When my wife and I moved to England we weren't sure how long we were going to be here so we opted to rent a house instead of buying. It was the first time we'd been renters in a long time but it seemed like the most logical thing to do. Weirdly we would be both tenants and landlords at the same time as we were renting out our house in California at the time. 4 years has gone by and we're still renting. Different house, different town but recently I've seen a lot of commentary and opinion on rent vs. own in 2012 and as a result I've been doing a lot of thinking about my past forays into the housing market and I wanted to share some of my thoughts and experiences. I bought my first house when I was 21 years old. It was a brand new house, far too big for Deanne and me but I was young and flippant and wanted the biggest goddamn house I could get my hands on. That was my only criteria. It had to be big, look impressive, have lots of rooms and basically make me feel good about myself. Yes, it was an ego purchase in many ways. Could I afford it? Yes but barely. Did I consider future value, how long we'd be there, cost of maintenance, energy efficiency, relative location to friends and family, etc. Hell no, of course I didn't.
Incredibly, I got away with it. In fact we doubled our money on the house in just over 2 years. The chart below is from Zillow.com and while I've removed the price points you still get an idea of how much we lucked out. And yes, we lucked out, it wasn't genius speculation on my part or brilliant analysis of the volatile California housing market. It was dumb luck. In fact, the market was so volatile that just a 3 years after we sold the house, we could have bought it back with the PROFIT we made from selling it in the first place. Now THAT'S volatility.
10 years ago when we bought that house, real estate was a safe bet. Hell, for the most part it's been a safe bet for the last 50 years. Insurance against stock market volatility and inflation. The rule of thumb when we bought our house was that one should expect the value of the house to double every 10 years. Decade after decade this was true. And then in the late 90s/early 2000s the market began to accelerate, especially in California where it just went crazy. Values were exploding, anyone (including a 21 year old kid) could get a mortgage, house-flipping became the fast way to big bucks. Buying a house seemed like a no brainer to first-time buyers and investors alike.
But then the bubble burst. On both sides of the pond. Values tanked, people were upside down in mortgages they couldn't afford, foreclosures skyrocketed, entire cities like Las Vegas and Phoenix were brought their knees. The same happened here in England, although not as spectacularly. And now the markets are generally stagnating. Values are stuck in post-bubble slumps, houses remain on the market for years when they would ordinarily be caught up in bidding wars. I've been in my current neighborhood for two and a half years now and the house across the street from us has been on the market from pretty much the day we moved in. They've changed real estate companies several times, lowered the price, tried everything but nothing is shifting that place.
It's always been assumed that one should own a home, it was the natural progression of adult life. You have to "get on the property ladder" as the Brits say. Someone referred to this as the "American Myth" - the white picket fence, keeping up with the Joneses, etc. But after we sold our last home a few years ago and I was officially out of the housing market, I began to seriously challenge that assumption, especially after I embarked on my new career path as a self-employed wantrepreneur.
Here's what home ownership in 2012 boils down to for me:
- It's capital intensive. Since the mortgage crisis, buyers have to fork out a huge down payment. "It's an investment!" I hear you cry. Not so fast, Charlie - in the US, inflation-adjusted housing returned 0.4% from 1890 – 2004. Still sound like a good investment? There are so many better vehicles for your cash in 2012. Hell, even the stock market would give you a better return. Or take a small chunk of that down payment and start a business. Now THAT's a life changing investment.
- It's time intensive. Especially in England where the entire house buying process seems completely archaic and convoluted.
- You have to maintain the house yourself. Now that's easy (and possibly fun) for a very small percentage of you. But for the vast majority of people, when the heater craps out or the roof starts leaking, it's wonderful to be able to say "NMFP" and call the landlord who has to incur the expense, not you.
- It lumbers you with an extraordinary amount of debt for the rest of your life. You are trapped by a crushing 6 figure debt that you slowly chip away at for 30-40 years.
- If you're upside down in your mortgage, you're trapped. You can't sell, you can't move, you can't get cash from your investment. That's not a nice feeling.
- It's very hard to access the equity in your investment. If you want to borrow against the value of your home, you can but rates are high, there's payments involved and of course you risk losing your house if you don't keep up with the payments. Liquidity is king in 2012.
- It's incredibly inflexible. Let's say you want to move somewhere new. New city, new country, whatever. As a renter you give your 30 day notice and you're off. As a homeowner, you have to either sell your place or find a suitable renter. Neither are trivial exercises.
Now I'm dealing in generalizations here and reflecting on my own opinion. There are exceptions. I think multi-unit and commercial real estate investment can yield healthy returns AND healthy cashflow. It's something I'm exploring myself. I know well off people in beautiful suburban homes who are considering selling those homes, renting a house and using the proceeds from the sale to buy a small vacation home in a desirable part of the world. Smart. There's a cost savings on vacation accommodation and cashflow opportunity when you're not using the vacation home. AND no penalties for owning a second home. In fact some of the wealthiest people I know are renters and diversify their investments to (obviously) great effect.
But for those of you considering buying your first home or even if you already have, I'd urge you to carefully examine WHY you want to buy a house. And ask yourself if you could do something better with that cash.
Oh and my first house? It's still worth less than when we bought it for way back in 2002. And has been for over 5 years. Does that sound like a good investment for you?
Do you rent? Own? Considering buying a place? I'd love your thoughts.