Great read; just one thing I’d add re the housing discussion which I think is sometimes neglected is that unlike essentially all other assets everyone is naturally short housing as they’re always going to need somewhere to live. As such buying a similar amount of housing as one plans to use in the future (this can also be done via investing disproportionately into housebuilding stocks or buying shares of various properties) can reduce your risk to future price increases (which historically have been large, especially if you value living in cities/desirable locations).
Housing could therefore be a sensible investment even if you thought an index fund would yield slightly higher returns. This effect is further heightened by the fact most individuals have extremely limited access to leverage unless buying a house and the tax advantages associated with a mortgage too.
Too often I see discussion of buying a house from purely a mathematical/investment perspective. I agree that the numbers need to be top of mind for this type of purchase… however these discussions neglect the non-tangible aspects of home ownership that are very real and important. Sense of physical security, familial bonding, community involvement—all can be increased with home ownership.
The intent isn’t to neglect these advantages; rather, I (probably wrongly) assume that everyone is familiar with these advantages—this is my intent in noting the psychological difficulty of dropping from a 500k home to a $1k/month apartment.
The intent is instead to bring to attention the nature of the financial trade-off. I use a pretty simple model, but you can dive into the counterfactual yourself: what’s the price you’re paying for owning your home instead of owning an index fund and renting? How low could you go on rent, and what would be the impact on your financial life? Is that tradeoff worth it to you for the advantages
The answer can certainly be “yes”—but I think people are biased toward assuming yes when they haven’t actually examined the issue.
I’ve seen the advice to buy only if you plan to be in the area for ten years and that if you do buy, to get the longest term fixed mortgage you can, with the monthly payment at what you’d be willing to pay in rent
The rationale is that since the bank can’t call it in at any time (like they could in the 1930s), you can live there as long as you’re making the payments. If the house has appreciated in value when you’re ready to move, sell and receive the equity. If the house has declined in value, the mortgage is only collateralized by the house (is this typical?), so either convert it to a rental property (with a rent rate that brings mortgage plus maintenance to breakeven) until the market recovers, or just walk away from it and view the money spent as ‘rent’ paid to the bank instead of a landlord.
Great read; just one thing I’d add re the housing discussion which I think is sometimes neglected is that unlike essentially all other assets everyone is naturally short housing as they’re always going to need somewhere to live. As such buying a similar amount of housing as one plans to use in the future (this can also be done via investing disproportionately into housebuilding stocks or buying shares of various properties) can reduce your risk to future price increases (which historically have been large, especially if you value living in cities/desirable locations).
Housing could therefore be a sensible investment even if you thought an index fund would yield slightly higher returns. This effect is further heightened by the fact most individuals have extremely limited access to leverage unless buying a house and the tax advantages associated with a mortgage too.
I roughly agree with this. My biggest concerns around buying housing are:
The transactional friction of buying/selling homes causes opportunity costs.
People tend to buy too much due to low-interest credit.
But you correctly point out upsides that I don’t dive into.
Too often I see discussion of buying a house from purely a mathematical/investment perspective. I agree that the numbers need to be top of mind for this type of purchase… however these discussions neglect the non-tangible aspects of home ownership that are very real and important. Sense of physical security, familial bonding, community involvement—all can be increased with home ownership.
The intent isn’t to neglect these advantages; rather, I (probably wrongly) assume that everyone is familiar with these advantages—this is my intent in noting the psychological difficulty of dropping from a 500k home to a $1k/month apartment.
The intent is instead to bring to attention the nature of the financial trade-off. I use a pretty simple model, but you can dive into the counterfactual yourself: what’s the price you’re paying for owning your home instead of owning an index fund and renting? How low could you go on rent, and what would be the impact on your financial life? Is that tradeoff worth it to you for the advantages
The answer can certainly be “yes”—but I think people are biased toward assuming yes when they haven’t actually examined the issue.
I’ve seen the advice to buy only if you plan to be in the area for ten years and that if you do buy, to get the longest term fixed mortgage you can, with the monthly payment at what you’d be willing to pay in rent
The rationale is that since the bank can’t call it in at any time (like they could in the 1930s), you can live there as long as you’re making the payments. If the house has appreciated in value when you’re ready to move, sell and receive the equity. If the house has declined in value, the mortgage is only collateralized by the house (is this typical?), so either convert it to a rental property (with a rent rate that brings mortgage plus maintenance to breakeven) until the market recovers, or just walk away from it and view the money spent as ‘rent’ paid to the bank instead of a landlord.