Home Ownership: The American Dream Or A Dumb Investment?

Why buying a house is a dumb investment

There are many reasons why buying a house is a dumb investment. Firstly, it is not just an initial drain on the cash reserves of the owner but a relentlessly ongoing one. It is also illiquid and can take months to buy or sell. The transaction costs are very high, often around 5% coming and going. It is complex to buy or sell, and there are lots of extra fees and reports. It generates low returns and is leveraged, which means that people will convince themselves it is a good investment when it is actually very risky. It is mortgaged, which means that people can be persuaded to borrow money against it more than once. It is unproductive and does not pay interest or dividends. It is immobile and is subject to the fortunes of the country, state, city, town, and even neighbourhood it is in. It limits the owner's options and keeps them docile for their employers. It is expensive to buy and own, and requires endless repairs and maintenance. It is fragile and easily damaged by weather, fire, and vandalism. It is heavily taxed. For all these reasons, buying a house is a dumb investment.

It should be a drain on the cash reserves of the owner

The first thing to consider when buying a house is the initial cost. This includes the down payment, which is typically 20% of the total price of the house. For example, if you are looking to buy a house worth $355,000, you would need to put down $71,000 upfront. This is a significant amount of money that could be invested elsewhere.

In addition to the down payment, there are also closing costs, which can amount to thousands of dollars. These include fees for services such as appraisals, inspections, and loan origination. There may also be other costs, such as prepaid property taxes and homeowners' insurance, that need to be paid at closing.

Once you have purchased the house, there are ongoing costs that need to be considered. These include mortgage payments, property taxes, maintenance, and repairs. Over time, these costs can add up to a significant amount. For example, let's say you have a $284,000 loan with a 3.5% interest rate. Over 30 years, you will end up paying a total of $612,000, which includes $257,000 in interest. On top of that, you will also have to pay property taxes, which can amount to tens of thousands of dollars over the years. Maintenance and repairs can also be costly, with an average of 1% of the home's value per year being spent on these expenses.

All of these costs can add up to a significant drain on your cash reserves. It is important to consider these ongoing expenses when deciding whether or not to buy a house.

Another thing to consider is the opportunity cost of buying a house. This refers to the potential gains you could have made by investing your money elsewhere. For example, if you took the money you would have spent on a down payment and invested it in stocks or mutual funds, you could potentially earn a higher return over time. This is especially true if you live in an area where rent is significantly cheaper than buying. By renting instead of buying, you can save money that can be invested and grow your wealth over time.

It's important to note that while buying a house may not be the best investment in terms of financial returns, there are other benefits to consider. For example, owning a home can provide a sense of stability and security, and it can also be a way to build equity over time. However, it's crucial to go into the process with your eyes open and be aware of the potential financial drain that comes with homeownership.

It should be illiquid

Why buying a house is a dumb investment

The process of buying or selling a house takes a lot of time and effort. It can take weeks or even months to buy or sell a house. This makes the investment illiquid.

The transaction costs of buying or selling a house are very high, typically around 5% of the deal. There are also many extra fees and reports that need to be paid for, making the process complex and expensive.

In conclusion, buying a house can be a bad investment due to its illiquidity and high transaction costs. It is important to carefully consider all the costs and benefits before making a decision.

It should be expensive to buy and sell

The cost of buying and selling a house is often overlooked when people are considering whether to buy a house. The transaction costs of buying and selling a house are very high, and can add up to 5% of the total value of the house. These costs include agent commissions, home improvements, closing costs, and moving expenses.

Agent commissions

The standard commission is typically 6% of the house's sale price, split between the seller's and buyer's agents. So, if you sell a $300,000 house, $18,000 of that will go to the real estate agents ($9,000 each).

Home improvements and repairs

Many homes, especially older ones, need fixing up before they go on the market in order for sellers to get top dollar. Today's buyers have high expectations: 77% of house hunters recently surveyed by Curbio said they wouldn't consider a home that isn't move-in ready. While pre-sale home repair expenses can vary widely, sellers who make repairs before listing their home spend an average of $14,163.

Staging

Although it's not a requirement, staging your home can help your property sell quicker and for more money. Staging involves decluttering and decorating your house to appeal to the masses. On average, staging costs between $800 and $2,800, but expenses can vary depending on how many rooms are staged and how long it takes for the property to sell.

Closing costs

Closing costs for sellers include title insurance, recording and settlement fees, prorated property taxes up until the closing day, escrow and wire transfer fees, and attorney costs. Sellers might also be asked to cover some of the buyer's closing costs. These costs can add up to 1-3% of the home's sale price.

Moving costs

The average cost of hiring professional movers for a local move is $1,699, but this price can be much higher for long-distance moves.

Taxes

There are several taxes that sellers might have to pay when selling a house, including property taxes, transfer taxes, and capital gains taxes. Property taxes are often paid in advance, so sellers might need to pay the prorated share of property tax up to the closing date. Transfer taxes are levied by many states and are typically a percentage of the sale price (usually less than 1%). If you make a sizable profit on your home sale, you might trigger the federal capital gains tax.

It should be complex to buy or sell

If you want to buy a house, you should be prepared for a long and tedious process. It is not a simple transaction, and it can take weeks or even months to complete. There are many steps involved, and each one comes with its own set of challenges and complexities.

First, you need to find a property that meets your needs and budget. This can be a challenging task, especially in a competitive market with low inventory. You may need to spend time researching different neighbourhoods, attending open houses, and submitting multiple offers before finding the right property.

Once you've found a property that you're interested in, the next step is to get pre-approved for a mortgage. This process can be complex and time-consuming, as it involves gathering financial documents, submitting a mortgage application, and waiting for approval from a lender.

After you've been pre-approved for a mortgage, you can make an offer on the property. This step can be tricky, as you need to consider various factors such as the asking price, the condition of the property, and the current market trends. It's important to do your research and negotiate effectively to get the best deal.

If your offer is accepted, the next step is to schedule a home inspection. This is a crucial step, as it allows you to identify any potential issues with the property before finalizing the purchase. It can be a complex process, as you may need to hire a professional home inspector and navigate any necessary repairs or negotiations with the seller.

Finally, once the inspection is complete and any necessary repairs have been made, you can proceed with the closing process. This involves signing a multitude of documents, transferring funds, and finalizing the sale. It can be a complex and overwhelming process, especially for first-time homebuyers.

In addition to the complexity of the process, there are also high transaction costs associated with buying and selling a house. These costs can include real estate agent commissions, closing costs, and various fees for reports and documents. These costs can add up quickly and significantly impact the overall cost of the transaction.

Overall, buying or selling a house is a complex and time-consuming process that can be challenging for both buyers and sellers. It is important to be prepared for the challenges and complexities that may arise and to seek professional guidance when needed.

It should generate low returns

The average home price in the United States is around $355,000. If you take out a 30-year fixed mortgage with a 3.5% interest rate, you'll end up paying around $612,000 in total principal and interest—that's $257,000 more than the original amount. And that's not including property taxes, maintenance, and other costs, which can add up to hundreds of thousands of dollars over the years.

When you buy a house, you're also locking up a significant chunk of your net worth in an illiquid asset. It can take weeks or even months to sell a house, and you'll typically have to pay hefty transaction costs and commissions.

So, while a house may appreciate in value over time, the returns are often meager compared to other investments like stocks or bonds. In fact, some economists argue that houses are a bad investment because they don't generate any income and can be a drain on your cash reserves.

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