Defend Yourself From Bogus Arguments
Everyone trying to separate you from your money reads from the same sorry script of lies and spin. Here's a list of their bogus arguments and replies you can use against them.
"Using a buyer's agent is free for the buyer."
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FALSE. As a buyer, your own real estate agent is your worst enemy. His financial motive is to get you to take out the maximum mortgage and to spend as much as possible as quickly as possible. Why? Because he gets paid nothing if you do not buy, and he gets paid more if you overpay for a house.
Those two perverse incentives neatly combine to give your agent a powerful motive to push you into grossly overbidding, because that gives him a greater chance that your offer will be accepted, so that he can quickly gain the maximum profit from your mistake. Your agent's financial motives are the exact opposite of your best interest.
Agents take $100 billion dollars each year in commissions from buyers. Agents point out that the seller writes their commission check, but they always fail to mention that the seller gets that money from the buyer. Who brings the money to the table - the seller or the buyer? All money comes from buyers. No buyer, no money. Even if we politely agree that the seller writes the commission check, doesn't that payment then show who your agent is really working for?
"Houses always increase in value in the long run."
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FALSE. The value of a house is constant. It just sits there. You get shelter, but you have to pay property tax and maintenance and the loss of alternative uses of capital. A house is a dead asset. The price of a house rises with salary inflation, but house prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - the house drained cash from its owners for 100 years of maintenance, taxes, and insurance - costs that never go away. The price of the house went up about as much as salaries went up, which is about the same as the number of dollars printed by the Federal Reserve went up.
My grandmother always used to complain about the cost of milk. "Why, when I was a girl, a gallon of milk cost a dime! Just look at how much people are overcharging for milk now." I asked her how much people got paid back then. "Oh, about $15 a week", came the reply. Hmmm, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that inflation and salaries rose a proportional amount as the Fed debased our currency.
I don't see any salary inflation in our future for years to come, and that's the only kind of inflation that boosts house prices. Inflation in everything else (food, energy, medical) just takes away from the money people have to spend on housing.
"Renters have no opportunity to build equity."
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FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing.
- Owers are losing every month by paying much more in ownership costs than they would pay in rent. The income deduction does not come close to making owing competitive with renting.
- Owers are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of "owners" who actually own only 20% of their house. Remember that the agents will take 6% if they possibly can.
- Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
- Owers must insure a house, but not most other investments.
- Owers must pay to repair a house, but not a stock or a bond.
"Renting is just throwing money away."
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FALSE, renting is often much cheaper per month than owning the same thing. If you don't rent, you either:
- Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
- Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
Either way, owners can easily lose much more money every month than renters. Currently, yearly rents in the San Francisco Bay Area are about 3% of the cost of buying an equivalent house. This means a house is returning about 3% rent minus taxes and maintenance, bringing the landlord's return down to 0%.
Landlords are loaning a house to their tenants at a 3% interest rate, called rent. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 3% yearly rent at the same time a loan of a million dollars in cash costs 6.5% interest, plus 1.3% property tax, plus 1% maintenance, something is clearly broken. Renters are enjoying an extreme discount at the owner's expense.
If someone tells you that you are throwing money away, you can reply "The landlord is giving me a huge gift. He's subsidizing me to live in his rental. I'll take free money any day."
If someone tells you that you are "Not building equity", you can reply you are not LOSING equity, which happened to millions of people, and is still going on right now.
To add insult to "owners", their property is declining in value. Renters are completely protected from the massive losses owners are experiencing. Here's a great quote from NPR:
Underwater owner: "We would do it [pay the mortgage] if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money."
"There are tax advantages to owning."
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FALSE. There is a theoretical tax benefit for high-income couples with expensive houses and big mortgages, but unfortunately for them, the higher price of the house completely wipes out that benefit in reality. The price simply gets bid up by all the other high-income bidders who are also counting on that deduction. Only the banks really benefit from the deduction, by increasing the amount of mortgage debt they can earn interest on.
There is not even any theoretical tax benefit to owning for modest-income couples in modest houses. Every married couple filing jointly automatically gets to subtract the standard $11,900 deduction from their adjusted gross income to arrive at their taxable income. Alternately, you may add up modest deductions in seven categories: Medical, Taxes, Interest, Charity, Casualty and Theft, Job Expenses, and Other Misc. If the total of your expenses in these categories exceeds the standard deduction, you can itemize them on Schedule A of your tax return to reduce your taxable income.
Let's assume that your only deductible expenses fall into the Taxes and Interest categories. Taxes mainly include the income tax you pay to the state (or its sales tax) and the property taxes on your house or other non-investment real estate. In a high-tax state like New Jersey, you might easily pay $7,200 in property taxes and $700 in income taxes, for a total of $7,900. So the first $4,000 of interest expenses just brings your deductions up to the standard $11,900, without reducing your taxable income at all. It’s only the interest above $4,000 that you can deduct.
For a high-income couple, let's assume they can itemize their state income tax of $3,400, charitable contributions of $1,000, and medical expenses of $1,000. These deductions use up $5,400 of the $11,900 standard deduction. So the first $6,500 of property taxes and interest saves them nothing. After that, their savings depend on their tax bracket, which could be as high as 35 percent for a certain segment of income, but is limited by the Alternative Minimum Tax (AMT) and the limit on total mortgage debt.
Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. You don't get rich spending a dollar to save 35 cents!
Buyers do not ever “get interest back” at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
"House prices don't fall to zero like stock prices, so real estate is safer."
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FALSE. It's true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because agents will take 6% if they can trap the seller with a contract. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
"House prices are driven by supply and demand."
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FALSE. House prices are driven primarily by interest rates and lending standards. Most people will borrow as much as the possibly can. During the great housing bubble in particular, supply and demand were clearly violated.
The www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the
- 2000 580868 / 1686474 = 0.344 housing units per person
- 2001 587013 / 1692299 = 0.346
- 2002 592494 / 1677426 = 0.353
- 2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those
years. There was an oversupply compared to a few years before, when prices were lower.
At a national level, there is a similar story in the years 2000 to 2005:
- 2000 115.9M / 281M = 0.412 housing units per person
- 2005 124.6M / 295M = 0.422
At a national level, housing supply increase 2.5% per person, and average family income fell 2.3% in that time period. So national prices should have fallen as well.
Supply and demand are very poor explanations foisted on you to get you to think some immutable cosmic law of the universe means you have to sign away your life to live in a house.
“They aren't making any more land.”
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TRUE, but America has plenty of land, far more than we need for our population. Anyway, it is always possible to overpay for a house, no matter how little land there may be.
Japan actually does have a severe land shortage, with close to half the population of the US crammed into a space the size of California, but that hasn't stopped prices from falling in Japan for 22 years straight. Prices in Japan are now back down to the same level they were 25 years ago, because buyers overpaid by so much back then.
"Commissions don't matter."
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FALSE. The median length of house ownership in America is six years, not thirty. That means that half of owners end up selling within six years, so the 7% or so that you'll pay in commission and closing fees comes out to more than 1% of the purchase price per year, and that's a lot of money.
You may think you're different and that you will actually stay put for 30 years, but statistically you're not, and you won't.
"Agents don't care what you pay."
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“The difference between $200,000 and $210,000 is about $300 in commission to the buyer’s agent (3% of the $10,000). He doesn’t really care about that extra $300.”
FALSE. Your agent may not care directly about the extra $300, but he cares a lot about whether your offer gets accepted, so that he can get paid as quickly as possible and move on to his next victim. If your agent gets you to bid more than necessary so that your bid definitely comes out on top, then the extra $300 is a bonus that you paid your agent to betray you. The $10,000 you lost by overbidding didn’t cost your agent anything.
"You have to live somewhere."
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TRUE, but that doesn't mean you should waste your life savings on a bad investment. You are likely to be able to live in a better house for less money by renting. A renter could save hundreds of thousands of dollars, not only by paying less every month, but also by avoiding the devastating loss of his downpayment.
"Rentals all suck."
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FALSE. In upscale neighborhoods, for any given monthly payment, you can probably rent a nicer house than you can buy. Renters in those areas live better, not worse.
There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but millions of people are quite happy renting. There are worse downsides for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes and maintenance are forever.
Some people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within a month or two, with no real estate commission. Some of the savviest people in the world are renters. For example, the majority of people in New York City and Switzerland are renters.
Most landlords are happy to let you redecorate the rental to your taste, as long as you are improving the property. The median ownership length for a house is only six years anyway, which is the same as the median rental tenancy length.
Parents of young children should note that is generally cheaper to rent a house in a good school district than to buy a house in the same district.
Plus, the biggest upside of renting is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best work bonus you can ever get.
"Owners can remodel."
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FALSE. Even single family detached housing is often restricted by Covenants, Conditions, and Restrictions (CCRs) and House Owner's Associations (HOAs). Imagine having to get the approval of some picky neighbor on the Architectural Review Board every time you want to change the color of your trim. Yet that's how most houses are sold these days.
In California, your HOA can and will foreclose on your house without a judicial hearing. They can fine you $100/day for leaving your garage door open, and then foreclose and take your house away if you refuse to pay. In about half of all states, when you join an HOA you also give the HOA the right to foreclose on you.
Reader Funtime points out that owners are stuck with neighbors in a way that renters are not:
I don't envy my neighbors who got into some kind of disagreement during one of their massive remodel/expansions to the sky and now won't talk to each other. Imagine crashing a million dollars plus into a place and living right butted up against, as we do in SF, people who you don't even want to see because of your anger. For years.
"I just want to own my own house."
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TRUE, most people do. There's nothing wrong with that. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise.
Great quote from http://healdsburgbubble.blogspot.com/: "People want to buy a house, they want to have someone tell them it is the smartest decision they are making in their lives, and they don't want to hear about any downside risk."
Housing is the biggest expense in nearly everyone's life, far more expensive than food, gas, energy, even more expensive than education or medicine. To reduce the time you spend working to pay for housing is to increase the time you have for everything else.
Cheap housing is good for us all! High housing costs take away from families' ability to save for retirement, fund their children's education, travel and lead a quality life.
How can we make lower house prices our official government policy? How can we completely eliminate the mortgage interest deduction which drives up housing costs and discriminates against renters? How can we wipe out Fannie Mae, Freddie Mac, the FHA, and other agencies whose job it is to enslave Americans to mortgage debt?
As reader Sean Olender put it: "Many people have forgotten that the number one restriction on their future freedom to do what they want, when they want, and to go where they want isn't the Iraqis, or Iranians, or North Koreans -- it's their mortgage lender."