I read saw this over at Free Money Finance: If we really want to be rich, the best financial advice David Bach has for us is to buy a house.
I have to disagree. Bach compares the average net worth of a renter (under $5,000) versus the average net worth of a homeowner ($171,00) and goes on to argue that nothing will multiply your wealth like owning a home.
The problem I have with this statistic is that Bach is not really comparing apples and oranges. For it to be a valid comparison, you would have to compare the average net worth of renters and homeowners in the same income range.
It makes me wonder why David Bach encourages homeownership so much. If you have ever read any of his books, most of his financial advice is pretty solid. He teaches readers principles such as: paying yourself first by saving 10% of your income, spending less than you earn, and watching our for those little purchases that can really add up.
When you compare owning stocks to owning a home, it is crystal clear which investment is the winner. According to this article from Smart Money, after considering inflation, stocks have returned 7% in the long-haul while homes have returned an average of 0%. Home values have skyrocketed in recent years, but the historical data shows that you have more to gain when you invest in stocks.
Is it a wrong move to purchase a house? No, not at all. Just don’t expect it to be a fast-track to great wealth. Building wealth is still achieved through sound financial planning. By starting early, diversify your investments, and being consistent in saving, you too can be on your way to great wealth. You don’t have to get so fixated on owning a home at the expense of all other things.
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One thing you don’t mention and Bach glosses over is the fact that you are living in your ‘investment’ and not paying rent into what is essentially a black hole. Assuming one purchases a home that has costs in line with what their rent is (not an unreasonable propostion) and the investment amounts say the same for the renter and the buyer, the buyer is building his/her net worth over time. And while the return is 0% after inflation (depending on the market of course), after the mortgage is paid off you can are able to incorporate that money into other investment vehicles, where as the renter would still be using their rent money (which is typically also rising with inflation) to pay someone else. I am not saying that renting is a bad idea, it is just that you shouldn’t compare the stock return rate to the housing return rate. It makes more sense to anaylze and compare the cost of owning vs. renting, not owning vs. investment. My fiancee and I plan on buying a home within 4-5 years, while still maintaining a investment plan to ensure retirement.
Comparing the returns on investment and the returns on a home makes sense only for the cost of the home above the cost of a rental of comparable utility (in the economic sense). Please let me know what you think at my email if you like, I would enjoy the discussion.
Comment by Shoe — August 7, 2007 @ 7:15 am