Home sales have been breaking records during the coronavirus pandemic, spurred by record-low interest rates and the geographic flexibility afforded by remote working arrangements. But is purchasing a home a no-brainer? Ramit Sethi doesn’t think so. Sethi, the author of the best-selling personal finance book, I Will Teach You to Be Rich, and the founder of Iwillteachyoutoberich.com and Earnable, was a recent guest on the podcast The Long View. In a wide-ranging conversation, he discussed the role of homeownership in a financial plan, as well as his goal to focus financial planning on aspirations rather than spreadsheets and net worth statements. This excerpt from the interview has been lightly edited.
Christine Benz: I want to talk about homeownership. You have argued that many people overemphasize homeownership as a component of a successful financial life. And it's definitely hard to argue that homes are always great investments, but they are the largest source of wealth for many households. And they're also, as an illiquid asset, something that people can stick with, and not tap for short-term needs and so forth. So how does homeownership fit in? How do you suggest that people approach that?
Ramit Sethi: This has been a really interesting conversation that I've had with my readers over the years. My big advice for people when it comes to buying a house is that I want them to run the numbers. It seems so simple and innocent. Of course, Ramit, we'll run the numbers. But as I've dug deeper into it, I've discovered so many things about buying a house.
In this country, real estate is religion. And we grow up being taught these phrases like “You're throwing money away on rent,” “Don't pay your landlord's mortgage,” or “They're not building more land.” And so, people grow up without really thinking about it, but eventually "knowing" that they should buy a house. And this is so funny. You hear people talking about this. One of the favourite things on the Internet is to complain about how expensive weddings are. No matter what if you write about weddings, somebody's coming out, popping out of the comments section and saying, “Oh my god, you spent that much? Well, I spent $52 and we served hot tamales at our wedding and we're still married 30 years later. That's such a waste of money.” And people will then say, “Yeah, we could have taken that money and bought a house with it.” Notice that the wedding and the house are always tied together.
Now, where do you think that came from? You have people who are largely financially unsophisticated. You never hear folks talking about investing, target-date funds, dollar-cost averaging. But suddenly, when it comes to a wedding, they're talking about, “Oh, we would just prefer to just put that down for a down payment.” Where'd that come from? And the answer is that there's been a systematic marketing campaign from The National Association of Realtors. The government and of course, our parents, who bought houses, telling us that “You need to buy a house. That's the best investment there is.”
When I started to dig into this, I became extremely fascinated because if you actually truly run the total cost, you include what I call the phantom costs of buying a house and you compare it to investing in an S&P 500 fund, you will often find that housing is not a great investment. Not always, but a lot of times. I have lived in San Francisco, New York, and Los Angeles. I've rented in all of those by choice. It would have made no financial sense for me to buy. I want to say that again because it is so counterintuitive. It still makes no financial sense for me to buy. And I could buy right now. So, I'm a renter by choice. I'm sure one day I will buy. I'm also sure that when I do, I'm sure the house is going to be great. I'm also sure it's probably going to be a terrible financial decision.
What happens is you have somebody saying, “My grandma bought a house in Texas in 1970 for $200,000 and she just sold it for $600,000. She made $400,000 of pure profit.” But of course, if we dig into the numbers and we look at how much she spent on maintenance and taxes and interest, and then we compare all that plus your down payment to what you could have made by just simply investing in a S&P 500 fund for 0.1%, you often find that people could have made much more by renting, the key being they need to invest the difference. That's a big, big key.
My point with this is not to tell people that buying a house is a bad decision. That's not my point. Like I said, I will buy a house someday. My point is that a rich life involves deep thinking about your big decisions and buying a house is perhaps the biggest financial decision for most people. I don't want people going into it unknowingly. I don't want them getting charged crazy fees on their investments. I don't want them investing in things that are not properly diversified and I don't want them buying something that for a lot of people ends up making them house-poor and because of the way that all the fees are levied and obscured, they don't actually realize, wow, this house is costing me a lot more than I thought.
So, I'm giving people permission, run the numbers, question what you've been told about buying a house. It may be right for you, or it may not. But you should never feel pushed into a large financial decision. You should get clear on the difference between what is a luxury purchase and what is an investment. And you should get educated about all of your different options because you have lots of options to grow your money. And if you want to use housing, that's fine. Understand the trade-offs. If you want to do a target-date fund, great. If you want to do all the above, great. But I don't want somebody using phrases that they were taught when they were seven years old--"don't throw money away on rent.”
