John Paulson Is Wrong: A House Is a Lousy Investment
John Paulson — the infamous hedge fund manager who shorted the sub-prime mortgage market back during the financial crisis — recently told CNBC that he believes that buying a home that you live in is the best investment that an individual can make.
I think there are several things wrong with this claim, and several of the reasons he gives overlook certain aspects of home ownership that make it undesirable from an investment standpoint. But before I go into these, let me just first point out that this isn’t necessarily an argument against home ownership. There are many benefits to owning a home that make it preferable to renting for certain individuals.
So, what is wrong with Paulson’s claim?
First, he says that home ownership is an investment. This simply isn’t true, and it misrepresents the notion of investing. An investment is an asset that generates cash-flow. Unless you are renting out your home, it simply doesn’t qualify. Paulson says that if you buy a home and put 10 percent down and the home’s value rises 5 percent, then your “investment” is up 50 percent. But that is only true if you actually sell your home. Furthermore, this claim doesn’t take several costs into consideration such as taxes and broker fees. In fact, if you put 10 percent down on a home and it increases in value 5 percent and then you turn around and sell it, you would probably be lucky to break even.
But it gets worse. A home is a depreciating asset that requires upkeep capital. Things break in a home and you need to repair these things in order to maintain the resale value. Furthermore, even if things don’t break you need to modernize your home if you wish to realize a good selling price. Nobody wants to buy a home with appliances that are 50 years old and with lead paint on the walls. You need to modernize your home in order to maintain its value, and that costs a lot of money.
Finally, there are moving costs. It costs money to move into a new home and to move out of it once it appreciates in value in order to realize that “profit.” Chances are you will be throwing things away each time you move because the cost of moving them outweighs the cost of simply replacing them.
So to recap, Mr. Paulson is espousing the benefits of being able to use leverage in order to buy a home, and that you can gain a lot on your initial investment if the home appreciates just a little. Yet he neglects to mention the following expenses:
- Real Estate Taxes
- Broker Fees
- Moving (Twice)
Suddenly, home ownership appears to be really expensive, and while it is certainly not impossible to be able to turn a profit on your home, a lot of things have to go right. Specifically, the market price has to appreciate significantly before these expenses eat into your profit margin. This is difficult because broker fees and moving costs are not ongoing costs, and so they remain the same no matter how much time passes between the time you buy and the time you sell.
Ultimately, home ownership is burdensome, and it requires a lot of responsibility and savings. There are very few circumstances in which it is actually cheaper than renting, and the advantage to ownership is more in the convenience of owning your own home without having to deal with a landlord. But this convenience comes at a cost, and there is little investment opportunity involved.