Financial Fiction Friday #16
The Housing Market is Making Everyone Crazy
Another "self-made millionaire" making a fool of themselves on CNBC.com. Unfortunately this time it is Chris Hutchens who is an all-around impressive guy and who I thought would know better.
I want to zero in on one paragraph in particular:
“If you took the money for a down payment and property tax and repairs and closing costs, and put it in a brokerage account, that will also grow over time,” he says. “You could be investing in equities and other investments, including real estate. You could build equity that way.”
What's being missed here is one of the largest benefits of owning a home as a wealth-building tool: leverage.
Considering the average long-term growth rate of US real estate (5.3%), if you put down $40K on a $200K house and that house appreciates to $255K over five years, your equity (not including your mortgage payments) will grow by 128% (18.8% per year). The average stock market return is less than half of that.
Can you use leverage in the stock market? Sure, but it will cost you much more than the current mortgage rate at most brokers and has significantly more risk than borrowing for a mortgage.
Don't fall for this 'renting for your whole life is as good as owning'. It's not true except in very specific circumstances, none of which Chris is talking about.