Tuesday, January 01, 2008

To Buy or Not To Buy: The Mortgage question

The lure of home ownership is strong in the US. But is it really worth it. From a portfolio stand point, it shouldn't matter if you buy a house as an investment, or rent a place, and use your savings, to invest in a diversified portfolio. In fact, buying a house, being decided not diversified, would be significantly worse. So why buy?

In Ithaca, part of the attraction is the mismatched supply and demand between renters and buyers. The high student population makes rental demand higher, and thus more expensive than buying.

But other reasons don't hold. There is the tax credit, but given the value of the tax credit is mostly capitalized into the value of the house, that shouldn't be a compelling reason either. (That is, the fact that I get a tax credit makes the house more expensive, and in an efficient market, that should cancel. There is a second order effect if my tax benefit is somehow higher than the tax benefit from the average buyer, but that is unlikely.)

Roger Lowenstein in the NY Times cites a Shiller and Case paper for another reason that I still need to ponder. That a mortgage is still a low cost loan that gives people a low cost loan that most stockholders don't have access to. (Makes me think I should be borrowing more; I don't have enough debt in my portfolio). Will have to think whether this makes sense. For now, I am using the need for more debt as a compelling excuse to buy a new car. But I don't think that really makes sense.

Oh, and to my few dear readers, Happy New Year!


Alex said...

Can one actually save enough by renting to get stock market returns that are superior overall to buying a house as an investment?

HoBs said...

Sure. In theory, returns should be roughly the same (adjusting for risk. a mortgage amplifies returns, but also amplifies risks). Buying a house on mortgage can offer great returns, but buying a house on mortgage last year in Florida could yield very large losses.

Anonymous said...

happy new year! but where is your Old econ blog?

HoBs said...

Ah, my old econ blog. I stopped updating it so forgot to transfer it to the new server. But it's back now at

HoBs said...

oh, meant to add, i now just co-mingle econ with non-econ stuff. in some ways, my life is econ these days, so no point separating.