Why do home owners advise against home ownership?

All the different ways of solving the shelter problem. To be static or mobile? Roots, legs, or wheels?
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conwy
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Why do home owners advise against home ownership?

Post by conwy »

I've started to notice a curious phenomenon:

Famous people who advocate low-fee index funds are actually home owners!

Here's a list so far:

1. Peter Adney (MrMoneyMustache.com) -- wrote many blog posts exhorting followers to buy index funds, but more recently he started to admit that he owns his home outright
2. Peter Thornhill (MotivatedMoney.com.au) -- wrote a book and delivered many talks and interviews where he advocates investing in low-fee index-like LICs. But when directly asked about whether he owns or rents he admits that he owns!! The excuse he gives is that the Australian housing market doesn't include "security of tenure", so to avoid having to move frequently, he decided to buy his home. I believe he uses a mortgage so he can use the credit line for leveraged stock investments.
3. Ben Felix (RationalReminder.ca) -- published papers and appeared on YouTube videos and runs a podcast, in which he frequently and passionately advocates low-fee index fund investing and claims on many occasions that real estate underperforms index funds in the long-run. But he admits to owning his home, saying that he wasn't able to find the kind of home he wanted as a rental (and I believe also based on "the 5% rule").

Isn't it interesting that those who make a business of telling everyone to invest in the markets are actually closet home owners?!

What is going on here?

Are they lying when they advocate stock portfolios?
If so, what motivates them? What do they get out of advocating something they themselves don't believe in?

Supposing they aren't lying, then why do they own homes?

If stock outperform, then why would one own a home?

If home ownership allows one to stay in a home which one could not otherwise afford, doesn't that prove that home ownership actually outperforms stock performance, in terms of purchasing power of accommodation?

What do you think?

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Seppia
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Re: Why do home owners advise against home ownership?

Post by Seppia »

I guess it depends on how one sees housing.
I personally see it as a cost (some see it as an investment and actually made money with it + leverage), so I tend to rent and invest.
But I also own a (very!) small place in my hometown as a “shit hits the fan” insurance: I like the idea that I could live with my family without paying a rent in case I really needed it.

chenda
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Re: Why do home owners advise against home ownership?

Post by chenda »

Well index investing and home ownership are not mutually exclusive. Pete MMM has always been upfront about his home ownership, so its not like he is hiding it.

Renting vs ownership has advantages and disadvantages. Security of tenure is important, and varies a lot between jurisdictions.

take2
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Re: Why do home owners advise against home ownership?

Post by take2 »

Housing is a cost ultimately. It may be cheaper to rent or buy depending on timeframe, location, ability to secure cheap debt, etc. If you’re going to be in the same place for a long time (>10 years) it almost always becomes better to buy, but even that depends on location, tenancy laws, etc.

Personal housing is a consumer good, not an investment. There are some exceptions to that (house hacking, constantly moving every few years to take advantage of tax code), but for the most part it’s a consumer good. Whether you choose to reduce your consumer good housing expense via renting or owning depends on your skill level, options available to you, and willingness to take on risk.

It’s not that different to reducing any other cost, it’s just typically the largest one.

rube
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Re: Why do home owners advise against home ownership?

Post by rube »

Looks like you're trying to come up with something far fetched to be able to accuse others that they're are lying.
But the answer is simple: personal housing situation and investing are often two separate topics you don't want to mix.

Dream of Freedom
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Re: Why do home owners advise against home ownership?

Post by Dream of Freedom »

Why do people keep trying to compare the stock market to home ownership? Are they going to live in their stocks? You have to live somewhere. So, the proper comparison is with where you would live if not your own home. That could be a place you rent, a car, or under a bridge. I can understand the comparison for a place you will rent out to someone because then you are looking at two investments, not one investment and one place to live, but with your home, it doesn't make sense to me.

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C40
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Re: Why do home owners advise against home ownership?

Post by C40 »

My friend said he likes Budweiser beer. But one day I saw him eat a cookie. WHY IS HE A LIAR!?!?

But really, what Take2 said.

Plus, balanced asset allocation. A home can turn out to be a profitable investment. Having a non 100% asset allocation doesn't invalidate a recommendation they made about investments.
Last edited by C40 on Tue Jun 28, 2022 9:02 pm, edited 1 time in total.

Western Red Cedar
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Re: Why do home owners advise against home ownership?

Post by Western Red Cedar »

I think Pete has been relatively upfront about owning his house, but I'm not familiar with the other two mentioned in the OP. In fact, I thought part of his regular pitch was that "I could retire on $24,000 per year with a paid off house." He elaborates on the issue here in an interview on the mad fientist, and I always thought this was a balanced way to look at things. It isn't necessarily about optimizing everything. Simply avoiding really stupid mistakes will likely lead to success.

Audience Member: My question revolves around investing. We’re here in the middle of 2016 after a long boom market. And even though I know what the textbook says and what you guys say on your blogs, “Just keep investing every month a little bit,” one cannot help to think—or to want to time the market anyway. That’s an internal struggle that I have sometimes and other people here have this weekend.If you can just give some advice, either general or specific, that would be great.

Mr. Money Mustache: Super quick one. So, there are different levels of timing the market that are more or less destructive. And sometimes, you just need a psychological crutch to feel like you’re doing something.

The destructive way would be like, “I’m just going to sell everything, and then just hold it in gold coins under my mattress until it’s cheaper again.” That’s really, really unlikely to work. It’s super likely to cause problems.

At the same time, you’d feel like you’re doing something, but then you’d feel bad when you have no money 20 years from now.
So, instead, first of all, you could keep training yourself and just keep reading these books and be disciplined and always just throw every paycheck into the market. That’s probably the most winning strategy.

But if you really, really can’t do that, you could do little stuff like, “Well, stocks are so expensive. I’m just going to pay a little bit of my mortgage off extra. I’m going to start doing $500 extra to my mortgage next month or for the next year.” And so you’re still creating a win-win situation where you’re getting positive returns on this money, and you’re diversifying a little bit. You can’t really predict the statistics either way. You might get lucky or you might get slightly unlucky, but you’re still going to come out ahead and way better than almost everybody else.

So, the thing I like to think about with investing is you don’t have to be anything close to amazing to make it worth for you. You just have to keep a net positive over a long period of time.

So, you can actually just do whatever approach, but just don’t let yourself become uninvested. Don’t try to really outsmart the world.
For me, I did pay off my house because I felt, “Well, I want to keep investing in stocks even though it’ll probably exceed this mortgage rate in terms of how much it gives me back.” But I paid off the house, and I’ve never regretted it. I feel great not having a mortgage payment. Statistically, I would’ve been better to leave the money in stocks and still have a mortgage now, but it’s not a contest for most money. It’s just a contest for feeling good about your financial situation and sleeping well.

So, yeah, I’d say just be easy on yourself while avoiding the most stupid possible decisions.

*Here is a link to the full episode. One of my favorite MF podcasts - https://www.madfientist.com/camp-mustache-q-and-a/

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mountainFrugal
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Re: Why do home owners advise against home ownership?

Post by mountainFrugal »

In our case we could literally not find a place to rent and our landlord was going to jack up the price of our studio mother-in-law unit above a garage. We had been watching the housing market in our town for over a year and it has (thus far) worked out way better on every dimension to buy a house. If we decide to move for some reason, we could rent this out for hundreds of dollars over our low mortgage and convert it into an investment property. Right now it is not an investment, but the mortgage, taxes, insurance are still cheaper than rent (downpayment investment income included in this market environment). We are taking more leveraged risk with the mortgage, but we could easily pay that off in full if necessary. With a 3% fixed rate we will ride the inflation tail wind for now especially as rents continue increasing month over month for less quality housing. This reply does not even touch on the other many quality of life benefits that we enjoy from owning over renting. It is way more complicated than just own a home or not to worship the numbers.

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Re: Why do home owners advise against home ownership?

Post by jacob »

conwy wrote:
Mon Jun 27, 2022 11:36 pm
If stock outperform, then why would one own a home?
You're looking at different stages of the FI-game. When the end-stage is reached and one is FI, owning one's home which at this point may be 10-20% of one's NW, increases the chance that one stays FI due to less market exposure. Also there's less reason in accumulating more money (what is 2xFI). Whereas in the early stages, paying off the mortgage instead of investing delays FI substantially due to the theoretically lower returns.

All this contingent on the belief that stocks generally outperform bricks---which I suspect the OP gurus all believe.

So they're looking at an additional variable (downside risk) aside from just total return and networth.

sky
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Re: Why do home owners advise against home ownership?

Post by sky »

Anyone giving advice on early retirement will recommend an accelerated, optimal path to financial independence. In the short term of a decade or so, living in a low cost rental unit will almost always be more cost effective than owning a single family home (except where one rents rooms in a sf home to others).

The reasons for owning a home are in part lifestyle choices where one pays more for privacy, stability, control, the ability to make improvements which one will use long term.

The financial reasons in favor of owning one's home are related to being insulated from rent increases due to increases in market value of real estate where one lives. These financial benefits generally are realised two or more decades after one has owned a home. While renting, one is subject to future rent increases, which are out of one's control and are based on market demand and supply, housing market value, increases in taxes, maintenance costs, insurance, the financing cost of rental property in the region, and of course popularity of the neighborhood to inmigrating residents. The homeowner still is subject to increased cost of maintenance and increases in property taxes, but the ever onward and upward market value has little impact on the long term homeowner. Once the mortgage is paid off, one's personal budget is relatively low and stable.

prudentelo
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Re: Why do home owners advise against home ownership?

Post by prudentelo »

Own home ownership is tax advantaged in (all?) English-speaking countries. Problem is frictional costs. Great idea if you stay for decades.

ducknald_don
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Re: Why do home owners advise against home ownership?

Post by ducknald_don »

I'd prefer to rent (I would have moved twice in the last two decades) but the rental market in the UK is quite dysfunctional.

suomalainen
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Re: Why do home owners advise against home ownership?

Post by suomalainen »

When I got divorced, it was cheaper to buy than rent similarly sized and located apartments/condo units, and I knew my time-horizon was 8 years, so buying was an easy choice. In addition to other considerations noted above, liquidity can factor into the decision for you as well (noting that renting gives you liquidity at the cost/risk of rising rents while buying with cash lowers liquidity while buying with a mortgage preserves (~80% of your) liquidity at the cost of the APR). Math plays a role, but so does psychology. No one right answer.

But yeah, when I read the OP, I was so confused what the assumed contradiction was between index investing and home ownership. I thought the answer was going to be (as it is in my case): because home ownership sucks if you don't enjoy the responsibility of maintenance.

WFJ
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Re: Why do home owners advise against home ownership?

Post by WFJ »

My own experience was to not buy a home to maximize the value of labor. My professional fields were usually better to find a new job than to ask for a raise at a current job, so owning a home introduces another cost to consider when moving to a new employer. Some professions are highly dependent on staying in one location (small business owner) and would lend towards owning a home while other professions reward mobility. This is how I would frame the decision.

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