents. You've got nothing left for home owner's or flood insurance but so what? Nothing bad has happened in close to 50 years.
On the other hand, if you had rented the same place, you'd still have your money, your parents wouldn't be wondering how they'll buy their medication...OK, you get the point.
2. Homeowners get leverage
Well, Bach's not a complete idiot, this is true. But leverage works both ways. If you invest $40,000 in that $200,000 house and the value of the house falls by 10%, $20, 000 then you've lost, not 10% but 50% (don't you love that number?) of your money. Then he throws this in:
As much as I like stocks, bonds, and mutual funds, there's little chance any of them will produce anything close to that return in such a short amount of time.
Apples or oranges? Please stick with one, Bach. You can also leverage stocks. Buying on margin is an example. There's also options which at the right time can produce returns of 10x or more in a single day. Doesn't that sound great? (You can also lose 100% of your investment but who cares about that.)
3. Homeowners Get Tax Breaks, Renters Don't
4. Homeowners can earn tax free profits
I got no quibble with these. Well, maybe just a couple. If you're tax deductions are already limited than new ones won't help. If Congress changes the law (doubtful but possible) both of these could change overnight. I'll give Bach the benefit of the doubt here and assume his audience doesn't make much money (just enough to buy his book) so they wouldn't hit the deduction limits and he's assuming that Congress won't change the laws anytime soon. Lastly, I'll just note that in order to take full advantage of #4, you'd need to sell your house before your profits exceed the $250k/$500k cap or else pay cap gains taxes on the excess (a problem most people would be happy to have).
5. Homeowners become savers
This one is also mostly true (there are actually negative amortization loans where the principal of the loan increases each month early in the loan...until your payment go up). My bigger problem with this is that this somewhat contradicts #2 (leverage) because as you pay off principal you lose leverage. If leverage is so great why get rid of it? Lucy! You got some splainin' to do.
Well, I wish Bach would have stopped right there but no, he had to go and hack up this furball:
According to statistics compiled by the Federal Reserve, the average homeowner is 34 times richer than the average renter.
Dude! Cause and effect! For crying out loud.
All that said, I'm not against home ownership. It makes sense for a lot of people but not everyone. And certainly not for the reasons Bach states.
