The American Dream: “Go Out and Get a Home Loan!”.


Part of the American dream is to be a home owner right? So shouldn’t I go out and take advantage of all these tax credits and great incentives so I can own a home!

Well not so fast there sparky. If the property you are living in has a loan attached to it, how exactly are YOU the home owner? The answer is that you’re not. You’re a LOAN owner. Don’t nobody own that house but BankofAmerica for the next 30 years. Don’t believe me? Lets look at 12 things you’ve either been told or have been telling yourself and then lets look at what the truth is:

1. Houses always increase in value in the long run.

FALSE. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.

For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don’t increase in intrinsic value. Unless there’s a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite – the house drained cash from its owners for 100 years of maintenance, taxes, and insurance – costs that never go away. The price of the house went up about as much as salaries went up.

My grandmother always used to complain about the cost of milk. “Why, when I was a girl, a gallon of milk cost a dime! Just look at how much people are overcharging for milk now.” I asked her how much people got paid back then. “Oh, about $15 a week”, came the reply. Hmmm, sounds very much like the reasoning people use now when they talk about how much their father’s house appreciated “in the long run” without considering that inflation and salaries rose a proportional amount.

2. As a renter, you have no opportunity to build equity.

FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing.

Owers are losing every month by paying much more in interest than they would pay in rent. The tax deduction does not come close to making owing competitive with renting.

Owers are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of “owners” who actually own only 20% of their house. Remember that the agents will take 6%.

Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.

Owers must insure a house, but not most other investments.

Owers must pay to repair a house, but not a stock or a bond.

3. Renting is just throwing money away.
FALSE, renting is now much cheaper per month than owning. If you don’t rent, you either:

Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
Either way, “owners” lose much more money every month than renters. Currently, yearly rents in the San Francisco Bay Area are about 3% of the cost of buying an equivalent house. This means a house is returning about 3% rent minus taxes and maintenance, bringing the landlord’s return down to 0%.

Landlords are loaning a house to their tenants at a 3% interest rate, called rent. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 3% yearly rent at the same time a loan of a million dollars in cash costs 6.5% interest, plus 1.3% property tax, plus 1% maintenance, something is clearly broken. Renters are enjoying an extreme discount at the owner’s expense.

To add insult to “owners”, their property is declining in value. Renters are completely protected from the massive losses owners are experiencing. Here’s a great quote from NPR:

Underwater owner: “We would do it [pay the mortgage] if the equity was there, but in a case where we’re already so behind… Imagine that for five years, say, we’re gonna pay four grand a month and then we’re just gonna be back up at what we bought the house for. We feel like we’re throwing away money.”

4. There are great tax advantages to owning.
FALSE. Every married couple filing jointly automatically gets a $10,900 tax deduction, just for breathing. You have to have mortgage interest payments greater than $10,900 to get any advantage at all from the mortgage interest deduction. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn’t pay income tax on those dollars before spending them on mortgage interest. You don’t get rich spending a dollar to save 30 cents!

Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that’s just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.

If you don’t own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5. As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
FALSE. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

6. House prices don’t fall to zero like stock prices, so it’s safer to invest in real estate.
FALSE. It’s true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because realtors will take 6%. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.

7. The real estate bubble prices were driven by supply and demand.
FALSE. Prices were driven by low interest rates and risky loans. Supply is up, and the average family income fell 2.3% from 2001 to 2004, so prices are violating the most basic assumptions about supply and demand.

The http://www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased: year units people

2000 580868 / 1686474 = 0.344 housing units per person
2001 587013 / 1692299 = 0.346
2002 592494 / 1677426 = 0.353
2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years ago, when prices were lower.
At a national level, there is a similar story in the years 2000 to 2005:

2000 115.9M / 281M = 0.412 housing units per person
2005 124.6M / 295M = 0.422
At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.

The truth is that prices can rise or fall without any change in supply or demand. The bubble was a mania of cheap and easy credit. Now the mania is over.

8. They aren’t making any more land.
TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren’t making any more buyers, either.

Japan has a severe land shortage, but that hasn’t stopped prices from falling for 15 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

9. It’s not a house, it’s a home.
FALSE. It’s a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a “home” is a manipulation of your emotions for profit.

As a realtor said to me, “a house is a wooden box that sits out in the rain and slowly rots. No one would buy in this market if they really thought about how much pain it’s going to cause them in the long run. That’s why we have to sell them a home, not a house.”

10. It’s unpatriotic to talk about mispriced houses. It might drive down prices.
FALSE. Lower prices are better for America, especially for new families. Aren’t lower food and energy prices better for America? Housing prices are the same: lower is better because its not an investment to begin with. Most Americans directly benefit by a decrease in house prices. Only the banks benefit from increased mortgage debt.

If you own a house, lower prices have very little effect. If you want to sell and buy another house, higher prices mean you’ll just have to pay more for the next house, while lower prices mean you will get a discount when you buy. If you want to buy a bigger house, you come out ahead with lower prices.

11. My wife will divorce me if I don’t buy a house.
FALSE. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won’t divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month each spring, which you can do just by avoiding that suicidal mortgage.
If she’s religious, you could also point out Proverbs 22:7: “The rich rule over the poor, and the borrower is servant to the lender.”

12. My new baby needs a house.
FALSE. If you’re expecting and desperately want to buy a house for your new child, that’s a perfectly normal feeling called “nesting”. It is also the leading avoidable cause of financial fatalities! You most definitely do not need a house for a baby. A baby is utterly unaware of whether it lives in a rental or not. Babies also don’t need much space.

Your baby will do better if you’re not stressed out about a mortgage. You have five years before school quality becomes an issue, and at that point you can more easily move into the best school district as a renter than as an owner. Avoid debt and save your money so your child has a better start in life.

Folks, at the end of the day: Buy houses only if you need the sentimental value and NOT because you’ve been fed the notion that its an investment.Its not. Also, NEVER borrow money to buy something thats not even an investment in the first place. Cash is king. You can learn about how to buy houses with cash here.

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8 thoughts on “The American Dream: “Go Out and Get a Home Loan!”.

  1. Pingback: Home Equity Genius «

  2. This is powerful! Thank you!!

    I have been asking people if they watched Oprah when she had the Facebook co-founder on her show. During the piece about him it stated that he RENTS his home!!!!

    I have not seen or heard anyone comment on this.

    This speaks tremendously to your point.

    Like

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