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Why do we assume that higher house prices = good?

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If the price of toothpaste or a burrito dropped 20%, most of us would be thrilled.

Burrito

So why is it considered a catastrophe when housing prices drop?

Last week, I asked you to identify the cultural assumption in this screenshot. Here’s what I was thinking of:

20100302-kaktjeriih5g69h8xqpxp5982

Isn’t it funny how “home prices falling” is assumed to be a bad thing?

You never know how American your assumptions are until you go to another country. That’s because in the United States, we have been systematically taught that housing is a good investment and that prices must go up. Ask your parents why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” Yet I’ve shown very clearly that for many people in many situations, it is not. In fact, housing is often a terrible investment.

Yet the illusion persists, whether it’s my friend wanting to buy a million-dollar house with no research, or people saying things like, “I wish I’d bought more real estate” after incurring a paltry 1.2% return rate over several decades.

As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment. The way they describe the housing market — oops, “housing recovery” — influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:

Interesting…it’s a “housing recovery” when prices are getting expensive. Would you say that with toothpaste?

Also interesting: Why is it a painful decline when young people and other first-time buyers get more affordable housing?

Alice in Real Estate

What if we discard the assumption? Let’s try: For each of these screenshots from major media sources, I’m including the opposite cultural assumption below it.


Or…prices could become more affordable for young people


Or…prices reach a new level of affordability


Affordability grows for first-time homebuyers


Housing market bargains continue for young people, first-time homebuyers

As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.

This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Why “higher house prices = good” persists

Deep-seated beliefs like this exist for multiple reasons. What might some of them be?

  1. American culture believes that home ownership is a right that everyone should have (it’s not).
  2. Since most newspapers are written by and read by older people — whose wealth is predominantly (and mistakenly) tied up in their houses, it only makes sense that real estate prices “should” increase. As a result, you see words like “recovery” and “crash” rather than “bargain.”
  3. Unlike toothpaste or other commodities, there are ancillary effects of changes in real-estate prices. If one house price declines in a neighborhood, there are spillover effects that affect nearby houses. This is why neighbors and realtors will do anything to prevent a house from being sold at a low price, including throwing in things like cars and TVs instead of lowering the list price.
  4. Crooked organizations like the National Association of Realtors and banks use every trick in the book to prevent house prices from actively reflecting the market price. Remember how, in Chapter 6 of my book, I described example after example of how Wall Street firms use disingenuous tricks like survivorship bias to obscure how poorly performing most of their funds are? The same is true of real estate. Where there’s lots of money in commissions, there is virtually always shady behavior, obscured facts, and whispered promises that never turn out to be true.

In fact, this cultural expectation goes to the very highest levels of the U.S. government. In a speech, President Obama said:

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

It’s fascinating, but unsurprising, to hear the President’s explicit goal is to “shore up housing prices for everyone” — and, you could argue, maintain unaffordably high rates for most young people.

It’s not that simple

For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.

Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. That’s why this crisis is so serious and confusing. (See the President’s full remarks here.)

Just because virtually every media presentation decries the “rapid decline” in housing values doesn’t mean that applies to you. “Higher house prices = good” is a cultural assumption.

You can read more on my page about real estate investing.

* * *

What other money assumptions are there?

I’ll start:

What money assumptions have you noticed?

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Tom  | Build That List
6 years 5 months ago

The one assumption that a lot of people have is:

‘People with money only have money because they are greedy and selfish.’

And I totally missed what you saw in that picture when you posted it last week!

Rusko
Rusko
9 months 11 days ago
I really think the writer misunderstood the fundamentals of our modern economy. This isn’t mercantilism- i wonder if he even knows how we measure the wealth of a nation. The point is that if we have a big budget deficit then intetest rates rise which makes the rates of loans for businesses go up and causes a domino effect making rates of almost everything rise – and that causes the price of houses to fall. Take a basic economic course before you berate American economics. You missed the entire point – prices of housing lowering is a clear reflection of… Read more »
Celeste G.
Celeste G.
6 years 5 months ago
The difference between a house and a burrito is that buying a burrito, you usually do not plan to sell it on (or pass on to your children). I think the assumption you talk about stems from viewing house prices as one of the indicators of how the economy fares. It makes sense, to some degree – the stock is limited (especially in desirable locations with no space for new houses), so house prices reflect how much people are willing/able to pay. They rise when people have a lot of money, fall when people can pay only so much. So… Read more »
Kevin Khachatryan
6 years 5 months ago

Even if real estate is not as a lucrative investment, say it brings you 1-2% annually, its a safer investment.

If the stock market crashes, you’re left without stocks and without income.

But if the real estate market crashes and you lose everything, at least you know you have somewhere to live. In my eyes, that is worth much more than the few % extra you get from stocks.

The Amazing Spider-Ads
6 years 5 months ago
This is a really good insight towards a principle of American economics that, you are right, has two sides, either of which making very good points. A good corollary to this is the price of gas and oil… we cheer if the price of gas goes down but we panic if house values go down. I guess it’s mainly because the average American doesn’t own much of a stake in the oil market. This is part of why I think many people get confused with the idea of the economy needing to expand and panic when prices stagnate. As long… Read more »
Jonny | thelifething.com
6 years 5 months ago

It is also worth remembering that in reality rising house prices do not actually mean the value of the house it going up, it simply means more dollars are required to purchase the house which is a direct result of inflation or put another way, the devaluation of the dollar because of the amount of “funny money” being injected into the system by banks, the federal reserve and the government.

Just a point to think about. Great site Rammit.

Rusko
Rusko
9 months 11 days ago
No the price of houses rising is a result of our economy growing to fast like in 2009 where houses were seling in 4 hours so the prices rise – you cant build a house in four hours. Thats why we have fiscal stabilization policies. That is litteraly designed to stabilize the economy when it is going too fast or too slow. For example the expansionary policy will increase spending or lower taxes to get the economy moving at a faster pace when it is moving too slow. Thats almost the same reason (and applys to the same example) why… Read more »
Andrew
6 years 5 months ago

It’s pretty normal behaviour.. everybody goes fear and loss.

Not..wow what will we all gain. If more people can buy houses, more people get employed, builders will need extra workers, since most of use fix,repair change a house as soon as we’ve moved into it.

It’s always about me,me,me. I’m about to lose something. After all the media cheer at house price rises and bemoan any falling of anything. The masses just follow.

Happy Travels

A

Divya
Divya
6 years 5 months ago

Ramit, how is this a cultural assumption? This is true in other places too. In India, the builders even throw in all sorts of freebies to avoid lowering their prices so people can continue with the assumption that the house prices are rising or stable.

Eric S. Mueller
6 years 5 months ago

One cultural assumption that I find annoying is “A car is a depreciating asset”. A car isn’t an asset; it’s an appliance. Once I figured that out, cars got a lot easier for me. I drive a paid for minivan, because that’s the appliance that my family needs right now.

thekevinmonster
thekevinmonster
6 years 5 months ago
Buying a house means you can control your own house. Renting an apartment, on the other hand, means you have to follow the landlord’s rules. So far, I like having a house, since it’s my responsibility. If the cat ruins something, I can replace it with something better. If the cat ruins something in an apartment, the landlord has to replace it and chide me for breaking the rules. On the other hand, house prices going down means that you’re stuck when you go to sell a house. Houses are so expensive that if the value drops and you need… Read more »
Tyler WebCPA
6 years 5 months ago

You said it right when you said that the newspaper was written with the interests of its readers, the majority of them presumably already own their own houses, in mind. The newspaper doesn’t care about the young or the renters because that is not their intended audience. The problem is when the president shares that prejudice.

rob
rob
6 years 5 months ago

Perhaps if you owned a house you would like rising home values. Personally, I enjoy seeing something I bought a year ago go up $20K in value. My 401k should be so lucky……

Joshua Ulrich
6 years 5 months ago
Sorry for the double-post, my phone was acting up. If it’s possible to delete my previous post, please do. Ramit, I agree with your sentiment, but homes are generally purchased with loans. If you’re a home owner and house prices are falling, even if you put 20% down, you could be under water. Now, being under water is only a problem if you sell your home, and is particularly problematic if you’re forced to sell (e.g. due to job loss). So, in many respects “Higher house prices = good” is a cultural assumption. But steep drops in housing prices, either… Read more »
baron
baron
6 years 5 months ago

@Kevin Khachatryan

if you brought a broad based index fund that tracked something like the s&p 500 or the wilshire 5000, and the stock market crashed to the point that you had no stocks and no income, your real estate would be worthless too. that’s because it would mean nearly all of the publicly traded companies would have gone out of business. nearly everyone would be unemployed and people would go house to house stealing and pillaging to survive mad-max style and the only things of value would be food, water and gasoline.

Customers Revenge
6 years 5 months ago
I’m with Kevin Khachatryan, real estate is a very fine purchase. You can leverage it more than stocks, and it has utility for the person living in it. It is a real business for those who buy investment properties. Stocks are comparatively very lame, in fact. They are just shuffling paper. There is nothing there. Sure you can believe that you “own” a part of a business, but you have no power. And funds are even worse, you pay someone else to shuffle the paper and take a piece. The average investor needs no knowledge to handle stocks other than… Read more »
JT
JT
6 years 5 months ago
This is the first personal finance blog that I’ve seen that has actually made some sense about housing prices. So, congratulations Ramit. It’s refreshing to hear! The only thing that I would add is that the government needs to get out of the way when it comes to the correction. The housing credit was a failure and a waste, as all it did was push forward demand. People that were going to buy in a year or two moved up their purchase date to now. But when the credit ends there will be a drop in demand to correct for… Read more »
Ken Siew
6 years 5 months ago
This post is great! My mindset changed 360 degrees while I was taking a class on Equity Valuation and Analysis back in college. We had to read the entire “Essays of Warren Buffett”, and man I finally began to see why we should really be excited when the stock prices are down (same goes for real estate). Buffett said something like would you want to buy a hamburger at a lower price or a higher price? All of you will say yes with 2 hands raised. But when it comes to stock purchases, most people hope for high prices even… Read more »
adam
adam
6 years 5 months ago

Lower housing prices are great…. if you’re buying. If you’re trying to sell because you’re getting married in June and moving then you’re not so lucky. Especially when you owe $20k more on the mortgage than the current going rate is for the house 🙁

ctreit
6 years 5 months ago
You say, “American culture believes that home ownership is a right that everyone should have (it’s not).” I basically agree. This should not be considered a right. Nevertheless, the American system supports individualism which includes individual home ownership. That is why the US tax code allows you to deduct a substantial amount of mortgage interest in your tax return. This tax code comes from a political consensus within the US – quite normal in any democracy. So, I would rephrase the statement to, “American culture believes that rising home prices is a right that everyone should have.” That is, of… Read more »
JT
JT
6 years 5 months ago
Adam, I feel your pain. It hurts to see losses like that. However, for every buyer there is a seller, and the new place that you’re moving too will most likely be cheaper as a result of the housing correction. I’m assuming that when you say you’re moving, you and your wife-to-be are moving into an entirely new place and not a place she already owns. If that’s the case then, yeah, it sucks. But, if not, then try to think of the money you’re saving by purchasing/renting your new place. So, while you see the hard $20,000 loss on… Read more »
Todd
Todd
6 years 5 months ago

Housing is NOT a terrible investment when you are actually investing. (i.e rental property) You are trying to compare home ownership of a primary residence (generally an expense) to some other form of investing (stocks, mutual funds). Its a flawed comparison from the beginning.

Kelly
6 years 5 months ago

The other thing I keep hearing about is that new home construction is “weak” or “tentatively improving”. Isn’t building fewer new homes a good idea? …for sustainability of our communities, for the owners of existing homes, and preservation of open spaces. Of course if you’re in the construction industry that is understandably a bad thing – for you.

Todd
Todd
6 years 5 months ago

I should say that I do agree with your over all message of this post: people should be glad prices are falling. If you are a buyer, either primary residence or a RE investor, you like falling prices.

Jason
6 years 5 months ago

Owning a home is not an investment. Typically, investments are meant to be cashed in at some time, right? Would you sell your home once the price is right? Would most people?

The housing market has instilled the aura of ‘investment’ to expand the appeal. But in this global market, more people are nomadic, going where the jobs are. In that scene, I’d figure renting is much more economical.

Erica Douglass
6 years 5 months ago
The comments on this post are SO classic! Ramit, I think you could easily do another post on this just regarding the comments. Love #3: “Even if real estate is not as a lucrative investment, say it brings you 1-2% annually, its a safer investment. If the stock market crashes, you’re left without stocks and without income. But if the real estate market crashes and you lose everything, at least you know you have somewhere to live. In my eyes, that is worth much more than the few % extra you get from stocks.” #3, have you done the math… Read more »
Dennis
Dennis
6 years 5 months ago
I don’t think the current press about home prices has to do with anything more than the fact that 40+% of homeowners are potentially underwater in their mortgages and the ripple effect that has on the broader economy. The assumption is that rising prices help to cure that situation and help stabilize the economy by stabilizing price levels in real estate and other goods. Rapid inflation or deflation creates uncertainty which creates fear and people don’t respond well when they are scared, which serves to destabilize the economy. So my assumption is that stable price levels have a value all… Read more »
Erica Douglass
6 years 5 months ago

@#25 Dennis: “Rapid inflation or deflation creates uncertainty which creates fear”

House prices were going up 15-20% a year for at least 4-5 years…more here in California. Between 1997 and 2005, real home prices more than doubled in a lot of areas. Yet I didn’t see any fear at that point. That’s definitely “rapid inflation.”

-Erica

Honey
Honey
6 years 5 months ago
Here’s a semi-related cultural assumption – having a home as a forced savings plan is a good thing, but getting a refund on your federal income taxes somehow makes you a bad person for loaning your money interest-free to the gov’t. I got $1500 on my taxes this year, and while on the one hand most of it was because I didn’t think to adjust my withholding when we had furlough, now I get to pay off almost half of my remaining credit card in one fell swoop. Would I have saved that $1500 for that purpose if I’d gotten… Read more »
Troy
Troy
6 years 5 months ago

Every asset has a buyer and a seller. Lower prices benefit buyers. Higher prices benefit sellers. This isn’t rocket science.

This post sucked.

The reason prices are expected to increase is because the price of everything is expected to increase over time. Increasing prices are the byproduct of productivity and economic growth. This is why milk no longer costs a nickel, and cars cost more than the $2K they did in 1950. This is the exact reason why people get raises, the COLA adjustment, etc.

And you went to Stanford?

D
D
6 years 5 months ago
Perspectives and contexts matter. If you’re looking to buy a house, prices going down is good. If you’re looking to sell a house, prices going down is bad (depending on why you’re selling). If you’re one of the double-digit-millions of Americans who is currently significantly underwater in your home, putting you at significantly higher risk of default, and you can’t sell it and won’t be able to for another decade regardless of what life events might motivate you to do so, and your mortgage is part of unnecessarily complex securities held by many mutual funds, and represents significant real-but-unaccounted losses… Read more »
Al
Al
6 years 5 months ago
This is a much more complicated topic than you allude to. When you buy a home with 10% down you make an investment where you are leveraged 1:10. That can be good or bad depending on market situations. One thing to notice is that if the value of the dollar goes down, inflation goes up, then your making money because the house as an asset will rise with inflation while your debt is based on whatever interest rate you secured to take the loan. My most annoying cultural assumption here is the respect we give to people that have a… Read more »
Mike Lutter
6 years 5 months ago
Price decreases are bad for people who own their homes but are even worse for people who haven’t paid off their loans yet. The real estate “gurus” who preached RE investing prior to the bubble bursting were doing so with the schtick that you can put very little money down and get a huge house. The reason they were saying it was a good thing was because with $1,000 down payment and three cans of paint you could possibly make $5-$15K on the deal. That’s a a 500-1500% return possible in less than a year. The less money you put… Read more »
Dennis
Dennis
6 years 5 months ago
@#26 Erica Real estate isn’t everything Erica, I was thinking of all types of inflation. And there were lots of people who were fearful of what they called the “real estate bubble”, and they were right. But my reference was to inflation and deflation generally, not to real estate specifically. For example, in the price of consumer goods, food, fuel and other consumables. Look at how disruptive the rapid rise in the cost of gasoline was to the economy just a year or so ago. Right now we have some amount of uncertainty regarding the potential for high inflation due… Read more »
Aitor Calero García
6 years 5 months ago
I’ve been renting since I left my parents’ home at 26. Now I’m 35. I’m from Spain, the European country most affected by real state market crash. Back in the 90’s there was a great pressure to buy a house. Prices started to soar up quickly and steadly. Lots of young friends get mortgages and started to buy home, even when the prices where dramatically high (600K €). Now they have childrens, have changed their jobs, and they cannot sell their home. Moreover, they are paying a mortgage which worth more than the current market price, since prices have fallen… Read more »
Zain
Zain
6 years 5 months ago

Even if you were planning to sell your house, if you wanted to move to a larger, more expensive house then falling prices would be great for you (if both houses fall 20% in value you end up paying less overall). It’s only if you were nearing retirement and ready to sell your 4 bedroom place for a small 1-bed retirement home that you’d need to be concerned about loosing money.

Khalid
Khalid
6 years 5 months ago
What’s funny is that these journalists understand so little about the economy that they still can’t see the $8 trillion housing bubble, even after it burst and caused economic collapse. All housing prices did for the 20th century was track inflation. In about 1996, prices started to outpace inflation, for no reason, and with no corresponding increase in rent prices. There will be no “recovery,” because homes are still overpriced, and have about 15% to fall before they return to their historical trend levels. Dean Baker, one of the few economists who understands the economy, was all over this a… Read more »
Victorino
6 years 5 months ago

I think buying a house is still a good investment. Having a house may not a good financial investment in a certain time, but beyond that – emotional investment and other meta-financial investment, it’s always a good thing to have a home. Of course, unless you crave to buy excessive houses.

WR
6 years 5 months ago
In my book ‘The Hero with a Million Dollars’ (www.hero-book.com) (shameless plug…sorry) I list a few “Wealthy Homeowner Tips” The one that seems most relevant to this discussion is: Do not ask your bank or real estate agent how much home you can afford. As Ramit suggested, their incentives are not your incentives. They are not trying to ‘help’ you. They are trying to earn interest or commission and the higher the sales price, the bigger their boat. Owning a home is not the right choice for everyone but I firmly believe that owning a modest home still provides a… Read more »
The Rich Blog
6 years 5 months ago

The change in housing prices is one of the important indicators of the economy. Of course nobody wants to pay for a higher price when buying a house, but they are expected to rise because we expect our economies to grow. The higher the demand for housing, the better the economy is doing.

Joey
6 years 5 months ago

Here Here Ramit!

I’ve often thought the same thing about why people buy when stocks/housing prices are high and try to sell when they’re low (in desperation)…should be the other way around. Those that got into houses that are now underwater and doing fine on their mortgage, it just means they have to stay in their house for at least another 15-25 years for the prices to overcome the debt…for those looking to buy, it’ll be a great time for the next 5-10 years!

Right on brother Ramit!

Bob Weber
6 years 5 months ago
There are some economic factors that you didn’t address. The first being construction. Construction is a large segment of our economy, and with house prices at their current levels construction companies have had to drop their prices as well, or be out of a job. The other big reason that dropping home prices are bad are loan defaults. When house proces drop below what a person owes on a home there is little to keep them from short selling the home and moving, ultimately leading to bank failures and losses by many people or government covering those losses and higher… Read more »
Credit Card Chaser
6 years 5 months ago

Ahh, I was hoping that you would reveal what you were thinking when you posted that last week. Very good observation.

Kevin
Kevin
6 years 5 months ago

IMO, there is a difference between your residence and investment real-estate. With your residence, there are nice tax benefits which you need to consider, along with the downsides of taxes, maintenance, more taxes, etc.
To me I see my house as returning maybe 50-cents on the dollar.. still better than renting. At least right now. I try to keep my housing costs low and invest $$ in actual investments though. A house is simply a place to live..

WR
6 years 5 months ago
Fictional conversation circa 2007 “I just sold my 2 BR townhouse for $325k, I bought it 6 years ago for $125k. It sold in 4 hours after listing it!” —“That’s great! Must be nice to have a nest egg and money in the bank” “Now I live in a 4000 Sq foot McMansion with a $625k No money down, No paperwork Reverse Double-lindy Balloon Mortgage.” —“What’d you do with the $200k?” “Had to buy new furniture and a Lexus, can’t have a futon and a Camry in Towne Village Estates.” It should be noted that people were buying houses that… Read more »
Honey
Honey
6 years 5 months ago
@ Bob Weber, #40 – I don’t understand this reasoning at all. It seems to me that if you can still afford the mortgage payments, being underwater actually de-incentivizes moving because as long as you’re still in the house, it’s only a paper loss, and if you short-sell and move, it becomes an actual loss. Also, my understanding of short sales is that they are NOT easy – you have to get the bank’s permission, and then the sale itself takes 2-3 times longer than a normal sale (during which time you are still paying the mortgage). Banks will usually… Read more »
Bob Weber
6 years 5 months ago
@Honey – Do we NEED new homes? None of this is about need. Sure, we could all live in factory built cement towers, one room huts, wigwams, whatever. Regardless of your personal opinion, many people in this country want to live in freestanding homes. My point isn’t a philisophical one about how much construction should be done, or what type of home people should live in, it’s simply an observation that reduced construction has resulted in lower wages and unemployment. Another good point you bring up is renting. This is a larger issue than home ownership. Even if your rent,… Read more »
Honey
Honey
6 years 5 months ago
Um, there is a 10-month supply of existing homes right now, so we certainly don’t need to be building more even if people want to live in freestanding homes (which are more expensive and worse for the environment). I’m not saying or implying that there aren’t people who want to live in freestanding homes, I’m saying wow – what a cultural assumption that anyone DESERVES that, like it’s a RIGHT. If you can’t afford a freestanding home, or can’t afford a brand new home, then you shouldn’t buy one. It’s not like the universe owes you something – live within… Read more »
WR
6 years 5 months ago

I agree. I have very few needs. here is my short list:

1. I NEED coffee. Every day. In bulk quantities.
2. I NEED my DVR. Haven’t watched a commercial in years (except the good ones and then usually on youtube)
3. I NEED a shower. Just jogged.

Bob Weber
6 years 5 months ago
The 10-month supply of homes is why home prices are low. Supply exceeds demand so prices are down. If the surplus supply drops prices will likely increase. I don’t believe anyone deserves to live in a freestanding home. This isn’t a right. This is a desire and an opportunity. Let’s not mix altruism and economics. It sounds like you belive that owning a home is a moral choice, and that’s fine, but it clouds the economic issues. If the country is prosperous there will be more demand for homes, home prices will rise, construction workers will make more money, real… Read more »
GS
GS
6 years 5 months ago
Government encourages others to buy a home. It allows money to float around. Look at the list of people who earn money…feel free to chip in where I had missed 1. Realtor 2. Bank that handles the mortgage 3. Assessment parties who value the home 4.Government – Yearly tax on the property 5. Some furniture/carpet/wherever you buy more stuff to fill the house will benefit 6. Contractors whom you source out for that change in the bedroom, or the bathroom, or the kitchen 7. Insurance 8. ………. What can i say, there are another good 10 other things that will… Read more »
Wish I Were Riding
Wish I Were Riding
6 years 5 months ago

I wouldn’t care if toothpaste burrito prices dropped 99%.

Monevator
6 years 5 months ago

The burrito argument is fun, as Warren’s burgers were tasty, but strictly speaking they’re nonsensical.

You eat a burrito. If you store a load of burritos under your bed for the long-term, you’ll soon discover the different between a consumable good an asset.

It’s blatantly true that someone who is short one house (i.e. young would be first time owners) want low house prices.

It’s not rocket science to see why the 70%+ who do own want high hight house prices.

Monevator
6 years 5 months ago

(p.s. Never post comments on a clever person’s blog after a trip to the pub! Sorry for all the typos Ramit. Please treat working out what I meant as an entertaining parlor game 😉 )

Alex
6 years 5 months ago

First, I want to say Thank You! Why? Because this post is exactly what I like to see/read. The news is so twisted and takes everything and turns it into something negative. I love how you have taken this “housing crisis” and turned it into something positive. I love doing that and seeing that done. Great job. This post really pumped me up

Kevin
Kevin
6 years 5 months ago
RS- Your post is just as targeted towards your younger skewing, renting audience as the newspaper is towards its older, house owning one. People usually buy homes with debt. They don’t usually buy stocks with debt. People aren’t net buyers of homes. Typically, you buy one, you hold it. Then you sell it. This is different than accumulating shares of stock over time, or eating burritos. Obviously. So if you’ve already bought a house, it’s bad news if the value goes down. You won’t need to buy another one in 4 hours, unlike your burrito analogy. You’re better than this.… Read more »
Ketan
Ketan
6 years 5 months ago
I’m not impressed with this article – I’ve seen better from you, Ramit. It’s too one-sided for the ‘young’ ‘first-time homebuyer’ that housing is now affordable. I don’t live in San Francisco where home prices are outrageous. Nonetheless, in Chicago, I see some home prices falling to within 110% of their prices 15 years ago. My own home is 10% below the purchase price 9 years ago. Foreclosures or people dropping the responsibility to pay their debt and continue to spend outrageously hurts all the rest of hard-working, bill-paying class. This is where a sub-prime issue grows into a prime… Read more »
Craig/FFB
6 years 5 months ago
Housing market please CRASH, CRASH, CRASH!!! We’re looking to buy soon and all of this stimulus only hinders my opportunity to buy. The past decade built up this idea that a house is a great investment where you can make a lot of money. That’s still true in my opinion but its something you do late on in life, when you are selling your home ’cause the kids moved out and you’re ready to retire someplace warm. THEN you sell the house and make some profit, maybe after 20 years. Otherwise a home is where you live and the investment… Read more »
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[…] read a rather interesting post today from Ramit Sethi’s blog, I Will Teach You To Be Rich. It is about home prices — and how we are kind of backward in our assumption that home prices […]

Juan C.
Juan C.
6 years 5 months ago
So if I buy an apt for $150,000 and rent it out where the renter is paying for my mortgage and maintenance, how is that a bad investment? In 10 Years I could sell the property for the same amount (unlikely because price will likely (hopefully) be higher) and all of the money that I get from the sale would go into my pocket, of which I only put the down payment and closing costs out of my pocket. So let’s say I put 20% down that is $30,000 I would get that back and whatever equity was built up… Read more »
Nishant
Nishant
6 years 5 months ago
yo ramit, great post. On the latest issue of Canadian Business magazine : Why Buying A House is Bad Investment. Here’s link http://snipurl.com/usvq7 “The father of modern economics placed housing in the same category as clothing and furniture — useful consumer goods that do not generate wealth. For the homeowner, a house is a “part of his expense, and not of his revenue.” Were Smith alive to make such a statement today, he would no doubt be regarded as a heretic.” As for what it all means for the future of the economy…this whole recession is not some minor blip… Read more »
Antoine Bugleboy
Antoine Bugleboy
6 years 5 months ago

How come no one has pointed out the obvious?

Losing 99% of your money on a house > Losing 100% of your money on rent

Antoine Bugleboy
Antoine Bugleboy
6 years 5 months ago

Ah, I see Kevin already brought up the point I just made.

Raul
Raul
6 years 5 months ago

the burrito analogy doesn’t work because:

1. You do not borrow money to buy a burrito
2. You do not re-sell burritos, so a price drop cannot hurt you, unless of course you’re in the burrito business.

WR
6 years 5 months ago
Ramit has some very good material in his book on this subject. I suggest you pick up a copy! In an earlier post (#37) I mentioned a ‘modest’ home can be a great investment. I’ll elaborate a bit and use a personal example. I bought a home about 2 years ago that was a Fannie Mae owned foreclosure. I bought it for 180,000 (Which, at the time was 1.3X the salary from my job, I also have rental props and a home based business but I don’t use that in my calcs.). This was at the final weeks of the… Read more »
Forex Automatic
6 years 5 months ago

Owning a home gives a different sense of fulfillment when compared to the purchase of other material belongings. But with that said, it becomes more imperative that first time buyers be more wise in making this crucial decision.

Margo
Margo
6 years 5 months ago
Ramit, A house is not a burrito. The problem with decreasing home prices, although they make those homes affordable for young people, is that people have loans on their homes. When the prices decrease enough, people will default on their loans because they agreed to pay so much more than the home is now “worth.” When too many people default on their loans, the companies who hold those mortgages will go bankrupt, and our entire economy will be negatively impacted. If the price of a burrito or toothpaste goes down, the economy will generally not be impacted as significantly as… Read more »
Mike P
Mike P
6 years 5 months ago

You cannot sell a burrito after you use it. If you can I don’t want to be involved.

You can sell a house after you are done with it, maybe in even better condition than you received it. Why wouldn’t I want my home to increase in value? I still don’t understand why you think its invalid for me to expect that my home increase in value over a period of time.

But I would agree with your notion that a home is not a “great investment”

WR
6 years 5 months ago
To be fair to Ramit, he is looking at a house as a consumable. When you buy a Burrito you pay for the ingredients, any premium additions that go in there (Guacamole!) and for the drink. You can’t have a spicy burrito without a Diet Coke now can you. This Consumer behavior is similar to buying a house. The details are different, sure, but it is a consumer activity nonetheless. You don’t ‘buy’ a house, you mortgage it. You borrow a ton of money based on a rather modest down payment. So a $180,000 house does not really cost $180,000.… Read more »
The Rat
6 years 5 months ago

I’m a firm believer in owning a home for a lot of reasons; however, buying the WRONG home as it relates to one’s earned income, the current market in one’s region (eg. inflated housing prices), and size of the home can literally ruin a family’s finances.

In my view, it’s probably the most important decision from a personal finance perspective that a family can make.

Nice post.

Free advice on everday problems

I love when they assume that if something is 2 for $3 then it must be cheap! but really.. it means $1.50 each.. and there’s a product in the shelf near there that is probably only $1.20 for an item..

haha

Jimmy
Jimmy
6 years 5 months ago
Renting is a smarter move ? I am renting my apartment in Hong Kong now, as I am here on work assignment. It can be any time that i may pack my bags and go. Just like a hotel room while U are vacation, so rental makes sense Then my own apartment at my home country, was rental out just before I moved over. The rental helps me to accelerate the repayment that with a bit of discipline, a 30years loan @ 2.6% took just 3.5 years to clear off. There is no penalty for early redemption. yeah, i did… Read more »
Kiran
6 years 5 months ago
A few things that many of the pro-homeowner commenters aren’t taking into consideration….in some areas renting is cheaper than a mortgage payment. You might be able to save the difference and invest that elsewhere. In fact that’s the smart move – renting the most expensive place you can afford is silly. Also, home ownership has a plethora of other expenses you’d need to evaluate to do a fair analysis. Did you take into account taxes, repairs/maintenance, and the fact you are guaranteed to spend more on non-essential items if you own a home? There’s also the cost of your time… Read more »
lynn
lynn
6 years 5 months ago
I bought my home in 1999, before the housing bubble rose to the unsustainable high it reached before it *popped*. I got a fixed rate mortgage on a small home in an inexpensive older neighborhood. I live in an area where housing prices do not fluctuate very much, but rents are high because it is a college town and people who want to charge high rents can (college students will just borrow more money to make up the difference). In my situation – in a stable housing market and with a fixed rate mortgage – it makes better sense for… Read more »
EyesOpen
EyesOpen
6 years 5 months ago
Ownership, Shmoanership. Our REAL cultural ineptitude here is the assumtion that buying must = DEBT! We didn’t experience a housing bubble, it was a CREDIT bubble. If buyers paid with CASH, the true value of housing would be obvious. Lenders used to have a vested interest in the communities they lent in. They knew their profits would be realised only if the people paying them stayed fiscally healthy. And they valued collateral property accordingly. Then along came “swaps”, “derivitaves” and “mortgage backed securities,” and suddenly lenders realised they could make as much money off the gullible in a few months… Read more »
Dwight Kellams
6 years 5 months ago
I work for YourFinancialWatchdog.com, and this is my personal opinion. Our personal residence has not appreciated as anticipated. Combine that with losing thousands of dollars because of defective siding, maintenance and repairs, property taxes that have doubled, new heating/air conditioning, appliances, roof, and garage doors, and renting would have been much cheaper. I tried to talk my wife’s single girlfriend from purchasing a home. Now she is locked into a home that has lost tens of thousands of dollars in net worth due to a land contamination issue that was identified after she purchased it. She purchased a home because… Read more »
Matthew Peters
6 years 5 months ago

Great ideas here Ramit. Well worth the read.

I know many people who have a large portion of their retirement wrapped up in their house and figure on the value of their property increasing every year. When it doesn’t increase in perceived market value, they are upset and concerned and looking for someone to turn the market around for them or even ways to bail on their mortgage.

WR
6 years 5 months ago
Housing is unique. Home ownership in America is an emotionally loaded political minefield. I believe that it was the “Chicken in every pot” mindset that allowed the crisis we are in to initially brew. Everyone does not deserve to own a home (or anything). Housing is inescapably a large part of just about everyone’s financial picture. Whether you rent or own, you are going to pay for the roof over your head. Owning a home can be a major positive part of your portfolio but it has to be treated like everything else in the basket. Many of the people… Read more »
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[…] Here’s a couple of my favorite articles at I Will Teach You To Be Rich:  The Cash Only challenge, and a not-so-average take on the housing market. […]

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[…] the housing market going up again that means that rent and houses are increasing in price . If you are looking to move soon and you are looking to sell your old house, don’t wait […]

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