CONCHO said, “No one here (to my knowledge) is saying that you should never buy homes or invest in real estate.”
Actually, that’s practically what the author (Jack) is saying in this article. Re-read the article if you doubt me. No, he doesn’t use the word “never,” but he clearly suggests that his preference would be never to purchase a home, but rather to perpetually rent and earn his “7% on shares.” Read the last paragraph of the article again.
One thing where Jack gets completely confused is when he states: “If you have $300,000 and a choice between spending it on a house or shares, you’ll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)”
Jack is completely wrong here because he ignores the impact of leverage (as I noted before). Assuming a 20% down payment, a mortgage at 6.5% interest, a return on stocks of 8%, inflation/home price/rental increases of 3%/year, and IMPORTANTLY assuming that rent and the costs of owning the home are approximately equivalent (not realistic right now here in SD, but realistic for many people much of the time in much of the country), you’ll come out WAY ahead buying the home. Work through the math as this guy did not (properly).
Now, is buying a home a good idea right now in SD, LA, SF, Phoenix and other bubble markets? Probably not. BUT THAT’S NOT JACK’S POINT. He’s making a blanket statement about buying versus renting as a long-term financial decision – regardless of price – and it’s based on faulty math and reasoning. End of story. Again, go back and re-read the story.
