Friday, March 30, 2018

So is Buying a House Really an Investment? (Part 3)

In the last two weeks’ posts I have tried to analyze the value of owning a house as an investment.  I deconstructed an article by well-known investment manager Ken Fisher that contended houses are a “lousy investment”.  But at the end of the day, we should recognize that a house almost always becomes a home.  As such, it usually brings with it emotional attachments that can endanger the investment because we do not view the house dispassionately and thus could make unwise decisions concerning it.
In that sense, a house differs from the typical investment because it is simultaneously a “good” or product as well as an investment.  We invest in the product/investment, mostly in the form of memories—memories of things we did there, our nearby friends and neighbors, life events in general that we classify by place of residence, such as “that happened while we were living on XYZ Street in Anywhere, USA.”  That may cause us to over-value the house if we try to sell it, or hold on to it when we ought to sell it to downsize (as we grow older) or upsize (when the family is growing).
But putting aside those pitfalls, owning a house has benefits beyond what an ordinary investment offers, and I’m surprised Ken Fisher ignored these.
First, it is an inflation hedge, especially if you have a fixed rate mortgage.  I saw this firsthand in my own home-buying experience.  In the early years I struggled with the mortgage payment and tried not to think of the measly sum I was applying to principal each month.  But not only did the amount of interest paid go down and principal payment go up over time, but my monthly payment remained steady.  Over just a few years, inflation and wage growth made that monthly payment a progressively smaller percentage of my total income and left me more money to save—and invest.  In fact, over the course of 30 years and buying/selling four houses, our mortgage payment never varied by more than $150.  And most of that increase was due to refinancing to a shorter term loan.  If I were still living in an apartment I am quite sure my monthly rent would far exceed what I ever put out in a mortgage payment, by at least a multiple of three.
And of course the value of owning a home without a mortgage in retirement is priceless.  My own dad discovered that after he sold his house and reaped a nice chunk of cash—but thereafter worried continually about the steadily rising rent at his apartment.  No, an elderly person doesn’t need a high maintenance money pit for a home, but a reasonably sized residence with easy and low maintenance requirements and owned free and clear is a source of security in old age.
Finally—and I don’t necessarily endorse the idea—a reverse mortgage is a source of income in retirement that is only available to homeowners.  It is a option with some serious drawbacks, but as an emergency source of income, a supplement to the income of someone who did not save enough to generate an adequate income stream in retirement, or as a last-resort means for the uninsured to pay for what will likely be a life-ending stay in a nursing facility, a home is nearly unrivaled.
And I’ll throw this thought out there, not to disparage Ken Fisher but to raise a red flag and remind you to “follow the money” (see my first blog post) whenever you read investment advice (or blogs about personal finance).  Ken Fisher is not a real estate agent; he’s an investment advisor.  Is it surprising he would downplay real estate and promote investments that he might be able to sell you?  Just sayin’.
I hope I’ve made a convincing case for buying a house.  The tangible investment benefits and the intangible aspect of pride in ownership argue powerfully for it, in my opinion.  Just keep in mind that it does require a commitment.  Signing my first mortgage note, realizing I was committing to a monthly payment on it for 30 years—longer than I’d been alive at that point—was sobering.  So, too, were the responsibilities of owning a house, like becoming a handyman (I use the term loosely when referring to myself) or having to purchase and maintain things that a landlord used to take care of.  It takes some mental preparation as well as financial.  Count the cost before leaping.
Until next time,

“Get your fields ready and plant your crops before starting a home.” Proverbs 24:27 CEV

Friday, March 23, 2018

So is Buying a House Really an Investment? (Part 2)

Last week I examined an article by investment expert Ken Fisher published in USA Today in which he argued that buying a house is not a sound investment decision.  I pointed out what I considered flaws in his reasoning.  After publishing the article he had to go back to re-work his numbers and found that the theoretical house in his example returned a 10.8% annualized rate rather than the 3.1% he originally calculated.  That fact alone should have sunk his argument because that rate of return is very close to the historical returns of the U.S. stock market.  In other words, the value of a house grows as quickly as the value of stocks, on average.  But Fisher stuck to his guns and maintained that a house makes a lousy investment.
For all the technical errors I pointed out last week, they are minor compared to what I think is Fisher’s wrong starting point for his argument.

First, he writes that renting is cheaper than buying.  That is not completely accurate.  Money magazine, citing statistics from the real estate data company, Trulia, states that buying is cheaper than renting in the majority of states in the U.S. and in all of the 100 largest cities.  It is true that if rent holds fairly steady and mortgage interest rates rise by a couple of percentage points then that advantage might disappear eventually.

But even more fundamentally wrong is Fisher’s treatment of the money that would be used for purchasing a house.  He views it as a single pot of cash that can either be used to buy the house or to be invested, and since he thinks that a house is a lousy investment, then you should invest it in stocks.  Okay, but you still need housing. 

Let’s consider a hypothetical situation.  Suppose after all your other expenses you have $2000 each month left for housing and investing.  Some of that money has to be spent on either renting or buying shelter.  Let’s further suppose that rent is $1000 per month and that the alternative is to spend $1700 on a monthly mortgage payment (principal, interest, and escrow for taxes and insurance) and $300 in related housing expenses.  And finally, let’s take Fisher’s original estimate of only 3.1% annualized return on housing and then round the average annual stock market return to10%.  It would look something like this:
                        Renter                                                             Buyer
            $1000 spent on rent                                        $1700 spent on mortgage payment
            $1000 invested in stocks @ 10%                    $ 300 spent on housing expenses

This doesn’t look too bad for the renter.  He has invested $1000 and gotten a 10% return on it.  The buyer is spending all his money on housing and has nothing left to invest.  In the early years of the mortgage, only a small portion of the $1700 can even be considered “invested in the house” because much of that payment is interest and is not even going toward paying off the principal. 

But what is missed in this line of reasoning is that while the buyer has relatively little equity, the 3.1% rate of return is applied to the value of the house, not the amount of equity.  So let’s say that the house was worth, and was bought for, $200,000 and was 100% financed at a fixed interest rate of 4.5% , i.e. no money down.  So after one year the investment situation looks something like this:

                        Renter                                                             Buyer
            $13,200 = total investment value                    $3230 = equity ($ paid on principal)
            (calculated as if the entire $12,000                 $6200 = investment growth of house
               was invested the entire year)                       ($200,000 @ 3.1%), $9430 total value
The renter is still ahead, and by quite a bit.  But in the second year, and in every subsequent year, the amount of principal paid (and equity accumulated) will increase for the buyer.  The renter, however, will likely face a rent increase annually, cutting into the amount of money he can invest from that $2000.  So the buyer’s investment will accelerate, the renter’s diminish.  And remember, we’re using the very conservative estimate of return for the buyer.

Does purchasing start to look like a more attractive investment option?  More next week.

Until then,


“Invest in truth and wisdom, discipline and good sense, and don’t part with them.” Proverbs 23:23 CEV

Friday, March 16, 2018

So is Buying a House Really an Investment? (Part One)

Have you ever read an article or book written by someone you knew to be smart, an expert in his field, and found that it didn’t make sense?  I don’t mean that the material was too complex but rather that the line of reasoning seemed somehow faulty or didn’t flow logically or was missing some major point.  You began to question yourself, think that you perhaps misread it.  After all, the author is an expert.  So you re-read it, once, twice, and you finally came to the conclusion the author is wrong.  His argument really was faulty.
I had that experience a few weeks ago when I picked up a copy of USA Today in a hotel lobby and read a feature column by Ken Fisher, chairman of Fisher Investments (and author of 11 books), titled “Why Buying a Home is a Lousy Investment”.
The title itself went against my personal belief about the value of owning a home, but I had an open mind and was willing to consider his arguments.  But by article’s end I was only confused and far from convinced.  I put the paper aside and came back to it a few days later.  I read Fisher’s column again.  Same reaction, except maybe I became even more entrenched in my own original opinion of home-owning.
Finally, I picked it up again this week and then point by point considered Fisher’s argument and made my final decision: He’s just flat wrong.
I will only summarize his argument in this post.  You can read his original article at
Fisher took as an example a median-priced home ($305,083) in a northern California county in 1995, with a 20% down payment and the balance mortgaged at the going rate of 7.5%.  The owner paid for ten years then sold the house for $763,100, the median price in that same county in 2005.  He estimated taxes and upkeep expenses, calculated interest charges and resulting equity, and concluded that the annualized return was a measly 3.1%.  He compared that unfavorably to investing in stocks, which over the same ten-year span yielded about 11% annually. 
(Fisher later issued a correction, acknowledging he miscalculated some expenses of home ownership like interest charges, leading to a very different number: 10.8% annualized return—a number that really is about par with the historic annualized return of the U.S. stock market.  Nevertheless, he doubled down on his argument against home ownership as an investment though he did allow that it had benefits beyond investment value.  He apparently got an earful from unhappy readers.)
Here is how I think he came to the wrong conclusion.
1. Fisher cited an expensive and atypical California market as his example.  The national median sales price for a home in 2005 was $228,300, or about half a million bucks lower than his theoretical average house in California.  It might be argued that the difference would be proportional in the calculations and his percentages would still be accurate, whatever real estate market is being evaluated; but that is not a given.  Real estate, like politics, is local.  Moreover, his example assumes someone buying, selling, and moving in the same county.  That is often not the case in real life.  In the small town/rural county where I live (with lower prices and even lower property taxes) we have many transplants from high tax areas like New York.  Selling an expensive home and moving to a cheaper area magnifies the gains of home ownership.  Of course, moving from a lower to a higher cost area can be financially difficult but not necessarily a losing investment.
2. He used California’s high tax rate to calculate property taxes.  The rate he used was double my own local tax rate.  That higher figure erodes his calculated annual return for the homeowner.
3. Fisher calculated interest paid using a mortgage interest rate of 7.5%.  That is double today’s average rates.  Using a figure from 20 years ago is fine for his example, set in 1995; but it is incorrect to apply that number to today’s market to calculate an estimated annual return.
4. Realtor’s commissions were figured at 5%.  Buyers may sometimes hire an agent, but usually it is the seller.  My wife and I have sold four homes and only paid a commission twice, and never as high as 5%.  Negotiating a lower rate or using for-sale-by-owner options like Zillow can drastically cut this expense and increase investment return.
But it was Fisher’s conclusion about a home’s annualized investment return—whether his original 3.1% figure or his revised 10.8%--and comparison of that to stock market returns that especially irked me.  And I’ll address that next week.
Until then,


“Without the help of the Lord it is useless to build a home or to guard a city.”  Psalm 127:1, CEV

Friday, March 9, 2018

Wearing the Dad Pants, Stylishly

Balenciaga.  Totokaelo.  Noah.  Brunello.

Quick, are those

            a. Characters in the Old Testament?
            b. The names of emperors of the ancient Roman Empire?
            c. Designer/fashion names?
            d. Italian economics professors who wrote and just released a best-selling book?

If you said (c) then you may know more about the fashion world than I do.  That’s a pretty low bar to clear, roughly the equivalent of being able to put your name at the top of an exam paper but not answer any of the questions.  Nevertheless, you’ve got a head start over me.  I only learned those names when I read an article about a new fashion trend in the Wall Street Journal online recently.  (And you thought the WSJ only published stock prices and financial news.)

I would have skipped over the article if it hadn’t been for the lead-in: “’Dad Style’ Is Now in Fashion”.

The gist of the article (at least as I understood it; it was largely written in an unfamiliar fashion vernacular) was that clothes your later-middle-age father might have worn—and still be wearing—is in vogue again.  Baggy pants.  Oversized shirts.  Larger sneakers. Even jeans.  Think late 1980’s Jerry Seinfeld.
Not sloppy, mind you.  The trend is toward comfortable, well-fitting, and even utilitarian.  As the article’s author, Jacob Gallagher, wrote, “Dads need clothes that can withstand boogers, pizza sauce and whatever mystery substances fatherhood throws their way.” 
And Dad clothes are so much easier to slip on than skin-tight jeans which don’t do much to flatter the average middle-age male physique anyway.
I’m heartened at the new-found acceptance of something I’ve never given up, but I have to admit to being cynical of the fashion gurus.  I highly doubt they’ve developed a permanent affinity for utility in clothing.  I believe it’s more an attempt to sell some new old clothes to people who never owned this style before or who discarded them in some misguided attempt to be cool a few years back.  I’m hopeful people will permanently embrace, if not this particular style, then at least the mindset of not throwing money at each new fashion trend that comes along.
And that’s my point in even bringing up fashion in a blog devoted to personal finance.  If you like your clothes, they’re comfortable, presentable, and clean, why would you abandon them in favor of what someone else is telling you is in fashion?  Someone stands to make a lot of money on those who try to keep pace with what designers say we should wear.  Trying to, as they say, “keep up with the Joneses” is almost never a good idea.
The article made no mention of my personal favorite clothing item, cargo pants.  I read a few years ago that men sitting on their wallets in their back pants pockets for long periods of time can lead to hip and leg problems.  Solution: cargo pants, with the pockets in the side of the leg.  Cell phones seem like a necessary tool these days, but where to carry them?  Solution: cargo pants, with the perfectly sized slot-pocket.  Working around the house, those easily accessible pockets can hold nails, screws, small tools (check for these items before laundering).  Men just can’t beat this clothing item for pure utility.
Balenciago, or whoever, would probably tell me I need a man-purse for my stuff.  I happily and proudly hold my wife’s purse while she tries on clothes in the department store.  But I will not own a man-purse.  Ever.
And if anyone tries to bring back the 1970’s leisure suit, the most hideous men’s fashion idea of my lifetime, I’m afraid of what I might do to that person.
Until next time,


“Why worry about clothes?  Look how the wild flowers grow.  They don’t work hard to make their clothes.  But I tell you that Solomon in all his wealth wasn’t as well clothed as one of them.  Matthew 6:28, 29 CEV

Friday, March 2, 2018

An Unhappy Inheritance: Leaving Your Money to Your Kids

As we learned last week from the published results of a survey of thousands of millionaires, there just doesn’t seem to be enough money, even for that crowd, to guarantee happiness.
But one other survey finding stood out for me as well as for the professors who commissioned the survey: respondents who had earned their fortunes scored higher on the happiness scale than those who had inherited or married into their money.
I’m certain that would not surprise Richard Watts, a personal advisor and legal counsel to the wealthy and founder of Family Business Office in Santa Ana, California.  He recently authored a book titled Entitlemania: How Not to Spoil Your Kids, and What to Do if You Have.  Marketwatch reprinted a short essay adapted from the book, and the correlation with the survey results is remarkable.  Watts argues that it is NOT an act of love to leave a huge inheritance to your children.  I think he can say it best:
“How would you react if I told you that your children would never speak to each other again because you left your three kids your house?  What if the son you designated as your executor or trustee seized control of your assets and was sued by his brothers and sisters?  What if the family business you build during your life dismantled the family after you depart?

“But you say, ‘No!  Not my family!’  To the contrary, in my 35 years of managing wealthy families every day, the incident of permanent damage occurring to a family is most of the time.”

It’s a sobering thought.  What you consider an act of love and generosity or even obligation to your survivors could be the very thing that tears them apart.  And no, it cannot usually be foreseen.  Family circumstances can change so unpredictably and be so out of character from what might reasonably have been expected.  It doesn’t always take money to cause that to happen, either; but money can be an accelerant. 

The Baby Boomer generation sits on massive wealth.  What will happen to it?  Financial planners often report that the more frugal retirees continue in their frugality and cannot bring themselves to actually spend their accumulated wealth.  With “experts” telling us we need $1 million or more in order to retire financially secure, it’s enough to scare the rest out of spending anything on themselves in their golden years lest they run out of money in their eighties or nineties.  This increases the chances that they will have a sizable inheritance to pass down.

Watts suggests that the bulk of a large inheritance should go to charities of the decedent’s choosing, or perhaps of the children’s choosing, and that the children themselves be given a much more modest bequest.  He points to Bill Gates and Warren Buffett as examples of the very wealthy who plan to do that very thing.  (Never mind for the moment that a “modest amount” of either’s wealth is still a boatload of money.)

At the very least this should give anyone pause before automatically turning over all the wealth to the next generation through a will or trust.  As one of the lead researchers in the millionaires survey said, “If inheriting wealth makes you less happy, perhaps you shouldn’t give it to your kids.”

Or, more chillingly, Watts’ warning: “Beware…For everything you give your child, you take something away.”

Until next time,


“A good person leaves an inheritance for their children’s children.” Proverbs 13:22 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide.