Friday , 23 February 2024

The False Economics of Home Ownership

Real estate has an unmistakable mystique in the world of investing…[where] “home ownership” is regarded as some sort of Holy Grail of financial planning… based upon the conventional belief that owning real estate is the #1 path to (at least) financial security, if not affluence, but there is no substance to this belief. Here’s why.

Residential real estate in Manhattan is arguably among the most coveted real estate in the world yet, in fact, while residential real estate there has increased nominally in price by ~10,000% in the last 100 years…virtually all of that price increase has been [due to] inflation.

  • Manhattan real estate hasn’t gotten 100 times more valuable over the last 100 years.
  • Rather, the U.S. dollar (in which those real estate prices are denominated) has lost 99% of its value over that period of time…
  • In fact, if we price Manhattan real estate in gold, we discover that over a span of 100 years, Manhattan residential real estate has only increased by 25%, i.e., a gross return on investment of 0.25% per year versus simply holding gold – and that is gross not net, as the real estate-holder would be paying property taxes and upkeep on that property – taxes that would steadily rise with the nominal value of the property.
  • In other words, net of taxes, the Manhattan real estate-holder would be significantly worse off financially than the gold-holder and that is a best-case scenario: buying the most-coveted real estate on the planet and paying cash for it.

In fact, the vast majority of real estate that is being bought today (at record prices) is not coveted nearly as much as Manhattan real estate, and the vast majority of home-buyers can’t pay cash for their properties. They take out large mortgages and, by the time the average purchaser is finished paying off their mortgage, they will have spent anywhere from two to four times the original purchase price – when interest and other charges are included.

[The above being said, it is acknowledged that] a homebuyer can deduct what they would have otherwise been forced to spend on rent…from the cost of their home (including interest) but that doesn’t make real estate a great investment…[these days]. When real estate prices were rational/reasonable and the supply of real estate was finite, disciplined homeowners could make home-buying a successful financial strategy [but] those days are long gone…In this market, first-time buyers are forced to take on huge, (often 30-year) mortgages…and any investment return in such a real estate purchase is eaten up long before 30 years (or even 20 years) of mortgage interest is added to the (record) purchase price of the house – along with the property taxes and upkeep that are required during the term of the mortgage.

Bottom line: Once upon a time, real estate was a good (not great) investment but those days are gone for the foreseeable future. Today, real estate, even in a prime market, is not a good investment. It is a wealth-trap, pure and simple.

What about the future? Prices cannot possibly be sustained this high over the longer term and interest rates cannot possibly be sustained this low…[so] when these market turn and interest rates start to normalize [we are going to experience a] crash unlike anything seen in the history of real estate markets.

For people who don’t want to gamble their financial future in the real estate casino, they have an obvious choice: gold…which has a 2,000-year track record as a perfect vehicle for wealth preservation. Gold equals financial stability and security.

What is the best way to become wealthy today?

Don’t buy real estate and hope that (somehow) the bubble doesn’t burst. [Instead,] rent and invest in gold. As 100 years of history clearly shows, real estate is not “as good as gold”.

Editor’s Note:  The above version of the original article by Jeff Nielson, has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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