If you haven’t heard of Robert Shiller before, then my guess is you haven’t been watching the news or anything related to money or economics.
Shiller is the economist that predicted the housing bubble in 2006 that sent the world as we knew it into a tail spin for the next five years and I am not sure if everyone has yet to recover from it.
Shiller and his team did something ridiculously simple, yet effective. Shiller simply looked at U.S. housing prices dating back to 1890, stripping away inflation. He “benchmarked” the 1890 prices at a value of 100 and tracked relative housing costs through the lens of inflation-adjusted dollars.
Here is what they found:
- A house in 1897 cost the same as a house in 1997, adjusted for inflation.
- If you benchmark 1890 prices at a value of 100, you’ll notice that U.S. housing prices have stayed within the 100-120 range over the past century.
- In 1950, for example, the index stood at 105; in 1996 the index stood at 106. Real estate didn’t make any gains (other than inflation) during that 46-year timespan.
- Starting in 1997, an unprecedented bubble began forming.
- Every housing ‘peak,’ or bubble, is followed by a tragic, painful, ugly fall.
Shiller and his team have created the Case Shiller Home Price Index. Below is the image of the current one. This index is created quarterly. If you look at the most recent spike. Right before the recession hit. You can now see why he was able to predict the housing bubble. What is even scarier. Is that you can see a current one is being formed as I type this.
So you are saying right now Brian, you are silly. A home is an investment. Over time, this appreciable asset can be sold for more money. Everybody makes money on real estate.
Well, let me tell you a few other reasons why I will never buy a home again as my primary residence. First of all, I own five homes. They are all rented out and make money each money. Matter of fact they are very profitable. But I rent where I live. And here are some other reasons why I will always rent, other than the fact as you can see by the chart above it isn’t a very good investment.
The only time I will not rent is the day I can write a check for the place I want to live in. Meaning I don’t take out a loan.
My other reasons.
Mobility: I don’t plan on staying put. I stayed put in my hometown from birth until age 38. I am not doing that anymore. I want to move. I want to see the world. I want to see the United States. My plan is to move at least every three or four years or so, or maybe sooner. Look, I get bored easily. I like new things. I want to move around and see new things and be in new areas.
Assets vs. Liability: The lie you have been sold is that a home is an asset. Its not. It is a liability. It doesn’t make you money every month. It costs you money every month. I know, so does rent. And unless you plan on staying in a house for more than five years, and depending on price, it doesn’t make sense to buy a home unless you plan on staying in it over five years. Which is not the case for a lot of people.
An asset is something that can provide you cash flow. If it doesn’t provide you cash flow, then it is not an asset. Simple definitions, an asset makes you money every month. A liability costs you money every month.
But I am getting the gains from appreciation? What is the point of appreciation if you can’t do anything with the money?
Costs: The average down payment of a $150,000 home should be, $30,000, 20%. If you invest that $30,000 into a home, you have to think about opportunity costs associated with that 30K. Which means, since you invested your 30K into this home, it means you can’t invest it into something else. Like a mutual fund, a business, or some other kind of asset that can provide you a return. So this money is tied up.
I, like you have been sold the “American Dream”, whatever that is. I think most would say, home ownership is the “American Dream”. I subscribed to that thinking growing up as well.
But to me the “American Dream” is “Ultimate Freedom.” Freedom from doing anything I don’t want to do. Freedom from any debts or obligations to others. Freedom to come and go as I please. Freedom to live off of my own assets that I have accumulated. Freedom to travel and live where I want to live. Freedom to get up on a Sunday and not have to worry about cutting the grass.
If you like to cut the grass, good for you. I don’t. Life is too short to spend one hour a week cutting grass. I have better things I want to do.
In 2006, I bought my first rental property. It was a $175,000 dollar duplex. At the time, I was renting a great apartment/duplex in the best area (in my opinion) in my city at the time. That duplex gave me cash flow every single month that helped me establish a love for real estate and a love for seeking pure freedom in my life. I am closer today to this goal than I was then. And I get closer every single day.
If you are not sold, I would encourage you to do your own research instead of just taking my word for it.
At age 21, I bought my first house. To live in. At that time, that was considered to be the biggest achievement one could make, at least in my circles at that time. Hey, I am not discounting it if that is what you want to do. If this is one of your goals, and you do it, then good for you. I am glad you set a goal and accomplished it.
But for me, ultimate freedom is the goal. And conventional and traditional ways of thinking have never got anyone I know to this goal.
Also, if you looked at the above chart, this should be a concern if you plan on selling your home over the next few years. We could be at the top of the bubble.
To your success and your future.
Chart: http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/
Pennies into Fortunes 
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