A House Is Not a “Home”…

…and it decidedly is not a “dream.” That’s an embarrassing little truth that Evan lays bare in a recent post at My Journey to Millions. In a burst of his characteristic common sense, he wonders whether a better name for “the American dream” might be “the American nightmare.” In a shoot-from-the-hip comment, I vaguely agreed with him, despite several commenters’ arguments that “owning” a home is better than renting. But since his post went up, I’ve found myself returning to his query of the sacrosanct American ideal. The question is impossible to brush off, especially if you’ve had any serious experience with homeownership.

Consider: if we do a search for “real estate” in our city, we find a Google link to Trulia: “Find Homes For Sale in [Yourtown].” Realty Executives wishes to direct us to “Historic Phoenix Homes,” something that surely is an oxymoron, to say nothing of moronic. We’re lectured that “Buying a home is one of the biggest investments you may ever make financially” and “the Urban Team can help you buy a home,” to which we answer, “That’s quite a trick,” because my dears, home is not a place; home is where you hang your hat.

We don’t buy and sell homes. We (and our mortgage lenders) buy and sell houses. A house is, in most (but not all) circumstances, an investment. Because real estate prices in livable neighborhoods are so outlandishly huge, few of us who live outside the One Percent can afford to pay for a house in cash; consequently, most of us borrow outlandishly huge sums, putting up our “homes” as collateral and nailing ourselves to debt that will persist for upwards of 30 years. Over three decades, should we last long enough to pay off the loan, the mortgage interest alone will be as much as or more than the purchase price of the dwelling.

Some investment, eh?

Oh, you say, but in 30 years the house will be worth many times more than what we paid for it! Well…not quite.

In 30 years, the value of a dollar will be worth many times less than it was when you bought the shack. If you are very lucky and the neighborhood doesn’t decline, the amount you can clear from the sale of your future paid-off house will be just about enough to purchase a similar home in a similar or lesser neighborhood. In terms of real purchasing power, then: no. Thirty years from now your house will not really be worth more than what you paid for it.

In the meantime, though: you’ve actually disbursed, to the mortgage banker, twice as much as the house’s purchase price. That is, after thirty years have passed, the place is worth about half what you paid for it, over the long run.

Almost.

But not quite: you’ve installed at least one new roof ($5,000 a hit); repaired and probably upgraded the plumbing system ($5,000 to $10,000), likely upgraded the kitchen and bathrooms two or three times ($5,000 to $15,000); painted inside and out four or five times ($2,000 to $5,000 if you hire someone to do this bitch of a job); replastered the pool ($10,000); cut down a 25-year-0ld shade tree ($1,000) and replaced it with an expensive specimen tree ($500); installed a new security system ($1,000 + a monthly subscription); installed energy-efficient windows ($5,000), replaced the door the burglar kicked in ($500 to $1,500; $500 deductible for the home insurance, plus the increase in premiums), replaced two water heaters ($500 to $800 apiece), repaired the HVAC system three times (a lot) and finally replaced that, too ($4,000)…and on and on and on.

Begins to make Evan’s “American nightmare” sobriquet ring true, doesn’t it?

You know, it’s not necessary to pony up mortgage payments for thirty years to achieve the “American dream.” If you crave to own a house, some day, you could do what my father did:

Don’t purchase the roof over your head until you retire, at which time you will need housing that doesn’t drain your bank account once a month.

Instead, during your entire working life, either rent or live in company housing. Take the savings that result — which will be considerable, since you will not have to pay for maintenance, repairs, insurance, taxes, mortgage interest, and fancification of your dwelling — and invest every penny.

Then, when you’re ready to retire (which, if you’re not paying through the wazoo for the roof overhead, is likely to be well before the age of 65 or 67 or 70 or 75 or whatever standard “retirement age” is inflicted on your generation), use part of your savings to purchase a modest but comfortable, low-maintenance house in cash. This will vastly reduce your monthly out-of-pocket costs — now you will have to pay neither rent nor a mortgage — and you will have achieved the “American dream.” Since you will have been married for upwards of 25 years, it’s unlikely you’ll divorce, and so your investment in the “dream” will be pretty safe. Voilà.

During the entire time I was growing up (and before then, as far as I can tell), my father never owned our several homes. He and my mother rented, except when we lived in Arabia, where Aramco provided our housing — essentially the same as renting. My mother, who was in charge of finding and maintaining these dwellings, usually got us into fairly decent places to live. Some were very nice indeed; only one was typical Southern California ticky-tacky. We never wanted for comfortable, peaceful housing. And as for said housing being a “home”: home was what the people who lived in it created.

My father was 53 when he quit his job to retire; my mother would have been 48. He moved them to Arizona (women didn’t make these decisions then, nor did they buy and sell houses, at least not without a power of attorney from their dear husbands), because taxes and real estate prices were far lower than anything they could find in California. He bought a house here in cash, providing them with a place to live that cost almost nothing: a modest annual tax bill was about it. Of course, they had to pay for the utilities and maintenance — but because the house was new, maintenance and repairs were almost nil for quite some time.

For him, the American dream was to quit working. And he achieved it largely by avoiding what Evan aptly calls “the American nightmare.” My father didn’t let himself get sucked into the myth.

Why should you?

 

 

 

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Mrs PoP @ Planting Our Pennies July 25, 2013 at 3:44 pm

I definitely agree that a house is not a home. My home is pretty much wherever Mr. PoP is. And perhaps the cat. When we’re traveling, the hotel room ends up being called “home”, especially if we’re gone for more than a night.

While I think that real estate investing has gone fairly well for us so far in our brief tenure as property owners (just about 4 years), I think we’re at least somewhat unusual in the semi detached/clinical/mathematical approach we take with it.

funny July 25, 2013 at 5:27 pm

Buying property to rent out is different, IMHO, than buying one’s own residence. First, of course, as you say, one doesn’t regard rental property as one’s “dream home.” And then, if you know what you’re doing you’re usually pretty cautious about what you’re getting into…which easier when you’re freed from the illusions that surround the liberally marketed concept of “home.”

Grayson @ Debt Roundup July 25, 2013 at 3:46 pm

Interesting perspective. I do think there are many pros and cons to owning, but what if you live in an area where the rental prices are close to the same as owning. I have a mortgage with escrow to pay for my taxes and insurance. If I wanted to rent something with the same square footage, no matter the type of dwelling, I am paying about the same price as I pay now.

That being said, in your example, I wouldn’t be able to save anything. If I lived here for 30 years and rented throughout the whole time period, I would have nothing to show for it. I would have no house to live in and I would have squandered away all of the money into someone else’s house.

Your example works well for places where renting actually saves you money compared to owning. In my city, it just doesn’t make any sense to pay for someone else’s property. Once I paid off the house, no matter how long, I now own the home. I don’t care what the value is because it is pure profit once it is paid off (only if you want to eventually sell it). I do think that many think owning a house is the dream, but I only see it as a place to live in that I can change to match my style along with any modifications. Now, when you own, you don’t have as much flexibility like you have when renting, but that is just one con on a long list of both pros and cons.

funny July 25, 2013 at 5:03 pm

There are indeed many advantages to owning, not the least of which is a little elbow room between you and the neighbors. And it certainly is true that in most parts of the country rent for a house are about the same as what you’d pay on a mortgage for a similar house. For that reason, you’d need to rent apartments or townhouses rather than more expensive free-standing houses. In other words, for that 30 years in which you’re working and saving, you’d choose to live below your means so that you could put aside money for retirement and rent-free housing.

A problem with the expectation that you’ll own the house as a paid-off place to live after thirty years is that you don’t know what the neighborhood will be like in thirty years. Most modern developments are not built to stand the test of time — in the Southwest, for example, a stick-and-stucco house is considered “old” (no joke!) and in need of major renovation after just ten years. How many of the people who bought there when the tract was new will still be there after three decades, and what kind of people will have taken their place?

If, like me, you prefer to buy better-built older construction that’s centrally located, you’ll find that the leadership of most American cities quite deliberately lets the central urban core run down — and in fact proactively does things to damage the quality of living and property values. This occurs because it’s in the interest of the developers who fund political campaigns and who get themselves on boards of supervisors to push the middle class outward, into the suburbs that said developers are building. I’ve seen it happen time and again here in Phoenix: central city neighborhoods are gentrified and maintained in spite of, not with the blessings of, elected and appointed leadership.

The result is that after 30 years, you’re likely to find yourself surrounded by Section 8 housing, or at best in an area that has run down and from which middle-class shopping, doctors, dentists, and other infrastructure have fled. I have to drive to Scottsdale or Arrowhead — way east or way west — to get to reasonably upscale shopping (we’re not talking Ralph Lauren here…), and in an emergency EMTs will not take me to the nearest hospital that has good national safety and competence ratings because it’s too far away.

Grayson @ Debt Roundup July 25, 2013 at 5:23 pm

I agree with some of your sentiments, but from what I am looking at in my area, the southeast, I do not see what you see. My cost comparison was just talking about square footage and the representative cost. I have a home that fits our current needs. We wouldn’t be able to live comfortably if we downgraded in size. No matter if we went with a townhouse or apartment, we would be paying very close to what my mortgage is. The reason being is that rental costs have gone up around here for close to 15 years, well before the 2008 fall out. The apartment that my wife and I rented when we got out of college cost us $50 less per month than where we live now.

That being said, we wouldn’t be able to live in that apartment now because we have a child. We would have been out of space and being cramped is not worth the $50 savings per month, at least not to me.

The area in which I live, I know quite a few people that have lived in their neighborhoods for well over 40 years. They have their original home with some minor upgrades inside. They are close to shopping and the amenities, while that was not the case when they first moved in, that is the case now. I have been here for over 20 years and our “section 8″ housing has never outwards. They actually have gotten rid of many of it, due to crime and tenant issues.

We can never know what 30 years will hold and that is why where I would agree with renting. We never know where we end up, but we only can make the decision based on now, not next year.

I do think your argument is a good one, but I enjoy owning my home. I have a hobby that requires good garage space, which would cost me much more if I rented a place with a garage (apartment or townhouse). I value my hobby and can’t do it in many places without working space.

There are also some people that pay off their mortgages in 15 years or less. Would it not be worth their time and money to own rather than rent?

funny July 25, 2013 at 5:40 pm

LOL! Children do complicate all sorts of calculations, don’t they? :-D

The real estate crash changed the calculus, too. Here in Arizona, so many houses were foreclosed that banks were practically giving them away, while interest rates fell to historic lows. If you were among the few who could still qualify for a loan, you certainly could buy a house for less per month than it would cost to rent….especially since the rental market was booming, as so many people were out of their houses and forced to rent apartments.

My parents had only one child, and so a two-bedroom house or apartment sufficed. In those days, too, people didn’t expect to have a home office, because there were no such things as computers, nor did they expect to have space dedicated to entertainment media — the TV just naturally went into the living room. As for hobbies…my father’s idea of a hobby was goin’ fishin’.

Absolutely, if there’s any way you can pay down your mortgage in 15 or 20 years, that is radically in your interest. I think a lot of people don’t realize that by shortening the term of a 30-year mortgage by prepaying principal, they can save startling amounts of money on interest — there’s really no need to lock yourself into a 15-year mortgage if you can train yourself to pay more than the required monthly payment. And if you were fortunate enough to score a house while values were down and interest rates were in the sub-basement, you’re in an exceptionally good position.

Grayson @ Debt Roundup July 25, 2013 at 5:45 pm

Yes, the certainly do. Wait, people didn’t have home offices or dedicated entertainment rooms back in the day? ;)

There are too many factors to put together to figure out which scenario is better. I do think that people need to seriously think about each one before they make the jump. There should be no reason why owning a home needs to be a dream. Your dream should be to have a place to live, have your health, and have money to survive without struggling month to month. At least, I think that should be the basic dream. You can add on whatever piece you want on top.

Funny about Money July 25, 2013 at 6:05 pm

Well said!

Linda July 25, 2013 at 6:24 pm

I hear you on the salesmanship that goes into pushing “the American dream” on us all! There are so many ways people get suckered into over-extending themselves because they have become convinced they must have certain products or a certain lifestyle.

Similar to Grayson, my eyes were opened recently when I was looking at the rental market in my area. I was looking not because I need to or want to rent, but because I was curious. (I have one of those personalities that is constantly gathering data about seemingly useless things, and then — BAM! — it is useful knowledge and I’m glad that I’m so curious.) I was really shocked to see how much a two-bedroom apartment with similar amenities (dishwasher, w/d “in unit”) rents for in my area. It was as much as my mortgage payment, and my house comes with much more space (4 bedrooms and three bathrooms) and freedoms (a yard to frolic in! ability to paint the walls whatever color I want!) than a rental. It’s true that I pay property taxes on top of that monthly “rent,” but at least I get a tax write- off to equalize that factor. Perhaps utilities would be less…perhaps, but not definitely, as Chicago rentals aren’t necessarily well-insulated (especially those in vintage buildings, which have no insulation in the walls.)

Now, here’s where it differs: maintenance costs. As you so aptly point out, as the owner you are on the hook to do repairs and maintain the property: fix the roof, fix wiring or plumbing, replace the appliances and mechanicals if needed, etc. Those costs are ones the renter never sees…or is that true? Rents increase over time, too, and are adjusted to allow the property owner to cover these costs while still maintaining some profit margin. My maintenance costs may be more than a renter, but my base monthly fee (my mortgage payment) is fixed.

I’m in agreement that owning a house does not match the beautiful fantasy one is sold. Nor do I think that house = home. However, everyone needs to pay for a place to live, and in many markets it is at least a break even proposition to buy a house.

funny July 25, 2013 at 8:01 pm

Hm. For a perfectly horrid one-bedroom hovel in a dangerous firetrap, my son paid about half of what we’re paying for the house we and the credit union are copurchasing for him. His landlord had already informed him that the rent would raise significantly when his lease renewed.

The house has three bedrooms and a gigantic walled yard with plenty of room for a big dog; a garage with an actual door, a washer-dryer hookup in a separate laundry room; and a nice kitchen with a great gas stove. It’s centrally located and is close enough to walk to the new lightrail line but far enough from it to avoid the riff-raff the train attracts; and it’s in a pleasant neighborhood ripe for gentrification.

If we had waited just a year or so before jumping off the cliff, we could have gotten him into a much nicer house that would have required little or no renovation (we threw money at the place he’s in) for the same amount or less than his increased rent would cost.

funny July 25, 2013 at 8:20 pm

And on the topic of repairs: When my son and I were worrying about what we would do with the downtown house, which quickly went upside down with the crash of the economy, we looked in to the possibility of renting it. We found we could not rent it for enough to break even at the time (although that is no longer true). A couple of people who were experienced with renting advised that we should get a large deposit to help cover unforeseen events, collect first and last month’s rent, and also carry plenty of insurance on the place. And, they suggested, we should build a repair fund from whatever source of extra money we could find.

Ideally, one charges enough rent to fund the “repair” savings account and also cover insurance. Whether you could do that, though, would depend on the market and the mortgage payment. That’s why it’s best to buy rental properties in cash, or at least put enough down to keep the monthly payments well below the worst-case rental income.

Evan July 26, 2013 at 6:38 am

Your property taxes are not an equalization. You get a deduction on them (and may not even be using that deduction should your total deductions be below the standard one).

Your mortgage may be fixed but those costs mentioned are not. I live in a diff part of the Country where a roof is no less than 10K. It just isn’t. So if I pay 10K into that roof am I really making any money? The value of my home doesn’t increase by 10K from the day before. I can’t charge 10K more even though I through 10K into the home.

The point I originally made was that when looked as an investment it is a TERRIBLE one.

funny July 26, 2013 at 6:55 am

@ Evan: Yes, even here 5 grand is on the low- to middling side to reroof a house. If you’re using asphalt shingles, it depends on the cost of oil at any given time. If you roof with shake shingles or “tile” (most roofing tiles are fake — they’re actually something like concrete), the price is much higher, and a metal roof is simply out of sight.

It’s also important to note that the much-vaunted tax deduction on mortgages is just not that big a deal for most middle-class homeowners. If you’re very wealthy and own a high-end property, no doubt it’s helpful. But for the hoi polloi? One wonders.

After I paid off my house ( to my financial adviser’s despair), I saw no difference in the amount of taxes I was paying…the following year I got exactly the same tax refund as I had been getting while I was shelling out half my salary to a mortgage company. You pay out a gigantic hunk to get a tiny drip back — not a smokin’ deal.

All the maintenance, repair, insurance, and tax costs eat into your “investment.” IMHO, Evan has got something when he suggests that however you look at a house, it’s an expensive endeavor that should be regarded neither as a “dream” (unless it’s one you’d like to wake up from) or as the best of all possible uses of your money.

The present value of my paid-for house represents about 34% of my total net worth; my adviser has said I’m “over-invested in real estate.” And that doesn’t count the huge liability represented by my having copurchased the house with my son.

Linda July 26, 2013 at 12:45 pm

See, I don’t look at my house as an “investment.” I will have to pay for housing one way or another. Paying that money to a mortgage company for a house is what I choose to do because I like the benefits — I get to choose my level of privacy, do what I want with my yard, etc.

I use that property very effectively, I think. I grow food, I raise animals for food (eggs and honey), and I have spare rooms that I can and do rent out as needed.

This doesn’t make my house an investment, but it does make it an asset. And since there are business applications (renting rooms) there are business costs that get handled as additional business deductions on my taxes. Of course, I also have to claim the extra income, too, but it usually comes out in my favor at tax time.

jestjack July 26, 2013 at 3:44 am

Hmmmm….this sure blows my “life plan” out of the water. DW and I decided loooong ago that the way to a comfortable retirement would be real estate. Yes that’s right …about 35 years ago before reality shows and seminars we chose to become investors. And for the most part we have been blessed. Make no mistake the dynamics of this business have changed since 2008 when the Great Recession hit. People just don’t have the money or confidence they once did…which leads to “analysis by paralysis”…which leads to staying put. This is the toughest rental market I have seen in my 35 years with a very shallow tenant pool. At imes I do wonder if I own these houses … OR …do they own me?…

funny July 26, 2013 at 6:39 am

Oh dear…that’s bad news, indeed. What part of the country are you in? Here in Arizona, the rental market is very hot.

Here, possibly the major factor that’s driving the real estate turnaround is the presence of investors — some of them large investors — with lots of money. They’re coming in to Arizona and buying houses with cash, driving up selling prices at a ridiculous rate. This is making it difficult or impossible for those people who lost their homes to the economic crash but can now qualify for loans to buy houses in the $150,000 to $200,000 range. We’re seeing bidding wars that are shutting out ordinary, local buyers.

These frantically bought-up houses are being turned into rentals or, in neighborhoods where real estate is worth something, fixed & flipped.

But meanwhile, because even people who can qualify for houses in the low- to middle-income range are being shoved aside, the rental market remains very hot. Zillow is showing the rental value of my son’s house as exactly what we’re paying for the place; if you were to buy it for what Zillow thinks it’s worth — which is now very close to what we owe on it — your P&I would be $415 a month less than the alleged rental value.

Hmmm. My own house, which is free & clear, supposedly would rent for $447 more than the mortgage payment on its putative value. Interestingly, it’s now worth $13,000 more than I paid for it, or so Zillow imagines.

tmgbooks July 26, 2013 at 8:40 am

I love these discussions on the buy vs rent debate. In this one, one of the most important factors has yet to be mentioned:

The money you spend to pay a mortgage (buying) is not the same as the money you pay your landlord (renting).

Rent is the line item in your budget for housing.

A mortgage payment is what you pay to acquire the underlying asset; ergo (that’s right, I just used the word ergo), the buyer receives the value of the housing as imputed income.

Leave that out of the equation and your result is wrong: GIGO! Do the math if you are able.

Maintenance, new roof, blah, blah, blah, living alone in my big house is a luxury. Just like you, Funny, living alone in your big house (with a pool, no less!) is also a HUGE luxury.

But, hey, it my money (and yours) and I can spend it however I like…and I like lots of space, an office with a separate entry, and the big picture window over my desk.

I own seven rental units. Paid cash. I don’t love ALL aspects of the business but, then, I don’t love all aspects of life, either. Owning a home is not a perfect answer regardless of the question; there is no perfect answer.

funny July 26, 2013 at 10:58 am

Ah, that does add an interesting dimension to the discussion! The math is way, way over my head, but in a hazy way I can see that it makes a vast difference.

Yes, a lot about owning a house, especially if it’s a typical family-sized structure occupied by one or two people, is pure self-indulgent (or…masochistic?) luxury.

Up until the past few months, I’ve regarded the pool as total extravagance. Just now, though, between the heat and the amazing pain, it’s the ONLY way I can get any exercise…walking simply hurts too much, and it’s too hot to bicycle (which also, once the weather cools, may prove to be too painful to be practical). I loathe bedroom sculptures; even if I could afford one, I would never stick a stationary cycle or rowing machine or treadmill in my house. I consider public pools to be filthy no matter how sparkling they look (a recent study proved that to be true), and so if I didn’t have a pool in the backyard, where I know who’s used it and what they’ve done in it, I would get no exercise at all. The swimming pool just now is the only thing that’s keeping me mobile…without it, I’d probably be in a nursing home by now.

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