Buying a house is a way to force people to save?

[PerryChase]

I often hear the argument that buying a house is always good because housing always goes up and that it’s a way to force people to build equity. The logic is that if people don’t buy a house (however overpriced it is), they’ll just spend the money on frivolous stuff instead of saving it. Would an automatic salary deduction to a 401k not achieve the same?

While browsing house listings, I’m seeing more and more sales below the purchase price of a few years back.

It’s easy to point to people who bought years ago and have their houses nearly paid off. However, I beleive that tons of buyers will be driven into bankruptcy from buying more than they can chew. Those people will be soon forgotten and only the resilient buyers will be remembered (and hailed as examples of why one should buy, buy, buy)

What about the trade offs? Is buying an overly expensive house worth the sacrifices of giving up education, travel, sports, entertainment and other pleasures of life?

[bubble_contagion]

That is absolutely true but the same people that build equity and would not save otherwise take HELOCs and second mortgages to pay for frivolous stuff.

[Anonymous]

not to me. I think that most of these people have a perception problem and on a more critical note might think about the future but never plan for it. I live in an area where the houses have gone up astronomically (like everywhere else in San Diego) I see young couples who own their house (by young I mean fairly new to the workforce)and both drive nice cars usually mercedes, lexus or bmw. and all new furnishings.

My nephew came over and commented about how much money they must make to have all those things. My reply to him was if they are all paid for then yes you would be right. I then added that I find it more likely that they bought the house in the last few years (most had) and tapped the equity to buy their toys. Looks good on the surface but underneath I am thinking paycheck to paycheck. Anyhow, it’s interesting as that alot of these houses are for sale and some have been on the market since July.

[an]

I would think a 401k and other retirement vehicle would be a much better way to force people to save. With a house, you can tap the equity without penalty. So if you do too often, you’re basically renting. While 401k and the like, you’ll be hit w/ a penalty if you withdraw. If you quit or change jobs, you would have to pay back the loan you made of it. You can also only borrow 1/2 of the money you have in there. Bottom line is, they make it very hard to borrow. Also, since it’s automatic, people don’t see it in their pay check, so they adjust their spending accordingly. Savers will be savers regardless of what they use to save it in, i.e. retirement account or a house. A spender will spend. Even if they have a house, they would tap the equity to satisfy their spending habit. So I guess, nothing can force people to save except themselves.

[BikeRider]

The government and banks want you to buy a house, period. You keep money coming into the economy. Your house is where you live. It is only worth what someone will pay and you only can call it savings if you SELL IT for more than you paid for it. A real savings account is money you have put away into an account and can withdraw without any type of penalty. Can you get the equity from your home by just pulling the money out of a bank account interest free? Nope. A house is an asset that can be borrowed against and also, will likely be worth more than you paid for it IF you sell it. You better hope that it is worth more later, if you decide to tap it for a loan above what you already owe on the mortgage. It just boggles the mind that people think the house is savings. Money put into a bank account or under the mattress is savings for a rainy day. The equity in your home is just another bill if used before the home is sold. My two cents.

[PD]

Americans have quit saving because it has been a really long time since people have the seen the effects of NOT saving. Those who lived through the depression were/are very thrifty. We need a very hard recession or depression to wake people up.

[BikeRider]

Saving is very hard to do. My wife and I stopped using credit two years ago. I mean NO loan for anything. It is different now. We were thinking about redoing the kitchen the other day. We talked and decided that we didn’t want to redo it enough to pull the money from savings. You think about things differently when the money is going to leave your hands, verses ‘giving yourself a loan’ with credit cards. We aren’t rich, but we are comfortable and working towards being rich. And that is worth much more to me than someone seeing me driving a BMW. Our finances are such- 15% from each of our checks goes into our 401Ks each payday. We have no loans (including the house) and a large sum in a money market account as our emergency fund (job loss, sickness, etc). We don’t charge anything, so we have to have the cash for it or we save for a big item such as a car. A friend told me the other day that he and his wife are trying to do the same thing, but finding it very hard to stop using credit. The ‘want it now’ mentality if powerfull.

[PD]

It is very hard to resist buying what you see everybody else buying. I see many twentysomthings who should be saving like mad yet they spend, spend, spend because all their friends are doing it. It seems reasonable to them to buy that brand new car, regularly spend $100 for a dinner for two and fully furnish their homes with brand new stuff from Pottery Barn. People are looking only at their payment but never really look at the COST.

[BikeRider]

PD, you hit the nail on the head. Looking at monthly payment amount only. I think someone posted here a while back how in Lowes the cost of a washer and dryer aren’t posted, just the monthly payment amount (figured by the minimum payment on your Lowe’s card I guess). When my wife and I decided some years back to pay everything off and stop using credit, it was a huge eye opener. It took us a while to get down to zero debt, but it has been worth it. What we know now is that we were constantly juggling payments. When we wanted something, the main questions we asked ourselves were 1. Can we fit the payment into our ‘budget’ (I quote that, because the fact we had a budget back then was a joke) and 2. what time of the month did we want the payment (middle or 1st of the month)?. And at some point, you get to a point where you can’t fit in another payment, you are slave to the lender, and you are years away from actually owning anything. Imagine on the other hand if the only bills you recieved in the mail were phone, electric, insurance and taxes. Imagine what you can do with the remainder of your paycheck. I have to tell you, it is nice.

[Critter]

The Housing Bubble Blog was covering a story about a couple who bought a house a couple of years ago and then the wife, while unemployed, racked up $80K worth of credit card debt. They refinanced to cover the debt and then “discovered” new debt because the wife kept on charging. In this case, owning a house not only discouraged saving, but encouraged spending.

Their house is up for sale now because it is the only way they can pay off that pesky credit card debt. The ironic part of the story, to me, was the “we discovered new credit card bills” part. For some people, there is a disconnect between whipping out plastic at the check-out stand and opening their mailbox a month later to find a bill.

Some people cut up their cards and only buy items with cash to force themselves to get out of debt. There’s something about actually seeing money leave your wallet that makes it more precious and “real.”

[Anonymous]

When I was a kid, my Dad took me to a seminar a friend of his was giving that was basically “How to get rich.” I was too young to understand much of it, but part of it has stuck with me to this day. It went something like this:

“Are you poor? Sure, you’ve got a nice house, a couple of nice cars, but are you poor? Here’s how you tell. Next time you get a paycheck, don’t cash it. Hang on to it for a month. Would you be OK? Could you pay your bills? Because if you can’t manage without that paycheck for one month, then it doesn’t matter how big it is. You’re poor.”

[gold_dredger_phd]

Is there a link to this story or is it old? I could not find it on the “Housing Bubble Blog.”

It sounds like the wife is a compulsive spender. How do you wrack up $80K in credit card debt? Who’s going to loan them the money? None of my credit cards has an $80K limit! Maybe this woman was buying gold and silver coins and burying them somewhere? After bankruptcy, she can always dig them up and start fresh.

The banks, credit card companies, realtors, and retailers don’t want people to save any money. Better to have all the people, who are employed, in the country being debt slaves. That’s what consumer culture is. The culture of debt promoted by advertisers and other shills. Don’t participate!

[poorgradstudent]

I agree that Americans overconsume, and as a whole need to cut back and “trim the fat”. Credit card debt is almost always “bad debt” (as opposed to “good debt”, like student loans or 30-year fixed mortgages). Money spent paying off credit cards is like a 15-25% annual guaranteed investment, something that even the most bullish investor probably doesn’t think they could beat.

[Raybyrnes]

I can appreciate that this system works for you and if it works that’s great but I am definitely in a differnt camp when it comes to debt. The way I see it I have to work a full year to make 100K and out of that I am left with 60K when you factor in taxes. Give me a 100K loan and not only do I have the time premium fof that money but the lender is going to charge 7%. That’s a bargain.
I find that I have a very disciplined approach to spending so regardless of when I am making a lot of money or if things slow down my purchasing habits do not change. This means I can put 20K on an American Express Blue card and simultaneously put that money in an interest bearing checking account.
How many times have you heard the argument that if I hd his type of money I would be rich too yet when a lender is willing to step up to plate and give it to you non borrowers thankfully decline.
I am constantly in tune with opportunity and when the cost of the opportunity is less than the cost of borrowing I am going to borrow.
I can appreciate that many people have a hard tiem being disciplines and if you do than using a cash basis sytem can be very effective at curtailing tthose impulse decision but it is not the most efficient way of managing your finances. A better attribute to focus on might be the inability to control your inclinations to purchase. Once this is in check than you can borrow more freely. In essense borowing can be viewed as a risk management tool.

[Critter]

Gold_Dredger, here's the link to the story about the couple who had to sell their house after the wife ran up all the credit cards:  

http://thehousingbubbleblog.com/?p=1811

 I got the impression she had many credit cards and a husband who didn't check the mail very often (or answer the phone). It takes a lot of work to spend $80K when you’re unemployed.

[Author]

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