Don't Buy a House
I am moving for work in a few months. When I tell colleagues this, without fail they ask "Where are you buying?" They never think for a moment that I might rent instead.
Since I can't educate them about my views of fiscal responsibility in 5 minutes, I just respond with "we're looking at neighborhoods." That's true, but NOT for buying a house because that would be stupid.
Buying a House is Great for the Realtor
It's an unquestioned, forgone conclusion for most people that every American aspires to home ownership. The advice I hear is that "Building equity in a house is a good investment vs. throwing money away renting."
I've owned a home. The realtor who both sold it to me AND sold it for me made 5 TIMES the money that I did on the transaction. She never had one dollar tied up in it and made out like a bandit. I couldn't buy a damn thing for 8 years because I was "building equity."
A house was not a good investment for me. Is it a good investment for you?
Buying a House Delays Your FI
Here's how to test for success: a house is a good investment IF you reach Financial Independence (FI) SOONER than if you had rented.
But the math shows unequivocally that you cannot. There are two reasons:
1. Returns Are Too Low
Returns on housing average 3.7%. Housing prices also include 6% realtor fees (read: back-end load) on the sale.
With 3% inflation you must hold the house for 8.6 years just to break-even [ 6% / (3.7%-3.0%) ]. That's if you pay cash.
If you take out a mortgage at 4.6%, then you can't even START breaking-even until you pay off the house. By that time, you're deep in the hole with 30+ years of equity that you overpaid for by 3.9% every year [ 3.7% - 3.0% - 4.6% = -3.9% ].
Side note: You can't make money by paying down debt. You make money by investing.
2. Opportunity Cost Is Too High
Stock market returns average 11.7%. The money you set aside for a house incurs an opportunity cost of 8.0% per year. Here's what both investments amount to in 12 years (adjusted for inflation):
$100,000 down payment appreciates to $108,467
$100,000 in the stock market increases to $264,601
Let's assume your mortgage payments + maintenance + property taxes are just as cheap as a rent payment (even though they aren't). Building equity doesn't figure in (see previous point).
Investing in a house forgoes an inflation-adjusted gain of $156,134. That's just crazy.
Buying a house DELAYS your arrival at Financial Independence. Invest the down payment in index funds (stocks and bonds) and rent instead.
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