Writing about bitcoin this week reminded me of how obsessed I am with asset bubbles, which can often be fascinating windows into our culture values. When the mercantile Dutch kicked off the first-ever asset bubble in the early 1600s, they were obsessed with tulip bulbs. Tulip mania is now evoked any time people are paying way more for something than seems rational. At the time, tulips — utterly unlike any other flower in Europe — represented a connection to the outside word.
A version of this article originally appeared in the Strategy newsletter from Inverse. Sign up for free here.
We don’t worry about tulip bubbles anymore, but real estate bubbles remain a problem. According to research from Columbia Business School, serious real estate bubbles popped in Las Vegas, Phoenix, and Miami during the mid-2000s, helping set the housing crisis in motion. Like Dutch merchants exhibiting their connection to the outside world, the prevalence of housing bubbles sheds light on how Americans share a deeply held set of values of their own: independence, security, and self-reliance.
This set of values, at least as far as homeownership is concerned, leads us astray. Not everyone needs to own a home. Homeownership is more expensive than it used to be, and the opportunity costs of staying put for 20 or 30 years are going up.
The Diminishing Returns on Homeownership
I got the idea to tackle homeownership last week after talking to Ramit Sethi, a bit of a personal finance legend, who, in 2009, wrote I Will Teach You to Be Rich, a best-seller many times over. After a decade, Sethi finally relented to his publishers and came out with a second edition that was published last month. (A timeless personal finance book, he’s always argued, wouldn’t need to be updated.) He has since softened his stance after getting married (hence a new chapter on merging finances), and his business grew.
He also revisited the topic of homeownership.
“Buying a home is not that great of an investment,” he tells Inverse. “I rent by choice. That’s a new thing! I ran the numbers, and it just doesn’t make sense for me, especially with prices the way they are. That’s a political issue that millennials should be furious about.”
The idea that homeownership isn’t that great of an investment isn’t strictly Sethi’s. It’s Robert Shiller’s, who won the Nobel prize in 2013 for his work determining how to price assets. Shiller crunched the numbers and found that, at an average of 0.6 percent a year between 1915 and 2015, home prices have historically appreciated far less than stocks, whose average annual return is closer to between 8 and 10 percent (at least, it was for the S&P 500). That’s a big difference.
The caveat is that homeowners still get to build equity with their home payments while renters do not. In other words, after 30 years of paying down a mortgage, you’ll own something, whereas a renter won’t necessarily. But this assumes the renter wasn’t doing any equity-building with all the money they saved from not owning a home. Home maintenance costs alone average about $9,000 a year, according to HomeAdvisor. Without crunching the numbers yourself, assuming home ownership puts you ahead every time could be a costly assumption to make.
So why, then, is homeownership often presented as reaching the peak of #adulting mountain?
“Most financial advice is built in this monolithic approach to the American dream: go to college, get married, have 2.5 kids, retire. That’s it, simple,” Sethi explains. “These days, we have such different dynamics: late marriage, people switching industries. Maybe I want to be flexible, travel and work? You can’t do that if you’re operating under the old assumptions.”
One of the “old assumptions” is that everyone should own a home some day. To be sure, most Americans do own a home (something like 64 percent of households, according to the latest census data.) And most people who don’t own a home want one. An Apartment List survey of 24,000 renters found that 80 percent of them said they wanted to own some day.
They should talk to some actual young homeowners! Most millennial home buyers say they actually regret the purchase, according to a 2018 study by the Bank of the West. According to the bank’s data, 68 percent of millennial homeowners expressed buyer’s remorse. And 44 percent wound up not liking the space for some reason, or saying they felt stuck after the ink dried. Meanwhile, 41 percent expressed financial regret, saying the expenses left them feeling stretched.
Sethi says the reason so many people bear the homeownership burden is because we get shamed into it.
“There is an entire industrial complex built to shame people into buying,” he says, pointing to the National Association of Realtors, the second-biggest lobbying spender in the country, according to Open Secrets. “Even the media uses all this loaded language to imply you can ‘make money fast by buying real estate,’ and that ‘if you don’t buy now, you’ll be priced out forever.’ When you start to hear this from the media, your parents, your government, you start to believe it.”
It seems important to point out that homeownership still pays off quickly in inexpensive cities with modestly priced homes (imagine that!).
But in expensive cities, the renters are increasingly likely to prevail. In my hometown of New York City, a $676,000 median-priced home spread out over a 30-year mortgage would cost me and my spouse $1.1 million, according to SmartAsset’s renting-vs-buying calculator. Thirty years of rent would only cost $1 million. At the end of the day, “pouring my rent money down the drain” will save me about $100,000, and that’s not counting any of the opportunity costs.
After 30 years, for example, a $14,000 down payment, plus an average of $9,000 per year in saved repair and maintenance costs, plowed into the market would be worth $1.1 million, too (I used Treasury.gov’s compounding interest calculator to get that figure, assuming an 8 percent annualized return).
As more and more people move into cities, the increasingly unfavorable math of buying versus renting is worth paying attention to.