An Argument for Buying to Reduce Risk Without Cost
I’ve been against home buying for purely financial reasons for about as long as I’ve paid rent, since the financial reason people usually give for home buying is that rent is purely an expense, whereas a mortgage builds equity. This argument to me intuitively smells like a $20 bill on the ground, but it’s also pretty easy to work through and debunk more formally. In California, this reason for home buying is especially invalid since Prop 13 disincentivizes home owners to sell, creating artificially high home prices and artificially low (if you can believe it) rents compared to home prices.
There’s also the more valid hybrid financial argument that people who don’t want to get priced out of a specific housing market should buy there to hedge against that possibility. While this strategy is reasonable for some people with strong connections to a particular region, the oft-ignored inverse of this is that you get “priced in” to a housing market by losing money on a home purchase such that you take a hit if you try to buy (or rent) elsewhere.
Other arguments in favor of buying include the desire to be able to install a dishwasher, deduct mortgage interest from your taxes, paint the walls purple, or to “feel like you own the place”. But in general, as someone with no strong ties to a specific place, and only a moderate desire to install a dishwasher that is not worth many thousands of today-dollars, I’ve been a proponent of renting indefinitely.
However, something occurred to me recently, which is that most capital investments promise to increase future returns, rather than decrease future costs, but homebuying is an exception. That’s an interesting opportunity because future returns are highly uncertain, so the less you have to rely on them the better - with some quantifiable cost. This is true for home purchases in cash and also to a lesser extent purchases with a mortgage.
Let’s say you plan to withdraw $45k per year of real investment income out of a $1M investment portfolio, and you plan to pay half of that $45k in rent. In this situation, buying a home and reducing that $45k by 50% is worth two things:
$500,000 in today’s dollars according to your assumptions: you would need that much less of an initial investment to pay your expenses according to your model
A change to the failure scenario from “not enough money to pay rent or non-rent expenses” to “not enough money to pay non-rent expenses”, while the odds of success and failure stay the same.
So that means you can spend up to $500,000 dollars on a home that you’d otherwise rent for $22,500 per year and improve your economic worst case scenario by reducing your dependence on your investment without incurring any cost in the average case. And if you spend less than $500,000 on something you’d rent for $22,500 per year, then you might be one of those lucky people who actually managed to harvest some economic value!
Of course, you lose some of the upside by making an investment to reduce future expenses rather than increase future income, but if your goal is sustainability, not riches, that’s a good tradeoff.
There are other reasons to not buy a home - mobility being the big one - but the moral of the story is that if you aren’t buying a home purely because you think home buying is a mythical $20 bill lying on the ground, try re-examining that decision under this framework. Anyway, this is purely theoretical since I am in no position to purchase a home in the bay area. ¯\(ツ)/¯