The Home Ownership Scam

We are all curmudgeons about something. Some people don’t like cats or dogs. Others don’t like children. Me? I don’t like residential real estate. In fact, I think for the average American household home ownership is something of a scam. The scam is perpetrated by a massive housing value chain, which accounts for something like 4% of US GDP.

Think for a moment about the people lined up to rip your guts out when you buy a home: the seller; the seller’s real estate agent; your real estate agent; the home inspection guy/gal; the mortgage broker; the bank/wholesale finance operation funding the mortgage; the insurance company. All of these individuals have an explicit financial incentive to promote home ownership as your path to wealth and happiness, no matter the sticker price.

To make my point another way, here are some charts from JPMorgan:


See the con?

Despite the mid-2000s housing crash, the estimated multiple of average family income needed to purchase a home has increased nearly a full turn since 2000. This despite increases in median household income:


Massive housing price inflation has been driven primarily by one thing: cheap debt. Mortgage rates have come down steadily since the 1980s. This looks a hell of a lot like a super cycle to me. In fact it’s two inter-related super cycles: one in rates and another in debt (incidentally, you see the same thing with corporate debt — companies have spent the last 30 years swapping debt for equity in their capital structures by borrowing at low rates and using the proceeds to buy back shares).

One thing I try to remain conscious of as an investment professional is when people lose sight of cycles. Cycles can take a long time to play out and cyclical inflection points are difficult to forecast in advance. Hence, people tend to extrapolate naively from the present when thinking about the future. But I will tell you right here and now, households cannot continue to pay ever-increasing multiples of income for homes without access to cheap financing. Some day there will be a pointy reckoning.

One of the most pathetic things I have ever read about is people writing personalized letters to home sellers. If you are doing this intentionally as a Machiavellian value play knowing you are the low bid I have no problem with that. That’s on the seller for being a sucker. But the fact this tactic works at all demonstrates perfectly how emotionally warped our collective view of home ownership has become.

That, friends, is the home ownership scam. A cultish view of home ownership takes a straightforward asset purchase and transforms it into some bizarre emotional and cultural touchstone. So actually you end up feeling good about getting your faced ripped off in the course of the transaction.

Because when you think about it emotionally, any price seems justified. What is the American Dream worth? What is the boost to your image and self-esteem? How about a great school district for your kids and a nice, roomy yard for Flopsy? Are those things worth 4x household income? 5x? 10x?

For most people, it all depends on whether they can make the monthly payment work.

Flopsy (at left) & friends


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