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Hating Homeownership

Posted on May 13, 2014 in Mortgage Market Updates and News

By Barry Ritholtz
Bloomberg View

U.S. homeownership falls to the lowest levels in almost 20 years, blared the headlines. Lots of articles explained “Why Your Home is Not a Good Investment” and why Americans think owning a home is better for them than it is. It seems that America’s former love affair with real estate is over.

Blame the recency effect. People have a disconcerting tendency to give more weight to what just happened than long-term trends. This is why the monthly jobs report, a very rough estimate, has such an outsize impact on the markets. This same effect is what is driving people toward renting over buying.

A little context is needed.

Let me preface this by noting I was very bearish on U.S. residential real estate in the last decade. All the metrics -- median income to median home price, cost of renting versus owning, residential real estate value relative to gross domestic product -- showed an extremely overvalued market by two to three standard deviations. Before it was all over, economists Carmen Reinhart and Ken Rogoff argued that we were in a credit bubble and housing was due for a 35 percent crash.

There are several issues with the current group of housing bears. Some of the assumptions in the investment aspect of this are questionable (more on this shortly). But the main issue is that too many people are looking at housing as if it is purely mathematical, which it isn't.

My colleague Josh Brown sums it up nicely:

I own my home and I consider it my greatest investment. It gives me confidence and satisfaction. It provides a sense of permanence for my children. It makes my wife happy to decorate it, landscape it and care for it. Plus, I like not paying rent, something I spent most of my twenties doing in Manhattan. I have no mortgage so my only ongoing cost outside of maintenance is property tax, which I look at as an investment in the town’s school district and as a barrier of entry that keeps the other homes around me filled with hardworking, productive members of society.
Whether or not my home’s price will exceed the rate of inflation in the next few decades is irrelevant to me. Especially because I invest elsewhere – retirement accounts, my own business, etc.

Owning a home addresses a variety of human needs, only one of which is the need to invest. It is a forced savings plan, a social signal, a source of security, a place to raise a family. The mathematics is only a small part of homeownership, and when we forget that simple truism, we end up with problems like we had in the mid-2000s.

What about the investment aspect? My friend Morgan Housel did the number crunching. I disagree with some of his basic assumptions. He writes: “Say you and I both have $250,000. I buy a house for $250,000 cash, and you rent a house across the street for $1,000 a month and put $250,000 in the S&P 500.”

Let me stop right here and point out that this isn't how most people purchase a home. They put up 20 percent -- $50,000 in our current example -- and finance the rest. The average person buying a $250,000 house has $50,000 to put down, and finances the remaining $200,000. (If they have $250,000, they might buy a $1.2 million house). That is 5-to-1 leverage, using fairly inexpensive capital. That changes the investment calculus considerably.

The other factor is that you have to live somewhere. Paying down a mortgage is forced savings versus paying rent, which is money gone forever.

There are many conclusions we can reach about homeownership: It represents control, accomplishment, a homestead. Maybe it even means Americans really love leverage. But the focus on the mathematics of homeownership misses the bigger picture.

Eventually, the memory of the recent crisis will fade. The economy will one day improve, and the millenials will move out of their parents' basements. When that happens, expect to see homeownership rates move back higher.

To contact the author of this article: Barry Ritholtz at
To contact the editor responsible for this article: James Greiff at


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