I posted a video of my pal James Altucher on Yahoo Tech Ticker this week, declaring he was “Never going to buy a home ever again!”
Whenever I hear that sort of declaration, it tells me we are closer to the end of down cycle than the beginning. The psychology is reaching a negative extreme, and that means we are nearer to a capitulation.
Lets take a closer look at Jame’s thesis: I do not agree with much of what he states here — from buying the home builders (why?) to being a renter (maybe) to not owning a home (huh?) to homes being illiquid (exaggerated). And while there are many reasons to buy a house, as an investment is not really one of them.
Indeed, I find myself noting the following in response to Jim’s concerns:
• Home ownership allows you to live in one place for as long as you like, without worries that the property owner will not renew your lease.
• You get to select the school district you like for your kids’ education.
• Those of us who lived in a city know what its like to be subject to the capricious whims of a landlord. (no fun).
• When you own your home, you have the option of painting the walls whatever color you want, doing capital improvements, renovations, etc.
• Homes are less liquid than stocks, but price any home correctly and it will sell quickly.
• If you buy a home you can actually afford, there is no more stress about mortgage payments than paying your rent.
• For middle class Americans, the mortgage deduction is a huge tax savings. No such benefit exists here in Canada (formally, anyway) although one can re-structure their financial affairs to put themselves in a position to be able to tax-deduct much of their mortgage payment. (Email or call me to find out how).
There are lots of reasons to choose between Owning and Renting — it is a personal life choice — but since you have to live somewhere, its simple math to determine what the price differences are. Are the marginal cost differences worth the perceived advantages? That is your calculus.
Currently, our 3 metrics for measuring home prices show prices remain elevated by various degrees.
1. Median Income to Median Home Price — it is still about 10% too high nationally. This is the most reliable of our indicators, and it shows the most expensive home prices of the three.
2. Cost of Renting vs Cost of Ownership: This metric is now reasonable — rents have gone up, people are fearful of buying an asset whose price is falling — so it makes Ownership look more attractive, depending upon the region. But it is the most volatile and least reliable of the three, as it is easily influenced by risk aversion psychology and rising rent prices.
3. Housing Value as a % of GDP: It shows only a slightly over-valued housing market, but that is due to the weak economy. A more robust GDP makes housing look pricier.
Barry R, The Big Picture.
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example. saverio manzo
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