Buying and owning a home is often considered a significant financial investment and a milestone in personal wealth building. However, economist Peter Schiff believes that this notion is simply not true.
During a recent appearance on the Iced Coffee Hour podcast, hosted by Graham Stephan and Jack Selby, Schiff was asked about the common belief that for many, a house represents their primary means of saving. Schiff, who runs Euro Pacific Capital, strongly disagrees with this perspective.
“A house depletes your savings. It’s a money pit,” he stated bluntly. “It’s crazy the amount of money that a house costs you.”
Proponents of homeownership often argue that property values appreciate over time. For example, the median sales price of houses sold in the U.S. was $329,000 in the first quarter of 2020, according to data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. By the first quarter of 2024, this figure had risen to $420,800, reflecting a 28% increase.
Yet, Schiff urges caution when interpreting these figures.
“[People] think, oh, the house appreciates — not always, it’s inflation that’s doing it. And all that’s happening is your land is keeping pace, but houses don’t,” he argued.
From $500,000 to $1 million?
Given the rise in America’s home prices over the years, if you bought a house many years ago and sell it today, chances are you will receive more than the purchase price. However, Schiff cautions that such examples often have significant caveats.
“Even if somebody tells you, ‘Oh, here’s this house that I sold for $1 million and I bought it, whatever 10, 20 years ago for $500,000.’ If you think about all the money they put into that house over that period of time, they may not have made any money,” he said.
He explained that houses can require significant upgrades, which can be costly.
“A lot of the houses too that were bought back then, if you don’t redo the kitchens, redo the bathroom, put on a new roof, you know, your audio, visual systems are all obsolete, the wiring — a lot of stuff has to be brought up to date in order to sell it for the million dollars,” he said.
He added that many of these houses, if not updated over the years, would be considered teardowns.
“A teardown means a house that was once brand new and had a lot of value, now has zero value. It’s going to be torn down. The only thing that has value is the land itself. The house is worthless,” he said.
Buying vs. Renting
The decision between buying and renting a home depends on a variety of factors, such as financial circumstances, lifestyle preferences, market conditions, and interest rates. Schiff acknowledged the individual nature of this choice but believes that for many, one option stands out.
“It depends on your circumstances and where the home is located, but for a lot of people — and this has been the case for a long time — renting is a better option,” he stated. He said money saved this way should be invested.
He also criticized government policies for distorting the housing market with tax incentives.
“Now another thing that the government has done to push people into homeownership, which has helped screw up the market, is the tax consequences. The government gives you a tax write-off: If you buy a home, you can deduct your mortgage interest, but you can’t deduct your rent,” he explained.
Schiff further pointed out that interest rates are another factor skewing the market. He said, “A lot of people are better off renting. A lot of people who own homes, the only reason they’re better off staying where they are is because their mortgage rate is so low, their mortgage rate may be so low that if they sold their home and rent it, their rent would be higher than what their current mortgage is.”
He also emphasized that homeowners are responsible for maintenance, insurance, and property taxes, and noted how these costs have been sharply rising.
Rising Costs and Alternatives
Mortgage rates have indeed risen sharply in recent years. Three years ago, the average interest rate on a 30-year fixed-rate mortgage was around 3%. Today, it stands at 6.87%. Elevated home prices, along with high-interest rates, can make purchasing a house unaffordable for many. However, if you’re interested in investing in income-producing real estate, there are alternatives to buying a house, such as real estate investment trusts (REITs) and crowdfunding platforms.
These investment vehicles allow individuals to invest in real estate without the burden of homeownership, providing a potential stream of income without the associated costs and responsibilities. REITs, for example, are companies that own, operate, or finance income-producing real estate and offer a way to invest in real estate portfolios.
Crowdfunding platforms allow investors to pool their resources to invest in real estate projects, offering another avenue for those who wish to benefit from the real estate market without owning a home. These options can provide diversification and liquidity, appealing to those who may be wary of the traditional homeownership route.
In conclusion, while buying a home is often viewed as a cornerstone of personal financial growth, Peter Schiff’s perspective highlights the complexities and potential drawbacks of homeownership. For many Americans, renting may indeed be a more financially sound decision, freeing up resources for other investment opportunities.
