Sunday, January 31, 2010

Common Wisdom

I hate it, because people accept it as fact without even considering questioning it. Maybe it's because I'm a bit of a contrarian, but when people pass on their little fact-turds, it drive me insane.


You've been there; the polite dinner conversation with friends that turns to the old, "I'm thinking about buying a house/condo" discussion. The prospective buyer goes on about how they WANT a house or condo, but then there's always the "and because it's a good investment" argument tacked on at the end as an afterthought to help rationalize their decision. Inevitably everyone agrees that buying beats wasting money on rent.

Fuck! This is such a gross oversimplification that it boggles the mind. I have no problem if someone wants to grossly overspend on a house because they WANT that house. Go ahead, knock yourself out. But don't try and fucking "justify" your house lust as being a good investment decision to boot.

If you're going to treat a house as both a place to live AND an investment (which maybe you should since it is typically the biggest purchase of most people's lives), then maybe you should try to define WHY it's the greatest investment since Bre-X/Worldcom/Enron/

Usually the "common wisdom" arguments are:

1) House prices will appreciate.

Assuming this was true, what's your expected rate of return? Is allocating the bulk of your assets in housing the best choice, or can you achieve higher returns elsewhere? Does it make sense to concentrate everything you own in your house? The vast majority of people do not ask these questions, because it makes their head hurt.

Second of all, assuming prices MUST appreciate is a BIG assumption, that largely to this point has been true in the long run (mainly due to declining borrowing costs). Most people don't consider the potential risk if housing prices stagnate or God forbid, decline (take a look south). But the housing bubble is another rant...moving on.

2) You're "building equity" vs. wasting money on rent.

OK, that may be true, but you can "build equity" by saving/investing in things other than houses as well. Generally speaking the cost of renting is less than the cost of owning, and if you're saving the difference, guess what, YOU'RE BUILDING EQUITY, and it's a hell of a lot more liquid than a house. Besides, the rate that you "build equity" is going to depend on how long your amortization is, how much you put down, what your interest rate is, etc. Instead of "wasting money" on rent, homebuyers waste money on interest costs, property taxes, maintenance, legal fees, land transfer taxes, realtor commissions. Contrary to popular belief, houses don't self repair and organically grow new roofs, paint themselves, rewire, fix plumbing leaks etc. People "accept" a car as a depreciating asset loaded with future expenses...but somehow not a house.

3) Interest rates are at record lows, so it's a good time to buy.

Is this really a good reason to buy? Yes your cost of borrowing is low (for now), but due to the excessively low borrowing costs, everybody can borrow their brains out to buy houses with other people's money. This inevitably leads to bidding wars, and grossly inflated home prices. Due to the high cost of home ownership people are often forced into taking long amortizations, and often can only put down a minimal down payment. As such, they are highly leveraged and should not be asking "Are interest rates low NOW?" but rather, "Are interest rates going to remain LOW ENOUGH over the lifetime of my mortgage that I can reasonably afford it?"

Rates have nowhere to go but up, the only question is by how much, and how fast. The best part in all this, is that you can actually usually get people to concede the point that rates will rise, but they'll argue that this will take place "slowly".


If I tell you to put your head in a vice (make sure it fits snugly to begin with), and I tell you to keep it there for the next 30-35 years while at the same time telling you that I will probably start to tighten the vice at some point in the future (and I guarantee this, I just won't tell you when, and I guarantee I won't loosen the vice). Do you still put your head in the vice?

Peer pressure doesn't end at adolescence...and neither does human stupidity.


  1. Just wait until you explain to people that YES a house is a DECAYING asset... much like your car... and you don't expect that to miraculously be increase in value the longer you drive it.

    Heads explode when people finally come around and grasp that a house has a 25 year half life and that it should DECAY in value.


  2. But houses are "different"! Everyone wants one, they aren't making any more land you know! (I love that argument in a country where we have ~72acres per person). Not that you'd want to live in Resolute...