mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Monday, February 26, 2007

Buy real estate. Because you can't live in a mutual fund.

I've seen this article a couple places - first on the Baltimore Housing Blog (whose author does not own a house and is hoping prices fall.... the opposite of me) and then on Fatwallet Finance. Evidently, Fidelity has done a study and found that stocks outperform real estate by a wide margin.

So clearly you should buy stocks instead of a house, right?

Well, you can live in a house, but you can't live in an index fund. Housing is more than investment -it's also a place to live. It's for the most part a necessity - sure, you may be able to avoid paying for it for a while if you live with your parents or crash on your friend's couch or live in a refrigerator box - but for most people, you either have to pay rent or pay a mortgage. Housing is a necessity, like food - you get much better returns on stock than on a ham sandwich, but that doesn't mean you shouldn't buy food. In the same way, real estate and stocks aren't subsititutes. For most people's investment strategy, they are complements. And you can't put ALL the money you are spending on real estate in stock, because you have to pay rent. So you basically have the choice of investing part of your money in rent and the rest in stock, or a larger portion of it in your mortgage.

And there is another financial reason to buy a house - the tax advantages. Of course, MadAnthony is a big fan of this part, because he recently bought a copy of TurboTax and realized he's getting close to 4 grand back this year between state and federal - which helps make up for the softening real estate market.

The other thing that real estate is is a hedge against rising rents. Assuming you have a fixed rate, non-IO mortgage, your payment is the same (ignoring taxes). You don't have to worry about rent going up, as it tends to do. And if you get your mortgage paid off before you retire, then the largest expense - housing - is something you don't have to worry about. And I'm guessing for many retired people, that's the reason for buying a house -not to sell it and cash out as you might do with a mutual fund, but instead to have a rent-free place to live.

Of course, there are plenty of nonfinancial reasons to buy a house - the ability to live in a nicer neigborhood that suits you, to decorate it as you please, to configure it the way you want to support your family or hobby or lifestyle, to not be dependant on a landlord, to have a refuge that is truely yours. These are a big portion of the reasons people buy houses, and even though they don't break down easily on a balance sheet, they are also reasons in a rent/buy decision where the numbers are close that can tip towards buying.

But few people decide between a primary residence and stocks, and for good reasons. They aren't mutualy exclusive, and there are reasons you should have both as part of your retirement portfolio. Comparing the two is pointless, and deceptive, and I hope I've illustrated why.


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