HomeownershipOn being owned by a home.

Posted:

In hindsight, it should have been obvious. Nearly all businesses lease their commercial space. Since most businesses exist for the purpose of making money, if owning were a much better deal than renting, wouldn’t it be unheard of for a business to lease? (Sure, some companies own their office or warehouse space, but only when they get to be so large that it makes sense to run a real estate and facilities division.)

At the time, though, I was noticing that most of my friends either owned their homes or were saving up to buy. I kept hearing things like “I don’t want to throw money away on rent, I want to build equity,” and I had to admit that if you could spend an equal amount of money each month and get to keep some of the value, it seemed like a no-brainer. And I found myself fantasizing about luxuries that had eluded me as a renter: a garage, a guest bedroom, a dishwasher. In 2016, I was ready to be a responsible grownup, join civilization, and become a homeowner.

A house is an investment. I’ve heard it said that a house is not an investment[1] but the message of that argument is really that a house is not a good investment. How could you put a large share of your net worth into something that you don’t think will at least hold its value? You expect to get that money back someday, and hopefully more. So it’s an investment. I understood, when I bought my house, that real estate doesn’t typically appreciate as much as some other asset classes, but since I was also putting money into stocks and such, it felt like good diversification to own some real estate too.

I was so excited to join the ranks of homeownership that I looked forward to what I imagined as the simple, earthy pleasure of maintaining a lawn. Early that first June, I bought a mower and some clippers and a rake and a blower and a weed wacker. I went out on a beautiful Sunday, and wasn’t even done with the task by the time I noticed I was bored. And it was a pretty small lawn. As much as I enjoy the smell of cut grass, I realized I would rather have been enjoying the smell of someone else’s grass through my window while reading a book. But there I was, making divots in the edging with my clumsy weed wacker handling and probably getting sunburned.

That was the beginning of my disillusionment. All of a sudden I realized I hadn’t just bought an asset, I’d took on a side job as property manager. I looked into hiring a gardener, but all the ones I called were going to charge hundreds of dollars a month to cut the lawn and trim the plants on my little plot. I decided to suck it up and do it myself. It couldn’t be that hard, right? Well, I wound up letting it go that year. The next spring, I was surrounded by a jungle. In the back yard, the weeds were up to my chest in some places. And these thorny vines (blackberries?) were everywhere. I tried to catch up, but was overwhelmed. So I hit Yelp again, found a gardener with good reviews, and paid her $700 to do a one-time cleanup and then $250/month to keep it tidy. The second month she didn’t show up, and I had to chase her, causing me to realize I would have to increase my monthly outlay if I wanted to book a more reliable service that I did not have to micromanage. I’d had no idea something that I thought of as so trivial would turn out to be such a hassle and an expense.

But the lawn story is not done. The second year, I realized the little stand of bamboo by the front door that the builder had planted as a privacy hedge was not clumping bamboo. No, the builder had thought it was a good idea to plant running bamboo. I happened to know the difference between clumping and running bamboo because some years back my dad told me about some bamboo he’d planted on his property. He explained that running bamboo is invasive and terrifying, but clumping bamboo is tractable, nice looking, and matures quickly. When I bought my house I thought to myself, surely the builder knew to plant clumping bamboo! Well, it had taken two years before I noticed how fast it was spreading and I had to take action. I researched bamboo removal and found out there’s a whole business. The Angie’s List reviews for bamboo removal in the Seattle area were a window into a nightmare. One reviewer had spent twenty thousand dollars getting bamboo removed from a large backyard, after it spread from a neighbor’s property, and they sounded grateful to have achieved victory at that cost. I hired a congenial couple with good recommendations, and they traced every last rhizome by hand over about a week, and I counted myself lucky to pay them only three thousand dollars to make the problem go away.

So it turns out property management is a job. This fact was invisible to me when growing up; my parents took care of it just like they took care of making dentist appointments and cooking dinner. I assumed it must not be that hard if they did it on top of their busy lives, and moreover, it is surely a hallmark of maturity to take care of property. But here’s what I realized. When you own one house, you get no economies of scale. A person who owns a fleet of properties can find a good gardener and a good plumber and a good handyman, and aggregate the work of dealing with them. They have time to dedicate to this purpose, because the property accounts for some portion of their income. Such a person can also make dispassionate decisions about whether and when to improve or renovate — whereas, when you own one property and you live in it, the temptation is much greater to gold plate things instead of keeping it reasoned. As an amateur property manager, you don’t necessarily have the expertise to know what is good bang for the buck and what is excessive (is granite countertop worth it? What about a claw foot tub? Soundproof windows?)

And perhaps the biggest issue: you are ultimately responsible for what happens to the house. Landscape maintenance is pretty forgiving, but bad plumbing can create a lot of damage. So you have to be able to tell if a plumber did a good job. That means you have to know something about plumbing. Do you know the risks if you don’t have French drains installed in the proper locations? You spotted some insects in your garage; is it a problem? Did you replace your furnace filters when you were supposed to? None of these things is rocket science, but raw intelligence is not enough, you need experience to learn all the edge cases. I’d bought a new construction house, thinking I could largely avoid maintenance pain if everything was new. In my naïve mental model, owning a house would be like owning a car: I only have to keep track of getting oil changes, and if a dashboard light comes on I can bring it to a dealer and they will take care of it.

But my experience was not like this. In the three years I owned my house, two windows failed (one got a random stress crack on the interior side, and the other lost its seal and developed mold in the insulated unit). I tracked down the window company[2] only to learn the builder’s warranty wouldn’t cover either failure. Then there was the time I came home from visiting family out of state, and while I was gone the wind had partially dislodged the gutter outside the master bedroom and had folded it back against the roof. In that state, the wind was intermittently banging it into the roof of my bedroom like a hammer. Of course I had gotten home on Friday night of a long holiday weekend, so I slept in the living room for three days to escape the noise before I could even call anyone to come and look at it. (I thought about buying a ladder tall enough to reach the top of the third floor and decided I would rather not risk my life.)

Gutter fail
The partially detached gutter, folded back against the roof. On the lower right, the bamboo can be seen. Fucking bamboo.

But wait, there’s more! The neighbor’s dog would defecate in my back yard, so I had to awkwardly ask my neighbors to stop letting their dog loose to crap wherever. Every time, they would apologize and promise to take care of it and then keep on letting their dog out. I thought about installing a fence but the property design was such that this would be nontrivial. Then there was the time I found pavement ants pouring out from under the baseboard in my living room and I had to hire an exterminator. As I was preparing to sell after my three year homeownership adventure, I discovered that the pipes under the kitchen sink had not been installed correctly by the builder, and there had been a slow drip the entire three years, which I did not see because the cleaning products under the sink hid the leak from view; as a result, the bottom of the cabinet was swollen and rotted, and the bottoms of the cans of cleaning product had rusted and made ring marks. Now these were all relatively harmless problems, for all the stress they caused. If you are truly enthusiastic about homeownership, you can be an amateur property manager. But after the novelty of owning a home wore off, I realized I had other things to do with my time and mental bandwidth. Why should I let myself be distracted by all this noise? It better be a damn good investment to make that worth it.

Guess what, it’s not.

This analysis has been done ad nauseam by bloggers much more thorough than I, so I will just touch on the highlights. Mortgage payments are made up of PITI (Principal, Interest, Taxes, and Insurance). The only part of the payment that builds equity is the principal. In a mortgage, the majority of the payment goes to interest, generally for the first half of the term (as much as 15 years). So unless you bought in cash, you are still “throwing away” most of your money each month. In other words, you don’t stop paying rent. This is not a problem in itself, but apparently most people don’t get a house that gives them the same size mortgage payment as they used to pay in rent, because almost everyone winds up buying a more expensive house than they originally planned. (I did.) So the likely scenario is that your “rent” (interest) is comparable to before, and now you are also being forced to save each month on top of that. Savings are good, but is home equity as good a place to invest your money as, say, a share of a business? Stocks make a historical 8% per year on average; do most property values grow at that rate? Spoiler alert: No, they don’t. Most of the time, house prices only keep pace with inflation.[3] That means that you can’t assume that any random house you buy will go up in value at all — you have to seek out a good deal, either a neighborhood that you predict will gentrify, or a diamond in the rough fixer-upper, something like that. In other words, you actually have to act like an investor and find a good investment. And that might require different criteria than you would ordinarily use to pick your primary residence, such as school districts or proximity to a job. Plus, don’t forget that it usually costs ten percent of the property value to sell a house. You need the value of your property to appreciate 10% over inflation just to break even.

Paula Pant’s Afford Anything has a super detailed analysis which comes to the conclusion that in at least one hypothetical scenario, renting and buying came out completely on par with each other, in financial terms. Noah Kagan came to a similar conclusion, based on his personal experience. Imagine — rents might be fairly priced in a typical market! Sure, mortgage interest is income-tax deductible, and that might save you a few hundred bucks a month. And maybe loan rates are low right now, so hey, buying could be a good deal for you, on paper, in your particular case. But note that the hypothetical scenarios assume nothing crazy happens to your property, like fire or earthquake or flood or hurricane or termites. And insurance doesn’t completely answer this concern, for example I couldn’t get earthquake insurance in the Seattle area with less than a $50k deductible, and the premium was going to be $1k-2k/year. As a real estate investor you’d have a chance to diversify into multiple buildings and multiple geographic areas, but as the owner of just your primary residence you are not at all diversified. If we were not talking about the place where you happened to want to live, would you otherwise consider a single asset with this much uncertainty to be a wise way to invest a large chunk (perhaps most) of your net worth?

Fire across the street
One afternoon in the second year of my tenure, a house across the street caught fire. I took this photo through my living room window after noticing the smell of smoke. The fire trucks rolled up moments later.

So the financials of private homeownership are not a guaranteed win. But in fairness, let’s not overlook the forced savings element. Apparently Harvard University’s Joint Center for Housing Studies released research in 2013 finding that those who buy homes tend to increase wealth faster than renters. This is completely attributed to the fact that most people suck at saving money. Let this sink in for a second. Owning a primary residence is risky and unlikely to do better than cancel out inflation, but so few renters know how to save money that it puts the average person ahead just to be forced by the bank to put money away each month. Wow, okay.

Anyway, back to my story. After the first year, I spent the next two years in denial. I told myself that the maintenance would get easier. I thought about taking roommates to offset the costs. I told myself that Seattle real estate was booming and it was a good investment. I told myself the neighborhood was perfect for me. I relished the idea that I might never have to change my address again. But I still felt like I was spending too much money on housing, so eventually I hatched a plan to finish out the room over the garage as an apartment for myself, move into that, and rent out the rest of the house on AirBnB. This way, I would still be able to offer space to family when they visited. I had engaged a contractor and I was starting to pick out materials for the remodel when I realized the insanity of what I was contemplating. I was going to become a hotel manager in addition to property manager?

With this epiphany, the spell was broken. Since I hosted guests only a couple times a year, I decided that when friends or family visit we could just get an AirBnB together. The workbench in the garage had turned out to be pointless — without climate control, it was either too hot or too cold to work in there most of the year, so instead I wound up leasing space in a shared workshop with 12 friends. Modern apartment buildings are constructed with pretty thick walls to block noise, and they feel a lot more secure to me than a house with bare windows that anyone can break. In an apartment building there is pretty much zero chance you will be forced to move, and in a rented house the likelihood is still pretty low. But if you should want to move (unpleasant neighbors turn up next door, you get divorced, you get a new job) go ahead and hire a moving service; you’re not paying 10% of your property value to sell! Finally, as a renter your unexpected maintenance costs are amortized for you as part of the rent, all nice and predictable each month. Perhaps the one thing that is unambiguously in the plus column for buying instead of renting is that your mortgage never goes up (if it’s fixed-rate, as it should be), and eventually, the mortgage gets paid off. But when the mortgage is paid off, your taxes can still go up, and you still have utilities, and you still have maintenance, and insurance, and maybe HOA dues; housing, like lunches, will never be free. So why would you want to tie up a lot of your savings in an undiversified, illiquid, low-yielding asset for the sake of expected reduced rent in the eventual future? Why not invest in higher yielding assets which will give you the future means to pay rent?

But I mean, I get it. The first night I slept in my house and it rained, I listened to the raindrops on the roof (my roof!) and I felt invincible. Even though there is zero tangible difference between owning and leasing your living space, there is sort of a magical overlay. You get to be a lord instead of a serf. You have a lawn to tell the kids to get off of. It’s infectious — somewhere between 60 and 90 percent of Americans surveyed say owning a home is essential to their “American Dream.”[4]

And there sure is a lot of vested interest in perpetuating the mystique. Homeowners are indirectly validated when others buy, so they are motivated to say things like “I’m not throwing my money away on rent.” If most people either own or want to, the media has every reason to pander — Ramit Sethi has a withering critique of a NYT article (“What they say: ‘…​the house on Livingston Street seems to taunt him every time he walks by’; What they mean: ‘You’re an embarrassment if you don’t own’”). Mortgage lenders, real estate agencies, title and escrow companies, not to mention the Home Depots and Lowes of the world — this ecosystem is able to siphon a steady stream of money off of real estate amateurs. Maybe the whole thing is actually a scam so that banks can lend your own money back to you at a higher interest rate. But in a world where we have a school year that is structured after obsolete agricultural traditions (getting summers off so that the children can help in the field) and where the daily school schedule remains immutable even when ending at 3 PM is a nuisance for parents who work until 5 PM and there’s evidence that forcing adolescents and teenagers to get up before 8 AM is harmful — in other words, in a world where inertia trumps reason — I can’t bring myself to believe in an organized, methodical conspiracy.

If you are interested in going into real estate as a primary gig or a side hustle, I wouldn’t discourage you. Or if the lifestyle you want is a farm or homestead with a lot of self-sufficiency, go for it. But casual homeownership purely for the sake of a primary residence is, I’ve concluded, irrational.

My homeownership experience taught me what I care about. It turns out I am happy treating my living space as a utility, so I can focus on other things. And it also taught me that sometimes you think you know what you want, but you don’t. So that’s another reason not to put off your dreams.

They say the two happiest days in a boat owner’s life are the day they buy the boat and the day they sell. I’ve owned a boat, and I’m here to tell you it’s true for homeownership too.


2. Tracking down the window company was a challenge. The windows all had serial number stickers on the inside of their frames, but no company name or phone number. One night two years into my time with the house, I was coming up the stairs and since it was dark outside, the interior light reflected off the window glass in just such a way that I noticed the faint imprint of the branded cling film that had been on the window when it was manufactured. The name was “Alpine Windows.” Elated, I fired up a search and it took like an hour to figure out that this company had been acquired by another company. I finally reached a human by phone and they told me very nicely to go away.
3. Nobel prize laureate Robert Shiller identified that, on average, housing prices have just about matched inflation since the 1890s. Funny, isn’t inflation totally artificial, manufactured and fine-tuned by the Fed as a way to prevent deflation, which is considered detrimental to the economy? This finding implies that, on average, outside of growth hotspots, house values don’t really change.
4. American dream: (1) Zillow®’s Housing Aspirations Report™ biannual survey in 2017 found that 68.7 percent of Republicans and 65.1 percent of Democrats saw owning a home as essential to living the American Dream. /source (2) “91% of homeowners and 74% of non-homeowners reported homeownership as part of their American dream.” — Brian Buffini’s Real Estate Report, US Edition, 1st biannual 2019