My wife and I recently bought a house. This has been inarguably the biggest purchase of my life and will remain that way until I purchase another one. Now there has been a lot of discourse on buying a house and building equity vs renting and saving the difference in today’s economy, and I have something to share on my own way of thinking, investing, and approaching that problem.
When we decided to buy we had an existing great deal on an apartment and we live in Denver, which has seen some of the largest decreases in rent in the country. So why in this period of falling rents and rising rates did we decide to buy? I have asked myself this question many times and spent months deliberating prior to the purchase.
Well first, I want to say yes for our long term maximum net worth it would make more sense to simply rent and invest the difference forever. This is simply due to the equity markets far outperforming the housing market and that’s before you take into account maintenance and interest. Especially since we bought “more house” than we currently need and would have easily been content living in a smaller apartment a few more years thus allowing us to save even more money.
Physical real estate is much less correlated with equity markets. So as we enter a period of higher inflation for the longer term and a potential AI bubble having negative effects on the stock market. A house offers some different risks and rewards that I had no exposure to previously. As someone who has their entire net worth invested in the stock market, through my retirement and brokerage accounts, diversification into a new asset class is welcome.
Physical Real Estate is also the best hedge to guarantee you can continue to live in a certain location. No one can refuse to renew my lease or drastically increase my rent. As inflation continues, historically housing values have been incredibly resilient against it. Which also will allow me a good base to eventually upgrade to a different home if needed. The non-fungibility of real estate is my most focused benefit of home ownership. I am in not only a city, but a neighborhood that I love.
The purchase of a house is first and foremost a place to live and enjoy life while secondarily acting as an investment. This home is one where we can imagine hosting friends and families for holidays or parties. One where we could start a family in a wonderful neighborhood. A place that we can walk to our favorite restaurants for a date night or easily go downtown for a concert. The location is what sold us on the purchase but what it could bring is what gives me hope.
Now to the downsides, the biggest one I dwell on is the lack of liquidity. WIth my stock portfolios it is so easy to cash out and buy a new investment or stay on the side lines. With a house you get nothing until you sell. Liquidating stocks to help fund the downpayment was a breeze with quick transfers, now that money is locked away from me for years.
Also the housing market will never compare with the equity market on performance. Even in Denver where housing has averaged 5.8% for 30 years that is still below the S&P 500 average of 10.4%. I would have done far better if I had just kept my down payment money in the market and not lowered my savings rate to account for the mortgage. There is no explaining these issues away, I clearly traded them away.
Now I still realize that this is not an optimal financial decision but as my wife and I now know where we want to live buying a home offers stability to us, our cat, and future family.
Alex Bronner, CFA
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