Emily & Amanda discuss the pros and cons of buying residential real estate. The key takeaway? Buying a home may be an aspiration (or necessity) for many, but don't think of it as an investment.
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1. A chart of the 30-year mortgage rate over the past 10 years.
2. Warren Buffet, widely regarded as one of the most successful investors in the world, doesn't think of residential real estate as an investment either.
Full transcript below:
Emily Agosto (00:08):
Welcome to connecting the dollars, a personal finance podcast. I'm Emily Agosto, a CPA and financial
Amanda Vaught (00:16):
And I'm Amanda Vaught attorney and financial advisor. Both Emily and I are co-owners at Propel
Emily Agosto (00:25):
Propel Financial Advisors is an investment management and financial planning company. We are fee-
only fiduciaries and independent registered investment advisors. I'm based in Chicago and Amanda is in
New York city, but we work with clients nationwide.
Amanda Vaught (00:40):
The purpose of our podcast is to explore personal finance topics, including budgeting, investing,
behavioral, finance, current events, and other helpful information. We also hope you'll get to know us
along the way.
Emily Agosto (00:54):
Thanks for listening. Hello Amanda.
Amanda Vaught (01:00):
Hey Emily, how you doing?
Emily Agosto (01:02):
Doing well. How are you?
Amanda Vaught (01:03):
I'm good. I am here in my rental apartment, which I am pointing out because today we are talking about
buying a house.
Emily Agosto (01:12):
Yeah. And I'm here in my home office in somewhat sunny Chicago, and we're getting to the spring
season and usually housing market goes crazy in the spring season, but it's already a bit crazy this year.
So can you give a little background of why you think that's going on currently?
Amanda Vaught (01:32):
Yeah. So what we have going on in the housing market right now is a confluence of several different
factors. And so one of them is driven by housing demand. So housing demand the past couple years
have been really high because of the pandemic. And then we also have a really low supply. Just to put
some numbers on that: a normal amount of homes on the market around January is 1 million homes.
And right now, or excuse me, as of January 2022, it was at 284,000. So it's a very significant difference in
the amount of homes available. And then we have that also coupled with interest rates being at record
lows. I think over the summer, the 30-year mortgage rate was well below 3%. I think now it's gone up. I
think it's almost the average 30-year is now almost four, but it's still pretty low, which helps drive the
prices of homes higher.
Emily Agosto (02:32):
Yeah. And then there's also the demographic aspect. The millennials who are in their like mid, late
thirties are in the prime home buying ages or years of their life. And we're also a really huge generation.
So like you said, there's high demand, low supply. And also, I feel like, at least for me personally, and
some of my friends who are in that millennial generation that I mentioned, it's ingrained that we should
be looking at houses at this time and like settling down and
Amanda Vaught (03:07):
Emily Agosto (03:08):
Being adults. Yeah. Investing and not just throwing away your money on a rental. So, and some of that is
really just misconceptions. Like why, why do we think like that?
Amanda Vaught (03:18):
Yeah. And what I, and a lot of people feel like it's something they're supposed to do. Right. And not
everyone thinks through it. Or think it's just something you're supposed to do. Therefore I should do it.
So exactly. Today we're gonna get into some of these pros and cons and different factors to consider
when we're talking about buying a home versus say, investing in the stock market.
Emily Agosto (03:47):
Yeah. So let's see the first thing let's talk about monthly payments. In order to maintain a living space
you're either paying rent or paying a mortgage. So what are some pros of paying a mortgage?
Amanda Vaught (04:01):
Well, that's one of the things that people say, oh, well, that's a great way to build wealth is by buying a
home. And to an extent that's true. And one of the reasons it is true is that it forces you to make a
monthly payment to build your equity and say, if you don't own a home, you're not forced to make an
investment every month.
Emily Agosto (04:23):
Yeah. And like how I mentioned people think maybe when they're renting, they're throwing away their
money every month. But really when I was renting, I thought of it as I'm paying someone else to deal
with anything that goes wrong with the house. And it's not my responsibility.
Amanda Vaught (04:38):
Yes, exactly. When I, I mean, like I just said, I rent, and I love it when something goes wrong, we just, we
call the landlord and they, they deal with it, you know, recent flooding, oh, there's a leak, you deal with
it, things like that. So in a way you are paying to not have to spend your time or your energy on these
types of things.
Emily Agosto (04:58):
Amanda Vaught (04:59):
And then, you know, I talk to my friends who live in the suburbs or family and, you know, they spend
their weekend mowing the yard or doing home repairs or all these things that I don't have to spend time
Emily Agosto (05:12):
Yes, I can definitely speak to that. Yes. Luckily we haven't had any issues lately, but it seemed like the
first six months of buying a home was just every weekend you're doing something you're paying for
something new. So definitely something to consider.
Amanda Vaught (05:26):
Yeah. and then another thing to think about when deciding whether or not to buy a home is liquidity.
And so what we mean by liquidity is just having access to those funds if you need them. So if you think
about a home as an investment, not that we're saying that you should, but if you do and you think, oh, I
have this money built up and then you go try to take it out that can blow up in your face a little bit.
Emily Agosto (05:53):
I was talking to a friend the other day. So he had a home in Southern Illinois and moved up to Chicago
about 10 years ago and he just couldn't sell it. And it was a huge hassle for him because the place is six
hours away and he was still responsible for it.
Amanda Vaught (06:07):
Yeah. And then the other thing is refinancing. You know, you say, oh, well maybe I don't want you to sell
it, but I can just refinance and take some money out that way if I need cash. And yes, that worked great
over, over this past summer, say in 2021, when the rates were really low, it was a great time to
refinance or to do a cash out refinance, but you know, sometimes life happens. And so you wanna take
that money out when rates are, are way up, you can always control your timing on that. Yes. So it's not
an automatic thing is what we're saying.
Emily Agosto (06:43):
Right. And along those lines homes are expensive to maintain. So you already have to budget for your
monthly mortgage payment, but you also have to build in a cushion for when those repairs are
Amanda Vaught (06:59):
Repairs, general maintenance, right. Your property taxes, any damage from whether insurance costs,
that type of thing.
Emily Agosto (07:09):
Yeah. Or even if you just want to remodel.
Amanda Vaught (07:11):
Yeah. It adds up. And then another thing along that line is the cost to buy and sell a home. A lot of
people just seem to gloss over this, but I mean, brokers fees can get up to 6%, getting an attorney,
paying other kind of real estate taxes when you buy and sell these add up and they do cut in, you know,
to the cost of your home. And that is a significant number compared to what you would pay if you
bought stocks or bonds. Right, Emily? Yep.
Emily Agosto (07:43):
Yeah, absolutely. And just in general, comparing a home to stocks and bonds. There's, it's a lot easier.
Like we were saying in the, when we were talking about liquidity, it's so much easier to just go online or
talk to your financial advisor, and buy or sell security, but when it comes to a home and speaking to the
costs of it, there's just so much more to consider and you have to live in your home for a certain amount
of time, and you may find that the gain is not actually really worth it - potential gain, I should say.
Amanda Vaught (08:18):
Yeah. but getting into to potential gains on average, the housing market does go up. I think we found
numbers recently that said on average, the price of a house has gone up by 3.9% per year for the past 25
years, which is pretty good that it's gone up and not down. And so that's, that's an average. And so
obviously it's highly dependent on what area of the country you're in. Compared to the stock market,
you're going to get returns on average, closer to 10%. So that's a significant difference and that's an
annual return. So that really adds up over time.
Emily Agosto (09:02):
Amanda Vaught (09:02):
Okay. So as far as returns you get in general, on average, better returns in the stock market. And
another thing to take into consideration is risk. So usually what we think of risk is higher risk gives you
higher returns. So you might think, oh, well, higher returns in the stock market that makes it more risky.
And so to certain extent, there is lower risk when you buy a home that it's not gonna lose value, but a
major other type of risk that you're getting into if you're putting all your money into a house, is that
you're losing a lot of diversification. You're putting all your eggs into one basket and everything is riding
on your home potentially.
Emily Agosto (09:50):
So if we have another mortgage crisis, then your entire investment portfolio is basically bottomed out
Amanda Vaught (09:59):
Emily Agosto (09:59):
Yeah. Compared to if you were well diversified. I mean, market goes down, everything goes down
Amanda Vaught (10:04):
When the market goes down, it's also a time, you know, when we see recessionary forces. So that's the
time when you could be losing your job and you could be wanting to sell your house or down size to a
smaller home because you've taken a pay cut or lost your job. And that's exactly the time that you don't
want to be forced to sell a home. So it's just, you know not that you shouldn't buy a home, we're not
trying to say that that's not what people should do, but a lot of times it does come down to a personal
decision about what's right for you, your family and the type of community that you are moving into.
Emily Agosto (10:42):
Yeah. That's a really good point. I mean, we just saw with the pandemic that people are working from
home and they can work pretty much anywhere. So do you want to tie yourself to a specific location? Or
Amanda had to me that some of her friends had moved out of the city, and now they regret it because
they're stuck out there, and that's not actually what they wanted. It was just kind of nice for the last two
years. So yeah, it's definitely, it's tricky. It's just a lot of things to consider. I mean, even in my
experience, my husband and I purchased our home, or one of the main factors of why we purchased our
home, was that we wanted to be close to the L to get downtown. And now neither of us even worked
downtown. So that was not a financial aspect. It was just a personal thing that worked for us at the time.
Amanda Vaught (11:30):
Right. Yeah. And that's the thing is that you try to plan for these things, but you don't know what the
future's gonna hold. Right? Yeah. It's so when you do buy a piece of real estate, the general advice is
own this home for five years or so to make it worth the cost that we mentioned earlier. But when
circumstances do change or life happens, you know, you might get, feel like you're stuck. Yeah.
Emily Agosto (11:53):
And moving is a pain. I don't know anyone who,
Amanda Vaught (11:56):
Emily Agosto (11:57):
Moving likes that.
Amanda Vaught (11:59):
Oh gosh. Yeah. Yeah. So I think, you know, we just, we do get a lot of questions about this. Should I buy
a house? How do I save to buy a house? How much money should I put towards my mortgage payment
versus say retirement savings. And so, you know, like we said, it is personal, but in general, we do want
to keep contributing to your retirement fund because that's gonna give you better returns over time,
give you better liquidity and better flexibility in general. And it's a better way to diversify your risk. Yep.
One more thing that we also get is people asking about paying off their mortgage early. And what do
you, what do you say to those types of clients who ask you about that, Emily?
Emily Agosto (12:45):
Yeah. Well, if someone comes into some money and they're like, oh, the first thing I would do is pay off
my house. We would not necessarily recommend that because those funds, you can invest them instead
and get a higher return. If you're just paying off your mortgage. You're putting again, more money into
that one asset that's not diversified and is not going to grow as much, potentially over time as an
investment in the market. Did that cover it?
Amanda Vaught (13:12):
Yeah. I think we covered a lot of the different issues around home buying.
Emily Agosto (13:16):
So it's really just kind of, if you're thinking about buying a home, we're not saying not to do it. We're just
saying there's a lot more aspects to consider instead of just I've been told it's a good investment and it's
just something I should do. And I'm at the point of my life when I should do it. There's, there's so much
Amanda Vaught (13:33):
But yeah. So at the end of the, a day, all of these decisions really come down to the individual person. So
even if we could say financially, the numbers add up to say, it's better to put your money in the stock
market or, and the bond market in a well diversified investment in portfolio, instead of putting all your
money into a home. But at the same time, people celebrate, you know, paying off their mortgage and
having a home free and clear, and they're not having parties to celebrate this well diversified investment
portfolio. So you know, with the, just the feeling about things can really just drive these decisions in a
way. And, and that's, you know, that's okay too, right? Emily.
Emily Agosto (14:15):
Absolutely. But if you're thinking about doing any of these things and you do have an investment
advisor, we always suggest talking to them about it, or you can always ask us questions, reach out to us
at firstname.lastname@example.org. We will link all of our resources that we mentioned today on
our connectingthedollars.com and any other final thoughts you wanna add, Amanda?
Amanda Vaught (14:42):
Yeah, just, we always love to hear from listeners. So please let us know if you have any questions we
love hearing from you.
Emily Agosto (14:49):
Yep. Thank you.
Amanda Vaught (14:50):
See you soon
Speaker 3 (14:54):
For all links and resources mentioned today. Head over to connectingthedollars.com. Thank you for
Amanda Vaught (15:01):
This podcast is for informational and entertainment purposes only, and should not be relied upon as a
basis for investment decisions. This podcast does not engage in rendering legal, financial, or other